Economic Development Incentives and Property taxes and Government & Economic Development

Indianapolis eyes TIF surplus to shore up city coffers

July 23, 2011

The city is considering ways to channel money captured for economic development in some of its 22 tax-increment-financing districts to units such as libraries and city-county government.

City financial officials and consultants are evaluating whether they can afford to shift some of the property taxes within the TIF districts back to the general tax base. They must make a determination by the end of this month.

tifCity-County Council leaders also plan in the next month to start a public discussion on how to craft guidelines for using TIF in ways that maximize revenue for basic city services.

In TIF districts, a city captures property taxes on new development to pay for projects designed to spur economic activity in the area. In Indianapolis, the captured property taxes mostly have gone to pay off debt the city issued to cover subsidies for such projects as the JW Marriott Hotel downtown and the Dow AgroSciences campus on the city’s northwest side.

That ties up property taxes from the new assessed value from going toward other units of government, but TIF proponents say that in many cases the development wouldn’t occur without the incentive.

In some of Indianapolis’ TIF districts, however, the money collected exceeds the amount needed to pay off the debt and provide a required cushion for bondholders. In some cases, the city has steered the excess funds to projects in other areas, such as upgrades to the Indianapolis City Market and an apartment development at the former Bush Stadium.

With many units of government financially strained, though, members of the public—including Pat Andrews, a political blogger and neighborhood advocate—are asking whether some of that excess money would be more effectively used to shore up the general tax base.

Some city elected officials are wondering the same thing.

“We have property-tax caps in place now and reduced income-tax revenues,” said Ryan Vaughn, the council’s Republican president. “We have to start releasing some of the money back to the base when the district starts to over-perform.”

One immediate step the city could take to do that is to decrease how much assessed value is taxed as part of a TIF district, versus the general tax base.

If more assessed value were part of the general tax base, taxing units would get more money, or tax rates would be lowered.

Every year, the city determines that assessed-value ratio, but the equation has rarely been adjusted in the past.

City leaders say they don’t yet have enough data to know whether they could reduce the amount of assessed value taxed within TIF districts this year, but they are hoping so.

Even if they can’t this year, city leaders say they want to establish guidelines making reductions easier in the future.

Those could include capping the terms of bonds within a TIF district at 10 years or 20 years, depending on the scope of the project, and establishing limits for how much revenue a TIF district generates before money has to start flowing back to the general tax base.

“If we have a TIF district that is generating 200 percent of its debt obligations, does it make sense to release part of that back to the base?” Vaughn said.

‘Overperforming’ districts

In some of Indianapolis’ districts, 200 percent isn’t a stretch. A TIF that includes residential properties on the near-east side, for example, was projected to generate 351 percent more revenue than the $315,000 needed to cover debt obligations this year.

A TIF in the Glendale Town Center area, meanwhile, was expected to kick out 138 percent more revenue than needed to service its $500,000 in debt.

The numbers are based on the city’s most recent projections, which will soon be updated to include new debt issuances. Financial officials don’t yet have an estimate for how much excess revenue the districts generate.

Having some cushion above the debt payments is essential, said Deron Kintner, executive director of the Indianapolis Bond Bank, which issues debt for city agencies.

A minimum of 25 percent above the amount needed to meet debt obligations is required, but Kintner said in many cases the city prefers to go above that to improve its bond rating and ensure municipal borrowers get better interest rates.

Having additional money—beyond the extra coverage—stashed away in reserve, he said, also helps improve the city’s credit in the eyes of bondholders.

“The question becomes, at what point is it better to have an above-average credit, instead of a really strong one, and put more [revenue] back to the base?” Kintner said. “The downside is, we’re dealing with TIFs, and those can be risky. You go out and issue new bonds … and investors can demand higher interest rates.”

For the downtown TIF—which has helped fund many high-profile projects, including Circle Centre mall—the city’s goal is to generate 50 percent more than it needs to make debt payments, plus hold another 10 percent in reserve.

The policy varies for other districts, depending on the kinds of projects involved and the history of their performance.

But local observers and national experts have criticized the size of the city’s reserves as excessive at a time when the Indianapolis-Marion County Public Library and many other units of government are battling financial challenges.

And pressure on units of government likely will intensify in 2012, when the city expects to face its most challenging financial year since the economic downturn took hold and state lawmakers approved property tax caps in 2008.

“If you’re diverting that much money, it’s going to have an impact on the budget,” said Thomas Cafcas, a researcher with Washington, D.C.-based Good Jobs First, which advocates making communities more accountable for economic development incentives. “If money is just sitting there, it should be returned rightfully to other taxing jurisdictions.”

There’s also the risk that excess money essentially becomes a slush fund—a concern Andrews and other advocates have raised about the downtown TIF reserve, which stands at $54 million.

Strengthening rules

Other cities and states also have looked at putting limitations on TIF as a way to offset financial strain on other government units. A law passed in California this year dissolves the redevelopment agencies that authorize TIF unless they set aside a portion of TIF revenue each year for schools and other local jurisdictions.

Last month, Chicago Mayor Rahm Emanuel assembled a panel of experts to come up with standards for how TIF is used in that city—in part to cut down on the amount of excess revenue they generate.

Some Indianapolis fiscal leaders have discussed the need to have a systemic way of tying the level of city assistance to the number of jobs created or amount of increase in assessed value.

Those factors are taken into account, Kintner said, but are evaluated without strict guidelines on a project-by-project basis.

Some experts say creating those kinds of benchmarks can be difficult—in part because companies can inflate their projected job numbers or capital investment.

“There are these huge claims that [companies] are putting in millions or billions of dollars of private money,” said David Merriman, associate director of the Institute of Government and Public Affairs at the University of Illinois at Chicago. “It’s very hard to track that accurately.”

Merriman said a more fundamental solution would be to evaluate whether certain TIF districts are still needed. He said the original purpose of TIF was to revitalize areas where development was scarce, but many cities have stretched its use beyond that.

Angela Mansfield, a council Democrat, said some of the city’s recent TIF deals “have been questionable uses to the overall benefit of the community.”

A more streamlined policy, she said, could help rein in their use.•

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