Des Moines Business Record, IA
07-30-06
Priming the pump
By Joe Gardyasz
joegardyasz@bpcdm.com
More than one-quarter of the state's property tax growth has been generated
within TIF districts in the past decade
Drive up and down the residential streets around the Tournament Club of Iowa in
Polk City, and you'll see more than 100 single-family homes or townhouses that
have been built or are under construction since the golf course opened three
years ago.
The 570-acre golf course community, which includes the 18-hole Arnold Palmer
signature course, was made possible in part by its designation as a tax increment
financing, or TIF, district.
Like each of the 117 TIF districts established within Polk County, Polk City's TIF
allows the city to set aside tax revenue from the incremental increase in property
values to pay for infrastructure improvements such as roads and sewers within
the TIF district. In most cases, cities issue bonds that are repaid by the proceeds
from the incremental tax revenues.
"I guess at a time that Polk City needed to initiate some smart growth, (TIF) came
along at the right time," said City Administrator Gary Mahannah.
"It provides developers an incentive to develop now, rather than sometime in the
future," said Bob Josten, a Des Moines attorney who largely wrote the law
governing TIF in Iowa and has structured numerous TIF agreements for
municipalities. "That's been the major use of TIF, to literally create cash flow for
developers. And where we're using it extensively now is for housing."
Winners and losers
Statewide, 375 communities are now using TIF authority in 2,358 TIF districts, a
number that has grown from fewer than 750 districts in 1991, according to an
Iowa State University study released in April. The study's author, ISU economist
Dave Swenson, questions whether the state is receiving sufficient benefit from
TIF districts, which in the past 10 years have generated - and for the most part
retained -- more than one-quarter of the state's property tax growth.
At the same time, there are 573 Iowa communities, or 60 percent, that aren't
using TIF authority, primarily because there are no prospects for large projects to
generate the incremental increases in tax revenues. Those communities grew at
a rate of just 1.2 percent in total taxable property valuation in the past decade.
"What you're really doing is just robbing Peter to pay Paul," said Swenson, who
concluded that TIF "works best by a large margin in the state's booming
suburban and metropolitan communities," but has had "only lackluster results at
best among many of its struggling medium-sized cities."
In Polk City, for instance, an earlier TIF district in which the bonds were paid off
about three years ago "worked out, but it was shaky for a while," said Mahannah.
That TIF, for the city's Edgewater Addition, didn't achieve the growth that was
anticipated for the commercial portion of the project, though the housing was
successful, he said. Following the Tournament Club TIF, the city council decided
to no longer approve TIF districts for housing, both to keep residential property
tax rates low and to quell complaints of favoritism, Mahannah said.
Greater Des Moines has arguably been the biggest winner from TIF, at least as
measured by additional property values within these districts. Ten Greater Des
Moines cities, led by Des Moines, accounted for 35 percent of the statewide
growth in incremental value within TIF districts in the past 10 years, according to
the study.
The projects made possible by TIF have included some of the metro's largest
developments, among them the Jordan Creek Town Center and the Wells Fargo
Home Mortgage headquarters in West Des Moines and mixed office-retail
projects such as the Galleria at Jordan Creek.
Coupled with the use of tax rebates, TIF has evolved into a means for Iowa to
compete with other states for economic development projects. West Des Moines
city officials, for instance, say the amendment of a TIF district in 2003 to extend
streets, sewer and water lines for the Wells Fargo project was a crucial piece of
the financial package that enabled the city to win the project.
Critics, however, say TIF provides incentive to companies and developers that
would have located within a district anyway. Developers acknowledge that
competing TIF incentives may encourage companies to relocate from one Iowa
city to another, or even from one Greater Des Moines office park to another, to
get the best deal.
Economic warfare
Developed in California in the 1950s, tax increment financing was originally
designed as a tool to spur redevelopment of blighted urban areas. Now, every
state but Arizona has enacted some form of TIF legislation.
When TIF districts were first authorized by the Iowa Legislature in 1957 as part of
the state's urban renewal law, municipalities could only use the technique in slum
or blighted areas.
In 1986, the Legislature amended the urban renewal statute to make economic
development one of the "public purposes" for which a TIF district could be
established.
"Now, it can be used in virtually any area where a local government sees a need
for growth," Josten said. In 1996, the Legislature granted authority for cities to
use TIF authority for low- to moderate-income housing projects, and then
expanded that authority to all housing projects.
As cities have shifted their use of TIF from traditional urban renewal projects to
economic development, several groups, among them the Iowa Farm Bureau
Federation and the Iowa Policy Project, have called for reform of policies they
say have strayed significantly from their original intent.
TIF "encourages cities to engage in economic warfare with each other," said
Peter Fisher, research director of the Iowa Policy Project. The non-profit, nonpartisan research organization in 2003 called for legislative reforms that would
have prohibited municipalities from using TIF revenues to fund tax abatements.
"The trend that disturbs me is [using TIF for] retail projects," Fisher said,
"because it's all about location. The best site is the best site. You don't need to
offer incentives to retail to get it to locate."
Another group unsuccessfully pushed three years ago to abolish TIF altogether.
Using data from a 2002 Iowa State University study, the Iowa Farm Bureau
Federation advocated eliminating the state's 2,000 TIF districts to form a
consolidated property tax revenue stream to back the sale of $2 billion in bonds.
The proceeds would have been used to lower property taxes, equalize school
funding statewide and to fund new infrastructure projects.
"It ultimately died of its own weight," said Josten. "The reason was, I think, that
the Legislature overestimated the negatives of TIF and underestimated the
economic development benefits. The real thing that carried the day is that the
Legislature realized there wasn't anything out there to replace TIF."
Joe Johnson, a policy adviser for the Iowa Farm Bureau Federation, said TIF
should be part of a larger discussion on property tax reform, "because we know
that when you form a TIF [district], that takes away from the tax base that's
available to the rest of the area." Citing an Iowa Taxpayers Association study
released last week that showed Iowa's average commercial property tax
assessment is 67 percent higher than the national average, Johnson said it's
likely the Legislature will revisit property tax reform next session.
Jeff Riese, president of the Polk-Des Moines Taxpayers Association, said there
have been some uses of TIF that "just make you shake your head," such as one
Iowa city - Maquoketa -- that used TIF to extend water and sewer to build a car
wash.
Besides choosing their projects carefully, cities should also avoid extending the
time limit on the repayment of the district or its geographic boundaries as a
fairness issue to the rest of the community, he said.
"Some governments do tend to stretch the limits, and that has to be watched,"
Riese said. "But overall, it's a good tool and it's being used correctly."