It’s no secret that United Airlines declared bankruptcy before it could fulfill its 1990s promise of 7,000 jobs for Indianapolis.
What’s less well-known is the legacy of that fizzled economic development deal. The tax-increment finance district created around the former United Airlines maintenance hub at Indianapolis International Airport doesn’t generate enough revenue to meet its annual debt payment.
Neither does the final phase of former Mayor Bart Peterson’s signature redevelopment, Fall Creek Place, or for the time being, the TIF district around Dow AgroSciences’ West 86th Street headquarters.
The underperforming TIF districts popped up during the lengthy proceedings of a TIF study commission, which is deliberating over recommendations that could change the way Indianapolis deploys a common economic development tool.
The findings of the commission, which was set up by Democratic City-County Councilor Brian Mahern, will likely influence a future council vote on proposals by Republican Mayor Greg Ballard’s administration to expand the downtown TIF and create a new district in Avondale Meadows.
The study commission is set to vote on recommendations June 28. The council’s Metropolitan and Economic Development Committee will take up the new TIF areas in July, said Steve Talley, a Democrat who is chairman of both entities.
Talley noted that he’s supported every TIF introduced since 1995, but nevertheless has wanted more information about the districts.
“Because of the work of the commission, there are things I’ll be looking for,” he said.
One of the commission’s top concerns is how Indiana’s new tax structure affects TIFs, which typically capture property tax revenue from new development in a district to pay for infrastructure. With the introduction of property tax rate caps, plus a change in school funding, TIF districts could fail to generate enough revenue to meet debt payments.
Beginning in 2009, tax caps kicked in that prevent homeowners from being taxed at more than 1 percent of the assessed value of their homes. Farms and investment properties can be taxed up to 2 percent of their value, and businesses can be taxed up to 3 percent of their value.
“Property tax caps introduce an element of risk,” said Drew Klacik, senior policy analyst at Indiana University’s Public Policy Institute.
But the primary risk in creating TIF districts is that developments inside their boundaries won’t pan out, tax revenue in districts won’t rise, and local governments will be on the hook for infrastructure investments.
That’s happened a lot since the 2008 recession, and investors are wary of bonds issued on new TIF districts, unless they’re backed by the local government’s entire property tax base, said Tom Enright, executive vice president of fixed income and capital markets at City Securities Corp. in Indianapolis.
“Most of the issue is on the slowdown of economic development across the country,” Enright said.
Indianapolis has 30 active TIF districts, and nine of them, or 30 percent, aren’t covering their current obligations. The gaps range from 7 percent for a consolidated airport fund, which is composed of seven separate TIF districts and covers the United Airlines maintenance hub, to 64 percent in the Fall Creek East housing TIF.
“None of that’s good news,” said Deron Kintner, executive director of the Indianapolis Bond Bank. “In each situation, we have the money.”
The bond bank has been able to make up the shortfall with surpluses from earlier years, or tapping related TIFs.
One problem with the airport TIF is that bonds issued for United’s 1.6-million-square-foot facility were back-loaded with larger payments from 2010 through 2016, Kintner said. The city has enough money saved from previous years to cover those payments, he said.
The maintenance hub, owned by the Indianapolis International Airport Authority, is 94-percent occupied, mainly by AAR Corp., Express Scripts and Republic Airways. The TIF area also captures revenue from two other developments, Holladay Properties’ AmeriPlex distribution centers and Comlux Aviation. It even reaches to the opposite side of town to include the former Naval Air Warfare Center at East 21st Street and Arlington Avenue.
The combined airport TIF generated 93 percent of the revenue needed to cover $15.8 million in payments this year. That’s far short of the bond bank’s goal of 150 percent, or a coverage ratio of 1.5.
Considering there are hundreds of jobs at AAR and Republic, Kintner said, “I wouldn’t go so far as to say it’s not providing value to the city.”
Fall Creek Place transformed a section of Indianapolis once known as “Dodge City,” but the final phase of the project, completed in 2005, stalled in the face of a historic housing-market crash.
As a result, the smaller of two TIF districts generated just 36 percent of the revenue needed to cover a $1 million debt payment this year, according to the bond bank.
The TIF districts were set up so that revenue from one could cover payments in the other, Kintner said. The larger Fall Creek district generated $1.9 million in revenue, which was eight times its current debt service.
Still, that’s money that won’t be available for other infrastructure needs in the neighborhood.
A TIF district around Dow AgroSciences’ 86th Street headquarters returned $6 million a year to city coffers after the original bonds, issued in 1991, were paid off in 2006.
The district also encompasses AIT Laboratories, which said in 2010 that it would invest $74 million to equip a 90,000-square-foot building at Woodland Corporate Park as a new headquarters.
When Dow decided to expand its headquarters, also in 2010, the city decided to continue sending $6 million a year to the local taxing units. So the bond bank borrowed the first two years of interest payments, a move that sent the coverage ratio down to 0.75, Kintner said.
Once Dow starts paying taxes on its completed expansion next year, the debt coverage will bounce back to at least 150 percent, and that’s after the $6 million flows back to the larger tax base, Kintner said.
“That’s as healthy a TIF as we have in the city,” Kintner said of Dow AgroSciences.
The study commission isn’t the first time TIF districts have come under review. Ballard scrutinized the city’s districts in 2008.•