Sunday, February 21, 2010

The Edgewater TIF. Or, Can I Use My MasterCard to Pay My Visa Bill???

As I watch the debates and political maneuvering around the proposed Edgewater development, it is hard not to consider ALL of the repercussions of the decisions that will be made before this is all over. One of the most invisible aspects of the debate is how TIF financing will affect the already-strained finances of Madison's public schools.

No matter where one lands on the question of how many permanent jobs will be created, the right of people to be heard on development issues that affect their neighborhoods, the value of historic preservation, or public financing for private development, there is one issue that should be made visible to all parties: the TIF financing package is going to hurt the tax base available to our public schools until the TIF is closed out (which could be over 20 years from now).

While proponents of TIF financing rightly assert that TIF increases property value and by extension increases the tax base for the jurisdictions that levy property taxes, there is a hidden side that is rarely discussed publicly in the crush to jump on the “pro-economic development” bandwagon: that benefit does not become available until the district is closed. While districts often close earlier, they may remain open for over 20 years. The benefit does not accrue for years down the road, and in the meantime the value of the affected properties is frozen at the start year of the district.

Not to worry, says the Department of Revenue:

In many areas the school levy represents the biggest portion of the local property tax bill, so it is not a surprise that a large portion of tax increment revenues comes from the school levy. This doesn’t mean that schools don’t get the money they need, however. The school levy that goes toward the tax increment is levied on top of the taxes they need to operate. The school levy is subject to the revenue caps, but within those constraints the schools get all the money they require. The tax increment makes the levy higher than it would otherwise be, but only for as long as the district has a TID in it. Once the TID is closed the larger tax base can help to reduce the tax burden on district residents. (emphasis added)

In other words, the Department of Revenue adopts the same posture adopted by the Joint Finance Committee when it went forward with the plan that left Madison with the biggest cut in state aid to any Wisconsin district: “It's OK. Schools don't need to be hurt because districts can raise property taxes to cover the revenue that they lost.” This leaves the dirty work to school districts, who must choose between raising taxes and hurting property owners during a recession, or cutting programs and adding to the damage done by successive years of cuts since Wisconsin's revenue caps went into effect in 1993.

The Double Whammy

In the case of the Edgewater, and the recently-approved expansion of the capitol square TID #23, Madison Metropolitan School District gets a double whammy of revenue loss. How does this work and what does it mean?

TID #23 as Precursor to the Edgewater Proposal

 On January 25, the Joint Review Board voted to approve the substitute amended project plan for TID #23. In full disclosure, I represent MMSD on the board and, at that meeting, was the sole vote against approving the plan at the direction of the Madison Board of Education's unanimous vote.

TID encompasses an area around the capitol square, and having been very successful, was scheduled to be closed out with the properties involved going to full value on the tax rolls and value accrued during the life of the district returned to the schools, City of Madison, Dane County, and MATC.

In a move that admittedly has no economic development impact, the city proposed that the district be kept open and expanded to other blocks around the square to cover cost overruns in the original TIF and, rather than creating a new TIF district, make improvements to the appearance of the areas added to the district:
The intent and purpose of this amendment to the TID #23 Project Plan is to increase the amount of total TID expenditures in the TID Project Plan. This increase in TID expenditures will provide for certain infrastructure projects to be completed, while also addressing an increase total project costs incurred to date.
 And what are some of the new costs?

a. Capital Square Improvements
Capital Square Improvements include built-in benches, granite curbing, replacement planters, tree replacement and related square improvement projects
Estimated Cost……………………………………...……………………$1,185,000
b. Rotary Plaza
Rotary Plaza improvements near the new Madison Children’s Museum.
Estimated Cost…………………………………………….……………….$157,000
c. 100 Block “Spoke” Streets
Improvements to 100 Block “Spoke” Streets including King St., S. Hamilton, N. Hamilton, E. Mifflin, E. Washington, W. Washington Ave., Martin Luther King, Jr., Blvd, and Wisconsin Ave.
Estimated Cost………………………………………………………….….$170,000
d. Survey, Design, and Inspection (15%)
Survey, design, and inspection of proposed improvements.
Estimated Cost……………………………………………………….…….$239,000

A secondary issue related to TID #23 emerged in response to questions at the Joint Review Board meeting: the owners of properties on the capitol square and State St. are exempt from assessments when improvements are made to sidewalks and streets in front of their properties. So, unlike homeowners, or the Madison Metropolitan School District, the full cost of improvements is born by the tax payers rather than shared with the owners of properties in these select - and highly valued - commercial blocks. We are still trying to understand that one, having received hefty charges for the stoplight that was installed at Gammon Road and Tree Lane (inn front of Memorial High School), the roundabout that went in to control the non-existent traffic near the new Olson School, and the East Washington improvements in front of East. The bottom line would appear to be capitol area property owners 2, Madison schools 0 on the public finance front.
Edgewater and TID #32
Having successfully slipped all of us a Mickey on TID #23, the city appears to be preparing to do it again with TID #32. TID #32, which includes University Square, Capitol Centre, and the Overture Center, appears to also fall within the level of success that would require that it be closed out in the near future.

Rather than creating a new district, which would be cleaner, the city is again proposing to expand a TIF district that should be closed out under law. Again, the life of the district is extended, keeping the lucrative downtown properties remain on the tax rolls at their base value - not their market value - until the Edgewater piece that has been added to the district is closed out. During that time, MMSD - again the biggest loser - does not get the payout on the TIF or property taxes at the full value of some of downtown Madison's most lucrative new develpments.

If the Common Council yields to pressure to approve this plan, it compounds the revenue loss created through the TID #23 decision. How big are the numbers for our schools? I do not have final numbers, but can predict that they will not be pretty and should be carefully scrutinized when they are made public.

Not Many Heroes Here

In the meantime, people who are watching to see if the Board of Education will close its $30 million gap by levying the maximum property tax (est. $300 for an average home; does not include any 4K start-up), may want to also watch the gamesmanship over financing for the Edgewater. These are hits to the district budget that could be avoided if the purported civic value for our public schools translates into a willingness to finance private development in ways that help rather than hurt school finances


stevesc said...

Thank you for the informative post. The issue about expanding TIDs that meet criteria for closing, rather than creating new TIDs, is one I was not aware of. It would be helpful to know what the actual tax loss to MMSD as a result of these actions. And why does the City prefer to extend rather than create new districts?

The issue of lost revenue during TID life is more complicated than portrayed however. The idea behind TIF is that the new tax revenue would not exist "but for" the public loan (TIF) that made the development possible. This is better in theory than in practice however.

Mark Clear said...

Lucy, MMSD has been (and continues to be) the happy beneficiary of millions of dollars of tax increment that would not have existed if not for TIF. It's an investment in the future, a concept that should be familiar. The decision to close a TID is not nearly so straightforward as you describe, as there are often other projects that could be captured (or lost). You may remember that Ald. Compton fought against the closing of TID 24 in 2008 for that very reason.

Lucy Mathiak said...
This comment has been removed by the author.
Lucy Mathiak said...

Mark, thank you for sharing your perspective. Certainly, there are many ways to look at TIF, and I respect your right and interest in advocating for what you believe to be the proper way to proceed.

We can agree that successful TIFs generate additional revenue over the long term. And yes, I understand that there is an investment in the future when TIFs are created.

I realize that it is inconvenient for me to question the impact of the decisions that you and other city leaders are promoting. However, it would be completely irresponsible if I failed to ask very legitimate questions about the purposes for which TID #23 was expanded. I'm sure that the aesthetic improvements will be lovely for the downtown, but am struggling to balance that against the impact of struggling neighborhood schools on property values throughout the city.

It would be equally irresponsible of me to fail to point out the down side of decisions to extend the life of successful TID's involving prime real estate. Especially when the down side has a significant impact on public school finance and, very likely, homeowners who may well see their taxes raised to make up for the funds that are not coming to the district when TIDs are artificially extended rather than closed out.

As you say, these are complicated decisions. And I am very much working to understand not just the impact of the proposals that are coming forward, but also how these proposals conform to TIF guidelines.

I do know that we are looking at this from very different perspectives. You, from your agenda as a city mover and shaker, and me as a member of a board that must live with decisions over which we have little control outside of the mostly symbolic no vote when we believe that the proposal hurts the interest of our public schools.

For me, the recent city proposals are a starting point rather than an end point. I am looking forward to working with people who can provide a good economic analysis of whether the financial gains that the district will reap when the extended TIDs are closed out are, as touted, significantly larger than the benefits that would accrue if the TIDs were closed out rather than extended (and the full value of property taxes made available to schools.)

Scot said...

stevesc said:
"And why does the City prefer to extend rather than create new districts?"

The city likes to have and keep TIF districts open so it can fund improvements -like Lucy mentioned for the Square- without sharing the resulting increased taxes with the county and schools. It's like paying for dental work with pre-tax income - new tax revenue pays off the the city's projects before income is shared with other taxing entities.

In the case of Edgewater, it goes beyond that because it's such a bad deal in terms of return on our investment. A whopping $16 million of TIF will only result in $45 million of added property value and a $900K tax increment.

Compare that to the bigger University Square project which got a more modest $3 million in TIF and is already returning over $1 million/year in taxes even though it's not fully rented.

If $3 million for Univ Square square filled a "gap", $16 million for Edgewater fills a Grand Canyon.

If Edgewater wasn't scabbed onto a successful district and was by itself, it would take 18 years just to pay off the principal of the loan. Adding origination costs, interest and just a few private or public works projects would take the Edgewater district to the 27 year statutory limit or beyond (while not sharing the increased taxes with the county and schools the whole time).

The "but for" argument for Edgewater is turned on its head by the city's Hunden Hotel study which labeled new downtown hotels that are not near Monona Terrace as "threats" to improving the viability of the convention center. See pages 20-21 of Hunden at:
Subsidizing Edgewater now increases the difficulty of reducing our $3 million annual subsidy of Monona Terrace.

In addition, Edgewater's TIF subsidized rooms and condos may actually drive down assessments and taxes of existing downtown hotels and high end condos (condo market already overbuilt) while TIF withholds new taxes from a big chunk of downtown from schools.