Organized opposition puts scrutiny on special tax districts

Tax Increment Financing is a fairly simple concept for improving a community – local government borrows money to help jump-start business in run-down areas and then pays it back from the increase in property taxes that comes along with the new development.

It’s been around for about 60 years, but is increasingly coming under fire in Wichita from a dedicated group of activists – and some public officials – who see it as an affront to the free-enterprise system, because, they say, it favors some businesses over others, putting the government in position of picking and choosing winners and losers in the economy.

The charge against TIF has been led by Americans for Prosperity, a group founded in the free-market economic theories promoted by Koch Industries owners Charles and David Koch.

They now have what they think is the perfect argument against TIF: a grocery store project in Planeview that got done even after Sedgwick County shot down the city’s plan to create a TIF district to assist in building it.

“The but-for argument that you can’t have development without incentives has kind of gone by the wayside,” said John Todd, a real estate agent and investor who is active in AFP and has opposed TIF districts at City Council meetings. “I thought it (the Planeview grocery store) was pretty important. Even though it was a small TIF it showed that if there’s a market demand for a particular product, the market will fill it.”

City Manager Robert Layton said TIF districts are used all over the country and “have been determined to one of the most successful tools in turning downtowns around.”

He said the Planeview case doesn’t say much about the effectiveness of TIFs one way or the other because the original developer sold the property after the county voted against the TIF. Plus, the grocer who went ahead and built the store still got public money from a federal Community Development Block Grant, albeit less than the original plan called for.

“I think it would be a better argument if that same (original) developer had gone ahead” with the plan, Layton said.

The activists’ complaints haven’t stopped TIF proposals. But they have made city and county governments take a longer look at how to make sure taxpayers are protected if developers’ plans go awry.

City and county officials recently received a report showing the condition of the city’s seven active TIF districts.

It showed that five are on pace to pay off their debt on or before their 20-year expiration dates.

However, two districts show shortfalls in their ending balances, including one that’s projected to come up $4 million short.

How local TIFs work

Created in the 1950s in California, TIF districts were originally a way for local governments to raise money to provide the local match for federal urban renewal grants.

Officials saw them as the closest thing to free money for local governments, because they tap into future property tax income from projects that otherwise probably would not be built.

In Kansas, only cities can create a TIF district. But because counties and school districts also have to give up their share of property taxes, either can veto the process of creating a TIF district at its inception.

But that’s the only power they can exercise over a TIF district.

Once it’s created, the city is free to make whatever development plans it wants for the site, change plans in midstream, or extend it beyond the regular 20-year lifespan if the tax increment fails to cover the public bond debt. If a district runs a surplus at the end of 20 years, the city can spend the money on additional improvements or dissolve the district early.

A new report by the city Finance Department shows that of the seven TIF districts currently active in Wichita, four have a deficit at present and three are in the black.

But projected forward, in some cases as far forward as 2030, the situation reverses itself.

Five TIF districts are expected to end in the black and two are forecast to fall short of paying their debts on time.

Layton said that’s not unusual and TIF districts generally tend to run shortfalls in their early years.

As development occurs over time – often with additional public assistance – the tax base rises and the taxes collected from the TIF district moves into position cover its bond payments.

When the TIF district ends, the city, county and school district get their regular share of property taxes going forward.

That’s happened with two city TIF districts, the original Old Town and the area east of Hillside and Central where developers have put in a hotel, restaurant and shops in response to expansion of Wesley Medical Center.

Wichita’s seven TIFs

As of now, here’s where the seven active TIF districts in Wichita stand:

Change in process

The ongoing protest against TIF development hasn’t pushed council member Jeff Longwell off his support for the concept.

“I’m not sure I would characterize it as a lot of opposition,” he said. “We’re hearing (repeatedly) from the same folks, really a handful of people.”

But the city has changed its process for handling TIFs, Longwell said.

While it wasn’t the case in the past, developers seeking TIF districts now have to back their plan with guarantees that they’ll cover the shortfall if the tax increment doesn’t cover the bond payments by the time the TIF district expires, he said.

As evidence of success, he points to the original Old Town and the district around Wesley Medical Center.

Both those TIF districts paid off their bonds and the additional development is now fully on the general property tax rolls.

“Some of that development absolutely would not have happened” without TIF assistance, Longwell said. “That kind of incentive is extremely important to business development. We’ve had some TIFs that paid off early and did everything they were supposed to do.”

And he disputes AFP’s argument that government incentives in the center city give those businesses an unfair advantage.

He pointed to newly developed and highly successful shopping areas in the western and eastern edges of Wichita as evidence that the city’s downtown effort is not bringing anybody else down.

“That argument doesn’t hold much water when you look at NewMarket Square or the Waterfront,” he said.

Such arguments don’t sway Sedgwick County Commissioner Karl Peterjohn, who says the TIF districts do little more than give a leg up to developers favored by City Hall.

From his campaign two years ago to a commission meeting two weeks ago, Peterjohn has repeatedly asked why not make the whole county a TIF district if it’s such a good thing.

Even the answer from county chief financial officer Chris Chronis, “It’s not legal,” doesn’t deter Peterjohn from the premise of his oft-repeated rhetorical question.

“This is a way of using tax funds for parking lots (for businesses) rather than core government functions such as police and fire,” Peterjohn said. “If there are losses, taxpayers end up paying the bill and if there’s profit, it goes to the private parties involved in the project.”

And he disputes the Longwell argument that the city would have missed out on development without the assistance of TIF districts.

Peterjohn said the kind of development spurred by TIFs would still have happened, just maybe not in the same places.

“The question is, can we have a level playing field that provides opportunity for everyone, not just those who have the best political connections,” he said.

This story was originally published November 20, 2011 at 5:00 AM with the headline "Organized opposition puts scrutiny on special tax districts."