by Steve Timmer

Mar 29, 2015, 1:00 PM

TIFs are unhealthy for schools and other living things

The TIF established at Pentagon Park in Edina in 2014 introduced me to the idea that a TIF district could have a negative effect on other taxing jurisdictions, including a public school district and others outside the TIF, too. In researching this issue, I found that the consequences of TIFs have been written about extensively.

TIFs sound benign enough: We’ll only take the additional, incremental property taxes “earned” by the development through higher assessments and rebate them to the TIF developer for “eligible expenses” incurred by the developer, to “encourage” the developer.

Nobody gets hurt, right?

But that rests on a couple of assumptions.

First, the development or redevelopment would not occur “but for” incentives to the developer; incentives in the case of Pentagon Park that amount to ten percent of a $500 million redevelopment. Without $50 million from the city, Pentagon Park would just slowly return to the prairie, or maybe wetlands, which we could actually use more of.

The second assumption is that since all the taxing districts are getting the taxes they got before the TIF, no one is harmed. Again, Pentagon Park demonstrates the fallacy of that argument, since the assessed valuation of Pentagon Park fell off a cliff just before the TIF was declared, and everybody, including the school district (but not the TIF authority, the Edina HRA!), is going to have to live with that assessment for 26 years, regardless of any general improvement in the real estate market. (You really do need to read the original story TIF-ed off in Edina! to follow this one entirely.)

In many cases, certainly in Pentagon Park, both of these assumptions are wrong.

I learned that Chicago Mayor (at least for now) Rahm Emmanuel is a TIF proponent, which may tell you more about TIFs than I ever could.

Apart from the effects in the TIF, they aren’t good neighbors:

Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly and perhaps more slowly, than similar municipalities that do not use TIF. An important finding is that TIF has different impacts when land use is considered. For example, commercial TIF districts tend to decrease commercial development in the non-TIF portion of the municipality.

In other words, the existence of TIFs diminishes any increase in the commercial tax base outside the TIFs. This makes complete sense, because the TIF developer can offer space at a rate that is subsidized, compared to other comparable space in the city.

The issue of the effect of TIFs on school districts is contentious; here’s a bit from a Chicago Magazine story in 2012:

TIFs cost CPS [Chicago Public Schools] because they fix the amount of property taxes available to CPS over a long period of time. More often than not, property values will rise and new development will occur over a period as long as 24 years. And the value at which the property is frozen is not adjusted for inflation. So that $100 becomes less than $100 in current dollars for one year, barring deflation. Which means the taxes that come from it buy you a lot less down the road:

A 2007 report produced by [Mike] Quigley found that local taxing districts in Chicago lost $3.6 million in taxes to a single TIF district in just six years because the Illinois TIF Act fails to adjust the base for inflation.

So if you have a $100 piece of land in the North Loop, it might be worth $500 in ten years. But CPS only gets to take its money from that $100—and that $100, ten years down the line, might only be worth $75 in current dollars. CPS not only doesn’t get to benefit from the growth, its “frozen” value is melting slowly.

Or melting quickly, as in the case of Pentagon Park.

A University of Illinois professor describes school districts as “collateral damage” for TIFs:

When those same structures are built in a TIF district (regardless of whether they took advantage of a TIF subsidy), CPS is not able to benefit from the taxes they generate until that TIF district expires. Hiding behind the fig leaf of the “but for” argument allows observers like Hinz [the author of an article that the professor was responding to] to avoid the painful truth: Schools are hurt by TIF now, and making them wait 23 years [apparently the maximum TIF duration in Illinois] to benefit from new construction is callous.

My colleagues and I have conducted research on TIF and school district finances in Illinois (we did not include Chicago because of its disproportionate size). We found that, on average, those schools sharing their tax base with TIF districts experienced slower revenue growth and higher tax rates than those school districts unencumbered by TIF districts.

Higher tax rates for whom? Well, everybody else, of course.

It is possible to provide some developer incentives for similar reasons to those for a TIF through tax abatements. Those abatements, however, would only affect the abating authority’s revenue. If a city abated property taxes, it couldn’t abate the school district’s. There is a “You run your side of the table, and we’ll run ours,” logic in it that appeals to me. Obviously, straight abatements of city taxes only would be more politically difficult; the resulting city mill rate increase for all other taxpayers would be more apparent.

The contrary argument is that development incentives benefit the entire community, and ought to be paid for by the community. There is a near identity of city and school district taxpayers, though; the question is really where do the mill rate increases come from?

Parenthetically, I should mention that there is not a complete congruence of municipal and school district boundaries in Edina. Centennial Lakes, which was a TIF project until recently, is in the city of Edina but is in the Richfield School District. There is also a small part of the northwest part of Edina that is in the Hopkins School District. I don’t know why.

Twenty-six years is a long time, though; the “new” Pentagon Park will be nearing the end of its life as Class A space when the TIF expires. Ironically, this will be about the time that the owner will start coming to the assessor and pointing out that the buildings are older and depreciated and should have written down assessments.

Well, ironic in an unfunny way.