After reading City Administrator Bill Reynolds' opinion piece last week entitled "TIF: Separating fact from fiction," I was compelled to write a response to correct some factual inaccuracies in the article. I have a background in real estate and general contracting having previously held state licenses in both disciplines. In my current position I analyze and reduce risk as an engineering supervisor for a local medical device manufacturer. Given these credentials I view the application of TIFs differently than connected political insiders.
Lawyers and bureaucrats like to make the concept of TIF sound extremely complicated, but it really boils down to a few basic points:
- According to the city of Shakopee website, TIFs are defined as government subsidies for business.
- TIFs are only allowed to be used in instances where development would not occur without these government subsidies. This is known as the “but for” test.
- Once approved, the additional property tax generated as a result of the improved property value is diverted from the general fund to repay debts incurred as part of the development. This amount is known as the “increment."
- When the debts are fully repaid, the full taxes owed are again collected into the general fund. Just like with any loan the payback period varies depending on the loan amount, interest rates, and the value of the increment (loan payment). This can be as long as 25 years.
- Since the entirety of the increased property taxes (increment) is being used for debt repayment, neither the city, county, nor school district benefit from the increased revenues until the repayment period is complete.
Shakopee has historically used TIFs judiciously following a well-established policy whereby TIFs were used to bring high paying jobs to Shakopee. Reynolds cites the Seagate TIF which was within the parameters and objectives of prior policy. It was about bringing 800-plus good jobs to our community. This use of TIF was indeed a success, but as with any government manipulation in the market, there is potential for abuse and unintended consequences.
Recently approved subsidies for residential development are a much riskier game altogether. They’re not bringing high-paying jobs, they’re bringing a population surge. Mr. Reynolds states "Your taxes do not go up because of a TIF." Well, not directly, but they will go up because of the increased need for services that all of these new residents will require. New streets require maintenance, plowing, repair and replacement. Our new neighbors require city services, licenses and permits, police and fire protection. They may have kids in school, use parks and trails, you get the idea. While our new neighbors will certainly be paying the same high tax levels that you and I are, the increment above the current vacant land valuation will not go to pay for these additional needs. It will be used to repay development loans that shouldn’t have been the taxpayers’ responsibility in the first place. Your taxes may not go up immediately, but they will go up. This is why politicians love TIFs — they can divert future tax revenue to their well-connected friends and the damage doesn’t appear until they’ve safely moved on to higher office.
So why is the Canterbury residential project so risky? Michael Kerski, director of planning and development for the city of Shakopee recently stated that TIFs were like a mortgage. He is exactly right. When you and I purchase a home with a mortgage we are making certain assumptions about our future. We’ll have continued employment, increasing property values, inflation and interest rates will remain at a stable level, etc. Many of our neighbors learned the hard way 10 years ago that it’s difficult to predict economic conditions 30 years into the future. Market instability spilled over into the real estate market and caused the mortgage crisis.
What assumptions are we making about the future of our city? Continued growth? Changing demographics? The truth is we have no idea what the city will look like in 30 years, or even who will be living here. That didn’t stop the city from borrowing over $10 million in general obligation bonds for infrastructure to be repaid by future TIF revenues. Reynolds assures us that there are safeguards in place to ensure the taxpayers will not be on the hook if the project is unsuccessful. I would kindly remind Reynolds that Canterbury has a history of bankruptcy, and assessing a tax-foreclosed racetrack is not a guarantee that the taxpayers will be made whole. If the project is unsuccessful, you and I are on the hook for this now useless infrastructure. TIFs were first used in California in 1952. They outlawed them in 2008 after the economic collapse nearly bankrupted the state. They learned their lesson, will we?
New development should be self funding. Reynolds states that Canterbury is underutilized "due to the lack of development." OK sure, but when did it become a government responsibility to pay for private development? Many parts of our city have grown organically without public assistance. If Canterbury invested in roads years ago, it likely would have developed in a manner consistent with the prior comprehensive plans. The developer of the apartments has developed numerous projects of this magnitude and smaller without public assistance. Now we are incentivizing this drastic change in policy and planning with TIF at the expense of future taxpayers. With private investment in roads, this area could have developed with light industrial, office and office showroom/flex years ago. The lack of private investment failed to attract the new development that has been coming to Shakopee. The problem is not lack of development, it’s the lack of private investment that would naturally increase the value of the land and serve the already existing demand for development. Have these wealthy developers been waiting all these years for a TIF-friendly mayor and council? It appears their patience has been rewarded to the tune of $84 million.
Reynolds writes: "Bottom Line: Without using TIF, all city taxpayers would have to pay for these public infrastructure improvements." This is nonsense! Many streets in our city, including larger collector streets, have been paid 100 percent by developers. Vierling Drive, the west end projects, Southbridge, and most of the commercial streets in Valley Green other than Fourth Avenue have all been privately paid for.
There is no urgent need for this development. If the property owners don’t find it financially beneficial to pay for the infrastructure now they can develop it sometime in the future. The world isn’t producing any more land and the value will only continue to increase due to scarcity. Sooner or later, a private developer will have a market incentive to develop the area without taxpayer assistance incentivizing premature growth. Bottom Line: The public and private streets serving Canterbury should be paid for by Canterbury and not by taxpayers.
Reynolds further tries to suggest the use of TIF has little or no impact on the school district. Does anyone really believe that? If you’ve been following the financial condition of our school district you know that we’re essentially broke. As the $84 million subsidy for Canterbury was being considered we were discovering more and more problems with school district finances. The perfect storm was already brewing and we spent future revenues before they existed. The city could have negotiated the exclusion of the school district from the TIF so that our kids and teachers would get their share of the increased revenues. They didn’t, and our teachers were forced to accept fractional pay increases at the same time our mayor and council members voted to give wealthy developers $84 million. It was a short-sighted decision that will lead to future school district tax increases. We deserve better.