Board of Estimates started out last night with a TIF presentation . . . and it wasn’t by the you-just-love-to-hate-him TIF Coordinator Joe Gromacki, but instead by Aaron Olver, the Economic Development Director. I believe this is part of the move away from demonizing one guy for city decisions about TIF and an attempt to let Gromacki do his analysis on TIF without all the outside influences.
Mayor Paul Soglin asks if they should do a roll call?
Rhodes-Conway says only to get people to shut up.
They do the roll call. Mayor says, ok, that’s cool. We have a few items on the agenda. We have a TIF presentation not the definitive but basic. The we’ll do the Board of Estimates agenda. Then the capital budget. Mayor asks staff who is going to do the presentation – Aaron Olver says he is – mayor says Aaron is going to drive.
There is a lovely powerpoint presentation that should be linked here, but was not as of this morning. If they have these materials prepared, I don’t know why they don’t make them available.
Olver says this is to make sure they are all on the same page going into the budget. He says this is basic, an introduction if you are not familiar, he tells them to ask questions or let him know if he goes too quickly. He also noted that technically he’s only 4 days on the job and tough questions will still go to Gromacki.
Olver starts out with some definitions.
A “TID” has a complicated definition on the screen, but this is where they define the area where they fix the levy and any increases in property value is used for projects, that is called increment. It funds different project costs when we spend money on particular projects.
“TIF”– that is the spending on the project. TID is the district, the geographic area. TIF is spending on a project.
“Generator” is a particular project that creates increment, an office building or medical center for example. Nice random example! 🙂
Olver reviews our history with TIF. We have created 37 TIDs, he shows a map of where they are. He says 11 are open, 2 are in process. Under state law we cannot have more than 12% of assessed value in TIDs, he says that is not a concern for us. He shows the city TIF report that they have.
TIF is a real estate development tool to create property tax base, state created it for municipalities to create more property tax base than would exist, and if we create new office space, we are hoping jobs will fill the offices.
There is quite a bit of complexity to TIF districts, there are mixed use, blight and industrial TIDs – there is a variety of complexity. He shows graph of what happens to property values if no TID, he show how the assessed value appreciates, he says the tax base increases at 2% per year is the assumption, that does not reflect the current market conditions. He also shows where tax base is going – to the taxing districts besides Madison including MATC, the School District and County. There is a small sliver that goes to the state, but we are ignoring that for these purposes.
Why would we create a TID? What are we hoping ot do? The four districts are overlying tax jurisdictions meet and agree to temporarily freeze or fix the base value of properties in a TID. It is frozen for up to 27 years, they are foregoing increment that they would have been able to spend, he shows the amount of money they forego. He explains that the hope is that if they invest in a project they will create even more property value and in doing so end up with greater tax base than what they have. When you hear talk about tax increment it is the amount over the frozen value.
“But for” is critical, if the development would have occurred without the creation of the district, it is foolish to create the TID, cuz you could get the growth right away, you need to convince yourself you need to find development wouldn’t occur but for the TID,
In Madison we have been closing TIDs in 12 years, we try to close it earlier, the benefit is that we get the increased tax base earlier in the process, so the value of creating the TID is greater for the city and other taxing jurisdictions, if the TID is distressed we can expand the life span.
Olver explains the process that TIF and TIDs come before the council and committees.
First, the city defines the area included in the TID with a specific boundary. They do a blight study, 50% of area in the TID has to be blighted, so they come up with proposed geographic boundary. That creates the flat base so other jurisdiction continue to get the base taxes, it doesn’t hurt them, they are voluntarily forgoing the growth in tax base. Next they do a project plan, its not a budget but a forecast.
The first thing they vote on is creating the TID. They don’t do it speculatively, they are not agreeing to fund a project, that comes later. They are just fixing the property tax base, then it goes to the Joint Review Board whis is 5 people including a citizen and a representative from each of the overlying districts. The 5 of them agree to create a TID.
There are two ways in create increment, appreciation happens even if there is no new construction. Second is through generators, some generators happen without the TIF assistance, there can still be projects that create value. Whole reason to create a TID is for the generator, usually the city makes a loan early in the life of the TID and the goal is to increase the trajectory of increased property taxes so when generator occurs you create increment. They borrow against the increment to make the loan, they need money up front so have to borrow it, increment comes later, but we have to be cautious because we are footing the bill up front.
The “50% rule” idea is to take the future increment and only invest 50% of it into the generator, it is conservative so it leaves you a margin of error. Wow, my notes got screwed up here . . . sorry. He points out that we are getting increment from natural appreciation of all the properties in the area and the from the new projects. We then spend money on things like streets. At least I think that is what he said
He says usually the city does the borrowing, some you will hear talk about “pay as you go” or developer financed TIF. In that case we would repay the private/developer loan with the increment, we can do that if its less expensive, usually not though. We borrow at a lower rate so it usually saves money on interest costs so we need less increment and we can close the district sooner and reap benefits faster if city borrows.
How do we decide how much to give, we do a “gap analysis”, we look at cost, what the developer can finance and the gap, that is how much the project needs. The TIF amount is incredibly sensitive to the design considerations, which is on a on a different decision track, we might drive up costs or down the value which can change the gap – there is a sensitivity.
Second they ask what the city can afford, how much increment will they create, they look at the net present value then use 50% rule and only use that. They have a 7% discount rate which means that they are discounting the future value of money at 7% which is higher than inflation, but they are being conservative, they are protecting the city from miscalculation – then based on gap and increment generated we negotiate an amount.
He points out that Tif policy requires that land use and TIF decisions happen at the same time. So, the statement 2 paragraphs up doesn’t quite make sense then to some degree
Olver talks about the underwriting considerations – he says the 50% rule is a hot topic. They try to only provide 50% or less to the project per policy, we are being conservative, that way there is room for a margin of error. If we conform to policy, we have money for other projects and then we are hitting home runs. After that it is a gray area, you will probably see projects come in asking for more than 50% and you have to wrestle with when that is appropriate, there are areas that are challenging, and you will see requests in the 50 – 100% range, and the other category is when they get greater than 100%, then we are saying we will spend every dollar that this generator creates plus take funds from the increase in the value of properties in the district. This is risky, you might do it cuz it is so catalytic that it will lead to other development that will draw in more development or because the public good is so great. He says we went over 50% for the Madison Mark because we wanted affordable housing downtown I’m quite certain I voted against that and really pissed off Judy Olson at the time. He also talks about the Hilton and Convention Center where we used more than 100%.
Olver shows a case study of the Bassett TID, I missed all the numbers he was throwing out, but i think the value was 206M when they started and it move to 485M, value of the property was up 13%, but the tax growth was 8.6 – that is not as great because of the mill rate. He says this also generated excess increment, they paid off the 12.7M based on bills they owed and had 4M left over, that was then paid out to tax jurisdictions. 6.6M went to generators, 4.1M went to streets and other projects.
Missed some about closing a TID.
He says there are a few policy issues – what happens with school districts when they create TIDs. The school funding formula doesn’t impact operating budget for them, but the school district will have a few concerns, the mill rate and tax burden on average home is one. If we don’t do a project they can close the district get the value back on tax rolls and lower the mil rate. You may hear concerns about if the increment is actually going to materialize, what if we are wrong? We require a guarantee typically, but that only occurs through the life of the district, the school district and others might be concerned that not as big of a benefit, they also might be concerned about infrastructure costs because the city would otherwise pay for that on our own. They could be concerned we are using their money for this investment. To the city, this is very attractive, we only pay 39% of the costs, out of $1 we only pay 39 cents so if we get street improvements they are a discount using the tax base of other jurisdictions. TIF can be helpful with levy limit, we can raise the levy 0% or net new construction whatever is more (I swear that is what he said, but it doesn’t make sense), we get more investment with TIF and that can help us with the levy limit.
He says there are some misconceptions about TIF. This doesn’t change your taxes, they continue to be the same, it just matters where the money goes, doesn’t impact property tax values but it could make properties more attractive to buyers. This is not related to condemnation, they are in different parts of the statutes. This has nothing nothing to do with building code enforcement, there are not broader implications. I don’t know about that last statement, I have heard some interesting stories over the years about how much people ended up paying because of building inspection and then the infrastructure costs for streets, sidewalks etc when the city does its work.
We have a good track record, 27 districts have closed, none have failed, we have created 1.3b in increment, $11M per year with a 9 year payback on the projects.
Mayor says would like to do the Board of Estimate agenda, unless there are pressing questions, they can come back and revisit when they do the TIF portion of capital budget.
Sue Ellingson asks if we make a loan to a generator and repay it with the increment, how is this a loan to the developer. It’s paid out of taxes.
Olver says that to the developer it feels like a grant, we borrow $1M and we invest it, we are repaying the loan with the increment and from developer point of view it is a grant.
Mark Clear spouting the business community line says but they still pay the taxes. Well, yeah, I don’t get the point, they have to pay the taxes either way. It’s not like they are doing anything that you and I don’t already do.
Olver says reason to borrow the money and invest is if the investment is going to pay back the loan.
Soglin says if others have questions they should keep a record of them, it would be good to know the questions and share the answers of the entire body.
Lauren Cnare also doing a commercial for the business community says that DMI (Downtown Madison Inc) has a really nice paper on TIF.
