Distressed TID 4

There’s an observation from 2011 from Whitewater’s city manager to consider about the distressed status of tax incremental district 4. (I came on the observation while reading this week about Generac.)

Before going further, I’ll observe that when one talks about distressed tax incremental districts, one’s talking about rare birds.

By the assessment of the Wisconsin Department of Revenue, the number of distressed districts in the state is exceedingly small — in fact, as of April 2011, of over 1,050 tax incremental districts, only 13 were distressed (or severely distressed).

That’s only 1.2% of the statewide total. The overwhelming majority — the other 98.8% of districts — were not similarly ailing.

If the economy or changes in the state’s formula for property valuation simply made a district distressed, then more would have been equally ill. They weren’t.

The next time someone tries to tell you how common distressed districts are (“It should be noted that many other municipalities are seeking distressed designation for TIDs…”), you’ll know that’s an exaggeration– it’s very rare for a city to have a distresssed district.

(So rare, that the WI Dept. of Revenue concluded that the state would have few additional distressed designations: “However, since the ability to declare a TIF district as “distressed” or “severely distressed” must be done before October 1, 2011, the bill [SB-55] is not expected to significantly affect the number of TIF districts that will be designated as “distressed” or “severely distressed.”)

Many more filings just weren’t in the offing.

Tax incremental districts use expected, future tax receipts to justify present-day infrastructure spending — on the theory that current public spending will bring additional tax receipts (the incremental amount) to the designated district. So a city might, for example, spend for a new a road in the belief that the road will bring new development (and taxes from that development) to pay for the public cost of the paving.

If these are not true, there’s scant reason to build the road. (The public spending would exceed additional tax revenues, and the development would have happened even without the road.)

This is really an ‘if you build it, they will come’ tactic, with the added assumption that they won’t come unless you build it.

How much a municipality can and should spend, of course, depends on how much the district’s property is worth, and how much the municipality can expect in incremental development and taxes from what they’ll spend.

What if, for years, municipalities were justifying incremental public spending based on inflated, unrealistic values? That was part of Whitewater’s problem, by the city manager’s own admission:

Whitewater City Manager Kevin Brunner said the district had suffered development setbacks because of an inactive real estate market.

The Department of Revenue formula [to calculate the actual worth of property] change played a role, too. It reduced the value of Generac Power Systems, costing the district $50,000 annually in increment, Brunner said.

In 2010, District No. 4 fell $128,000 short in tax collections. In a controversial move, Whitewater declared the loss as a special assessment it could not collect and passed the debt along to the county.

In doing so, the county had to reimburse Whitewater for the special assessment. It’s now up to the county to collect the debt.

Got that? When the WI Dept. of Revenue adjusted the formula for property values — to make the formula more accurate and realistic — communities that gambled using unrealistic values were caught up short.

The values on which these officials justified public expenditures were too high. That’s either because (1) officials didn’t see that the valuations were inflated, (2) didn’t want to see as much, or (3) didn’t care.

How to avoid problems like this?

(1) Discourage TID spending,
(2) alternatively, find those who can manage TID projects skilfully,
(3) require beforehand from any prospective developer specific financial compensation should he or she fail to build,
(4) separate permanently the functions of city manager and chief community developer,
(5) put major spending projects to a community vote,
(6) emphasize basic governance over development schemes,
(7) commit necessary money to truly needy people rather than to pave the way — figuratively and literally — for developers, and
(8) reduce overall city spending and regulation to encourage private businesses to establish here without specific public subsidies or expenditures.