9/18/2013 12:01:00 AM Financing option for DDA reviewed
The Harbor Springs Downtown Development Authority (DDA) recently discussed the possibility of using TIF (tax increment financing) to fund future DDA needs and operational expenses. In recent years, there have been some concerns across the country about TIF as a funding method, particularly in California. We recently sat down with Harbor Springs City Manager Tom Richards and North Lakes Economic Alliance economic development specialist Jan Kellogg to discuss the possibility of using TIF funding as an option for the DDA and what it will mean to the residents and surrounding entities of Harbor Springs.
What is TIF funding?
Tom Richards: Within a designated redevelopment district, which is the concept behind the DDA district, any increase in property values is based upon improvements or increases in assessments of that property. Instead of the taxes for that property going toward the general community and all of the different taxing entities, the increase in value and taxes related to that increase go to help in the redevelopment of that district.
The increased increment amount from where it was and where it has gone since then becomes the amount that can be captured and used for redevelopment. I think in a sense as you improve an area, the financial benefit from that improvement goes back to help increase that redevelopment.
Jan Kellogg: TIF isn't a new tax or an increase in taxes. Basically, as the taxable value of property (not the tax rate) goes up, over time with improvements in the DDA district, it's just that increment--that increase that goes to the DDA. Taxing units affected include the city and county, among others, but the exception to this is the schools. School taxes still stay with the schools. Their taxes aren't affected.
What are the misconceptions about TIF funding?
TR: The misconception is that this will somehow have an offsetting impact on people's taxes. People are thinking if so much money goes to the DDA, they'll have to make up for it as a taxpayer. This in not the case. TIF only captures any increase in property tax revenue, and that money goes to support the DDA and their projects.
TIF funding will never decrease what other relevant municipal entities are already getting. It just says as things get better and the value of that downtown property gets higher, any increased amount is skimmed off and goes toward a specific purpose other than general funding. If TIF were not in place and property taxes increased on their own (without DDA efforts), that increase in tax revenue would be captured by relevant municipal entities.
JK: It's important to note that this includes the taxes only within the DDA district, not the entire city or the county. It's really just the core of the downtown.
TR: The valuation of our downtown district is about $30 million dollars compared to an almost $300,000 million dollar valuation of the entire city. The downtown district represents only 10-percent of current city valuation, and the TIF would be the percentage increase of this 10-percent of the community, which is pretty small. It doesn't have a big consequence on anything.
Are any TIFs currently being used in the city?
TR: No TIFs are currently being used in the city. The last time TIF funds were used was in the mid-1980s under a five year plan and none have been proposed or approved since. The TIF that was established in the 1980s was used to develop parking lots and an area between Bay and Main Streets, which included a merchants walkway between stores. The city acquired some of this property and made improvements to it, which was completed in the late 1980s.
What is the process of getting a TIF approved?
TR: It's a fairly extensive process. It's not just a pot of money the DDA can spend on whatever sounds interesting at the time. It requires a plan with specifics, along with public hearings and approval by City Council. We're just now beginning this process. TIFs are calculated upon the baseline level for the property values, and you want to make sure you're setting this level at a time when property values are not expected to go down. The adoption of the TIF plan would likely be made after the start of the new year to establish 2013 property values as the baseline. We're fairly comfortable we won't be seeing any further declines, but rather see upward movement, but as always, there's no guarantee.
There have been some negative associations with TIFs, especially in California. What went wrong there, and could the same thing happen in Harbor Springs?
JK: One of the issues comes from borrowing against a TIF, which is similar to taking out a mortgage to buy a home. If you're planning to do a really big project, like water and sewer improvements that will cost millions of dollars, if you waited until you had millions of dollars in your TIF, it might be 20 or 30 years later. In California, instead of waiting, they borrowed against a TIF.
TR: In the case of California, real estate continued to grow in value over several decades, and I think there was a presumption that it always would. Then 2008 happened and suddenly a lot of that value got washed away in the economic downturn, and so those communities who relied on their TIFs to pay off their bond indebtedness and saw that income reduced or stop coming altogether, and got in trouble. Trouble came not from the TIF but by taking out a loan based upon that income and I think in all cases that loan has to be repaid. In many cases the city's taxpayers ended up paying for it.
Are any plans currently for Harbor Springs to borrow against a TIF in the future?
TR: We've not discussed that, but this city is very economically conservative. It would take a lot of very careful consideration before there would be any thoughts of borrowing against a TIF especially since we have zero dollars from TIF and we're showing it to grow incrementally based upon what improvements will happen in the downtown.
What will TIF funds be used for by the DDA?
TR: The DDA has been talking over the last year about hiring a director, with the emphasis right now on a part time director. TIF funds would likely go into funding the administration of the DDA, which would include a director, advertising or other expenses involved in promoting the downtown area. TIFs to fund administrative purposes have been discussed much more than using them to fund big projects. Currently, there is no anticipation that TIF funding would go toward physical projects or large infrastructure.
Is there anything else the public should know regarding TIF funding?
TR: One of the most important things, in my opinion, is that TIFs don't have a negative effect on any of the taxing agencies in the area, except they might temporarily not see as much benefit from increases in property values within the DDA district. The DDA district is fairly small, as it runs from the water to the west side of State Street, just north of Third Street, and stretches to Judd Street.
TIFS are also not an increase in taxes, so taxpayers should not feel concerned about this, either.