Understanding Tax Increment Financing (TIF) and Its Impact

[XLFD]

Tax Increment Financing (TIF) has become a topic to be aware of and understand as a taxpayer of Michigan, and especially of our area, where the Ludington DDA and the Mason County Promise rely on this mechanism for current or future revenue. Briefly stated as a definition, in TIF plans municipalities typically divert future property tax revenue increases from a defined area or district toward an economic development project or public improvement project in the community.

Historically, TIFs started out in California as a way to finance urban renewal projects but has since fallen into disfavor there due to overuse and the inherent problems they cause to other taxing authorities-- not to mention their pre-emption by those whose motives were geared more for power and/or profit rather than for curing blight. But before getting ahead of ourselves let's see how they operate, and how problems can arise from them.

Once a TIF Plan is in place and an authority is empaneled to manage the plan, the municipality will request the county auditor and treasurer figure out the taxable value of all properties in the TIF district, which in the local DDA's case is the downtown business district of Ludington. Back in 1989, when the Ludington DDA first adopted a TIF plan, those numbers were figured out before the plan went into effect and effectively frozen at that level for the duration of TIF.

Each year, the new assessments would be figured out and a percentage (in Ludington, currently 12%) of that incremental increase would go to general or specific projects in the TIF plan. Property owners in the downtown would still notice their tax bill rising with higher valuations, but 12% of the excess amount would go to the TIF account. Provided that the current value of their property exceeded the value figured out in 1989.

The amount they get to use in Ludington is around $65,000 currently, less than half of what they projected back in 2008, when their amended TIF Plan went from taking 2% to 12% of incremental increases in order to improve the downtown. Back in 2008, the idea was that the money they used from the TIF would actually boost the values of the properties in that district dramatically, but it didn't.

This money does not come out of thin air. The money comes from the taxes the city, the county, our community college and the local mass transit authority would otherwise receive had the district not been formed. In an ideal situation, whenever the projects listed within the TIF Plan are finished, the remaining money should go back to those other units, and the TIF Plan terminated. That will not likely happen in Ludington, as the TIF Plan is very general and the accounting has been execrable as the TIF account is just another line item on the DDA's revenues, and the TIF Authority expenditures are interspersed with the DDA's other expenses.

Let's look at two cities, the first has a TIF Plan for the downtown (in the yellow box) and a budget about the size of Ludington:

As noted, the TIF collects $250,000 from their TIF Plan and that is used for the projects downtown. The taxable values of the properties downtown have effectively been frozen for the last 30 years, the business owners must still pay their taxes, but $250,000 of those taxes go back into their district for projects and not to the general fund of the City, to provide the usual services and such. This effectively gives the City $4,750,000 in their general fund.

Let's look at another city without a TIF Plan called Ludingtom. Their benevolent ruler has ordained that all properties are taxed proportionate to what their assessed value is, that TIF plans are too ripe for using in a corrupt manner, and devotes his full $5,000,000 budget to running the City efficiently:

Because of that his city has 5% more money to work with, an extra $250,000, and not a slush fund for projects that wouldn't otherwise be funded by fiscally responsible adults intent on achieving successful outcomes for their citizens. If Ludingtif want's to have the same level of services as this City, the property taxes will need to go up on everyone-- simply because the TIF money is lost to it for general City purposes. The county with Ludingtif in it will have similar monetary problems for the extra money it has lost.

And perhaps if TIF Authorities had the same goals as their originating municipality, this difference could be minimalized, but let's look to the Ludington DDA's TIF in 2008, the projects needing the $1,000,000+ over ten years that they thought would be nice public projects:

Wayfaring signs ($150K), James Street Plaza Improvements ($500K), Northern Parking Lots ($450K), Façade Program ($150K), Marketing ($61K), Bench & Trash Can replacement ($66K), Management for projects ($56K).

Sounds like stuff that is either fluff or would have been taken care of anyway by the City or downtown businesspeople for a lot less money. The proposed 45 year TIF Plan would raise quite a lot more cash, and they plan to use it for:

James Street Plaza Improvements ($2.5 million), Parking Lots/Alleys ($2 million), and amazingly the 45 year projections for management, marketing, bench & trash can replacement and management are the same as the numbers for the 10 year plan-- and so the project only goes less than $300K more than the plaza and parking lot numbers ($4,763,0000).

Thus, we have a 45 year plan being presented that will raise about $9.5 million according to their charts, and has expenses less than half of that. About 95% of those expenses, improving a street right-of-way and parking lot maintenance, are what the City would normally do anyhow with a lot less money. For reference, $9.5 million would be the money budgeted by the City of Ludington on their 100+ employee's wages, benefits, water, sewer, and everything else though the rest of 2019, all of 2020, and a significant portion of 2021.

So why create all of this superfluous paperwork and bother of a TIF district just so one of the City's departments can throw the money around with less accountability than the City would have? Unless that was the goal all along...

For lest we forget, the DDA was boasting and promising less than a couple of years ago that the James Street Plaza Improvements (creating Legacy Park) would be funded without using any taxpayer dollars in a project expected to cost only a little over $700,000 in toto in a cost estimate by its designer, or a bit less than a third of the cost mentioned in the TIF Plan.

[Freedom Seeker]

I hope the Magic works, but depending on whose point of view, what has really been accomplished in the last twenty years? More tourists, more downtown entertainment for those tourists, more beer (er entertainment) tents, pub crawls and sudsy fiestas that cost more than they bring in and crowd the locals out. Mean while locals taxes and water cost rise, still more sludge and infrastructure needs discovered and roads that get very slowly repaired. So it goes. Our city debt is higher than it has ever been, and if the economy takes another crash we may have some hard lessons to learn especially when our state can't decide on a budget and slows down on the grants, on the global trade wars may affect more than we can comprehend. It seems we've had a slippery tail, the DDA, running the local head and a lot of councilors and administrators needing this class for dummies, maybe because their conflict of interest and small town politics outweigh a true course.

[Du Wright]

It would be an interesting study to see just how the DDA has increased revenue for the city in the past 40, 20, 10, or even 5 years. Maybe our new city manager who seems more mathematically inclined and financially responsible than our last will show their benefit in a manager's report. Or has this been a part of any DDA report?

[XLFD]

I do not believe they would have all the data points to make such a study appear scientific, whatever conclusion is reached.  My own personal anecdote has me recall doing a fair bit of shopping in downtown Ludington (and Scottville) even after the big box stores of Grant's, K-Mart, and eventually Walmart and Meijer's moved in.  It may have partly been due to loyalty or the specialty they offered, but a lot of that is gone now, especially in Scottville.  

The barber I've went to since I was a wee little kid often laments about the glory days of Scottville, when they had three sporting goods stores, a couple of drug stores, three true grocery stores, a bakery or two and a host of variety stores and specialty shops.   I remember it too, but it won't ever return to greatness by using all of the public resources in keeping mostly-empty parking lots freshly paved and maintaining a plaza area.  Nor will Ludington.

[Du Wright]

Good point on data points or "study controls," I wasn't real clear, but I meant a history of report of property tax revenue for the DDA area. And of course there would be a lot of variables in that study also. How else can we measure the DDA effectiveness?