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Tax Increment Financing (TIF)

According to a recent Reading Eagle article, Jack Gulati, owner of Stokesay Castle, wants to use “aide” through the use of the PA Tax Increment Financing (TIF) Program to complete this development.  The PA TIF program is complex (by design) and most people don’t fully understand what the program actually is and how it works.  The larger issue is that the state has a history of misrepresenting properties covered under the TIF program, lacks accountability and tracking of results and is wrought with risk.  In order to fully understand it, we had to do a little research… ok a LOT of research. We started taking a deeper look at the origins of the TIF program, what the requirements are as part of the PA implementation of TIF and some of the potential risks associated with using TIF money.  The results were shocking.

What is Tax Increment Financing (TIF)?

“(TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district.”  – The Lincoln Institute of Land Policy. The first TIF was used in California in the 1952.  More on this later…

The concept in creating the TIF program was for local municipalities to use tax dollars to assist in funding private projects with the potential benefit of increased tax revenues over time to eventually make their money back (and more) in the long term.    Blighted or depressed areas that are not currently providing useful tax revenue or jobs, could be redeveloped using some local tax dollars into additional tax revenue and job producing areas to the benefit of all.  Once a project is approved a district is defined around the area of the project who will essentially fund it via local taxes.  Districts to pull additional taxes (often by raising taxes) can be as flexible as defined by the TIF committee and can include all or portions of cities, townships, and boroughs as needed. From the Pennsylvania Department of Community & Economic Development: “… [TIF] is designed to promote and stimulate the general economic welfare of various regions and communities in the commonwealth of Pennsylvania and assist in the development, redevelopment, and revitalization…” This is essentially what Jack Gulati is pitching to our local government.  He wants the local area to provide futures based tax revenue to assist in his badly designed private project.  Moreover, there are a lot of risks.  One in particular is that if his project does not work, or he miscalculated the future property values, the revenue created will never align and the local municipality will be stuck with the bill and have no choice but to raise taxes again to cover the gap in funding.

60 years after California started the TIF program nearly every state in the United States has some kind of TIF program; except California. That’s right – virtually every state is using TIF programs except the state that started it all.  That’s because there are a lot of risks which don’t always work out for municipalities (and whole states).   “…in 2011 Governor Jerry Brown enacted legislation which led to elimination of California’s nearly 400 redevelopment agencies that implemented TIFs, in response to California’s Fiscal 2010 Emergency Proclamation thereby stopping the diversion of property tax revenues from public funding… TIF subsidies are not appropriated directly from a city’s budget, but the city incurs loss through foregone tax revenue.”  – Are We Getting Our Money’s Worth? Tax-Increment Financing and Urban Redevelopment In Denver.  We will cover a lot of the risks in the rest of this post, but it turns out that if TIF programs are not properly managed, local municipalities and whole states can go bankrupt when the proceeds of the projects funded through TIF do not provide what they promised.  Moreover, this can happen pretty easily.  This is largely because the whole TIF process was created to allow local municipalities to bypass voting on projects that the community does not agree with.  “In California, the local urban renewal match required city-wide bond issues which, in turn, required voter approval, and voters frequently declined to give that approval. In a move similar to many other state and local efforts to circumvent voter approval rules, California authorized TIF as a means of raising the matching funds.” – Richard Briffault, Faculty at Columbia Law School.  So the TIF program was created to bypass voting rights so private companies can defer development costs. This alone should anger everyone.  Some might say, “Yeah but that’s California… in PA we wouldn’t allow that to happen…” which leads us to Pennsylvania’s implementation of TIF.

PA TIF Requirements

Pennsylvania does have some specific terms that need to be met in order to qualify for TIF funding – many of which a reasonable resident would determine that Jack Gulati’s project does not meet. That said, large business owners have abused the legal and lobbying process to the point that just about any project can meet the requirements. In the following sections we will examine the requirements and the issues that have arisen as a result.

Here are Pennsylvania’s TIF Terms:

  • Project must be located in a blighted area (containing the characteristics of blight as described in the Urban Redevelopment Law) – this requirement has become a joke in Pennsylvania given the extensive lobbying by large corporations like Walmart. Please see the Blight section below for a full write-up and explanation of this issue.  Gulati expects us to believe that a beautiful set of PA woodlands is “blighted.”  By that definition most of PA is blighted.
  • Project must be located within a TIF district – the committee is being created now to determine the TIF district if it is approved. Please contact the school board members and let them know your thoughts on this.
  • Project must be located on previously utilized property or on undeveloped property that is planned and zoned for development – we are putting together a post specifically on zoning. Needless to say, there are plenty of issues with the zoning law for the area that this development is being built on. Keep up to date with The Latest section of SaveOurMountain.org
  • Project must demonstrate its ability to comply with the TIF law prior to the issuance of bonds or other indebtedness
  • Applicants must show that the revenue to be realized as a result of the project will be sufficient to offset the amount of the debt service – Jack needs to prove that his community will be successful and add enough tax revenue to pay back the dollars borrowed as part of the TIF process. There are five 55+ communities within 10 miles or less of Spook Lane. Many have newly constructed homes still on the market. This does not include 55+ apartment complexes/facilities.  Additionally, there are 1,543 newly constructed homes for sale in Berks County; 449 of those are located in the 19606 zip code +10 mile radius (data as of 11/5/2015). Again, this figure only includes newly constructed homes that are on the market.   What if the units in Gulati’s proposed new development don’t sell (see the plans here)? Simply stated, the “aide” described at the beginning of this petition wouldn’t be able to be paid back and the township and taxpayers would be responsible.  This is one of the reasons that everyone needs to attend the township supervisors meetings, school board meetings, and any other public discussion about this project.
  • Business or private developers must agree to create a certain number of permanent full-time jobs within the TIF district – Permanent, full-time jobs are the key here. After the developers leave, we should all be questioning how a 55+ community will bring 102 PERMANENT jobs, as noted in the Reading Eagle, to the area.  Given that this portion of the terms are blurred by phrases like, “a certain number” we suspect Jack’s lawyers and attorneys to attempt to bypass this requirement despite its perceived meaning.

The ability for Jack to participate in the TIF program should be denied for many reasons – especially including those above.  A reasonable person would ascertain that the largest of those requirement violations is the blight requirement.  Read on for more about PA’s ever evolving definition of “blight”.

Blight

Dictionary.com defines blight in this situation as “the state or result of being blighted or deteriorated; dilapidation; decay: urban blight.”  Over the last few decades, Pennsylvania courts, pushed by large corporations and high-wealth individuals such as Jack Gulati have rewritten that definition.

“…the legal definition of blight is often fairly open-ended and frequently goes well beyond the slum image of decayed or deteriorated structures, unsafe and unsanitary conditions, and broader economic and social distress ordinarily connoted by the term “blight.” Only a handful of states – a 2001 survey found just seven – use an “objective” definition of blight, and even that appears to go to the issue of what proportion of the area proposed for TIF district status must be blighted, not the meaning of blight itself. More commonly the definition of blight looks not – or not only – to dilapidation or decay, but to the physical or legal preconditions for economic development, such as the following in Pennsylvania (Richard Briffault, Faculty at Columbia Law School):

  • inadequate planning of the area;”
  • excessive land coverage by the buildings thereon;”
  • faulty street or lot layout;” and
  • the defective design and arrangement of the buildings.”

So, the definition of blight isn’t really the definition of blight in Pennsylvania – It is pretty much whatever developers like Jack Gulati want it to be. Needless to say, we agree with Richard Briffault’s examination that “expansive legal definitions adopted of blight [and] adopted by many state legislatures or applied by many state courts in making their case that TIF has “stray[ed] from” its initial “good intentions.”

How do we combat this blatant destruction of the English language and potential waste of local tax dollars? We need to band together as residents to fully leverage the democratic process and ensure that this private development doesn’t proceed. We need to ensure that each and every use of the TIF program is visible to all residents and once again bring back the power of our community to its simplest form: our votes.

Votes will indeed assist in ensuring another important issue with the TIF program: the lack of accountability and tracking of success and failure rates of the TIF program.

Lack of Accountability and Tracking

There is virtually no accountability for the PA TIF program at a local or national level for a variety of reasons. At the time of writing this post, no public disclosure of the number of programs or the long-term success rates of these programs exist. “There is no national registry of TIF districts and many states do not centrally collect or publish data on their TIFs either, so it is difficult to know exactly how many TIF districts there are…” It is safe to take that one step further and mention that there is no way to tell how much money has been passed on to local residents via increased local taxes as a result of bad estimations by developers and the blind acceptance by township supervisors and governing bodies.  This fact has not even slowed the adoption of TIFS nationally or within the state of Pennsylvania.  “The economic questions remain open; in particular, TIF’s impact on development is unresolved. Yet, the uncertainty about whether TIF works has had little effect on TIF’s spread or its popularity with municipality government.” – Richard Briffault, Faculty at Columbia Law School.

How can it be so easy to make defaults on TIF funds disappear? “Defaults on TIF bonds are rare because cities have many ways of capturing taxpayer funds to pay for TIF.” Randal O’Toole (CATO Institute).  There are plenty of ways to simply ignore that a default has occurred as a result of mismanagement of the TIF process.  After all, residents are rarely aware that they are happening at all.  Local authorities simple raise taxes to cover the gap and *poof* their mistakes disappear to The State of Pennsylvania all the way down to local residents.

Randal O’Toole of the CATO institute explains other reasons to minimize or eliminate gaps in TIF fund repayment despite the failures of local committees and developers:

  • First, in many states, TIF agencies get rewarded for inflation. As property values increase due to inflation, TIF revenues rise even if the district does nothing to improve the area. Normally, such increased revenues would be used by schools and other tax entities to offset increased costs, but since the TIF districts are capturing those revenues, other tax districts must either raise taxes or cut back on services.
  • Second, in most states, TIF districts gain when other tax entities persuade voters to increase taxes. Say a school or library district convinces voters to pass a bond levy that increases taxes by $1 for every $1,000 of property value. Taxes are increased both inside and outside of the TIF districts, but the increased revenues inside the TIF districts go to TIF, not to the school or library district.
  • Third, TIF districts get credit for development that would have taken place in the district anyway. If a city creates a TIF district out of a neighborhood that is already being gentrified by private developers, all the taxes on new development in the neighborhood go to the TIF district even though that development would have taken place without the TIF district.
  • Fourth, TIF districts get credit for development that takes place within their boundaries that would have taken place somewhere nearby anyway. In a growing region, new homes, shops, offices, and other developments will be built somewhere. TIF subsidies may attract such development to the district at the expense of development somewhere else in the region. The result is no net increase to the region’s total tax base, but a net decrease to the tax revenues for schools and other entities that must compete with the TIF agencies for funds.

Perhaps, the worst part about the TIF program is its ability to bypass the voting and resident approval processes.  According to the United States Public Interest Research Group,

“Ordinary budget transparency requirements generally do not apply to TIF districts. TIF districts may be overseen by relatively obscure agencies with little public disclosure. Alternatively, mayors or other officials may make decisions about TIF districts outside of normal budget processes. TIF district budgets are separate from general municipal budgets; they are ‘off-budget.’

The use of TIF can also circumvent public control over municipal borrowing authority. Municipal officials often are required to seek voter approval to approve municipal bond issues, a safeguard to ensure that cities’ ability to issue debt is closely overseen by the public. TIF bonds, however, can be issued without voter approval in some states.” 

This includes Pennsylvania.  Local residents don’t get a vote on which programs are accepted and which are not in TIF procedures.  The TIF program was designed specifically for this purpose.

All of the reasons listed above again highlight the need for residents to exercise the democratic process in ensuring that our voices are heard.  We need to ensure that a township supervisor who votes for this project does not have the opportunity to do so again via our votes in the next election cycle.  You can bet that the folks here at SaveOurMountain.org will be using our considerable capabilities to ensure the public knows about their potentially wasteful use of TIF programs.

Conclusion

Jack Gulati is trying to use the TIF program for purposes of which it was not created. The TIF program in general is broken, voids the democratic process, and enables a no-accountability tax risk for all local residents – especially in the case of this development.  It should not be used to enable a private body to bulldoze beautiful PA woodlands through a misrepresented definition created by large corporations and implemented through crony-capitalistic means in the Pennsylvania court system.  We look forward to seeing all local residents that care about the local woodlands, the animal life and the local taxes at the local township meetings announced and updated at SaveOurMountain.org.

In conclusion I end this blog post with some of my favorite quotes about the TIF program:

“The proliferation of TIF is more than a little puzzling. TIF was originally created to provide support for urban renewal programs and was narrowly focused on remedying urban blight, yet now it is used in areas that are plainly unblighted. TIF brings in no outside money to a municipality nor is it actually a source of new revenue. Despite its widespread use, there is little clear evidence that TIF has done much to help the municipalities that use it. Moreover, it has become a source of interlocal tension and a site of conflict over the scope of public aid to the private sector.”  – Richard Briffault, Faculty at Columbia Law School.

“Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.” – ReclaimDemocracy.org

“Tax-Increment Financing can serve narrow private interests without broader public benefit. TIF can be lucrative to private developers seeking locations in which to build. But, from the public’s perspective, TIF is meant to benefit broader public goals. A clear evaluation of a TIF project’s benefits to the public, however, can often become lost in public officials’ rush to deliver new economic development.” – The United States Public Interest Research Group

“…the proliferation of TIF has been accompanied by a growth in academic studies and policy analyses. These have tended to focus on two issues: Which municipalities choose to adopt TIF and why? And what are the economic benefits of TIF and do they justify its costs? Neither of these questions has received entirely straightforward answers; indeed, as one recent study determined “we have more questions than answers with regard to the use of TIF as an economic development tool.” – Joyce Y. Man, Determinants of the Municipal Decision to Adopt Tax Increment Financing in Johnson & Man, supra.

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