April 24, 2008

Failed projects suck up local tax dollars

Caledonia Village President Ron Coutts recently talked about being leery of investing village money into projects with the hope of attracting businesses, or one big business, to the village. The city of Racine's TID situation is the reason why Coutts is right to be cautious.

Before we get to why, let's define TID. It stands for tax incremental district, which doesn't explain much. TIDs are important to local governments because (when done well) they can help spur development (ie. new construction, new businesses, new jobs, new homes, etc.) TIDs are used to pay for all of the stuff you need to build a development.

Roads, water lines, electrical lanes, stormwater drainage and all that other stuff we don't like to think about too much. Somebody has to pay for all of that work, it can run into the millions of dollars to get land ready for the fun stuff (like an office building or condo tower). The TID allows a city to say, "We'll pay for all of the infrastructure stuff, and then we'll pay ourselves back with property taxes on the new development."

It's a really good deal for the local government, because they get to keep all of the taxes on the new development. They don't have to share with the school district, the state, Gateway Technical College, or even their own budget. All of the taxes go into paying for the roads and pipes needed to make the development possible.

If all works well, a TID is created, development occurs, the TID is paid off and then everyone (schools, the state, the county, Gateway, etc.) get paid. But that's a big "if."

All of this is a big lead into news that came out of the city's Joint Review Board meeting today. Yes, that's a pretty bland name, and yes, not much happens with this board. It's largely an oversight committee comprised of the people who run the finances for local governments.

In the 1980s, Racine set up six TIDs (maybe more, but we're only talking about six for this article). Three of these TIDs have been successful. One was used to redevelop the city's shoreline from Downtown north over the Root River. This has led to a $48.2 million increase in property value since 1983 and annual payout (a tax increment) of $1.064 million. Not bad.

Another TID created in 1989 led to the creation of Gaslight Pointe, complete with the Chancery and all of those nice condos. That's led to $43.6 million in additional property value and annual tax payment of $962,00o. Again, not bad.

And the last of the good news: the TID created in 1985 that led to the Olsen Industrial Park between Durand Avenue and Chicory Road on the city's south side. That's led to $19.3 million in new property value and $425,000 in annual tax payments.

Brian O'Connell, director of development for the city, referrred to these TIDs as the donors. They made enough money to give away annual payments to a group called the "laggards." This is the bad news portion of the story.

Three TIDs created in the 1980s have not fared well. All are losing money, and worse, all of them are preventing the good TIDs from paying taxes to our schools and government services. Here's why: the bad TIDs still owe money. The city borrowed millions to setup these areas for development, but they haven't paid off. Now, the city either has to pay for the debt out of its general fund (it would be over a million dollars per year), or it has to take money from the successful TIDs (the donors) and pay down the debt.

Let's look at the failed projects:

1. The Shoop Parking Ramp. The city invested $2.06 million to build the ramp in 1983, but it's property value has only increased by $2.98 million in 25 years. The city needs to borrow about $120,000 from its good TIDs to pay off this debt.

2. The Lake Avenue Parking Ramp. The city spent $3.9 million in 1993 to build the ramp and repair streets and sewer and water mains. Its led to $19.7 million in increased property value, but it's short of expectations and the TID still needs money. The city will be paying this project off through 2011. It's worth noting here that the state's revenue limits hurt these projects. When the Legislature limited how much local governments could raise taxes, it limited how much money the TIDs could raise. That's hurt their botttomline.

3. Case. The city invested $10.1 million in 1990 along State Street in preparation for Case's expansion. When this was approved, the company had bought International Harvester and was going strong. But the bottom fell out, the need for a new office building disappeared, and Racine is still paying for the development (which, incidentally, is exactly what Coutts is worried about with rumors of CNH looking at building in Caledonia).

So what does all of this means? Not much, really. O'Connell noted at the beginning of the Joint Review Board meeting that the committee's actions were largely housekeeping. These TIDs were set in motion decades ago, and the report is simply the result of past decision.

But it's an important cautionary tale for governments interested in TIDs. The districts often span such large periods of time that no planner or elected official could anticipate the changes that will influence future development.

The big loser in all of this is Racine Unified and the other local governments that survive year-to-year on property taxes. New development should mean additional revenue for schools, the technical college and local programs. But TIDs claim all of the money for additional development for decades.

The city's shoreline TID will start paying local governments in 2010. The other two donors will begin paying in 2012, and the three laggards will return to the tax rolls in 2014. It'd be interesting to calculate the city's rate of return on their TID investments in the 1980s and '90s. It's questionable as to whether they have really paid off.


  1. Very well written, explained it well, thanks for taking the time to research and blog it!

  2. You forgot BID 1 that is used to fund
    The DRC with 30 K a year and filled with no bid contract, must be nice.
    Perhaps one could look into the money spent on WRJN and ask:
    1) Is that the best use of funds to bring in new business into Downtown Racine or a nice way to say thanks to two members?
    2) If bringing business of any kind to downtown the goal( as long as it not from Blacks or Hispanics) how about using a radio station that people tune in.

  3. Nice article.

    I don't get something, though. Does not the City own the Shoop and Lake Ave. ramps? Did they set up a TID to build them and then continue to own them? If so, how would property taxes eventually be generated from the publicly owned ramps?

    Any insight would be appreciated.

  4. how would property taxes eventually be generated from the publicly owned ramps? [or a street like State street.]

    The tax incremental financing district includes private property surrounding the improvement in the public property. The expectation is that an improvement in the public land will result in a large investment by private property owners in the surrounding area, resulting in higher property values and thus taxes.

    In the case of a parking ramp, the proponents claimed that the property owners would redevelop their properties if only there were enough parking spaces available.

    Case promised that they would build a number of new buildings on their State Street campus if the city would rehabilitate State Street. The new buildings would bring a large number of Case employees to that location. Which in turn would attract businesses to the State Street business district near Case.

    The TIF district included the Case campus and parts of the State Street business district. The resulting increase in property values on both the Case property and the nearby businesses would eventually pay for the improvements in State Street. Case didn't build all of the buildings they promised and without those employees working in the area, the surrounding businesses didn't develop.

    Apparently Case is considering building elsewhere rather than belatedly fulfilling their commitment.

  5. Gee why would I not want to build in that area... I know the high crime that is taking place. We have lots of DAYLIGHT robberies going on.
    And a city who would rather invest in
    Grant Writers and No Bid Contacts for the Uptown project then police.