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TIF districts: tiff over turf on sales tax growth By DIANE OLTMAN AYERS While lawmakers focused this fall on home district elections, hundreds of local officials set their sights on Springfield for another kind of November challenge: a veto session battle to restore Tax Increment Financing (TIF) funds deleted from this year's budget by Gov. Jim Edgar. As a veto showdown approaches, administration sources say they stand firm to slash unnecessary spending, while cities committed to the sales tax rebate program vow they'll fight to force the state to honor its promises. The cities may win the battle, but the war is another story. Those who know TIF best say chances for an override look fairly good, but the future of the controversy-plagued program does not. Even longtime legislative supporters now admit resources are shrinking and their enthusiasm waning, as allegations of misuse and abuse make TIF a perennial budgetary battle. A $12 million appropriation, less than half the amount pledged by law under the TIF funding formula, was slashed from the state's fiscal year 1993 budget by Edgar last July. While other items were also pared, the TIF fund was entirely deleted, making it the largest single cut in a $30 million veto package. Citing tough times and tough choices, Edgar claimed the state can no longer afford the often-criticized economic development program. But that explanation offered little consolation to more than 100 municipalities scratching to meet this year's payments on development bonds, issued with the understanding that the state would honor its own TIF formula: returning to the cities a share of additional sales taxes generated by their new TIF projects. Under a fully funded formula, TIF cities were due this year to collect around $27 million in state rebates; the $12 million in the final budget was a compromise figure reached after months of fiscal horse-trading. "That was an agreed bill by both Democratic and Republican budgeteers along with the governor's own staff," protested an indignant Rep. Don Saltsman (D-92, Peoria), TIF's chief standard-bearer in the House. "Whenever a governor vetoes an agreed bill, he cannot be trusted." Saltsman says he and a bipartisan group of TIF boosters are ready to override the veto in both the House and Senate, but Edgar aides say the governor won't back off or be diverted by high-profile clashes over casinos, airports or education. "I don't think there are any issues bigger than preventing us from spending money we don't have," said Michael Belletire, Edgar's policy adviser on TIF and one of his top executive assistants. "The governor didn't do this cavalierly. We're not trying to be cute here; we're trying to be effective. Our view is the General Assembly ought not to override any appropriation veto unless they're prepared to cut the budget elsewhere."
20/November 1992/Illinois Issues
The original TIF legislation sponsored in 1977 by Sen. Philip J. Rock (D-8, Oak Park) focused on property tax growth and did not involve state funding or rebates. The plan allowed municipalities to establish "blighted area" development zones, issue up to 20-year bonds to upgrade them, then retain any increased property tax resulting from rising equalized assessment values (tax increments) to pay off those costs.
In 1985, the plan was expanded to include sales taxes. The state pledged to return its full share of any sales tax revenue increase coming from the rebuilt commercial zones. There was a sales tax TIF district boom after Gov. James R. Thompson by amendatory veto set a one-year sunset date for cities to qualify. More than 100 new TIFs were created in a little over one year. Uneasy with the program's rapid growth and skeptical of some TIF proposals, lawmakers decided to tighten the reins on TIF. In 1988 the Department of Revenue reviewed and redrew TIF district boundaries to bring them more in line with the program's original intent. "There were cases like Highland Park that put almost their whole city in their TIF zone. Some used it to relocate businesses like car dealers out of central areas," said Douglas L. Whitley, director of the Department of Revenue. "Maybe they didn't understand the purpose, or they didn't care, but some narrowing needed to be done. The state really jumped into TIF without looking, and we had to go back and correct those mistakes. We probably should have narrowed it even more."
TIF's funding formula was also reduced, said Don Eslick of the Illinois Tax Increment Association. The state cut TIF's full sales tax rebate to a lower 80-60-40 formula. Under it, the state would return 80 percent of the first $100,000 of sales tax increment, 60 percent of the next $400,000 and 40 percent of additional revenues. This legislative year, the TIF fund was a recurrent issue through months of budget wrangling after Edgar chopped the sales tax rebates from his own budget plan in February. Many lawmakers of both parties seemed more than willing to trade TIF rebates for an increased share of the temporary income tax surcharge, which Edgar also wanted to retain "in toto" for the state. But many downstaters and suburbanites, who represent most of the state's TIF cities, insisted the state meet at least part of its $27 million commitment to provide TIF rebates. In the last hours of the legislative session, dissatisfied but resigned TIF supporters finally won approval of the reduced $12 million TIF funding under an agreed bill. Edgar's unexpected veto this summer drew angry reactions from lawmakers who thought they had a deal. Saltsman said he and other TIF supporters felt betrayed. "The fact is, the governor is a liar. We've got a commitment, and he didn't live up to it," Saltsman fumed. "If he wants to continue to lie to these municipalities, he can do it, but I'm not taking the heat for him and his mistakes." Other pro-TIF lawmakers said they were also disappointed but tempered their criticism somewhat. "This is a commitment we made to our cities — a commitment that has to be met, one way or another," said Senate Revenue chairman Richard Luft (D-46, Pekin). "But when you have a program that has negatives, and you have tight budget constraints, that may be used as a reason to deny funding." November 1992Illinois Issues/21 Those negatives include the perception by many lawmakers that the TIF program has strayed from its original intent of rebuilding blighted commercial zones and that it has been misused to finance "sweetheart" deals with local developers at state expense. "There's been criticism. There's been a few bad apples, but there's a lot of misunderstanding too," said Sen. John Maitland (R-44, Bloomington), whose hometown raised eyebrows by using TIF to convert an unincorporated flood plain and abandoned farmstead to a multimillion dollar commercial strip. "Jobs are jobs are jobs, and you should put that investment where it does the most good," Maitland explained. Lawmakers have always felt uneasy allowing unrestricted local control over such a financially complicated program, said Luft, whose district includes sizable TIF projects in Peoria, East Peoria and Pekin. "You don't have to bring too many examples before the eyes of a legislator before he/she decides to keep people in nursing homes before giving [money] to cities to pay off what seems to be mistakes," he conceded. Currently, a total of 137 sales tax TIF districts are operating in 102 Illinois municipalities, primarily in small-to-mid-sized downstate or suburban Chicago communities. Most have used sizable general obligation bond sales to finance land acquisition and infrastructure improvements to attract business investment, relying on state rebates to meet those bond payments. Since 1987, the state has returned a little over $65 million total to sales tax TIF cities (including $42,117 to Edgar's hometown of Charleston). In fiscal 1991, the only year the formula was fully funded, the state rebated $14.2 million, Eslick said. As TIFs prospered, generating more retail sales, the rebate due from the state grew, standing at around $27 million by fiscal 1993. In a year of tight budgeting, Eslick said the cities did not expect to receive the full amount. "We figured we needed $18 million to satisfy outstanding debts, but we eventually settled for the $12 million," he said. The irony of course is pointed out by Eslick: "If we have a problem, it's that TIF has worked too well, and the rebates we're entitled to have grown." Illinois' TIF program was seized upon by many cities as a much-needed lifeline for floundering development projects hurt by federal budget cuts in the mid-1980s, according to Luft. While municipalities scrambled to replace grant programs axed by the Reagan administration, economic development boosters in the General Assembly hailed TIF as an innovative alternative whose time had come. Now, many say the controversy-plagued program never really arrived.
"Economic development was the 'cause' of the day, so we just kind of fell into that mold," Luft recalled. "It almost sounded too good to be true, and I cautioned that if there were projects that violated the moral intent of TIF, there would be moves to eliminate it. I think I was being prophetic without even knowing it." The major flaw in the TIF program, Luft said, has been local approval of TIF contracts without any state review of proposed projects. "The problems are not of [TIFs] creators but its followers," he asserted. "If the state had made those decisions, no car dealer in Illinois would probably have moved with TIF help." That analysis is "a typical state perspective," Eslick responded. "If you try to control things from Springfield, you produce nothing. The farther away from the people involved, the less responsive it is to the needs of the cities." TIF critics concede that the program has produced positive results for some cities, turning financial decline to flourishing growth. In East Peoria, a downtown TIF has completely replaced blocks of dilapidated, mostly empty storefronts with a new shopping center and city offices that have changed the face of the factory town. Suburban Bartlett has given its downtown a much-needed facelift, and Cicero has used TIF bonds to raze an old factory complex, making way for new retail development. In DeKalb, new retailers have replaced a deteriorated strip mall, cleared away with TIF funding. Bloomington has extended roads, installed utilities and reclaimed a flood plain to accommodate a luxury hotel/conference center and shopping complex on the city's retail beltline, and attracted new stores and restaurants to a depressed west side neighborhood. In Effingham, a brightly lit complex of hotels, restaurants and truck stops greets travelers at the interchange of Interstates 57 and 70. Park Forest finance director Erica Peterson says rehab of her city's downtown shopping district would not have begun without TIF. Now she's worried it may be put on hold. With 22/November 1992/Illinois Issues more than $500,000 in outstanding TIP bonds, Park Forest has already had to raise property taxes to compensate for reduced state rebates, and it may have to do so again, Peterson said. "To depend on an unreliable source of revenue for bond payment is a real nightmare," she said. "We feel the state made a contract with us, and we relied on them. We'll never default on our debts, but in a small town like this it's the residents who are bearing the brunt. It's not good financial management to live from hand to mouth like that." In west suburban Hodgkins (population 1,963) city officials took the TIF bait last year, issuing nearly $35 million in development bonds for the largest TIF expansion project in the state. Now village accountant Robert Horstman is worried. The village has purchased land and built infrastructure for a rapidly developing commercial park to include a relocated Celozzi-Ettleson car dealership, WalMart, Sam's, Target, Kohl's and other retail outlets, which are expected to start generating sales taxes within the next two years. By fall 1993, Hodgkins will owe $2.4 million in bond payments, and Horstman is counting on a full-formula rebate to meet those bills. A reduced formula will leave Hodgkins in a tight spot, Horstman said. No rebate is disastrous. "We don't have the property tax base to pick that up. Our normal tax levy is only $600,000 a year," he explained. "I don't know how the governor and legislature can renege on that promise when they know communities have obligated themselves. This is a disaster for us. I don't know how those people can sleep at night." Horstman said he's written to Edgar but received no satisfaction. Pekin Mayor Don Williams said his city defeased most of its bond obligations after learning of Edgar's veto this summer, but the city still has about $3 million in debt to repay on a downtown renewal project that will now probably never be completed. "It could have been a great tool. It could have made some great things possible, but there were abuses and bad judgments," Williams admits of TIF in Pekin. "We're just trying to cut our losses and get out with our skins." Bloomington city manager Tom Hamilton said his town will have to cut capital improvements and reallocate funds to pay off $14.2 million in sales tax TIF bonds. Even if restored, the vetoed rebates won't come in time for this year's bond payments. Williams said he and other local officials wanted to sit down last spring and negotiate with the administration on TIF. "They didn't do that. They just said, 'Here's what you get — nothing!' It doesn't say a heck of a lot for the trust you can put in state government."
If state support for TIF does not improve, Illinois cities may be left holding the financial bag for over $200 million in sales tax TIF bonds and interest, Eslick said. The cities will still have their local share of sales tax to help offset their debts. There are also approximately 150 property tax TIFs, not dependent on state rebates, that are pumping added revenue into local coffers. But for many who based their bond indebtedness on state TIF guarantees, the gap will be hard to fill. "This [veto] will have very serious effects. Some cities will have to consider property tax increases, or start cutting important services," Eslick said. "What all this is doing is draining the effectiveness of the program. It's a shell game in a sense. The governor doesn't understand TIF, and neither do the people who write his veto messages. We've never been able to talk to him about it. We've always had to deal with staff." Not so, says top Edgar adviser Belletire: "We knew perfectly well what TIF involved: $12 million of expenditures which we weren't obligated by law to appropriate; by a formula that needs to be changed; in a financially difficult year when we have to limit spending. This is just a way for municipalities to make sure they put their hands around sales tax revenue. It is not a net advantage for the state in most instances." While TIF districts may bring new business into individual communities, that is investment and jobs that would have gone somewhere else in Illinois anyway, Belletire said. The net result is no net gain in overall state sales tax revenues, he said, while TIF puts the state in the awkward position of helping one city compete against another for new investors. "A TIF district in Bloomington isn't going to draw shoppers from Evansville, Ind. They'll shop in the area anyway." Belletire said. "[A sales tax TIF] is an advantage to the city, but it doesn't change a whit the amount of sales tax the state generates." What has changed is the escalating sum the state is espected to return, Belletire said. The administration insisted this year, he said, that the formula should be reduced even further, and a maximum limit set on the amount of increase rebated each year: "[TIF cities] didn't want to compromise with us. We offered them $17 million, but they thought they could get a better deal from the legislature. Now they're getting nothing at all. It's pretty simple finances from the state's point of view: Those revenues are not growing for us. Why should we be in the business of sharing those taxes?" Belletire added that the administration did approve an increase in this year's income tax surtax payment to all Illinois cities, which in many cases will be more than their share of the $12 million TIF fund. November 1992 /Illinois Issues/23
But unless the surcharge is made permanent for local government, the one-time payment won't help cover long-term bond obligations, Eslick said. The income tax surcharge expires next July. "The governor has confused TIF with the surtax issue. He wasn't there when TIF was created, and he has no commitment to it," Eslick said. Luft was more temperate. He said, "I don't think you can blame this entirely on the adminstration. There's enough guilt to be shared, between the legislature and the governor's office, and everyone else involved." Maitland said that he'll join Luft in an attempt to override the veto in the Senate. "[Edgar's] had some serious budget constraints — so have I — but we owe this to these communities. Whether he agrees with them or not, Jim Edgar needs to live by the commitments we've made. His staff knows what the TIF formula is all about. If they didn't communicate that, then somebody's abusing their responsibility." Saltsman said he's already drafted an override measure that he'll pursue in the House with the help of Rep. Phil Novak (D-86, Bradley) and Rep. Charles Hartke (D-107, Effingham), and he may also try to pass a supplemental appropriation to fully fund the formula. Saltsman said: "It's ready to roll. If we don't get it done, it's going to be devastating to a lot of small cities." Luft predicted it will be easier to restore the TIF appropriation than to rebuild legislative enthusiasm for the program's future: "There have been errors that are still being rewarded, but it's a commitment that has to be met. I'm not so sure, however, what commitment means in the legislature. My goal right now is to get the $12 million back. After that, I think we'd be very hard-pressed to get any more money. When you're laying off hundreds of people at [the Department of] Public Aid and DCFS [Department of Children and Family Services], it would be very difficult to come up with another $15 million for TIF." One wild card in the override contest could be House Speaker Michael J. Madigan (D-30, Chicago), who blocked an attempt by Saltsman during the regular session to add the full TIF formula to the budget, supporting instead the increased income tax surcharge for local governments. Madigan spokesman Steve Brown said the speaker will consult his own TIF adviser. Rep. Barbara Flynn Currie CD-26, Chicago), before taking a stance. "Obviously they'd like the money restored, but it depends a lot on the state's fiscal condition," Brown explained. "We didn't think we could support it last June, and I don't know how much has changed since then."
Election-year politics, and the attendant distractions, will be over when the legislature meets in November for its fall veto session. Said Maitland: "We'll be dealing in a more statesmanlike way. But with the number of lame ducks we've got this year, there's no way to know what will happen." Whatever the outcome, most TIF supporters agree the future of the controversial program is very much in jeopardy. A lawsuit filed by TIF cities to force the state to honor its commitment is still winding its way through the court system. Luft predicted: "TIF now, after this year's history, will almost cease to be because nobody's going to buy the bonds. It's like loaning someone money when they're unemployed. Nobody's going to do that." Hamilton said: "People see this in the financial markets; they're not blind to what's going on. It's got to affect the business climate in Illinois. It sends a very bad message that they're not a reliable business partner." Revenue director Whitley denied the TIF controversy will hurt the state's business reputation. "We're in a time that calls for cuts, and we're cutting nonessential spending. That's fiscal responsibility, and that's sound judgment." Eslick countered that most TIF cities are proud of their projects and believe the program is a good investment, pledging to fight to restore the vetoed money: "We would never have overridden three Thompson vetoes without learning something. We'll override this one too, and will be back again next year." But not all TIF participants are convinced the program has returned what it promised to deliver. Charleston building and zoning officer Jeff Finley said TIF has done little to revive his declining downtown. A permanent local government share of income tax, he said, might be a more reliable and desirable development tool. Belletire warned that unless TIF cities are willing to make more concessions, they'll be left out of the governor's budget every year. "If they'll listen to reason, we might be willing to guarantee a minimum each year, with no argument. If not, they can expect more of the same." Saltsman and other TIF proponents believe that they have already conceded enough and that more cuts will undermine productive TIF projects now underway. Saltsman said the TIF supporters are prepared to stand their ground: "I took them to the coals this year, and they haven't seen nothing yet. We're going to fight for it for two more years and then we'll have a new governor to work with. We'll see then what he wants to do." Diane Oilman Ayers is the owner and bureau chief of Great Prairie News Service, an independent legislative news service based at the Statehouse pressroom in Springfield. She has covered state and local government and TIF-related issues since 1986. 24/November 1992/Illinois Issues |
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