Tax Increment Financing and Muni Financing

This is a repost from back on googlepages in 2007.  It is included for historical reference, and has not been updated.

I took off the history and past abuse of TIF’s.  I’ll repost if needed, but there’s several excellent starting points for information on TIF available on line now.


The downtown (CBD) TIF District: The Good

TIF Districts can be beneficial if managed properly.  The Central Business District, or CBD TIF District as it was originally implemented, was a good deal.  We put into place a funding mechanism to make some expensive, badly needed repairs and upgrades: new streets, new sidewalks, new sewer, new water, we repiped St. Joe’s Creek that runs underneath the downtown, we installed new streetlights and banner holders, new planters and trees, added pedestrian crosswalks, made improvements around the train station, and built a Parking Garage.  These were badly needed public works infrastructure projects.

NOTE: The Parking Garage has it’s own history.  Presented originally as a $12-13 million dollar project, it came in at $21.4 million, not including interest on the money we borrowed.

The infrastructure repair/replacement by itself probably put the downtown back on it’s feet and triggered reinterest in the downtown as a destination for shoppers and diners.  Remember, three of our most used public facilities have always pulled people downtown: the Library, the Lincoln Center, and the Post Office.

Where we went too far is a few selected real estate deals we did.  We tossed millions of borrowed money away in bad deals and left the taxpayer with the tab.

So we started out good and got sidetracked.

The CBD TIF District:The Not-So-Good

TIF districts and TIF bonds are a special burden, and act as a hidden tax on residents of Downers Grove.

Here’s the problem in a nutshell: the downtown TIF forces up other taxes to compensate for loss of revenue.  The more downtown TIF District area the Village puts in place the more property taxes are diverted away from schools and other local taxing bodies.

The Village gets what should go to others, and keeps it for themselves.  That makes Village finances look better, and our school and other local taxing body finances look worse: especially our schools.  That’s a zero-sum game.  The Village borrowed over $51 million dollars to put together downtown TIF projects to date.  From 1996 to 2005, the EAV (Equalized Assesed Value) rose 114%, generating almost $68,000 in additional Village tax revenues in 2005.

Here’s what, according to Village figures*, was diverted in 2005 from other taxing bodies to the Village:

  • District 58- $300,004
  • District 99- $270,370
  • Public Library- $34,172
  • Park District- $56,096
  • County tax bodies- $93,576

In total, in 2005, the downtown TIF generated a skim of over $759,954 taken away from other taxing bodies into the Village.  So that’s a great deal for the Village.  In 2010 it could be a $1.34 million skim.  No wonder the Village loves TIF’s, and no wonder our Village finances look rosey right now.

Arguements that TIF’s are good for schools:

1- There wasn’t anything there to begin with, so there’s no reason to say we skimmed the CBD increment from the schools.

Facts: It’s a specious argument to point out the tax revenues before.  It doesn’t matter; there’s 2005 tax revenues there now. It’s all coming out of the taxpayers wallet/purse.

For every dollar the village takes, the taxpayer simply makes up elsewhere, so it acts as a hidden tax.  If the schools are pressed to borrow it costs us as taxpayers $1.30 to $1.40 for every dollar they do borrow.

2- There’s a windfall coming at the end: for the CBD TIF that windfall is in 2020.  It all gets taken care of then.

Facts: We have to take a shorter look than 13 years out. Chicago has yet to let a TIF District expire; they put on the allowable 12 year extension each and every time one has come up for expiration.  Just like the Home Rule Sales Tax (HRST) I expect council will find plenty of “good reasons” to keep the burden.  That’s cold comfort NOW to students and parents trapped in a system that has badly needed money skimmed away from one local taxing body (the schools) for the benefit of another (the Village).

3- We’re already helping.  We’re giving 58 50% of what they would normally get from Ogden Avenue.

Facts: That’s great, and shows that we do have a problem that can be responded to, and also shows we can help when we want to.  This deal was worked out on or abouts December of 2000, when Ogden Ave. was getting ready to kick in as a TIF District.  According to the 2005 and 2006 Ogden Avenue TIF Report, there’s no specific payback involved, but I got these figures from former Mayor Krajewski back in March.  These are all Tax Years, they lag a year behind the calendar year (look on your tax bill, you’ll see what I mean):

· 2003 = $38,348

· 2004 = $71,031

· 2005 = $87,357

· 2006 = Estimate only, $93,000

As long as I had BK on the phone, I asked why the Village didn’t do a better job getting this kind of info out?  After all, it’s positive, it shows the Village can help when it can.  Work in progress.  Whether it’s good or bad news, the important thing is that it’s accurate.

Correct for Inflation.

We should, at a minimum, link the baseline EAV to inflation.  That way, the schools, library, and the park district at least keep pace with inflation, and account for a dollar being worth a little less each year.

Each year, we increase the tax money paid back from the CBD TIF District by the percent rate of inflation; for example, if the inflation rate is 3% for a year, the next year we ratchet up the dollars we give back by 3%.

This one’s simple, easy, and fair.  The baseline stays a true baseline that accounts for inflation.

Be nice when the Village can.

The Village won’t have solid income and budgets every year, but when we do, we should sit down with the schools, talk to them about what they need, and help if we can.  The TIF funds that the Village gives to a school can have strings attached, they can be pre-designated for, say buying new computers, or fixing a roof.  If the school boards don’t want that kind of help, they can explain to taxpayers why they turned down the Village offer of fiscal help.

With the big and long term stormwater funding, there probably isn’t going to be a lot of extra cash lying around.

The Ogden Avenue TIF District

The Village’s goal for Ogden Avenue, which is also a TIF District, is to create another economic engine for Downers Grove.  Instead of borrowing money and creating more debt, the Village will try and use more incentives like Home Rule Sales Tax exemptions, and rebating a portion of our share of the regular sales tax based on performance.  The Village will also use Real Estate Tax refunds, credits, and abatements.

The first two- sales tax rebates- are used by quite a few communities, especially those up and down Ogden Avenue with car dealers.  Ours work fairly well with our high retail sales volume businesses, like Luxury Motors and Fry’s.  We know up front what most of our costs will be, and we only give away Village revenues, so there’s no impact on other local taxing bodies.

The next are sometimes called Pay-As-You-Go or developer notes.  The business does the work and spends the money, and we give them back some money each year after they invest, instead of up front before they do anything.  The difference here is we pay afterwards and every year, instead of up front and only once (like the downtown give-aways) so we avoid a bunch of interest payments and debt load.  Also, we can link performance to the repayments.  If the developer doesn’t keep their end of the deal, we are not obligated to keep ours.

Overall, both of these are more responsible and less expensive ways to give away money, but we’re still giving away money. In particular, if we rebate businesses some or all of their real estate taxes that they had been paying, then we may have to make it up somewhere else, and we’re back to giving away other taxing bodies’s money in addition to our own.

The Ogden TIF District is by far the more responsible way to go, and I think 10 years on we’ll know it for sure.

Municipal Debt:

Not all bad

The basic concept of municipal debt is to spread the cost of expensive capital improvements over an extended time frame, making possible a wider range of taxpayers, who benefit from the expenditure, to share in paying the expense in smaller payments on their tax bills.

Our DG Public Library is one example.  In 1996 (refinanced at a lower interest rate in 2003) Library Bonds were issued.  They allowed for an extensive renovation and expansion of the facility and services.

The 2001 Water Bond issue is another example.  The $4 million dollar bond is being paid back by water revenues at a clip of about $510,000 a year.

Our next project is Fire Station #2.  Health, safety, and welfare doesn’t get any more basic than fire protection, and EMT/ambulance services.  The initial guesstimates put the price tag at about $10 million dollars.

The Cost of Borrowing Money

In the case of the Water Bond, we’ll pay back about $5 million on the $4 million loan.  So we pay an additional 25% in order to spread the cost over 10 years instead of paying for it in one year.

AAA Muni Bonds (the highest rating) right now are about 3.8% for a 10 year note, and a bit more than that for a 20 year note.

If we issue $10 million in debt to build Fire Station #2, and pay for it over 20 years, we’ll pay about $723,000 a year, making the total real cost about $14.4 million, so we’ll be paying about $1.44 for every dollar we borrow.

Reducing the Cost of Borrowing

If we employ advance set-asides we can partly defray the interest costs associated with borrowing money.

We knew 5 years ago we needed a new Fire Station; we even bought houses next to the existing station ahead of time- a prudent expenditure that has already reduced the cost of the project.

Had we also created a fund and set aside $500,000 a year for those 5 years, we’d have $2.5 million in our Fire Station Fund to get the project going.

So now, we would borrow $7.5 million.  Our payments over 20 years would be about $536,000, and our total costs drop to about $10.7 million, saving us $3.7 million on the interest costs associated with the project.  If we did the lower amount over 10 years we’d save about $5.4 million in interest costs over the life of the bonds.

We’ve borrowed about $64.5 million starting in 1996.  We’ve paid that down to about $50.5 million total debt for 2007.

By paying some of the costs up front we could save money on interest costs that, when totalled, are substantial.

Total payments will be $14,460,000 for the Fire Station.  Note that part the 1/2 cent Home Rule Sales Tax that in 2005 was promised to be used for infrastructure improvements is being used to service bond debt on the Fire Station.  Since then the $4.2 million in Home Rule sales tax has been used for a variety of purposes, but never fully for it’s promised use.


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