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By HAROLD HENDERSON Local money, local control: the tax-increment road to urban renewal A new tax plan works to the advantage of cities that wish to redevelop a blighted area. The city of Canton plans to take full advantage of this financing option
Although called "tax-increment financing," the system does not involve an increase in tax rates. Instead, it is based on the principle that a successful urban renewal program will raise property values in the renewed area, and hence, property tax revenues. Obviously, valuable new buildings on sought-after real estate are more highly assessed than are run-down structures in "undesirable" areas. The increase in revenue only occurs after renewal and is divided among a large number of taxing bodies besides the city — the county, school districts, library, parks, townships and a multitude of other specialized governmental districts. But how then does a city pay for urban redevelopment? Local governments could, of course, invest current tax receipts in renewal — thus sacrificing current city programs for future benefits. Or they could raise taxes: when a Peoria city council imposed a local utility tax to finance urban renewal 11 years ago, voters threw out seven of the ten sitting aldermen at the next election. Leaving aside such unlikely courses, the only other choice for local communities has been to seek "outside" help from a kaleidoscopically varied and shifting array of federal programs. But since the "Real Property Tax Increment Allocation Redevelopment Act" (Illinois Revised Statutes 1977, Chapter 24, sections 11-74. 4-1 through 11-74. 4-11) went into effect January 10, 1977, and since the Illinois Supreme Court recently upheld its constitutionality, local governments have had a third option. They now can, in essence, finance urban renewal with its own proceeds — "bootstrapping" themselves up from blight to prosperity. When a city adopts a tax-increment financing ordinance and designates a tax-increment (urban renewal) district, the county clerk promptly determines the current assessed value of all properties within that district. For the next 20 years, the tax revenue that comes from that initial assessed value will continue to be distributed to the various taxing bodies; in Canton, it goes to the park district, school district, junior college district, city, county and township. During that same time the ongoing redevelopment project will be raising property values in the tax-increment district. The tax revenues that stem from this increase in assessed value will not be parceled out to the levying districts, but instead channeled into a special municipal fund. As private enterprise agrees to build in the renewal area, the city can sell bonds to be repaid from this special fund. The bond money can then pay for the public services needed to attract private investment: new streets, new sidewalks, improved lighting, buried utilities, building demolition, property acquisition and write-down, etc. (Note that through all this the properties in the tax-increment area do not themselves get any tax breaks; the added tax payments due to increased property values are simply used differently.) At the end of 20 years, when the bonds are paid off, each taxing district again levies its rate against the full assessed value of the area and receives the full amount. While taxing bodies other than the city may complain that they lose out during the two-decade tax-increment period, they do not lose any of the tax base they had at the beginning of renewal, and they stand to realize considerable benefits when the time is up. As for the interim, advocates of the new law simply note that the other districts would gain no new revenue at all if there were no renewal project. Another way of looking at tax-increment financing is that it concentrate the total taxing power of all local public bodies on one objective — urban 16/June 1980/Illinois Issues
redevelopment. The city itself does not normally get a very large portion of total property tax revenues. Canton's municipal tax rate, for instance, is $1.23; the total rate for all districts there is $6.20. The tax-increment law enables the city to "borrow" that total taxing power, apply it to the value added by new development, and spend the resulting revenue in ways that will encourage new development; the result is an enlarged tax base for all governmental bodies. A borrowed idea Tax-increment financing is not new; California has been using a similar law since the 1950's. Among neighboring states, Minnesota, Iowa and Wisconsin have such laws on the books. Illinois' version was drafted by attorneys Kai Nebel of Chicago and Jack Teplitz of Peoria, and it was shepherded through the Illinois General Assembly by Rep. Fred Tuerk (R., Peoria) and Sen. Howward W. Carroll (D., Skokie). Nebel says the statewide progress of his brainchild "so far is just excellent. It's working better than I hoped for." Canton Mayor Harlan Crouch is equally enthusiastic: "It's as though it were written for Canton." His city jumped on the new legislation soon after it went into effect and became the first in the state to pass the necessary ordinances to implement it. (Peoria, Rockford, Rosemont, Homewood, Danville and Chicago have since followed.) Canton also took the lead in carrying a test case to the Illinois Supreme Court, where a recent favorable ruling enables cities to sell their tax-increment bonds and get to work. Crouch notes three key steps in implementing a tax-increment project. First, the city must designate a tax-increment area, which is supposed to be a "blighted" or "conservation" area. Blight, according to the legislation, is a combination of five or more of the following factors: • age, If half the buildings are over 35 years old, and only three of the above factors are present, the area still qualifies as a "conservation area" which may become a blighted area, according to the legislation. In the case of the tax-increment district in northwestern Rosemont, Village President Donald E. Stephens says, "While each and every building is not seriously flawed, the overall area is a blight on Rosemont. It's an eyesore that can only cause trouble. It should be eliminated." Next, says Crouch, the city of Canton must prove that private enterprise will not develop the area unless there is an infusion of public funds. This is very important: "We have to demonstrate that we must do these things. The intent is that cities don't preempt development that would occur anyway. If you got into that situation, then you would be taking money away from other taxing bodies." On the other hand, Crouch does not look favorably on the municipality doing it all. "In the past, cities have maybe done too much and not encouraged private investment. We need to work not for somebody but in concert with others — to leverage the dollars we have." Third, the city must make a plan for the area. "You can't just designate an area and wait and see," said Crouch, "then you'd be saying that private June 1980/Illinois Issues/17 developers could do it on their own." Without being inflexible, the plan would show what land the city should acquire and what public support facilities (streets, parking, etc.) are needed. Canton has also sought out other methods of private financing. Although these aren't part of the tax-increment law, Crouch has found them very helpful. Since the city has only 20 years of tax-increment money available, the earlier a development comes in, the more revenue will acrue for the municipality to work with. Canton helped assemble 25 private investors needed to form a Local Development Corporation (LDC) under the federal Small Business Administration (SBA). The LDC can borrow directly from SBA and build "turnkey" buildings that individual members might be unable to do on their own. According to Crouch, Canton was also first in the state to issue "commercial redevelopment bonds" for the Fulton Square mall project. These bonds are tax-exempt and bring down the interest rate on private projects. Since developers don't always follow through on nonbinding commitments, Crouch warns other cities, "Never put yourself in the position of issuing bonds [anticipating the property tax revenue from a new development] without a contract in hand." Like many towns and small cities in Illinois, Canton was originally centered on a downtown "square." When the tax-increment opportunity knocked, the city was struggling with three related problems: an old-fashioned, declining central city being preempted by suburban stores with their asphalt acres of parking lots; the aftermath of a July 1975 tornado which had damaged the south end of the square; and a group of local businessmen who wanted to put together a mall at the north end of the square but couldn't pay for all the public improvements needed.
"The cities have got themselves in a heck of a bind," Crouch says, "They were built up over a hundred years ago and didn't anticipate our romantic involvement with the automobile. All the stores were side by side, long, and deep." Canton's old square fills that description perfectly. But merchandising techniques changed. Shoppers became accustomed to and then demanded wide, bright stores, and they had the mobility to go find them. Downtown found itself unable to adjust. "Through zoning," Crouch says "we've said that if you want to build a new store, you must provide so many parking spaces per so many square feet." This sensible provision against car-crammed streets rebounded against downtown's interests, however. Crouch says, "So you need two old stores to make one new one [wide enough], and two or three more for parking. At this price, it becomes prohibitive. You might be able to redecorate, but you can't build a new downtown. So it became easy to go out to the cornfields and build new." It wouldn't be economical to build a new store downtown until the old stores fell to rubble. By then the community would be dead. Crouch says that the energy crunch now has people looking for convenience, and in cities Canton's size, downtown is still closest to home. Thus the city is working to make downtown as attractive as the suburbs. In Canton, this involved completely renovating the park in the center of the square, where a series of noontime entertainment events (Dixieland bands, theatrical skits) were scheduled. Ultimately the city wants to turn the square "inside out" by eliminating traffic altogether from its center, putting parking around the outside, and shifting the new stores out into the former street and up next to the central park. The south and center of Canton's square will then, in effect, be an "open-air" mall; the north end already harbors the enclosed Fulton Square shopping mall. Crouch hopes to see $10 to $15 million of redevelopment take place within Canton's 10-square-block tax-increment area. He says, "We will probably be able to issue $100,000 in bonds a year, based on the contracts now happening; it could go to $150,000." In contrast to Canton's possible total of $2 million over 20 years, the city of Peoria expects to spend about $26 million in tax-increment money on part of its 168-acre "Southtown" clearance project. Rosemont, a Chicago suburb near O'Hare Airport, will clear and redevelop 90 acres for $31 million. One of the attractive features of tax-increment financing is that it leaves the decisionmaking about redevelopment in local hands. Federal programs often leave smaller cities with a choice between applying for available funds, regardless of the program's value locally, or letting them to go someone else. "No one knows the needs of the community but the local people," says Crouch. A friendly lawsuit Nevertheless, Illinois' tax-increment cities have not foregone the other routes to urban renewal. "I would love to say, 'No more federal money,' "says Crouch. "But if I don't take my share, it goes to other communities. And the same taxes are paid here. I'd be remiss in my duties as a public official if I didn't try to get some." And some he has got: Canton recently received a three-year, $2.5 million grant from the U.S. Department of Housing and Urban Development to rehabilitate housing and make public improvements in the southeast quarter of town. Canton has proven to be almost too good a spot for tax-increment financing: none of the other local taxing bodies objected to the plan, leaving the city (not to mention the others intently watching from the sidelines) without a 18/June 1980/Illinois Issues test case. In order to get a binding legal opinion on the law's constitutionality, Canton had to resort to a peculiar "friendly" lawsuit between the mayor and council. Crouch refused to sign tax-increment bonds without a bond counsel's opinion. And the city council, which had approved the bonds, sued to have him ordered to do so. A court decision in favor of the council would enable a bond counsel to OK the city's tax-increment bonds, and would thus both require and enable the mayor to sign them. Associate Judge Charles Wilhelm of the Ninth Judicial Circuit (Fulton County) affirmed the law's constitutionality in July 1979. The Illinois Supreme Court at first refused, then agreed to hear a direct appeal. In a March 28 decision with two dissents, the state's highest court upheld the law's constitutionality. The court concluded that Illinois' Constitution provides no obstacle to the temporary reallocation or sharing of tax revenues which the tax-increment law provides for. In fact, they noted that Article VII, Section 10(a) specifically provides that units of government may contract or associate among themselves "to obtain or share services and to exercise, combine, or transfer any power or function" not otherwise illegal. Dissenting justices Clark and Moran retorted that tax increment is compulsory, not voluntary, for the other taxing districts and that the association in this case is not mutually beneficial. Contributors to the fund that kept this amicable dispute going through the courts included Peoria, Springfield, Danville, Mound City, Woodstock, Rockford, Jerseyville and two private firms which have requested anonymity. Tax-increment financing will not solve all the problems of urban renewal. It has always been, and still will be, easier to build new business and industry than to build new housing for low- and moderate-income urban dwellers. But tax increment can make a difference. As Crouch says, "We can accelerate our program six times with no impact on individual citizens. We can arrange for our long-term needs without making short-term sacrifices." Harold Henderson is a free-lance writer and regular contributor to Illinois Times. He lives in Fulton County. June 1980/Illinois Issues/19 |
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