What is TIF and how could it be used to fund an arena in Milwaukee?
As the Milwaukee Bucks’ new owners continue their march toward a new facility, the elephant in the room grows: How will the Bucks and the local community find another $200 or $300 million to fund a new arena?
Two alternatives to a Miller Park-like sales tax that have been floated around lately – most recently by Wisconsin Gov. Scott Walker – are utilizing the state’s existing jock tax and implementing tax incremental financing, or TIF. We addressed the former financing method last month, and we’ll dive into TIFs below.
On its face, TIF is a relatively simple concept. TIFs are meant to spur the development or redevelopment of struggling areas and are “the most widely used economic development tool among the nation’s local governments,” according the Public Policy Forum, a nonpartisan research organization in Milwaukee. Every state except Arizona authorizes the use of TIF at municipal levels.
In Wisconsin, municipalities – cities, villages, and to a lesser extent, towns – can deem that a “blighted” area needs improvement or development. The municipal government can then draft up improvements to that area – including new infrastructure like roads, sidewalks and sewer systems. That area is then designated as a TIF district, or TID. Developers and companies can also negotiate with municipalities to secure a TID where they wish to locate. (State oversight is “minimal,” according to the Department of Revenue.)
It’s understood that property values within a TID should rise alongside development — as an area develops, it generally becomes more appealing and competitive for residential, business and investment ventures, thereby increasing the value of the properties. (In cases of poor planning or economic downturn, however, it’s possible for property values to decrease during a TID.) And as property values rise within a TID, property taxes also increase.
The additional revenue generated from higher property taxes within a TID can be seen as “extra” – tax revenue that simply wouldn’t have been collected without the TID. Thus, that additional tax revenue seems like natural source for paying off the previous or ongoing development efforts. As the Public Policy Forum puts it, TIDs fund contemporary projects “by leveraging future property tax revenues” (emphasis mine).
Right before a TID is enacted, the municipality records the total value of taxable property within the district. This is coined the TID’s “base value.” Once the TID is in effect, the municipality and all other entities that receive property tax revenue – which can include the county, school district, technical college, lake district, sanitary district and metro sewer district – must agree to only receive tax revenue from the previously set base value.
The difference between the total amount of property taxes collected and the previously set base value is called the value increment or incremental value. The difference between the revenue generated from the total amount of property taxes and the base amount of property taxes is called incremental taxes. The incremental tax revenue is then set aside to pay off the development projects until the TID expires (i.e., pays off all development costs). Once the TID ends, the entities that receive property tax revenue finally collect from the district’s full property value rather than the previously set base value.
Generally, development in TIDs is funded upfront by the municipalities, which can issue general obligation public bonds to cover the cost. The municipalities are then reimbursed through the revenue generated from the incremental taxes.
However, a TID can also be funded by private entities – developers, companies, property owners, etc. – that stand to benefit from the development. In those cases, the municipalities issue limited obligation debt to the developers. According to the Marquette Sports Law Review:
“The developer lends money to the governmental unit; the governmental unit uses the money to pay for the project costs to help the developer’s project; and the loan is evidenced by a debt instrument issued by the governmental unit to the developer or developer bond. Under the developer bond, the governmental unit repays the developer out of tax increment that is generated by the district.”
(The Department of Revenue’s graphic below should help visualize the moving parts. Terms on the chart are bolded in the text below.)
To (over)simplify things, let’s say a municipality wants to develop a stagnating two-block area (or a developer wants to build new stores on a two-block area of vacated property) in 2014. The municipality establishes the two-block area as a TID and notes that the total property value within that boundary is, say, currently $500,000, generating $11,200 in property taxes this year. Thus, $500,000 is now the base value. Let’s say the municipality, county, local school district and local technical college all receive equal revenue from property taxes in that two-block area. Those entities must now agree to only collect property tax revenues in that area from the set base value – $500,000 – until the TID runs out. The assumption is that without the TID development initiatives, the base value would have remained the same or decreased anyway.
Let’s say that the following year, due to the development and improvements, the total property value within the TID increased to $600,000, generating $13,440 in property taxes. The taxing entities – the municipality, county, local school district and local technical college – still only collect from the tax revenue generated via the base value of $500,000. The $100,000 difference between the new property value ($600,000) and the base value ($500,000) is called the value increment or incremental value. The $2,240 difference between the taxes generated from the new property value ($13,440) and the base value ($11,200) is called incremental taxes or tax increment revenue. This “additional” revenue – the taxes collected through the incremental value – is used solely to pay off the debt incurred from the development project.
When the TID is terminated (i.e., paid off) – let’s say in 2034 – the base value becomes irrelevant. At that point, the taxing entities again receive their full share of the property tax revenue from the property value, which should be significantly higher than when the TID began.
Criticisms of TIF
Like the “jock tax,” publicly financing a new arena via TIF will not be without controversy.
The Public Policy Forum noted two frequent criticisms: “that TIF harms other local taxing jurisdictions, such as school districts, and that there is little or no benefit for property value growth.”
The validity of the former argument is largely dependent on whether a TID area would have increased in property value regardless of implementing a TID. If the area would have increased in value without a TID, then it’s certainly possible that the taxing entities are missing out on additional property tax revenue.
The latter argument is often contested. “Empirical evidence … is growing in support of TIF’s positive influence on property values and job growth,” the Public Policy Forum concluded.
The Public Policy Forum added: “(Some environmentalists and urban activists) argue that TIF rules promote much easier development over green spaces and encourage urban sprawl, both of which are viewed as deleterious for central cities and traditional urban main streets. They suggest that broad interpretations of blight designations and ‘but for’ tests allow municipalities to designate almost any property ‘blighted.’”
The argument that nearly any property can be framed as “blighted” is particularly vital and will be addressed in the next section.
George Lefcoe, a professor of law at the University of Southern California, published an article in 2011 examining other “uses and abuses” of TIF. He addressed the following six fundamental criticisms of TIF:
1) “Prosperous, growing outer suburbs use TIF to lure jobs from center cities and inner suburbs, and the low income and minority populations that live there.”
2) “TIF should be confined to serious blighted urban areas and not used, as cities often do, to support projects in already well-established, successful commercial areas.”
Lefcoe categorized these first two criticisms as “questionable” and “objectionable,” arguing that they “overestimate what TIF can realistically achieve.”
3) “TIF is often used to subsidize retail development for the property and sales taxes it will bring, displacing sales from other locations.”
4) “Cities sponsoring tax increment projects drain property tax revenues from schools and counties while attracting new residents and firms, increasing demands for public services.”
As alluded to earlier in this section, Lefcoe wrote that the third and fourth criticisms are “contingent because their validity depends on a comparison of a project’s success in adding net present value to the tax base greater than the local tax revenues that would have been generated had the TIF-funded project not been built.”
5) “Local governments sometimes confer excessive TIF-funded benefits to attract private redevelopers.”
6) “Many local governments hide or neglect to gather information that would reveal whether each of their TIF projects was a net producer or loser, and whether actual property tax yields matched the estimated yields forecast when the project was approved.”
Lefcoe concluded that the fifth and sixth arguments “merit serious attention” and “threaten popular support for such (TIF) programs.”
It’s important to note that criticisms of TIF vary from project to project and location to location. States and municipalities have their own unique TIF regulations, and some scrutinize the application of TIDs far more than others do. (Wisconsin is rather TIF-friendly, which will be covered below.)
Wisconsin’s broad application of TIDs
Wisconsin first embraced TIF in 1975 as a remedy for blighted urban areas. Over the years, its use has drastically increased – and broadened. Per the Public Policy Forum, only 10 Wisconsin counties failed to implement TIF by 1990. By 2006, only three counties did not utilize TIF. As of this June, there were nearly 1,143 active TIDs throughout Wisconsin, according to the Department of Revenue.
In a 2009 report that analyzed Wisconsin’s TIF usage from 1990 to 2006, the Public Policy Forum released several important findings:
- Wisconsin municipalities are increasingly using TIF (400 percent increase between 1990 and 2006).
- Larger cities are less likely to use TIF than medium-sized ones.
- Municipalities already experiencing economic growth are actually the most likely to use TIF.
- Property values have increased — “statewide, for every $1 increase of TIF value (amount spent), total property value is estimated to increase by $6.”
- Suburbs tend to overuse TIF (there is a point of diminishing returns), while Wisconsin’s largest cities underutilize it.
The third finding gives some credence to the criticism that TIF no longer exists solely as a remedy to “blighted” areas – its original purpose. Rather, TIF’s application has greatly expanded in Wisconsin, likely due to broad interpretation of the state’s lax criteria for TIDs.
Wisconsin has set a few straightforward limits on TIF. For example, a municipality may only use up to 12 percent of its total property value on TIF (though its incremental value can surpass that percentage). Further, according to the Public Policy Forum, TIDs must be terminated within 27 years (though, again, there are exceptions; municipalities that file for “distressed” or “severely distressed” classifications are eligible for an extension).
From there, criteria for TIF eligibility are largely up to interpretation. The Public Policy Forum identified three major statutory standards for TIF:
- Proof that the area, including its properties, is “blighted”
- Proof that “if not for” TIF/a TID, the area would not be developed
- Proof – such as revenue projections – that the TID can be paid off with property tax increment by the maximum limit of years
The first standard can be circumvented rather easily. “Language in Wisconsin’s state regulations as to what constitutes blight is fairly broad and municipalities have used this latitude to define blight in different ways,” the Public Forum w Policy wrote. For example, there is precedent for establishing a TID on grounds that a certain property is underutilized and could be better utilized through TIF. A municipality could also use the vague argument that the “assessed value is much below what the market would dictate,” according to the Public Policy Forum. Both arguments could be applied to myriad potential arena locations.
The second standard is equally ambiguous. It’s nearly impossible to definitively prove, particularly before the fact, whether certain area will develop “if not for” a TID. Further, according to the Public Policy Forum, there is no statutory rubric for determining whether development could occur without TIF. Thus, municipalities and developers can resort to technicalities. An argument can be made that “the development exactly as proposed would not happen” without TIF. The Public Policy Forum offered this example: “Perhaps a baseball stadium could be built without TIF financing, but a baseball stadium with particular physical or design amenities wouldn’t be built without the TIF.”
While meeting the first two criteria may not be particularly difficult, the Bucks could face a unique barrier in establishing a TID given the third standard. The Public Policy forum noted that the current home of the Bucks, the BMO Harris Bradley Center, resides on tax-exempt public land. Thus, if the new arena were also built on land exempt from property taxes, the TID would need to include surrounding lands and properties that pay property taxes in order to pay off the development. One option could be creating an entertainment district encompassing the new arena – something that has been suggested by the Wisconsin Center District but would require significantly more public funding.
“We raise these issues not to suggest that it is inappropriate to consider TIF as a financing mechanism for these sports facilities,” the Public Policy Forum wrote in April, “but simply to note that the state’s TIF legislation did establish certain criteria that dictate the types of projects that are eligible for TIF. Consequently, proponents of the use of TIF for these projects not only will have to convince legislative bodies of the projects’ economic merits and benefits for taxpayers, but also that they meet the statutory criteria for using TIF.”
Milwaukee has established around 80 TIDs for projects ranging from the creation of the Harley-Davidson Museum, to the redevelopment of Park East Corridor and the Grant Avenue commercial district, to the construction of the Water Street Riverwalk. According to a 2013 report on Milwaukee’s TIDs, 31 of the city’s 45 active TIDs increased in value last year. “This positively reverses a trend in which 60% (of TIDs) declined in value in 2012, 54% declined in 2011, and 67% declined in 2010,” the report read. The approval process for creating a TID is as follows, according to the City of Milwaukee:
“The City of Milwaukee must first formulate a detailed project plan for the development or redevelopment of a specific geographic area … In the City of Milwaukee, a TIF project plan must be approved by several bodies. First, the project receives a hearing before the Joint Review Board, which is made up of five (5) representatives – one each from the City of Milwaukee, Milwaukee County, Milwaukee Public Schools (MPS), and the Milwaukee Technical School System – and a citizen representative. After an initial hearing before the Joint Review Board, the Redevelopment Authority of the City of Milwaukee (RACM) holds a public hearing on the TIF project and votes on the project. After RACM action, the Milwaukee Common Council’s Zoning & Neighborhood Development (ZND) Committee holds a hearing on the TIF project. Once adopted by the ZND Committee, the project is either approved or rejected by the full Common Council. Upon adoption by the Common Council, the Joint Review Board makes a final recommendation on the project and it is forwarded to the Mayor for … ultimate approval.”
The Public Policy Forum noted that other states, such as Minnesota, have legislated much stricter standards for TIF. For example, Minnesota only allows TIF for blighted, redevelopment areas, which are determined based on whether:
- “Parcels consisting of 70 percent of the area of the district are occupied by buildings, streets, utilities, paved or gravel parking lots, or other similar structures”
- “More than 50 percent of the buildings, not including outbuildings, are structurally substandard to a degree requiring substantial renovation or clearance”
Such strict standards for TIF could eliminate many of its criticisms in Wisconsin. However, it could also eliminate Milwaukee’s ability to use TIF for a new state-of-the-art facility, as the team presumably won’t risk attendance problems by plopping a new arena in a legitimately “blighted” area. (See the Milwaukee Business Journal’s slideshow for the six leading arena sites.)
Is TIF a realistic route to a new arena?
Matthew Parlow, a law professor and associate dean for academic affairs at Marquette University, told Bucksketball.com that it’s possible a TID could be implemented for a new facility as an alternative to a sales tax.
“It could be a tool, though not a lot of places use TIF districts (for arenas),” said Parlow, who serves on the BMO Harris Bradley Center’s board of directors and represents it on the Cultural and Entertainment Capital Needs Task Force.
Although TIDs aren’t a common source of public financing for new sports facilities, there are precedents. For instance, Dallas created the Sports Arena TIF District in 1998 to fund public infrastructure – particularly roadways – and surrounding development for the American Airlines Center, where the Dallas Mavericks currently play.
Around that same time, Columbus implemented TIF to help build Nationwide Arena and lure an expansion NHL team, which became the Columbus Blue Jackets. The TID was a success, according to an analysis in the Marquette Sports Law Review:
“Columbus taxpayers ultimately contributed $44 million to finance the arena district, which was financed through municipal bonds that were repaid through property taxes generated from a thirty-year tax TIF district. However, the TIF district has been an overwhelming success that has allowed Columbus to profit greatly from its initial investment. The district was initially projected to generate $47 million in tax revenue over a thirty-year period, but has instead generated over $31 million per year. The success of the TIF district is also proof of Nationwide Arena’s success in transforming Columbus, Ohio into a regional destination. The Nationwide Arena district includes restaurants, bars, office space, a movie theater, a concert pavilion, a baseball stadium, hotels, and apartment and condominium structure.”
Most recently, Detroit and the NHL’s Red Wings released their plans last month for a $450 million facility. In a scathing review of the deal, Deadspin reported that the city is funding $262 million, or 58 percent, of the project – primarily through a TID. (Note: The cost of a new facility in Milwaukee and the amount of public financing will likely be somewhere around those figures.)
In April, the Milwaukee Journal Sentinel reported that the Cultural and Entertainment Capital Needs Task Force is considering an enhanced TIF, or “super TIF,” as a method for helping finance an arena or larger entertainment district. In addition to using property taxes, a super TIF “would capture state income taxes and state sales taxes generated within the district to repay that debt.”
However, the Milwaukee Journal Sentinel noted, “because the proposal would take state income and sales taxes, the idea would need approval by the state Legislature and Gov. Scott Walker.” That could be a significant roadblock. Walker has stated several times that he will only support a sales tax if residents vote for it via a referendum, and polls suggest that isn’t likely.
While implementing a TID or super TIF district may be neither ideal nor likely, the important thing is that – for now – it’s still a legitimate option. At this point, with time ticking on a new arena and a climate of tax opposition in Wisconsin, more options are certainly better than no options.
“You see [TIFs] a lot in development, in terms of when cities redevelop their downtown areas and invest a lot in infrastructure and new buildings,” Parlow said. “You see it in those places, but you just don’t see it as much with arenas.
“But cities can be as creative as they want trying to find ways to finance and pay back public bonds or money spent on new arenas.”
Categories: Arena Debates