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• Note to readers: This is part two of three stories on the performance of tax increment financing.
In 2018, a total of 29 active tax increment financing districts existed within Community Unit District 300 based in Algonquin, leading to overall EAV growth of $296 million.
But instead of receiving a cut of the property tax revenue generated from this growth, District 300 chief operating officer Susan Harkin said her school district lost out on $17.3 million in 2018 because of TIF. Although the school district and other overlying local governments eventually will receive the full amount of tax dollars they miss out on, it could take up to 35 years – the maximum possible lifespan of a TIF district – for that to happen.
"If there's a frustration for the school district, it's the concern that the rules and regulations of TIF eligibility are pretty broad," Harkin said.
More than 1,200 TIF districts currently exist within the state of Illinois, many of which greatly improve the value of parcels within a designated redevelopment area.
But when districts are poorly designed or poorly implemented through the loose definitions of "blighted areas" within state statute, they fail to spur private development and struggle to achieve significant EAV growth without the heavy investment of bonds or other municipal resources.
State Rep. Sam Yingling, D-Grayslake, said structural changes regarding the implementation of TIF districts are necessary to ensure that only the truly blighted areas of the state are targets of these economic incentives.
"Unfortunately, [TIF districts] have been vastly abused and mismanaged to the point where they're implemented in prosperous areas," Yingling said. "As a result of that, TIF districts have become a mechanism to redirect education dollars to private developers and this creates a serious strain on the property tax system."
A Shaw Media investigation into TIF districts across 12 counties in and around the Chicago area identified dozens of districts that reportedly are worth less than when they were first drawn, according to tax increment financing reports submitted annually to the Illinois Comptroller.
Blight
Tax increment financing was first used as a mechanism to spur economic development in Illinois in the 1970s. Over the next two decades, hundreds of TIF districts were created using broad definitions that designate a potential TIF site as a blighted area.
For instance, there were no definitions for "deterioration" or "depreciation of physical maintenance." One blighting factor for vacant land was "flooding on all or part of such vacant land," which would have allowed a multi-acre tract with only a small corner located within a flood hazard zone to be considered blighted.
Thomas Henderson, executive director of the Illinois Tax Increment Association, said in the early years of TIF, there were several challenges to newly created districts, some of which were declared invalid. These early decisions helped to clarify the application of the law and led to more specific definitions of a “blighted area.”
Following a 1999 TIF reform effort, potential TIF districts must meet five out of 13 blighting factors.
However, lawsuits challenging a TIF district's compliance with these requirements still crop up. One recent case was against the Chicago City Council's approval of a $6 billion Lincoln Yards development, which included up to $1.3 billion in TIF incentives and met the minimum five of 13 blighting factors.
Under TIF law, one of the 13 blighting factors requires that the total equalized assessed value of the proposed redevelopment area has declined for 3 of the last 5 calendar years prior to the year in which the redevelopment project area is designated or is increasing at an annual rate that is less than the balance of the municipality for 3 of the last 5 calendar years for which information is available.
The Lincoln Yards suit contends that 2018 EAV information was available but not used as part of the TIF district's justification that it met this blight factor.
In order for an area to be designated as a TIF district, evidence must be provided to show that the area satisfies the “but for” provision of TIF law, meaning that economic investment would not occur in the area without the use of TIF incentives. The Lincoln Yards suit also challenged this designation.
"Many areas where TIF Districts were created already had natural economic growth or would have seen growth without the TIF, resulting in TIF districts capturing this growth revenue, not creating it," the lawsuit read. "As a result, incremental tax revenue remains sequestered in such districts instead of contributing to the general citywide tax levies for schools, parks and libraries."
One successful TIF district in Illinois was the Mellody Farm district, which transformed farm and marshland into a booming lifestyle center. In 2018, the TIF district reported about $7.1 million EAV compared with its $291,000 base.
But the village now is in talks with a developer to establish another TIF district across the street from the Mellody Farm TIF district, which Lake County Board member Julie Simpson said would not be in compliance with the but-for provision.
“We have a system currently in place where the definition of a blighted property is so broad that anyone with enough money can tailor it to make anything blighted, no matter what the impacts are to other governing bodies,” Simpson said.
David Merriman, Stukel Presidential Professor in the University’s of Illinois at Chicago’s Department of Public Administration, said in an affidavit submitted for the Lincoln Yards lawsuit that the latest scholarly literature surrounding TIF suggests that it does little to generate economic activity.
However, a judge granted a motion to dismiss the suit in September. The plaintiffs, Grassroots Collaborative and Raise Your Hand for Illinois Public Education, stated that they plan to appeal.
Bond debt
The first story in this series focused on TIF districts that cover administrative costs and other expenses through general fund transfers. But for TIF districts that are underperforming, the opposite has occurred: general fund revenue being allocated to TIF districts failing to generate sufficient tax dollars to pay off debt.
Ideally, taxes generated from new EAV growth would help to fund new economic development in TIF districts. But TIF districts often will incur debt to kickstart initial development opportunities and use tax revenue from the subsequent EAV growth to pay off the debt through the remainder of the TIF district’s life.
In the case of bonds, some municipalities issues tens of millions in bonds to spur initial development. Between 2000 and 2014, $1.274 billion in bonds were issued for TIF districts in Illinois, according to Merriman’s work.
However, there are times when tax increment is not enough to pay off bond obligations.
In St. Charles, the city’s First Street Redevelopment TIF District, which was created in 2002, reported about $54.8 million in bond proceeds through fiscal 2019.
Jackie Uhler, St. Charles City Records Division Manager, said the city front funded the improvements in the various TIF districts early in the life cycle of each district by issuing General Obligation bonds.
“With the exception of TIF 7, the overwhelming majority of the public improvements were completed very early on in the life of the TIF with the expectation that the city would make debt service payments from the TIF increment and general revenue stream as necessary to pay debt service on the bonds annually,” Uhler said.
In 2017, the First Street TIF district generated about $427,000 in increment but was left with $1.1 million in debt service expenditures, according to the minutes of a Joint Review Board meeting conducted in November 2018.
A combination of funds from one of the city’s other six TIF districts and a transfer from the city’s general fund made up for the shortfall that year.
As of April 30, 2017, the First Street Redevelopment TIF District – which expires during the 2024 levy year – has about $24.7 million in debt outstanding and owes the city’s general fund about $2.1 million. General fund obligations then jumped to about $2.8 million in 2018.
Surpluses from some of the better performing TIF districts in St. Charles have been paying off previous advances from the general fund when incremental revenue was not sufficient to cover debt service payments. Because of this, there will be a smaller surplus to redistribute to local governments when the TIF districts expire.
From fiscal 2016-19, the village of Addison transferred more than $3 million into its Town Center TIF from the general fund, Michael Lane TIF and the debt service fund, according to its budget records.
John Berley, director of community development for Addison, had said during a 2017 Joint Review Board meeting that some of the projects the Town Center TIF funded included lighting installation, installation of new signage, paving of a parking lot and replacement of a retaining wall. However, there were not a lot of major projects slated for the district.
EAV growth
Even when TIF stimulates economic development and commercial projects, some districts still don’t experience EAV growth because of the declining value of neglected parcels.
According to McHenry County parcel reports, six active TIF districts in the county contain a majority of parcels that are worth the same or less than when the district was created. In addition, Crystal Lake's three active TIF districts, Cary's two TIF district's and McHenry's TIF district all reported an EAV for 2018 that was less than the base value of the TIF district.
Total TIF increment is calculated on a parcel-by-parcel basis. Therefore, so long as there is at least one parcel in the TIF district whose EAV is about the base value, the district would still collect property tax revenue even if the overall EAV of the district is lower than the base.
Although the EAV of the city's TIF districts is down, late Crystal Lake Mayor Aaron Shepley told Shaw Media earlier this year that he supported the use of TIF when it's done responsibly and in a way that helps taxpayers.
"Downtown wouldn't be what it is without it," Shepley said.
But even when EAV is on the rise, TIF districts can still face problems if they can't entice private investment.
Although the EAV of DeKalb’s Central Business District – which makes up most of the city’s downtown area – has about tripled since its creation, there has been little outside investment.
Instead, local developers like John Pappas have proposed multimillion-dollar residential projects.
Pappas’ two upscale apartment projects, Cornerstone DeKalb and Plaza DeKalb, required about $5 million in TIF funds. Meanwhile – without outside developers to entice – businesses like O’Leary’s, the House Cafe and Eduardos have closed their doors.
Between 2012 and 2018, the city of Braidwood spent about $8 million from its TIF district on public projects and TIF transfers. In that same time, the city spent no TIF dollars on private projects.
Recession
For some TIF districts, poor performance is a matter of bad timing.
Overall, TIF performance took a steep downtown during the Great Recession.
In the collar counties, TIF increment increased by 72% and EAV increased by 85% between 2000 and 2007, according to data from the TIF task force report.
But between 2009 and 2013, TIF increment in collar counties dropped by 49% and EAV dropped by 23%.
Beach Park created one TIF district in 2006 and three more in 2010 but as of fiscal 2018, none of them reported an EAV above the base value.