Tax Increment Financing As A
Local Government Development Policy

By GEORGE H. RYAN, Lieutenant Governor

Throughout my travels in Illinois, there have been instances where local government officials sought advice on how to finance and refurbish areas for development to create job opportunities and additional tax revenues. Because few local governments are exempt from fiscal belt-tightening, financing existing public facilities and new private developments has caused many officials to wonder about alternative methods of financing. Their worries have been brought about by difficulties in generating new and additional taxes and other revenues. To possibly counter the prevailing attitude of "how to fund a project", one must look at an idea started in California in 1952. The precept of tax-increment financing (TIF) can be one viable tool many municipalities may use to stimulate re-development in blighted areas.

Tax increment financing is a technique that cities and towns may use to pay public improvement costs necessary to attract a private developer into a particular re-development area. It is a method where a community would benefit from sound property re-development and increased property tax revenues, invariably affecting the welfare of the community at large.

Tax increment financing is so named because the cost of public improvement is borne by the increased real estate tax revenues that result from public improvements and new private developments. In addition, TIF has been available to generate revenue and secure obligations for communities in Illinois, ameliorating the conditions of parking lots, sidewalks, enclosed mall space and streets. Tax increment financing, though, can only be used when public improvements are made by the city with the intention of private development involvement. It is an advanced commitment between the city and a private developer, not a tool to speculatively prepare for development.

Tax increment financing in Illinois gained its popularity when the Illinois General Assembly passed the "Real Property Tax Increment Allocation Re-development Act" in 1977. Under this State law, municipalities may designate blighted neighborhoods, business districts and industrial areas for re-development and may cover the cost of professional surveys, studies, plans and services. Under TIF, a municipality may also offset acquisition and relocation expenses, undertake demolition and site clearance activities, rehabilitate salvageable structures, construct publicly-owned improvements and offset related TIF costs.

The essence of TIF is that a city determines areas that are in need of development assistance and designates these areas as re-development districts. Once a city determines a blighted area, then the total equalized assessed valuation is established for all property in the proposed area. The city concurrently makes the necessary improvements which it pays for with existing revenues or the sale of bonds. Subsequently, the city sells all or part of the property to a private developer who builds the planned industrial, residential or commercial project. The public and private investment, in turn, increases the re-development area's assessed valuation (the re-development areas will eventually generate taxes due to the increased valuation). This increased valuation, or the tax increment, then goes into a special tax allocation fund used to pay the public improvement costs. When the re-development area is completed and all the debts incurred by the city to pay for the public improvements have been repaid with the tax increment funds, the tax increment project is dissolved and property taxes, based on the full increased assessed valuation of the area, go to all taxing bodies (i.e. townships, counties, etc.).

There are 28 designated tax-increment districts throughout the State, ranging from Sterling to Highland Park, Illinois. As one can imagine, the benefits behind tax increment financing help induce development, allowing local governments the opportunity to be the developer and job creator. TIF offers local officials maximum local control over the entire revitalization

May 1986 / Illinois Municipal Review / Page 7

program for the re-development area in question (in concert, though, with local merchants and private sector investors). TIF techniques can also be used in conjunction with other "business development tools", such as the issuance of tax exempt commercial revenue bonds and special service area financing. In addition, TIF helps to stimulate private sector investment, which otherwise would not have occurred within the re-development area, thus creating additional tax revenues and jobs.

There are disadvantages to TIF, as well. The use of tax increment financing by a municipality carries with it the potential of being left "holding the hag". This might occur when public improvements are prefinanced by a city via a municipal bond issue and repaid (over a specified period of time) through the new tax revenues generated by increased assessed values. If, for any reason, the private sector commitments fail to materialize as a follow up to such public financed improvements, the city will not have the necessary tax increment resources to freely retire such indebtedness without subsidizing the project from another source of municipal funds. Other disadvantages include: hidden costs to other taxing districts and the city's responsibility — not the designated district — to repay the general obligation bonds used to finance the project.

There are special considerations by local officials when deciding to designate blighted areas as re-development districts and I would be remiss not to mention the pros and cons of TIF techniques. But, once a district has been designated and the boundaries drawn by a local government, both local government and developer have the opportunity to witness increased tax revenues and sound investment; and therefore, a sound economic environment for Illinois. •

Page 8 / Illinois Municipal Review / May 1986