Posts Tagged ‘Tax Increment Financing’


April 17, 2014

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.


February 6, 2012

California has always been a national trend setter.  It gave us the hippies of the 70’s, Silicon Valley in the 80’s and 90’s and tax limitations in the 00’s.

If being a leader is a forecast of the future, California’s repeal of its Redevelopment Agency enabling legislation in June 2011 may signal similar action by state legislatures elsewhere.

Could Michigan be one of them?

Governor Jerry Brown, under the authority of California’s fiscal emergency legislation enacted two bills (The Termination Bill & The Continuation Bill), “to secure funding for ‘core government services’ including fire protection, police and schools”.  His action bares the state’s 400 Redevelopment Agencies from conducting new business and provides for their windup and dissolution effectively terminating use of Tax Increment Financing in California.  The action did however, allow cities and counties that created Redevelopment Agencies to continue operations if they agree to make continuous payments to fund core government services.

Challenged (July 2011) at the California Supreme Court level by local government Redevelopment Agency sponsors, the court recently upheld the law. In its ruling (December 29, 2011), the Court held that “if the legislature creates a political entity, it can later dissolve it, baring specific Constitutional removal of power”. 

The Court ruling established February 1, 2012 as the terminal date for the state’s 400 Redevelopment Agencies.

This is a major philosophic change in practice of economic development.

California was one of the first states to recognize the need for special financing tools to eliminate blight, establishing in 1945 legislation allowing the use of a portion of property taxes to create public/private partnerships to eradicate blight.  It was the first state to use tax increment financing in the early 1950’s whereby taxes paid on the value of new development was redirected to pay for government supplied infrastructure needed to serve the new development.

Like almost every state, Michigan followed suit enacting similar legislation in 1980’s that gave local government specific power to establish a special purpose local government authority that can establish a tax increment financing district and redirect a portion of real estate taxes to a special fund, funds which are to be used to promote economic development or another specific purpose specified by the authority.

Today Michigan has over a dozen special purpose authorities authorized to use tax increment financing. In fact, to many economic development practitioners, the use of tax increment financing is the “back bone” of local government economic development efforts.

These special local government authorities and use of TIF funds is one of the top, if not the top, Michigan economic development tool to attract and incent new development. 

With the constriction of developer bank financing for project infrastructure today, economic development practitioners in almost every development project consider use of TIF financing for funding required infrastructure improvements needed to make the project happen.

Is Michigan in line for TIF termination?

For the past several years, this author has watched as university research and public and private “think tanks” have studied use of Michigan tax increment financing authority. 

There is no doubt that TIF has been used inappropriately in many cases, the most flagrant misuse being use of TIF funds for purchases and services that would ordinarily be funded by the operating budget of the local government.  Some example being the purchase of public works vehicles since they plow snow in the authority district, purchase of street signs both in and outside the district, replacement of street light luminary globes, development of a park next to the authority district to attract visitors, payment of salaries for the portion of time government employees spend doing their regular job in the special purpose district.

In my opinion call for termination of TIF due to misuse is inevitable.

However we must remember the original purpose of TIF was to provide infrastructure financing not to replace local government general fund budgeted expenditures.

Here’s why TIF in Michigan is necessary. 

During the economic good times land use planners and government officials could require developers of new projects to pay-for, install and donate to local government both on-site and off-site infrastructure necessary for their project.  Today developers are not inclined to do so.

If the private developer can’t or won’t fund public infrastructure needed for new development, the burden is upon Michigan local government to do so in order to support future new growth and development.

With revenue limitations upon local governments TIF may be the only means to effectively financing infrastructure necessary for new development.

There is no doubt in my mind that TIF termination will be on the legislative docket for discussion as Michigan’s financial emergency is no different that California’s.

My hope is that Michigan’s TIF returns to its original purpose “project infrastructure financing”.

 _ _ _ _ _ _ _ _ _ _

(For an overview of Michigan TIF’s see: Michigan Tax Increment Financing: A Primer; Planning & Zoning News, Dec. 2008, p.11-14).

(For a description of the importance of TIF in Michigan Economic Development see:  If Not TIFA, Then What?; Planning & Zoning News, May 1994, p. 5-8)


December 17, 2009

Michigan’s economic development platform is based on TIF’s, the notion that increased taxes payed by businesses locating in a specific area will be used to pay for infrastructure and other economic development incentives needed to assist their location in the designated area.

It’s a tried and proven incentive offered by all but a few states.  A bit unusual is that Michigan offers a TIF for almost everything – from inland lake weed control to public supplied street, water and sewer infrastructure.  

Have an economic development need – “TIF it” seems to be the mantra of economic development in Michigan.

But a growing number of economic development practitioners are starting to question this approach.  

First, there is a growing public resistance to “channeling” general fund tax revenues away from their intended use, moving county, college and the local unit of government general fund  tax revenues to fund specific authority needs.  Counties and colleges don’t want to target use of their funds to a specific area within the county in lieu of county or district-wide use of these funds.  Likewise, when a  local unit of government moves general use funds beneficial to all, for use in a specific geographic area, it sometimes is resisted in the court of public opinion.

Second, there is some “cold hard economic realities”  facing Michigan that questions whether TIF will continue to work, a question faced by several TIF’s who have already discovered that  projected tax increment revenue is insufficient to pay for the debt incurred for infrastructure improvements.

TIF”s work when new property development takes place and when property values increase.    

Here lies a dilemma – if the Chicago Fed says that Michigan’s auto production capacity is now at 38% utilization and under the most optimistic economic recovery we can expect no more than 83% utilization, what does the impact of this excess capacity mean for new construction and increasing values of existing buildings (see blog post – MICHIGAN AUTOMOTIVE JOB LOSS NOW EXCEEDS 50%).

The law of supply and demand would say that 1) we will see little new building construction untill this supply is used and 2) the value of existing vacant buildings will decrease, due to over-supply.

The cold hard economic realities is that TIF financing cannot be relied upon – our ability to say that we will have new buildings constructed and taxable values of existing buildings will increase is in serious jeopardy.

We have experienced this already, in many cases TIF district tax values are decreasing and holding on to a stable value is becoming more difficult. 

This raises the question – Can we rely on future increases in taxes to pay for infrastructure needed to locate new development?

Northern Indiana experienced this in the 80’s Rust Belt recession era downsizing the steel industry by some 5,000,000 square feet of building space in a 5-7 year period.  It took time to “downsize” the supply of building space with building values declining to almost nothing.

Michigan’s building overcapacity will likely drive down taxable values and lessen TIF revenue.

The story here is whether Michigan can continue to rely upon phantom future tax payments as a platform for its economic development program.