City Government and Local Government and Taxes and Government & Economic Development and Government and Economic Development

Downtown tax district reaps unexpected windfall

September 29, 2010
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At a time when tax dollars are scarce, Indianapolis has accumulated more than $12 million from a downtown tax district to spend on projects in the area.

The money comes from property tax revenue from new development  that is captured to cover payments on $576 million in debt on downtown projects that are part of the Consolidated Tax-Increment Financing, or TIF, district (see map).

Over the last few years, the money collected beyond what’s needed to pay off those obligations has grown, freeing up $12.1 million for other projects.

Those include $3.5 million in renovations to the City Market; $600,000 for a skywalk connecting the Artsgarden to the Hyatt Regency Hotel; and $8 million to fund tourism promotion activities of the Indianapolis Convention and Visitors Association. Next year, another $9 million could go toward sewer and street improvements for a proposed development that includes a gym and hotel near Eli Lilly and Co.

City leaders say those are prudent uses of the funds, which, once collected, must be spent on economic development projects in the downtown area or used to pay off the debt. But some members of the City-County Council and the public have questioned why the windfall came about and whether there’s been thorough discussion about its use.

“We hear about projects here and there,” said Brian Mahern, a council Democrat. “It appears there’s more money than needed for [debt]. It only makes sense that there’s a broader discussion about where to use those dollars, and I don’t think that’s been the case.”

City officials counter that the decisions about how to use the money were made at public meetings.

Each year, the downtown district, like similar districts in other areas of town, brings in more money than is needed for debt payments. The extra money provides a cushion to meet bondholder requirements and boost bond ratings.

In 2008, the excess money in the downtown TIF district doubled to $22 million as tax revenue increased. Revenue rose as more projects came online and as refinancing helped debt obligations remain steady.

Those funds remained consistent in 2009, when the state legislature allowed Indianapolis’ downtown TIF to capture businesses’ personal property taxes to make up for tax revenue lost to the state's 2008 property tax reform.

For this year, the city also opted to take those personal property taxes for the TIF—rather than giving them to the general tax base, which includes schools, police, libraries and fire. The amount of overflow in the TIF grew to about $28 million. The city has chosen not to take those funds in 2011, which will decrease the excess money brought in next year to $18 million.

By the end of this year, the city estimates there will be close to $91 million collected from the downtown TIF beyond what’s needed to make its debt payments. The money eligible to be spent would dwindle to about $24 million after factoring in a $9 million cushion for tax money lost to appeals or non-payments and another $58 million for the city to hold a reserve of 10 percent of its debt.

And that number likely will further dwindle to about $12 million, pending the issuance of bonds for the proposed development near Lilly and Clarian Health’s planned neurosciences center near Methodist Hospital. Those would increase the downtown TIF debt to more than $700 million and hike the amount needed for a 10-percent reserve to $70 million.

Deron Kintner, executive director of the Indianapolis Public Improvement Bond Bank, said it was prudent for the city to take in enough money to build its reserve, given the high level of debt in the district and the need to retain credibility with rating agencies.

Kintner said leaders were being especially cautious when they made the choice to keep the personal property taxes for the TIF. They were making calculations based on projected tax revenue. Real figures weren't available because the property tax cycle was behind schedule.

Kinter also pointed out that once the reserve money is factored in, there’s not much wiggle room for extra spending.

“It’s going to give us some flexibility and allow us to do some good projects with the development of downtown,” Kintner said. “(But) we’re not in a position where we have plenty of excess.”

It seems like plenty to some neighborhood advocates concerned about amenities such as libraries that are cutting back hours due to funding gaps a third the size of the $12.1 million for downtown projects.

And some have questioned spending the money on things such as the City Market and the ICVA when there’s a need for improving downtown roads and parking meters. The city has proposed addressing those issues with a controversial 50-year lease of its parking meters.

“If there’s that much excess money, wouldn’t it be wiser to apply the funds to upgrading parking meters or helping to handle the infrastructure deficit or paying off the bonds more quickly?” said Cathy Burton, president of the Marion County Alliance of Neighborhood Associations.

Mike Shaver is a Carmel-based community and economic development consultant who works with municipalities across the state. He said it’s common for cities to collect excess TIF funds and use the money for other economic development projects, citing the towns of Seymour and Converse as examples.

He said in those cases it’s important for government officials to have a highly public discussion about how the money will be used.

“What you have to do in that process is be very transparent about it in order to convince the public you’re not creating a slush fund,” Shaver said. "That’s a very real potential problem.”

Mahern, for one, is concerned that there hasn't been enough transparency. The council approves development plans and debt issuances for projects in the TIF. But decisions about how to spend excess funds are left to the nine-member Metropolitan Development Commission, whose members are made up of appointees by the council, the mayor and the county commissioners.

Kintner said the city is simply following state law and points out all decisions about the spending have been made at the MDC meetings, which are open to the public.

“The legislature has designated what the process is,” Kintner said. “We’re just following that.”

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