By John A. Ostenburg
Even lots of informed citizens, when they hear about TIF districts, have a negative reaction. TIFs have a bad reputation and it’s not totally undeserved.
First of all, let’s define what constitutes a TIF district. The acronym stands for tax increment financing. A TIF district is a set geographic region in which a tax increment financing program is in place. In Illinois, state law requires that the geographic region designated for a TIF district be blighted, or be in danger of becoming blighted.
Now, how does a TIF district work?
It starts with the designated area and how much that area is assessed in property taxes at the time the district is created. For example, say a specific region generates $1 million in property taxes at the time the district is put in place. Once re-development is underway in that region, the property value should go up, so the property tax assessment should go up also. Say the assessed taxes go up to $1.2 million in the first year after redevelopment. The increment is the difference between what the new assessed taxes are and what the assessed taxes were at the time the district was created. In this case, $200,000. The increment now is available to pay for various TIF-eligible expenses related to the re-development of the district.
That all sounds rather simple, doesn’t it? But in reality, lots of problems often pop up if things haven’t moved along in a totally kosher fashion.
The most common problem from the get-go is the interpretation of what might be a blighted area. In desiring to establish a TIF district, a municipality will hire a consultant to analyze the situation and decide whether it qualifies as blighted or potentially blighted under the definitions established by the state. Herein lies a major complication: it’s a little like asking the fox to guard the chicken coop for a city or town or hire a consultant to evaluate an area the municipality already has chosen as a place where it would like to create a TIF district. Furthermore, once the city or town begins the process of applying for TIF status, it’s usually the same consulting firm that provides all the guidance to see the process through to fruition. Therefore, as is obvious, just getting the TIF district off the ground is a hotbed for conflicts of interest.
A second complication is getting all the various taxing bodies located within the proposed TIF district to agree that it’s a beneficial process. School districts, park districts, library districts, and the like sometimes have less opportunity to gain increased revenue in such districts because they don’t have the qualifying TIF-eligible expenses. For them, the tax revenue from the TIF area will remain the same for the life of the TIF agreement, usually 20 years. No matter how much the property values go up during that period, they will see little — if any — increased revenue.
For truly blighted areas, this is less of a problem. In most of those cases, the revenue return to various taxing bodies probably wouldn’t have increased anyway without new development, and new development probably would have been unlikely without some infusion of incentive dollars from local government. In areas where the assessments probably would have increased due to inflation or other reasons, however, a TIF district can be a definite loss of revenue for governmental entities that cannot cash in on the increment that’s generated.
Where this becomes a true public policy detriment is in cities and towns where municipal officials also have control over other taxing bodies, either directly or indirectly. In the city of Chicago, for example, the mayor also has direct control of the public school system and has a political influence over government in Cook County. Neither the school district nor the county, therefore, is positioned to offer an adequate check and balance on the city’s decision to establish a TIF district. In many regions where TIFs are established, the political entity that controls municipal government also has a strong hand in the other elected bodies.
What constitutes TIF-eligible expenses in itself is a point of controversy in some regards. Political leaders often direct much of the funds toward associates who are developers or consultants. Likewise, they often will designate large municipal expenses as TIF-eligible. As such, even though a TIF agreement may indicate that any revenue above and beyond the TIF-eligible expenses will be equally shared with other taxing entities in the TIF district, schools and the like seldom see much of the extra revenue.
Finally, the bottom line is that many TIF projects never succeed in producing the kind of revenue that was projected when the district was created. Obviously, developers and other property owners in the TIF district have to be financially successful in order to meet all development expenses and to pay the new taxes that are being assessed on the property. If they don’t meet their development expenses, no increase in assessment will occur; if they don’t pay their taxes, no increment will be generated. Municipalities thus often get left holding the bag on a TIF district that’s gone astray.
All this, of course, does not mean that TIF districts are all bad. The concept is a good one and has been in place in several states for a number of years. Many a blighted area has been restored as a result of TIF financing, with the entire community seeing positive results as time rolls on. The truly blighted areas are the ones where no one wants to invest without the hope of some return. TIF districts offer a great incentive for investment in areas that traditionally have been ignored.
At present, about 400 TIF districts are in place throughout Cook County, with 150 or so located in Chicago. According to Cook County Clerk David Orr, 67 percent of those districts saw an increase in assessed taxes from the 2006 to 2007 tax years. In my own community of Park Forest, a TIF district created in 1997 for the redevelopment of our downtown saw an increase in assessed taxes of approximately $400,000 during that one-year period. We have a second TIF district, designed to redevelop a defunct strip mall, that has not yet begun to provide any increment.
So are TIFs bad? The answer is "No." That is, they’re not bad if they really do meet the TIF standards that are codified in the law. From my perspective, those districts that have been created by twisting the law one way or another shouldn’t really be viewed as TIF districts at all. Rather, they are simply projects in which the law has been manipulated by self-serving politicians and their friends in the development world for their own personal gain.
I was told many years ago that no matter how good a public policy might be, persons with larceny in their hearts will find a way to twist it to their own ends. That’s certainly been the case with TIF districts. Yet, doing away with the program offers little hope for many communities that have grasped onto TIFs as the last straw for their survival.
So, when it comes to the TIF program, the need is for reform, but not elimination. Our legislators need to look at how the program has been used and by whom, and then correct the errors to eliminate the abuses but maintain the benefits.
John A. Ostenburg is mayor of Park Forest, Illinois, and formerly served in the Illinois House of Representatives. He is the chief of staff for the Chicago Teachers Union. E-mail him at [email protected]. This article is from his blog The Outpost Observer, Copyright © 2009 John Ostenburg, used with permission.