Beyond Municipal Boundaries: Rethinking Tax Increment Financing
Insights from Dr. John Kovari, author of “Tax Increment Financing: A Practical Guide for Analyzing TIF Risks, Benefits, and Outcomes”, Professor at the University of Wisconsin – La Crosse.
What if the path to sustainable economic development is hidden in the complexities of Tax Increment Financing (TIF)? In my recent conversation with John Kovari, author of the newly published book, Tax Increment Financing: A Practical Guide for Analyzing TIF Risks, Benefits, and Outcomes, we explored the complexities of Tax Increment Financing (TIF) and its implications for local governments. Kovari highlighted the pivotal role counties can play as guardians of TIF, ensuring that diverted tax revenues are used effectively and transparently. By adopting objective evaluation methods borrowed from the banking sector, he advocates for a more structured approach to TIF oversight – one that could transform how communities leverage this financing tool to foster sustainable growth.
To better understand how this is an opportunity for counties, I spoke with Dr. Kovari about his motivations for writing the book, the challenges of TIF oversight, and how counties can play a pivotal role in ensuring these financing tools are used effectively.
-- Paula Freeze, Northern Illinois University-NACA Secretariat
What inspired you to write this book?
As an academic you go where the data and new stuff is to look at. TIF isn’t easy to understand right off the bat and you have to roll up your sleeves to understand it. That’s intellectually engaging to me. Also, there isn’t a lot of attention being paid to TIFs in academics and research. I did know that it affected a wide array of players, and that includes county governments, particularly through review boards.
There’s a big county impact. There's a lot of revenue that could go to county coffers if TIF was not used. Those are valuable resources, as every county administrator knows, amidst dwindling resources, right? TIF use can be a valuable investment for counties, but if TIF isn't used wisely, then it could be a drain on county resources and not a wise investment.
TIF is like a personal investment, you need to be engaged and invest wisely. Counties want to be engaged players to ensure their diverted tax revenue (that goes to the tax increment) is being invested wisely and is being looked after. That was the impetus for the book, to really figure out a more objective way that all players can get engaged, provide oversight, and provide guardrails.
TIF doesn’t always go the way we want it to go. For example, in the state of Wisconsin at one point in time, 10% of the TIF districts in the state were categorized as either distressed or severely distressed, meaning that there was kind of pressure that was put on local governments to figure out how they were going to meet those obligations. If a bank had 10% of its loans that were distressed or severely distressed there would be government intervention. There is no government intervention for TIFs at this point. There's no state or federal government agency to swoop in and save the day. It is critical that cities, counties, school districts, and special districts are all engaged in that planning process.
What surprises did you run into during your research?
I was surprised that there's a wide variety of political approval mechanisms. So, for example, who can initiate a Tax Increment Finance district? Sometimes it's the city, sometimes it's the county, sometimes there's a regional development authority. It just depends on the jurisdiction. Some states have layered political approvals – approvals at the local level and a review board too.
How does the complexity of TIF affect oversight, and what parallels can be drawn with other financial institutions?
Creating a TIF district in some states is quite easy and doesn't require multi-jurisdictional approvals. I served on and observed review boards and noticed that they were a little bit of a rubber stamp. Their thinking was we have to do this for political approval’. Because TIF is so complex local officials on these review boards don't want to speak up and say, can someone explain this to me? If the local government has farmed out the number crunching to a consultant, they want to just go along with it. It’s too complicated.
TIF is millions of dollars that require strict oversight, and that oversight does happen at other financial institutions. At banks, there's a kind of apparatus. A more quantified kind of process before a bank is going to give out a loan. What the government is doing with TIF is giving out its money, right? Or it's figuring out a way to use incremental revenue. And yet we haven't applied a rigorous objective methodology for how we do that. That's what my book is all about. How can you make it less political? How can you make it more transparent? How can you get these other players, particularly counties, to step in to say let's look at this. There are some key strategies to do that. The strategy is basically taking the underwriting process that financial institutions use and applying it to local government and how they evaluate TIF.
It seems like a straightforward solution; why hasn't anyone considered it before?
I have seen a lot of different presentations from a lot of different people about TIF. There are some communities that are using scorecards and metrics to evaluate TIF but they're the exception to the rule for sure.
I think the big controversy is it gets so political. You're either for it or you hate it. There's no gray area in between. That was interesting to me. Then I saw Joe Gromacki, my co-author and the TIF coordinator for the City of Madison, Wisconsin give a presentation to state legislators. Joe was applying these underwriting techniques to TIF to define that gray area and make things more objective. I was inspired by that, and it was my motivation and inspiration for the book. I wanted to collaborate with someone like Joe, who's really doing cutting-edge stuff.
This is difficult stuff and it's not widespread knowledge. I’m hoping to bridge the divide. I want to take the best practices that we've researched and share them.
Given all that positivity, what kind of challenges did you face?
A couple to mind. People weren't willing to be very candid. Interviewing people or trying to collect information was difficult. I thought that there would be more governing policies about TIF that have been adopted. Then you think about it. There are governments that don't have climate change policies either and they don’t know how they're going to respond to that. There’s a lot of work to be done.
I think the biggest challenge was when we wanted to look at whether a TIF deal worked, there was no information. We really had to dig. States have very minimal requirements to collect TIF information. I was a little surprised at how much wasn't transparent at the state level.
When developers go to local governments to ask for TIF support, very often there isn't a formal process that includes giving information about their developments. For example, if a developer says, hey, I need 2 million in TIF, the only question is, well, can this district generate 2 million? It's not whether they need the 2 million. That's really hard to evaluate, but banks do it. Financial institutions do it. Developers do it. They know how much money they want to make on a deal.
One of the benefits of working with Joe Gromacki was that he guided a more formal TIF policy for Madison. It was very transparent, the developers must give over all their financial records, ownership records, and things like that. They must detail what their project is going to look like, including the number of bedrooms, and rent. Madison can verify all that financial information, just like a bank. Other communities aren't doing this. That's the big surprise. That also leads to a bigger challenge. If anyone wanted to evaluate this, and how it works in other communities, there's no data.
Are there counties doing innovative things with TIF?
We profiled Allegheny County's Redevelopment Authority in the book. There's a mall called Pittsburgh Mills that ran into some issues. The Redevelopment Authority did a big tax incremental financing district right before the Great Recession for the mall. There were changing dynamics with retail, consumers were shopping online not at malls, and property values went down. These challenging times put pressure on the TIF and Allegheny County. I think they've done some interesting fiscal management. There are ongoing legal issues, but Allegheny County is one I'm interested in watching and following up on.
How are counties typically involved in TIF?
The plurality of TIF deals usually are initiated by municipal governments and then it's the school districts and counties that must sign off on it. I would love to hear more about county interactions with TIF.
So, what's the proper role of a county in tax incremental finance framework? It depends. Some counties are a little bit more economic development forward. If there is a big city involved, then usually the city is going to kind of focus on its own, and then the county might focus on economic development in the surrounding area. Sometimes counties are the primary economic development players throughout the entire county. Sometimes municipalities will farm out their economic development to the county itself.
“Here’s what I think counties really can do: become a partner in evaluating TIF projects.”
Here's what I think counties really can do: become a partner in evaluating TIF projects. They should be an extra set of eyes, helping cities if they are the key player to negotiate. In fact, they should insist on it. What developers will often do is approach a city and say, “Hey, I need 10 million in TIF”. Then they go to the nearby village and ask, “Can you give us 11 million?” There's almost an extortion game at play – “Unless you give me X, we'll leave”. Counties can play a fundamental role in helping cities say, “No more.”
Because counties operate at a higher level and see the bigger picture, they can take on a really cool oversight view by evaluating a deal based on certain metrics and encouraging municipal government to go back to the negotiation table and say, “You don't need 11 million. You only need 9 million”. This approach can reduce the amount of increment that's needed and be diverted to the TIF. I'm really optimistic that if counties can fulfill that role, it will make TIF use even better.
I don't think I've ever heard anybody say that they have a solution to making TIFs better. I hear callings to stop using TIFs.
It's either or. You're in one camp or the other. There is a gray area. There is an objective way to do this where it doesn't have to be either. We can get out of this kind of black-or-white TIF mindset and say, we're going to evaluate it based on internal rate of return, in particular, debt coverage ratios, net operating income, etc. If a developer isn’t going to meet a bank’s benchmarks, the bank isn’t going to give them money. It should be the same with governments.
What kind of changes need to happen for that to become a reality?
Yeah, that's a great question. I wrote the book with the hope that it would be a resource so that local government, and those elected and appointed officials, could use it to better understand TIF before approving them. They need to understand how it works—because it is complicated. The book provides examples of TIF policies, best practices, and applications. It also includes step-by-step instructions for TIF analysis to reduce risks and prevent excessive use.
What’s next?
The next step is to develop some sort of programming element. I'm trying to meet with as many folks and spread the word about the book. I'll be presenting at the Wisconsin Economic Development Association’s annual meeting in February.
Is there anything else that you would like people to know?
I just really like the idea of county governments, and in particular county administrators, encouraging that deeper dive into TIF deals using the framework that we've laid out in the book. I think it would make TIFs healthier and more sustainable. I love that idea.
For more information on TIF and its implications for local governments, consider reading Dr. Kovari's book, Tax Increment Financing: A Practical Guide for Analyzing TIF Risks, Benefits, and Outcomes. If you'd like to connect with Dr. Kovari please feel free to reach out at jkovari@uwlax.edu.
Earlier in 2024, NACA was honored to award Dr. Kovari with the David J. Krings Scholarship. This scholarship, in honor of the late David J. Krings, supported registration and travel to the 2024 ICMA Annual Conference. Click here to read Dr. Kovari’s summary of the conference and idea exchanges that took place. Thank you to the family of David J. Krings for their support and generosity.