Processing Your Payment

Please do not leave this page until complete. This can take a few moments.

December 11, 2006

The great TIF experiment | Tax increment financing helps towns attract development, but how do the deals affect municipal budgets?

By Douglas Rooks
During a five-week stretch this fall, a handful of cities and towns in Maine inked big-time deals with developers. City council votes were counted, negotiations were made. And from the cluster of mill buildings on Saco Island to the former Hathaway Shirt factory in Waterville, municipal officials and developers agreed on long-term, multi-million-dollar deals to spark the revitalization of long-idle properties. And each of these projects had one thing in common: Tax increment financing.

Fact is, tax increment financing agreements ˆ— or TIFs ˆ— have become a basic economic development tool for towns and cities all over Maine. "There aren't many major commercial or retail developments that take place in Maine now that don't include TIFs in some form," said Jim Nimon, business assistance director at the Department of Economic and Community Development.

TIFs have become prominent, even central, parts of redevelopment schemes for several moribund properties around Maine, making headlines in the process. Saco Island LLC is seeking a $100 million TIF package to overhaul mammoth mill buildings that have stood idle for more than 20 years. In Augusta, the historic Kennebec Arsenal has been vacant for even longer, but is soon to be revived with a $4.3 million TIF package that will forgive nearly 100% of future property taxes over 25 years.

Such major concessions are a relatively new factor in Maine TIFs, but reflect the conviction of city officials, such as Saco Mayor Mark Johnston and Augusta City Manager Bill Bridgeo, that these agreements represent a last-chance effort to bring historic buildings back onto the tax rolls. They say that without TIFs, the structures will simply have to be leveled, with all the history and ambience they represent gone as well.

The Kennebec Arsenal property is unique, according to Bridgeo ˆ— a national historic landmark that, thanks to its riverfront site, is among the city's most visible properties. It was because of those factors, he said, that the city council unanimously approved a TIF package that will create $1.4 million in revenue enhancement for the developer, North Carolina-based Niemann Capital. It's also why such a package of tax breaks is unlikely to be repeated. "We wouldn't have done it except in extraordinary circumstances," said Bridgeo. "Any other developer would have a very high standard to meet."

Despite the large size of some of these municipal tax concessions, TIFs have generated very little public controversy in Maine. Perhaps it's because they are solely a municipal economic development tool, rather than a statewide program. (In fact, as backers point out, TIFs are the only such tool, since Maine allows no local option taxes or municipally defined enterprise zones to spur development.) Also, and not so insignificantly, TIFs generally have achieved their intended purposes without busting a town's budget or impacting taxpayers, according to state officials who monitor the process.

The idea of forgiving taxes is often initially unpopular with citizen taxpayers, but the aim of putting idle properties ˆ— many of them in central, highly visible areas ˆ— back on the tax rolls often proves irresistible. That TIFs can be used to tackle environmental cleanups and provide hard-to-find affordable housing also adds to their appeal. Developers, too, are increasingly using TIFs as part of their portfolio in searching for new business in existing downtowns, in large part because lenders are now comfortable including tax concessions in their finance reviews.

Benefit or boondoggle?
The fairly rosy view of TIFs in Maine, however, is at odds with how they're viewed outside the state. Nationally, TIFs have been plagued with bad press and have attracted unusually strong academic critiques that charge the financing deals with having more to do with political gamesmanship than they do with rational economic development.

But in theory, most observers agree that TIFs make sense. It's the expansion of some programs beyond the original distressed areas that seems to have generated most of the controversy elsewhere. Some 46 states besides Maine have used TIFs, largely for the purpose of attracting development to blighted areas, often central cities or old industrial sites. Maine has added several other purposes to its TIF statutes, including environmental remediation and enhancement and, more recently, the provision of affordable housing units, aimed at bringing families and workers back downtown.

Elsewhere, though, TIFs are seen more as boondoggles than useful tools. One 2003 study released by Good Jobs First, a Washington, D.C.-based advocacy group, was highly critical of TIFs as practiced in many states. The study, titled "Straying from Good Intentions," outlined how most states have weakened enterprise zone and TIF programs. The argument of this and other studies is that while TIFs made sense in their original form, the definitions of "blighted" areas have become so expansive as to be meaningless when applied to particular projects. Developers, the critics charge, are getting tax breaks for projects that could have ˆ— and would have ˆ— been built anyway, and that there are no real public benefits to compensate for the reduced tax revenues.

David Merriam, a professor at Loyola University in Chicago, is even more specific in his criticisms, after studying the working of TIF agreements in Illinois and Wisconsin. TIFs in Illinois are supposed to be granted only in areas of cities where rental vacancy rates are significantly higher than other neighborhoods. Yet one developer managed to get a TIF deal on a project in the financial district of Chicago known as "the Loop," because of a statistical blip which showed a short-term increase in vacancies. "This is some of the highest priced real estate in the world," Merriam said. "If you grant a TIF there, you're saying that you'd grant it anywhere."

Merriam also said that the network of consultants putting together TIF deals for developers does not seem to discriminate between projects that truly need TIFs and those where they are simply an attractive add-on for the developer. "I've never heard of a consulting firm saying to a potential client, 'No, we can't TIF that,'" he said. "They always seem to find a way."

A study Merriam co-wrote this year for the Cambridge, Mass.-based Lincoln Institute of Land Policy also showed that growth rates in distressed areas sometimes increased after major TIFs were granted, but that the growth essentially was siphoned from nearby areas. "It was difficult to find any positive correlation between TIFs and overall growth in a region," Merriam said.

Local control
The experience in Maine has been rather different from the line-blurring and dealmaking that is chronicled in most of the national studies of TIFs. That's true for several reasons, including that TIFs came relatively late to Maine. (For more on the history of TIFs in Maine, see "It came from California" below.)

But unlike other states, Maine's rules don't allow the state to issue TIF agreements ˆ— they only can be granted by municipalities. The local focus, along with fairly stringent state rules, has kept the problems chronicled in the national studies from taking root here, according to Jim Nimon at DECD. He points out that TIFs cannot represent more than five percent of the taxable value of a community, and also are limited in terms of acreage and number. Municipalities can forgive up to 100% of property taxes for up to 30 years, though relatively few deals include that level of commitment. Except for historic, "white elephant" properties like the Saco mills and Augusta arsenal, the agreements generally are for smaller amounts and shorter time frames, and any tax breaks often are recycled for public infrastructure improvements rather than sent back to developers in the form of rebates.

The TIF rules continue to evolve in Maine, however. For example, creation of an official historic district allows a municipality to waive the usual five-percent valuation cap and the acreage rules, Nimon said. That change was engineered in 2003 by the Maine Service Center Coalition, a lobbying group based in Hallowell, which pointed out that the many vacant downtown buildings in a number of Maine cities were an economic drag both locally and at the state level.

Noreen Norton has worked as a city economic development official in Augusta and Gardiner, and now draws up TIF agreements as a consultant for Eaton Peabody in Augusta. She noted that TIFs are the only economic development tool available to towns other than such traditional devices as industrial and business parks.

Still, there continue to be arguments from anti-TIF voices that towns give away money to developers without necessarily receiving any long-term benefit, saying that a given development would have happened even without the TIF. This argument is valid, said Norton, but only for municipalities that fail to use the TIF statutes properly. That's because towns have plenty of latitude to impose conditions on the TIF arrangement, whether it's a minimum level of investment or the number of jobs created. "The way TIFs are structured is very, very flexible," she said. "A town that doesn't get a good deal is just not using the law the way it was intended."

Jim Nimon agrees with that assessment. The state's role in approving TIFs, he said, is based not on the specific terms of the agreement, but on whether the municipality held the required public hearing and correctly voted on the agreement. Other than that, municipalities are on their own, for better or worse.

There's no doubt that TIFs involve large amounts of money, committed over what are ˆ— at least for politicians ˆ— enormously long periods of time. Yet the lack of controversy over these agreements in the 20 years they've been permitted in Maine suggests that this is one area where lawmakers are more likely to tinker than to undertake wholesale changes.

It came from California

California has long been a Petri dish for innovation in state and local government. Take Proposition 13, which is generally credited with igniting the tax limitation movement that made Ronald Reagan president and continues to ripple through states like Maine, with the Palesky and TABOR referendums.

It's unsurprising, then, that the Golden State's history of innovation also includes tax increment financing, a concept launched in California in the early 1950s by which municipal officials could offer tax breaks to developers to help fund local improvements, whether it was buying property or building infrastructure. Here's a quick tour of Maine's TIF history.

The three-decade trip
The TIF concept spread fairly rapidly among western states as the 1950s wore on. But, like many trends from California, it took more than a few years to make it to the Pine Tree State. Maine's first TIF agreement was signed in 1985 by the city of Saco, which employed the financing arrangement to renovate unused mill space on Saco Island. In an interesting symmetry, one of the recent high-profile TIFs was granted in early November to Saco Island LLC, a development group that has planned a $100 million mixed-use renovation for mill buildings in the same complex. The city council approved a 30-year TIF that's expected to return roughly $35 million in property taxes to the development group.

A slow burn
In the early years, there were relatively few TIFs approved ˆ— just 26 statewide during the nine years through 1993, or less than three a year, according to Jim Nimon, who monitors TIFs for the state at the Department of Economic and Community Development. That was in large part because Maine's early TIF mechanism required municipalities to take out a bond to finance the public improvements required for a TIF-approved project. If the business failed ˆ— and some did ˆ— the town was on the hook for the entire cost of the bond. Understandably, many municipal officials were leery of that kind of commitment, even for a company that seemed ready to bring jobs to the community.

The key to growth
The situation changed in 1994, when the state's TIF statutes were amended to allow a new system of financing called "credit enhancement." Under this method, developers could count the anticipated future tax revenues forgone as part of their financing application with a bank or with equity investors, and borrow on the strength of the TIF agreement. In essence, the financial risk was removed from the town and transferred to the developer and its creditors.

Thanks to those rule changes, TIF agreements became much more popular in Maine. In fact, more TIFs ˆ— 31 in all ˆ— were signed in the next two years than had been approved in the previous nine years. In the five years after credit enhancement became the rule, 102 agreements were signed. From 2000-2004, a relatively flat time for the state economy, another 87 agreements were approved by the state.
Douglas Rooks

Sign up for Enews

Most Recent

Most Recent

Comments

Order a PDF