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Tiff About TIFs ~ City Leaders Spar Over...
Tiff About TIFs ~ City Leaders Spar Over Private Development Financing Using Taxpayer Dollars
June 14, 2014
By Jay Mejia
After General Motors shut down its Leeds Assembly auto plant in Kansas City, MO in 1988, many jobs evaporated, hitting the local economy hard. Area city and state leaders scrambled to find ways to ensure that potentially blighted areas could be redeveloped.
Enter TIFs or tax-increment financing. TIFs were designed as a financial instrument to pay for public and private improvements. This includes demolishing abandoned buildings and plowing land for new development.
Fast forward to 2014. An $18.5 million TIF contract is being negotiated to finance part of the proposed massive Summit Place shopping center project in the northwest part of Lee’s Summit near Interstate 470 and U.S. Highway 50. While $5 million will be spent for roads and sewers, $13.5 million of new taxes under the TIF will be redirected to reimburse private developer RED Development for construction costs of grading, rock walls and parking lots.
If approved, this will be the first time that the city of Lee’s Summit has authorized the use of TIFs for private development costs.
In Lee’s Summit, the TIF approval process requires a redevelopment plan that must be presented to the TIF Commission and then to the City Council. If approved, a redevelopment area is formed by action of the City Council and a life span is established for the district.
The net effect of tax increment financing is to permit a developer to use a portion of taxes that otherwise would be paid on the completed project to repay all or a portion of the development costs.
According to documents created by the City of Lee’s Summit, “This assistance reduces the net annual debt service on the completed project and increases the rate of return on the project for the developer, making some projects financially feasible that otherwise would not be.”
Some city leaders are enthusiastic to help fund Summit Place using TIF, saying the deal will bring jobs to the area and have a positive impact on the economy. Some are appalled. One of those is City Councilmember Bob Johnson.
Johnson should know. As a state legislator he helped spearhead the creation of TIFs and later reform efforts to ensure TIFs are used for the right reasons. Johnson wants to reign in economic incentives for private developers in Lee’s Summit.
“Private developers should put up their own money to fund their projects,” Johnson said. “If a business development idea is so good, why should we put our city and tax base at risk?”
Johnson believes that TIFs should be used for purposes other than private retail development.
“We should be investing and creating centers for knowledge workers in financial services, software and biotechnology,” Johnson said. “Retail does not bring many quality jobs. Those are low-paying jobs and it drains money from other projects.”
Councilman Derek Holland is not against the TIF, however, he is concerned that financing the Summit Place private project with taxpayer dollars is taking the city into uncharted waters.
“I have no issue with using TIF for public projects like roads, bridges and sewers,” Holland said. “We’re being asked for $13.5 million to pay for their front door.”
Other members of the council are more sanguine about the proposed $18.5 million TIF, including councilmember Rob Binney.
“The next step will be the actual contract coming back to council for approval and we’ll get a chance to see how the plan will lay out,” Binney said. “The history of Lee’s Summit has been fiscally conservative in using TIFs. We’ll take a hard look at it before we agree to anything.”
Binney was upbeat about moving the Summit Place project forward.
“There will be local benefits through the creation of jobs for construction, engineers and landscaping,” he added. “Additional retailers in the area will also stop the sales leakage to other areas like Independence and points south where they have big box stores.”
Binney admitted that the actual retail jobs will not likely be the high-salaried jobs of those in technology, but said it is still a prudent move.
“Whenever there is interest in our city, we must take a close look,” Binney said. “Creating jobs is a good thing for many folks, even a part-time job is still income. If we can increase economic activity that will create more opportunity for growth.”
However, the Show-Me Institute, a non-profit think tank that supports free market solutions for state policy, contends that the combination of a very large number of local governments and the inclusion of sales taxation in Missouri TIF law has been a dangerous mixture. According to the institute, Missouri local governments use TIF more than all but two other states.
In a reform proposal it recently put forth before the state legislature, the institute said:
“The quest by cities to give away more tax incentives for new sales tax dollars has had a dramatic impact on Missouri. It has increased government management of the economy, made subsidies a permanent fixture, failed to achieve economic growth and has transferred the cost risk of profit-making businesses to the taxpayers.”
“TIFs are not a road to growth – it is a road to poverty,” said Patrick Ishmael, a policy analyst with the institute. “Providing private developers with green field opportunities with taxpayer dollars is not correcting or solving an economic problem. You shouldn’t use subsidies to shift retail, you’re just cannibalizing the existing market.”
While the institute is bent on reducing the government’s purported role in economic development, city officials suggest at least taking a look at ways to spur growth and job development.
Lee’s Summit City Manager Steve Arbo said that as the city explores TIFs and other financing mechanisms, that the city will do everything it can to protect the best interest of taxpayers.
“In the event that the revenues from the TIF are not sufficient to pay for the debt service, other communities have agreed to make up the shortfall with general fund revenues,” Arbo said. “This could result in the reduction of available funds for basic municipal services, such as Fire, Police and Public Works activities.
The City of Lee’s Summit traditionally has not found this type of commitment acceptable. None of our current TIFs have that type of financial commitment and I don’t anticipate our position will change at any time in the near future.”
Next: TIFs Gone Wild: Lessons Learned