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Thursday, August 28, 2014 |  Madison, WI: 58.0° F  Mostly Cloudy
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Madison struggles to make the TIF development tool more fair and effective
Tangled up in tax incremental financing
Clear (left): "I wouldn't describe any of the changes as radical." Rummel (right): "If we're going to spend public money, I don't want to create low-wage jobs."
Clear (left): "I wouldn't describe any of the changes as radical." Rummel (right): "If we're going to spend public money, I don't want to create low-wage jobs."

Susan Pastor, a Madison resident active with Progressive Dane, has always been skeptical of the idea behind tax incremental financing, known as TIF, a program that uses property tax dollars for development. But after following the work of a committee rewriting the city's TIF rules, Pastor is convinced that the city has been using the program wisely.

"I feel that Madison has managed this much better than I realized, and I see the benefits of it," she says. "Maybe our policy is a little cumbersome in its expression, but it is very solid."

Now Pastor fears that the city is about to undo its sound practices for the benefit of the business community.

"We're practicing sound fiscal management, and the business community is hollering that we're unfriendly to business," she says. "There's no evidence of that."

Common Council members involved in the process insist that they're trying to make the city's arcane TIF rules easier for everyone to understand and, in the process, better encourage the city's development goals.

Ald. Mark Clear, who sits on the committee, says, "I wouldn't describe any of the changes as radical, but the new policy really makes some significant strides in making TIF more accessible, the process more understandable, the guidelines clearer."

The process has gotten little attention so far, mostly because TIF is so bewildering. That could change as the Common Council takes up the proposed changes early next year.

Addressing blight

Tax incremental financing was conceived as a way of spurring development in blighted areas, but has come to be used much more liberally around the country.

It works like this: When a city creates a TIF district, or TID, property values within that area are frozen for taxing purposes. For the life of the district, the taxing bodies -- in Madison’s case, the city, Dane County, school district and Madison College -- will not see an increase in tax revenue from that district, even if property values grow or new projects are built.

As new developments are built or property values grow, taxes on that new "increment" are set aside to fund development. Developers can get "loans" for projects, with the tax revenues from increasing property values going to pay them off. These grants need to be approved by the Joint Review Board, a five-member body made up of representatives of the taxing entities and a community member.

When the district, or TID, closes, all of the property is taxed at its full value. The state requires TIDs to close after 27 years, but in Madison the average TID is open for 12 years.

Developers who want to use TIF money have to demonstrate that their project can't be financed without it. Ald. Chris Schmidt, president of the council, says the state requires municipalities to show that areas are at least 50% blighted before forming a TID.

Madison has been conservative in its use of TIF compared to other Wisconsin cities. Madison has 1.85% of its property in a TID, while Milwaukee has 3.54% and Oshkosh 8.42%. City staff report that Madison, in granting about $100 million in TIF grants over the years, has created $1.5 billion in new property value.

Changing the rules

The committee made its final recommendations Friday afternoon, and they'll now head to two other city committees before going to the full council early in the year.

Perhaps the biggest change is that there will no longer be an equity participation requirement, meaning that if a developer sells a project that utilized TIF, it won't have to give the city a cut of the profits.

"It was the kind of thing that no other community did, and it put us at a competitive disadvantage," Clear says. "And it was a tough thing to justify. We were made whole for the loan, so having an additional ownership stake didn't make sense."

Another change is revamping the "50% rule." This guideline says that developers should only get grants that equal 50% of the amount their project will generate in taxes during the life of the TID. The other half of that increment is supposed to fund infrastructure improvements. But Madison often makes exceptions to that rule, sometimes even going above 100%. This is possible if property values elsewhere in the district climb, putting more money into the increment.

The committee is recommending the city adopt a 55% threshold. Staff could process a TIF application below that amount, but any above would have to be approved by the city's Board of Estimates before proceeding.

Says Clear: "Saying that 50% is the right number in every or even most situations is ridiculous."

The committee is also recommending the city allow "speculative" districts, which could be established before a developer or project has been identified. Districts are usually only formed when a development has been proposed, but speculative districts could be used to encourage development in blighted areas.

"There may be some areas where there's good development potential, but there isn't an identifiable developer," Clear says. "And developers might be hesitant [to build there] because there's no TID and they don't want to go through the hassle of forming one."

Measuring the benefit

Ald. Marsha Rummel, who is not on the committee but has followed the process, notes that TIF is bad at doing some things, such as creating affordable housing. The reason is that housing projects have to be assessed by the income they generate, meaning they're unlikely to have a high assessment that can generate the increment to pay off a grant.

She also worries about using TIF money on businesses that create low-paying jobs.

"If we're going to spend public money, I don't want to create low-wage jobs," she says. "I don't want to pick on a Walmart, but some of these places pay so little money, their employees end up going on BadgerCare or public assistance to get their basic needs met."

In recent meetings, the committee agonized over just such issues. Members wrangled over the wording of goals and what types of development to encourage. Some of the goals the committee settled on include fostering the creation of family-supporting jobs, encouraging urban in-fill, revitalizing historically significant buildings and supporting sustainable design.

But it's the committee's first goal -- growing the property tax base -- that troubles Pastor. She notes that one downside of increasing property values is gentrification, which pushes working poor out of their homes as rents or property taxes get too high.

"They've redefined the purpose of TIF from fostering economic development in a way that addresses blight to simply growing the property tax base," Pastor says. "And they don't provide any way of balancing the negative impacts of this. They've bought into the dated paradigm that all growth is good."

Clear argues the opposite is true. "The more we grow our commercial tax base, the less our property tax is on homeowners and residents. That's the whole reason we want to grow the property tax base."

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