It was bound to happen….the destruction of Michigan’s most effective economic development tool.
Over the next several years, as new and updated Development and Tax Increment Financing Plans are adopted, it’s likely that more and more counties and colleges will “opt-out” reducing the amount of future funds available to Michigan’s Downtown Development, Corridor Improvement and a number of other specialized authorities created by Michigan local governments.
The impact is, and will be, pretty draconian to local community economic development.
A big loss of TIF revenue
A quick review of nine TIFs I have completed during the past five years in Southern Michigan shows that City/Village formed TIFs will lose between 20 to 50% of future revenue and township formed TIFs between 60 to 80%.
Ouch…is all Wayland City Manager, Michael Selden could say when I shared this information with him. “This will surely change the way we go about the budgeting process for our Downtown Development Authority”, he added.
Opt-out “its” – why counties opt out
I first saw this coming a few years back when a small community used DDA funds to buy a snow plow truck “cause it will be used to plow downtown streets too”.
It became more evident when one community had in in excess of $500,000 in their industrial park TIF; funds sitting idle with the entire infrastructure installed and paid for
This was reinforced when the lack of DDA oversight in two communities led them into emergency financial problems due to the use of DDA funds for unauthorized purposes.
It’s also common practice to “slide over” typical general fund expenses to an authority for payment; things like pavement marking, street sweeping, landscaping expenses plus certain salaries & wages – expenses that normally would paid with general budgeted funds if there was no TIF revenue.
It’s pretty easy to grasp the reason for “opt-out”.
Why in face of county fiscal challenges should the county divert funds to sit idle in a local community’s bank account or pay for things that normally would be paid from the community’s general fund?
In the industrial park case, the diverted county funds held by the community would fully fund the projected budget deficit for the year.
The reason for opt-out is pretty simple, poor management and lack of oversight on the part of the local community and yes, the county (college and other tax capture entities) also.
More opt-outs to come
Since most TIFs are outgrowth of DDAs (and other authorities) formed about twenty years back, we can assume that more opt-outs will take place as communities are required by law to update their Development & TIF Plans.
Because there are no TIF police or required legislative compliance reporting, the number of TIFs that may be subject to opt-out cannot be easily determined.
Based on my experience I suspect, a large number of TIFs operate without an up-to-date Development & (separate) Tax Increment Financing Plan properly approved by the City or Village Council or Township Board.
Even where these documents currently exist, often times, they are not current, incomplete or do not correspond to the actual projects and funding decisions made by the authority board.
The TIF police function is solely the duty of the legislative body of the community that establishes the TIF, a duty typically unrecognized and rarely exercised by elected officials.
Good use TIF guide
With changes bound to happen here are some “good use” TIF operating principles:
Option 1 – Ø county funds
Under this scenario, there is no capture of county (or college) tax revenues.
The impact of this decision is to leave funding TIF expenditures solely with local government general fund sourced revenues.
Bridgman City Manager, Aaron Anthony questions the need for the city’s Corridor Improvement Authority “if we have to fund all of its expenses”. Why don’t we just eliminate the CIA and do the projects ourselves”, he added.
But Michigan’s emphasis on central city “Place Making” requires a separate authority (DDA or CIA) to increase eligibility for state grant funding, to obtain redevelopment liquor licenses and to offer commercial renovation tax abatements.
“So even if we don’t ever form the TIF District and capture general funds, there’s a need for the CIA itself….I could run the CIA as a shelf organization and use it only when needed for these specific purposes”, quotes Anthony.
Option 2 – Cap the amount of county funds
Dan Fette, Berrien County’s Community Development Director, supports a somewhat different approach. On his advice, the county adopted a policy that places a cap on the total amount of county revenue that can be captured during the life of a current TIF Plan.
The county and local government agrees, by contract, to a predetermined amount of future county revenue that can be captured. The amount is determined by projecting future tax revenue expected for new development and inflation increased existing property values documented within the TIF Plan adopted by Council or Township Board.
According to Fette, “this gives the County an opportunity to discuss what projects and activities will be funded and how much future County tax revenue will be diverted to support local economic development within each specific community……obviously good projects that increase employment and create additional tax base will be viewed differently than activities that don’t”.
“Use of an intergovernmental agreement sets in place the opportunity to introduce recapture processes for TIF funds used in violation of the terms agreed upon”, he notes.
Option 3 – Project specific revenue sharing
A variation to the Option 2 – Cap approach is to the limit County (or college) TIF funds use for specific agreed projects.
This is an interesting approach; In Michigan we have several specific authorizations that effectively do this now; the Water Resource Improvement Tax Increment Financing Act, PA 94 of 2008, being an example.
For these TIFs the County (and college) effectively make an “in-or out” decision to participate in the single purpose use of TIF funds by a local government.
This same idea to “opt-in, opt-out” of specific projects can be used “right now” by a DDA or CIA.
It‘s pretty simple according to Aaron Anthony, “all that’s needed is a Development Plan that contains specific projects with their estimated costs approved by the Council and ok’d by the County. All tax revenue, both county and city, in excess of that needed would be considered ‘excess’ and, as required by law, returned to the city and county”.
Option 4 – Annual work program approval
Another approach, one this writer supports, is annual work program agreements between authorities and funders.
This was first introduced about five-years back in southern Michigan where authority Development and TIF Plan adoption ordinances, this writer prepared, added a provision that required the Chair of the authority and the chief elected official of the local government, to prepare and personally sign an annual report detailing accomplishments, expenditures and compliance with adopted plans.
The intent of this requirement was designed to serve as the basis for discussion of the past years use of TIF revenue and to discuss the use of TIF revenue for the coming year to assure that all funding was being used in accord with the terms of the approved Development and TIF Plans.
Unfortunately, this didn’t work well.
Neglected by the authority and the chief elected official and not “followed-up” by the county (or college), the reporting duty just became another disregarded task of local government.
Reforming TIF in Michigan
Michigan is a bit unique in use of TIF.
In other states, especially those that allow school tax revenue capture, the amount and purpose of tax increment financing is more individual project focused and subject to a higher degree of initial scrutiny and periodic performance review by the funders.
With this said, TIF is important to Michigan.
It is one of relatively few means for local government to incentivize a complex development or redevelopment project when applied in its truest form – “having new development tax payments fund needed infrastructure needs.”
(See: Michigan Tax Increment Financing: A Primer, Planning and Zoning News, December 2006, for an explanation and history of TIF use.)
Today in Michigan we need to return to the original purpose of TIF, funding needed infrastructure that results in new development and quit viewing, from the local governmental perspective, TIF being an opportunity to “leverage someone else’s tax revenue” to help support local government economic development and desired day-to-day operating needs.