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Mall Revenue Lets City Go Shopping

Was Growth of Suburb Designed or Destined?

Des Moines' Boom: $1 Billion in Taxable Property

Some Promises Are Kept While Others Fizzle, But Leave Competitors Crying Foul

Tax Increment Financing: How It Works

Do TIFs Really Attract New Businesses?

[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]

The problem?

- Taxpayers don't get to decide which projects are worthy even though cities and counties have amassed $1.6 billion in debt.

- Some of the projects fail to generate any new tax revenue.

- The benefits gained by one town -- or one business -- may come at the expense of another down the road.

- Some of the tax dollars are wasted on projects that fail to provide net increases in jobs.

How do you know who wins and who loses?

That's the problem, experts say. No one's keeping track.

Today and Monday, The Des Moines Register reports on tax increment financing, an ever more widely used but little-understood financing tool that allows cities and counties to capture property taxes for new development. Once used to transform urban blight, TIF is being used liberally by cities and counties competing against one another for economic growth.

On Monday, read about an Iowa town where city leaders have leveraged most of their property tax base to pay for a slew of ongoing development projects -- some of which are controversial.

Is all the spending worth the price?

You decide.

Coralville, Ia. - Coral Ridge Mall promised more than good shopping when it opened eight years ago. The $100 million development also held the hope of spurring millions annually in new property taxes.

Today, the city has harnessed that money - now $7 million - but it's not being used on local services.

City leaders opted to keep the new tax dollars until 2017. The money will be used to pay off long-term debt on a $60 million hotel-convention center that opens this month.

Over time, that venture could yield hundreds of new part- and full-time jobs. But the new business will also compete with others in the area - including a similar hotel-convention center in downtown Iowa City - while consuming a ready pool of public money that some say should be used to pay for immediate needs.

"We're hurting our schools, parks and roads so the city can build" a luxury hotel, said Michelle Nagle, who ran unsuccessfully for Coralville mayor in 2003. "All taxpayers bear the brunt of it. And if it's not successful, we'll all pay again."

More cities across Iowa are tapping an economic development tool called tax increment financing, or TIF, to generate local dollars for economic development. The financing allows local governments to use new property tax dollars within special economic development districts to help pay for the costs of getting projects off the ground.

Pros and cons of TIF

Proponents view TIF as one of Iowa's best hopes for fulfilling the state's most pressing mandates: attracting new jobs, businesses and residents. Statewide, the value of property within the hundreds of special taxing districts that now blanket many Iowa communities has tripled to $6 billion. That's 5.6 percent of the state's entire $107 billion tax base.

"If you take a look at what's happened in the state of Iowa - take a look at the progress - I think you can credit a lot of it to this tool," said Bob Josten, a Des Moines bond attorney who has counseled hundreds of cities and counties on how to use the special financing.

But more Iowans are questioning the true cost of TIF. A report released this year by two Iowa State University researchers examined TIF's explosive use in recent years. Consider:

- The property tax dollars that cities and counties have amassed from TIF districts for development in the past decade have nearly tripled - to $192 million from $68.6 million.

"It's a substantial amount of new growth being hoarded or sequestered in the name of economic development - often as direct payments to specific firms," said David Swenson, an author of the ISU report.

- Many Iowa cities now use most of their new tax-base growth for economic development. Coralville, for example, has snagged about 70 percent - or $296 million - of new growth over the past decade for TIF projects; Des Moines has tapped about 62 percent - or $297 million; and West Des Moines, 26 percent - or $197.3 million.

Roughly 30 percent of new growth statewide is now used for economic development.

- Long-term debt incurred by cities and counties to pay for TIF projects grew to $1.6 billion in 2005, a 13 percent increase from 2003, the only two years in which the state has collected such information.

- Not all of the debt taken on is used to finance development that will directly create jobs or attract millions of dollars in investment.

More and more, the money is being used to pay for projects that local leaders believe improve residents' quality of life, such as housing, libraries, aquatic centers and bike trails.

- No government agency or organization in Iowa, meanwhile, keeps track of how many new jobs that investment really creates.

Impact on schools

School districts, in particular, pay a price. This year, Iowa school districts were blocked from about $79 million in new tax revenue because cities had earmarked those property tax dollars for development. State taxes picked up a large chunk of that loss - about $32 million - through the state funding formula. Local taxpayers paid another $47 million, the ISU reports show.

Margaret Buckton, a lobbyist for the Iowa Association of School Boards, said her group wants the Legislature to slow the growth of TIF.

Buckton said tax increment financing made sense when cities first began using it to reverse urban decay. Now TIF is subsidizing projects in places where property values are already "going gangbusters," she said.

Jim Seelman, president of the Clear Creek-Amana school board, is aware of the power cities and counties have to capture local tax dollars for economic development.

The fast-growing school district cannot tap tax dollars from nearly 60 percent of the value of area businesses and homes. No other district in the state is affected more by TIF, according to the Iowa Association of School Boards.

The state is forced to replace about half of the nearly $2 million in taxes lost annually in the school district because of TIF projects. That revenue could pay for Clear Creek-Amana's new $25 million elementary and high schools over time, Seelman said.

Instead, voters agreed to increase their school district taxes to finance construction of the schools, which will be built next year.

With Coralville leaders deciding to continue using tax dollars from the TIF district until 2017, only the youngest of Clear Creek-Amana's 1,425 students will benefit while they are in school from new money in the city's expanded tax base.

"I hope I'm not dead by the time it comes on the tax rolls," Seelman said.

The right decision?

City leaders, meanwhile, believe the area will benefit from their decision in 2002 to use new TIF tax dollars from development around the mall to build the hotel-convention center.

Coralville City Manager Kelly Hayworth said the project should attract retail and entertainment development along the Iowa River, even if the public project itself will be exempt from paying property taxes.

The center's competition, the $30 million project in Iowa City, also is receiving $6 million in TIF dollars.

Marc Moen, developer for the Iowa City project, hopes both find their niches, although he added that the convention centers have already competed with each other for business.

Development around the hotel-convention center won't help Clear Creek-Amana, said Seelman, the school board president. With Coralville leaders expanding the mall TIF district east along Interstate Highway 80, any new tax dollars generated by development around the convention center will benefit the Iowa City school district.

Buckton, the school lobbyist, said that's one big problem with tax increment financing: City and school boundaries often are very different, meaning schools can lose tax revenue to TIF projects but residents in the district are unable to vote on the leaders making the decisions.

"I call that taxation without representation," Buckton said.

Pleasant Hill, Ia. - Since 2000, the population of this city of just under 7,000 people has grown by about 40 percent with no increase in the local property tax rate.

Civic leaders believe tax increment financing played a substantial part.

The first of three local TIF districts was established in the late 1990s and was used to build infrastructure for the Copper Creek commercial development that sits just west of U.S. Highway 65. Today, the area is brimming with newer homes and businesses, including Legends American Grill, Okoboji Grill, Copper Creek Cinema and Sylvan Learning Center.

"My personal opinion is that without TIF, we'd be about 10 years back," said Bob Fagen, city manager. "There's no doubt in my mind."

No one knows how much development would have occurred in Pleasant Hill without the government assistance. Numerous developers predicted that the U.S. 65/Iowa Highway 5 bypass built in the late 1990s around Des Moines' east and south sides would spur growth in Pleasant Hill and other cities, similar to the kind that has occurred in West Des Moines, Clive, Urbandale and Waukee.

Today, the original TIF-related debt for infrastructure around the Copper Creek development has been repaid. But the city is still using the new property taxes generated in the development area to pay for miles of new sewers that extend far beyond the taxing district's original borders.

Historically, cities pay for such projects with money from their general funds. In using TIF proceeds to pay for the sewer project, Pleasant Hill shifts some of the higher cost of government services and education in the area to county residents, area schools and the state. That's because those taxing bodies have to return portions of the new taxes they collected from residents and businesses in TIF areas back to the city.

Another benefit: The sewers will allow the city to open up 3,500 acres to more development without having to seek approval for the spending from taxpayers or other taxing entities.

Peter Fisher, research director of the Iowa Policy Project, believes that's unfair.

"The question I always like to ask people is: Couldn't you have got there some other way?" said Fisher, who for years has researched such incentives. "The truth is, they got someone else to pay a greater share of the cost of government so they can put the money toward economic development."

Under a newer part of the TIF law, the city is required to use 27 percent of the new tax dollars generated in a largely residential TIF area - more than $600,000 - for low- to moderate-income housing.

Fagen said Pleasant Hill has begun setting aside funds. City leaders want to find a way to give the money directly to residents for upkeep of homes.

Pleasant Hill also has borrowed money for two other TIF-related projects. One is largely commercial and one is industrial.

Fisher said he believes tax increment financing should not be used for residential and commercial development. He and other researchers say the payoff to city coffers from new homes is typically small or nonexistent, while commercial development would probably happen anyway.

One of downtown Des Moines' most recognizable buildings, Principal Financial Group's building at 801 Grand Ave., was constructed without the use of tax increment financing 15 years ago.

But the 44-story landmark, valued at $68.9 million, is the exception instead of the rule.

Tax increment financing has played a role in Des Moines' most high-profile projects, from the Civic Center of Greater Des Moines and Nollen Plaza to the Martin Luther King Jr. Parkway extension. Cities use the money generated to help pay for the cost of adding streets or sewers or other big expenses related to developing a site.

"Every important project - from Meredith to Wells Fargo, Allied and more - has been helped with TIF funding," said Chris Coleman, a Des Moines City Council member. "It's the single best single tool we've had to spur development."

City Manager Rick Clark said Des Moines has used tax increment financing to help add nearly $1 billion in taxable property value, primarily downtown, since 1978.

But Leslie Gearhart, who renovated two historic apartment buildings in downtown's Gateway West area, wonders whether the costs of some projects outweigh the benefits.

Taxpayers may not see the bulk of tax benefits from a new office building or manufacturing plant for years, she said. Instead, those taxes are being used to help pay for the costs or incentives that went to attract the project.

"If it's such a great idea, why is the city always broke? It's madness, in a way," said Gearhart, co-owner of Metropolitan Properties, which includes the Arlington-Hallett apartments.

Principal officials said they didn't need public incentives to build 801 Grand, the tallest building in Des Moines. But the insurance and financial services firm has sought it on other projects.

"We're not opposed to TIF. We consider its use on case-by-case basis," said Sonja Sorrel, a Principal spokeswoman.

Bob Mickle, a retired city planner, said Des Moines has used tax increment financing wisely, looking for projects that benefit the entire community.

"The improvements have widely encouraged other development" and increased the tax base, Mickle said. "Without the urban renewal powers and the use of TIF as a financial instrument, Des Moines would not be the downtown it is today."

But he doesn't want to see the money used to help private companies compete against others in the same area.

For example, a hotel being discussed for a site near Wells Fargo Arena would compete with other downtown hotels. Another example: A group led by Ladco Development wants TIF money to build office space on 10th Street. That building would compete with others downtown for tenants, Mickle said.

"Des Moines needs another review of its TIF policy to see how it's being used," he said.

Altoona, Ia. - When city officials here heard a couple of local folks were interested in opening a cold-storage business in 2003, they were more than willing to lend a hand.

Iowa Cold Storage, they say, was exactly the kind of company they had in mind for tax increment financing, a form of taxpayer-financed assistance that has fast become Iowa cities' and counties' economic development tool of choice. By agreeing to provide the business with $4 million in property tax rebates, they wagered, Altoona would gain new jobs and, more important, thousands of dollars in additional tax revenue.

Absent from their consideration was what would happen to existing cold-storage businesses in Iowa if the new company was given that leg up with taxpayer dollars.

Some national experts say that was a mistake. While potentially powerful, the benefits of tax increment financing can be rendered useless to an area's overall economy if not used judiciously, they say. Often, promised jobs don't materialize. Other times, jobs are created but at the expense of other businesses or municipalities in the same area.

"Studies have found time and time again that the promised benefits do not occur," said Steve Stanek, managing editor of Budget & Tax News, published by the Chicago-based Heartland Institute, a nonpartisan organization that advocates free enterprise.

Research around the country also suggests that cities tend to favor large employers - Target, Wal-Mart, Cabella's have all benefited - for the tax breaks.

"The trouble is, you have governments picking winners and losers, or bureaucrats rather than markets deciding who qualifies for special treatment," said Richard Vedder, an economics professor at Ohio University. "That creates inequity and opens the door for the misallocation of resources."

Iowa Cold Storage's owners did not return repeated phone calls seeking interviews for this story.

However, in the company's application for taxpayer assistance and other state records, the company indicated it could create up to 82 jobs by doubling the size of a 100,000-square-foot facility and constructing a rail spur to move more pork and other meat from companies like Cargill and Swift to the West Coast for export.

"There is little direct competition or adverse affect on other Iowa competitors," company officials wrote in one application for assistance.

Among the other perks the company received: a $17 million guaranteed loan from the U.S. Department of Agriculture's Rural Development agency, backed by the city of Altoona.

Competitors, however, say the tax breaks that Iowa Cold Storage received from Altoona, as well as additional low-interest loans and economic development grants, gave it an unfair advantage.

"Iowa Cold Storage is using millions of TIF dollars to undercut our prices and our business," said Edward Muelhaupt, who helps run a competing cold-storage business not 10 minutes away from the Altoona facility.

Muelhaupt said his family-owned business, Des Moines Cold Storage, was forced to lay off almost half of its workers, in large part because it cannot compete with Iowa Cold Storage's pricing. Although he contends Des Moines Cold Storage's wages and benefits are comparable, even better, for workers, he said the tax breaks that Iowa Cold Storage received allowed it to charge customers less.

Jim Hintz, plant manager at nearby Millard Refrigerated Services, agreed. "I'm sure the decision was made to do good," he said. "But it's giving one person an unfair advantage over another at taxpayer expense."

State law requires little of cities and counties that want to use TIF for economic development. Basically, local governments agree to use new property taxes generated in so-called urban renewal zones to pay for some of the costs of a project or to provide rebates to the new business for a certain period of time.

City officials in Altoona, like other Des Moines-area municipal officials, signed an agreement years ago that prohibits them from luring business away from nearby cities. But nothing in that agreement or in state law prohibits one city from offering an existing company a leg up over its neighboring competitors.

"We didn't go into the city of Des Moines and steal a business from the city," said Altoona City Administrator Jeff Mark. "The agreement means that I can't recruit a business, and if I do recruit, I can't use tax increment financing."

Mark said the beauty of TIF is that it allows cities like Altoona to meet specific economic development needs.

Like other fast-growing cities and suburbs, Altoona has used TIF aggressively in recent years. The city spent almost as much this fiscal year on TIF projects, roughly $2.8 million, as it did on city services.

Much of the TIF money was used to lure employers - big-box retailers that were noticeably absent just a few years ago. Whereas big retailers have encountered obstacles in some communities in recent years, "we welcomed Wal-Mart here with a parade," he said.

In 1999, when Altoona created the TIF district that would house Wal-Mart, Target, Lowe's and other businesses, the city had 7,000 people. Today, it has 13,301 - and plenty of shopping to offer them.

Currently, roughly a third of Altoona's total property valuation is used to help pay for TIF-related development projects like that for Iowa Cold Storage. While city officials say they expect to use the incentive less, they would have no problem dangling the carrot again. Particularly welcome are big businesses that do not use a lot of utilities, such as water, but generate a lot in new property taxes, like Iowa Cold Storage.

"What the next big plan? I don't know," Mark said. "But if it captures the imagination of the mayor and City Council, we'll work on putting a package together."

Does Iowa track TIF spending?

Some cities and towns are failing to accurately report how much money is being collected for economic development, a new state legislative report shows.

Nearly three-quarters of Iowa cities using tax increment financing will collect more in revenue this year than they reported to the state, according to the Legislative Services Agency.

In total, cities are collecting about $14 million more than reported. The discrepancies were discovered by reviewing mandatory tax increment and budget documents filed with the state.

Critics complain that some cities are also accounting for only a small portion of the overall long-term debt they have taken on for TIF-related projects. Because cities are hemmed in by constitutional limits on how much debt they can carry, many report only payments made annually on that long-term debt.

State Rep. Jim Kurtenbach, R-Nevada, was able to get a law passed this year that requires greater reporting from cities and counties. The measure will require cities to better account for spending on TIF-related debt.

"Some cities are certainly pushing the envelope on how they're using TIF," Kurtenbach said. "They've come a long way from the original intent of the law."

But Bob Josten, a Dorsey & Whitney bond attorney and TIF proponent, said cities are not required to report more than what they owe annually.

Josten said that contractually, many cities are not obligated to pay anything if development does not occur as planned. Developers understand that when entering into agreements.

However, defaulting on a debt agreement, regardless of whether it's considered short- or long-term, could harm a city's credit rating and its reputation with businesses, experts say.

What cities gain most from TIF?

Tax increment financing has been most effective in Iowa when used in major metropolitan cities such as Des Moines, a new Iowa State University study shows. Large urban areas saw the greatest growth in property values within TIF areas, and they garnered the greatest percentage of job and population growth over the past 10 years.

Medium-sized cities fared the worst, seeing the smallest percentage growth in property tax values, according to the report. Medium and small cities both gained jobs, but overall, their populations still dropped 4 percent to 8 percent.

In spite of the gains, the researchers question whether much of the growth, especially in large cities, wouldn't have occurred without incentives.

Bob Josten, a bond attorney and proponent of the state's expanded use of TIF, said that's "absolute baloney."

"Much of the progress seen around the state has been made because this tool has been there and it's accessible," he said.
Do cities spend money to make money?

Iowa cities are spending a lot of money to spur growth. This year, Des Moines will take in $19.7 million in new revenue from TIF projects, but it will spend at least $18.2 million to pay for debt related to ongoing TIF projects, according to the Legislative Services Agency.

How does the tax shift work?

Cities spread that cost from TIF projects to others. Taxpayers and businesses have to pay more for local services, such as education or police protection, to make up for the money spent on development.
Some cities roll all new money spurred by development in a TIF area into new projects. Des Moines city leaders say they have been conservative in their use of TIF, returning at least 25 percent of the new property value added through such projects to government coffers to pay for services when they are done.

When TIF works, as it has in the Des Moines example, the overall value of property in a city rises over time because of the new development. That feeds the tax base, so more money can be used to pay for schools, roads, parks, and fire and police protection, among other services.

Des Moines, for example, will gain about $6 million in property taxes to spend on services from TIF projects this year.

While tax increment financing has helped booming suburban cities expand their tax bases and pay for costly infrastructure needed to lure businesses, there is little evidence to suggest such local incentives actually influence where new businesses locate, researchers say.

"In fact there is a growing amount of research indicating the vast majority of businesses would have located in the winning jurisdiction nonetheless," an April 2006 study released by Iowa State University found.

Peter Fisher and Alan Peters, two University of Iowa researchers, studied special incentives given in economic development zones in 13 states. The two found little evidence that economic development grants or tax incentives did much good.

"We figured, if they were working, the zones given the larger incentives would do better than those given trivial ones. That wasn't the case," Fisher said. "Often growth in the area was determined by other factors: crime, access to rail, the labor market. Even when they were successful, it didn't mean residents in the zone were helped. That's because the employers would draw workers from the whole metropolitan area."

Almost 6 percent of Iowa's total property tax base is being used to finance TIF-related projects. In spite of that substantial investment, little empirical evidence exists suggesting the financial tool alone is fueling population growth.

Thus far, the areas that have gained the most in population and tax growth are larger cities and metropolitan suburbs, especially along Interstate Highway 80. Experts say those areas follow a natural demographic shift in population base, from rural to urban areas.

How many jobs has TIF created?

From 1995 to 2004, Iowa had a net gain of 117,000 jobs, but no one knows how much of that growth was due to incentives such as tax increment financing. The number of municipalities using the incentive has more than doubled in that time.

How do TIFs impact taxes?

Excessive use of TIF districts can contribute to higher taxes. Recent demographic trends, though, suggest that keeping taxes low is a more effective way to attract business, according to Richard Vedder, an economics professor at Ohio University.

Migration patterns in the United States show people are fleeing high-tax, big-government states for those where they can keep more of their income.

From 1990 to 2004, nine states with no income tax grew faster than others, Vedder said.

"If you want to draw new business, I would make a deal to cap property taxes or cut them, and then tell the world: 'If you come to our community, you won't pay more than x-amount in property taxes,' " he said.

In studies, businesses frequently rate the cost and quality of workers, transportation access, education, taxes and regulations more important than tax incentives, Vedder said.

Questions about TIF?

If you have concerns or questions about the use of tax increment financing in your city or county, contact your city council, mayor or board of supervisors.

If you have concerns about Iowa's TIF law, contact your state legislator. For a list of legislators and their numbers go to: www.legis.state.ia.us.

Readers can also call The Register at (515) 284-8770.

'SCHEMES': Richard Vedder, an economics professor at Ohio University, said he understands why local government officials are tempted to use TIF districts to spur development. But while he favors tax competition among states, he is skeptical of "schemes" that allow people in the same area to pay different levels of the same tax.