This is a repost from back on googlepages in 2007. It is included for historical reference, and has not been updated.
Tax Incremental Financing Districts, or TIF’s, first started in California in 1952 as a way to finance returning non-productive lands to the tax roles. Illinois created it’s TIF law in 1977 to allow municipalities to issue bonds to finance infra-structure improvements, undertake land assembly, and provide incentives to lure private investment to blighted urban neighborhoods that show a pattern of losing value. In Illinois, once a TIF district is approved, the designation stays in place for 23 years.
In 1999 the IL General Assembly changed the law, so TIF could be used as a more general economic development tool. That’s right about when Downers Grove started borrowing. Some of the most outrageous abuses, such as using TIF to build town halls and golf courses, are prohibited.
Some school districts are starting to ask for their share of TIF diverted revenues. We should come up with an equitable revenue sharing plan so we don’t have to fight with each other. I was challenged to prove that the downtown deals are bad. Let’s see my ROI analysis, and my Cash-on-Cash figures, I was told. I can do better than spew a bunch of guesstimates with intense math that the average resident won’t understand.
I’ll see if I can keep this in plain english. Acadia on the Green: We borrowed $8 million, added $7 million in free land, the parking lots (2004 low end market value), will pay about $3.5 million in interest on the $8 million we borrowed, and netted less than $2 selling. Starting hole=$18.5 million. The TIF baseline for this project is zero: every penny of real estate taxes is an increment that can be used against the Village’s cost of the project. The project has yet to come on line. When it does, starting in 2008, it will have 200 condos that average $320,000 selling price, and first floor retail renting out at $35 sq/ft. That leaves 12 years in the TIF District to come up with a minimum of $18.5 million in TIF funds to pay for the deal.
200 condos at $320,000 = $64 million dollars. The assessed value, or EAV = $21.3 million. At full bore, that will generate about $900,000 in real estate taxes each year for the residences, and about an additional $220,000 in local sales tax.
If we model our commercial tax rate to maximize return, the change in tax collections Rev with respect to changes in the tax rate t equals the tax base B times one plus the elasticity Є of the tax base with respect to the tax rate;
dRev/dt = B(1+Є).
Yeah, its all true, but I’m pulling your leg: I said plain english.
Pulling down $1.12 million in extra taxes each year doesn’t pay for any of the Village services required of the project. So it will take us until about 2034 to pay this down and get to a positive ROI (Return on investment). At the very end, even if we use every penny of TIF against the debt, we don’t break even at the end of the TIF District life span. And it doesn’t contribute a single extra penny to the Village coffers in the meantime.
Pay-as-you-go is a newer tool being used in TIF Districts. Maybe a LOT of taxpayers everywhere were getting upset about the free lunch for developers, so TIF backers came up with a better way to do the deals, and spread the word. We currently have a revolving group of CD’s totalling about $15 million dollars that earn us interest, but we pay 1/4% in fees, or about $37,500. The Illinois Funds Money Market Funds is an investment and banking service of the state, run by the state Treasurer, that offers slightly better than CD rates for money on deposit, and keeps everything legal for the municipalities that use it. They don’t charge 1/4% in fees, so they could save us some $$ there. We already use that service for our tax revenues that are collected for us, like real estate taxes, sales taxes, and our phone tax.
In February Standard & Poor’s upgraded our Bond Rating to AA+, one step from a top AAA rating. The better the rating, the lower the bond interest rate. Here’s a simple mortgage calculator so you can do a rough check of figures. When you get that “Payment” figure, multiply by 120 for a 10 year note, or 240 for a twenty year note.
3% as a percentage of debt to EAV as a debt ceiling is what I keep reading and hearing about. For every $1 we put in at the front end of any Bond debt, we save from $1.25 to $1.54 over the life of the loan.