John E. Mannillo
June 1, 2015
Tax Increment Financing (TIF), in theory can be a good tool for attracting private development in the City of Saint Paul. The basic idea is that “but for” the availability of the financing, a new project would not go forward and the city and other taxing units would not receive the taxes paid on the additional value the new project creates. The difference between new property taxes collected after a new development project compared with the taxes collected prior to the development is the “increment”. Future new tax dollars from a project can be borrowed against and capitalized thru “bonding”. These bond proceeds, collected up front but secured by project taxes to be paid over a defined period of years, can be granted back to the developer as an incentive to build the development. Guidelines that have been publicly accepted for these grants are:
- 9-to-12-year bond pay-off
- Paid back at competitive interest rates
- Usually, developer is required to use the grant for specified improvements
- The project would not be built “but for” a TIF grant
- Usually, but not in St. Paul, the developer is required to agree to a developer’s agreement in which the developer agrees to pay taxes at least sufficient to cover the repayment of the bonds. This is called an assessment agreement.
- Sometimes the projects are structured as revenue bond projects where the only security for payment of the bonds is the revenue from the project. Other times, these are structured as General Obligation bond projects where the full faith and credit of the city are put behind the bonds to guarantee payments. Sometimes, they are structured as “pay as you go” projects where the developer does not get the total grant funds up front, but only over time as taxes on the project are paid.
The hoped-for result is for the TIF project to continue will attract additional development not needing public subsidy and therefore increasing the tax base. The original TIF grant can be looked at as seeding new development. This is deemed consideration for the waiver of taxes by the public bodies. In the meantime, the public bodies need to fund their operations from taxes payable by others.
It is understood that there are currently 51 TIF districts in Saint Paul. We believe that these have transferred a significant financial burden onto the remaining taxpayers. We do not believe that anyone has ever computed what this burden shift amounts to in St. Paul and whether the benefits outweigh the burden of the program.
New development is usually politically attractive, especially to elected officials, but TIF is vulnerable to many abuses. TIF has effectively removed our most attractive developments from our tax rolls years into the future. This has happened for many of the following reasons in Saint Paul:
- Bond pay back periods are usually 25 years but often are rolled over for another 25 years at maturity of the bonds.
- TIF payments on a successful project can be pooled or used to pay for other unsuccessful TIF projects without public awareness.
- Assessment Agreements that require payments of taxes in the amount projected to pay the bonds are often not required by St. Paul even though they are standard in most other cities.
- Developments may be valued at cost for determining grant amounts, but may be taxed at market value, which may be considerably less at least for the early years. Developers will often immediately appeal their tax valuation after being placed in service and achieve a lower than projected valuation. A development agreement would prevent this.
- When new developers build in existing TIF districts, they may also be granted TIF funds.
- If a project under-performs, or fails, much of the original grant is lost as well.
- Ramsey County and the School District lose their share of taxes without any approval rights of a project.
When you add Government, churches and all other non-profit properties that may not even cover their own costs onto TIF districts, the Saint Paul taxpayer has an enormous and growing burden.