Monday, May 26, 2008

Dr. Blakely, call your former colleagues

It wasn't clear from Saturday's article whether a statement by Ed Blakely summed up the entire administration position:
Blakely said the administration's policy would require developers seeking a TIF to put up 25 percent to 30 percent of the cost of a project in private equity -- what he called "hard" money -- rather than depending entirely on public subsidies or tax breaks

I should certainly hope there's more to it than that: sounds like letting market forces guide the city's rebuilding, except it it wouldn't really be market forces. If Blakely is still working on the administration position, he should start by reading a Lincoln Institute report that concludes:
Tax increment financing is an alluring tool. TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable. The issues we have studied are (1) whether the targeting causes the growth or merely signals that growth is coming; and (2) whether the growth in the targeted area comes at the expense of other parts of the same municipality. We find evidence 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.

Policy makers should use TIF with caution. It is, after all, merely a way of financing economic development and does not change the opportunities for development or the skills of those doing the development planning. Moreover, policy makers should pay careful attention to land use when TIF is being considered. Our evidence shows that commercial TIF districts reduce commercial property value growth in the non-TIF part of the same municipality. This is not terribly surprising, given that much of commercial property is retailing and most retail trade needs to be located close to its customer base. That is, if you subsidize a store in one location there will be less demand to have a store in a nearby location. Industrial land use, in theory, is different. Industrial goods are mostly exported and sold outside the local area, so a local offset would not be expected. Our evidence is generally consistent with this prediction of no offset in industrial property growth in non-TIF areas of the same municipality.

Up until now, I hadn't read the 2003 BGR report, but it's long seemed obvious that there needs to be some limit on tax subsidies and tax incremental financing for new projects or the city would find itself with a frozen tax base. The BGR agrees:
To encourage prioritization and careful targeting of projects, the City should establish a cap, based on a dollar amount or a percentage of the City's General Fund, on the amount of taxes that can be diverted from the General Fund to TIF districts.

It's possible that I was too quick to criticize the city council's decision to hire a consultant to make policy recommendations. Ideally the council would draft a more comprehensive policy than city council staffers could expected to draft, But I don't see that happening. Without a cap, most other provisions will be easily circumvented, and I can't see the council approving a cap that couldn't be raised by 4-3 vote. If a council member can get the vote to approve a TIF district in his or her district, it will be easy enough to get the votes to increase the cap.

At any rate, a few key passages from the report:
To the extent that other areas and businesses are negatively impacted, the existing revenue base of the local government is reduced. In addition, successful TIF districts can increase a local government’s operating costs without providing additional operating funds to the local government. The end result in that case is a transfer of the additional operating costs to residents outside the TIF district. Given the many unknowns surrounding the performance of TIF districts, and the identifiable types of dislocations that can occur, it is exceedingly dangerous to
view TIF as free money. Rather, TIF should be considered an allocation of future resources and assessed with a stringency befitting other long-term investments of future revenue.

The TIF master plan and all TIF developments should conform with the master plan for the City.

The City should identify, and designate as eligible for TIF, blighted or brownfield areas that offer the greatest potential for development, assuming an appropriate amount of public funding. Blight should be defined in meaningful, quantitative terms to reduce the risk of the unnecessary use of TIF.

Good luck with that definition.
To limit the use of TIF to areas in which development would not otherwise occur, the City should condition the use of TIF on a finding that TIF is necessary for appropriate, future redevelopment (as opposed to a specific project) to occur in the designated area.

How rare do they think that finding will be?
All meetings relating to TIFs should be conducted in accordance with both the letter and the spirit of the open meetings law. Practices that undermine transparency, such as one-on-one briefings and behind closed-door negotiations between council members and potential developers/owners, should be avoided.

Sales TIF districts are more likely than property TIF districts to capture revenues unrelated to the TIF investment, thus reducing current tax revenues available to the jurisdiction.

Because sales TIF districts need large, creditworthy retailers or shopping centers to generate significant tax increments, the quest for a TIF source can lead to land use distortions and unnecessary subsidies for big retailers.

Subsidizing a retail operation with TIF revenues gives it an unfair advantage over its competitors.

Finally, I'm not sure, but I really get the impression the report's authors don't think that TIFs are appropriate for New Orleans:
As in the use of other economic development incentives, the effective, efficient, and equitable use of TIF depends on the wisdom, financial sophistication, and integrity of those involved in the process. To the extent that decisions are based on sophisticated analysis, made with an unwavering focus on the public good, and implemented through skillful negotiation, the chances of successfully using TIF increase. To the extent that decisions are driven by relationships, political deals, and other agendas, or that the government lacks the high level of expertise needed to analyze and implement complicated transactions, TIF is likely to be an expensive mistake that results in an unnecessary transfer of wealth to private entities.


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