Cities fight to overcome taxing district deficits

Special taxing districts designed to support public and private ventures do not always live up to expectations.

Just ask Branson city officials.

The city subsidized debt service on the Branson Landing to the tune of $11 million between 2007 and 2010. City officials said the complex financing for the $420 million retail development leaned, in part, on sales tax revenues from tax increment financing and transportation development districts. A state audit in May found projections for revenue from sales taxes, made prior to the late 2006 opening have fallen short of expectations.

The city of Branson, however, is not alone when it comes to covering debt service payments from its own coffers when revenue from taxing districts fall short. The city of Springfield has subsidized debt service for its two TDDs, which were established to collect sales taxes from the Heer’s building and the College Station development to help fund adjacent parking garages. Debt service payments on the two garages total $1.06 million for fiscal 2013, and city officials are expecting to subsidize $872,326.

TIFs can be unpopular among tax policy and citizen advocacy groups because they freeze revenue that would go to other taxing districts, such as schools or libraries, to help pay for development costs through taxes in a given area. TDDs are districts that can collect sales taxes designed to pay for infrastructure improvements. They can be viewed as a way to foster development and create jobs, but they also can create budget deficits if development sales projections are amiss.

In Missouri, there were 438 TIFs in 2011, according to policy analyst David Stokes with the free-market think tank Show-Me Institute. He said there were more than 100 TDDs in 2010, and those have been growing in popularity in recent years with local governments and developers.

Adjusting on the fly
Though Branson City Administrator Dean Kruithof feels the Branson Landing Feasibility Study by international consulting firm Economics Research Associates was overly optimistic in terms of revenue projections, he said the problem is being handled appropriately.

He said the city has been aware of the revenue shortfalls for years and has to date refinanced more than $30 million in infrastructure bonds. Officials are considering refinancing again to help address the problem. Kruithof said sales at Branson Landing have not disappointed, but that the complex financing structure included incorporating other debt, such as construction expenses for the Branson Convention Center, and total district sales tax revenues have not been enough to pay the debt service by themselves.

“It is not that the Landing has failed. The Landing is doing very well. But it is the overall development that took place where the projections were behind, and we’ve had to supplement those projections with local funds,” Kruithof said.

Noting subsidies have been siphoned from the city’s transportation, tourism and general funds, Kruithof said the burden has not been overbearing because the city has been budgeting to account for the shortfalls.

Kruithof declined to name services that were being impacted by the diversion of city funds.

“This is not new information to us. In our budgets, what we have had to do is make sure that we do have those monies to accommodate for the subsidies,” Kruithof said. “The hope is that as the economy improves that type of pressure on our budgets will start to decrease.”
 
Missing the mark
Springfield Economic Development Director Mary Lilly Smith said while it is disappointing that the downtown districts have yet to yield much sales tax fruit, the parking garages are public investments that support center city redevelopment.

“With College Station and Heer’s parking decks, the city is the backstop. If revenue is not generated that is adequate to pay the debt service, then the city steps in. But in those cases, what we were doing was building public infrastructure,” Smith said. “One of the main things a community can do to incentivize downtown redevelopment is to provide parking.”

She said it was always the city’s intention to pick up some of the tab on the downtown garages; it has just turned out that its obligation was bigger than expected.

On the College Station parking deck, there is a Community Improvement District and a TDD, both of which levy a 1-cent sales tax. In addition, property taxes were abated on the development in exchange for a parking deck participation payment from developer Scott Tillman. A CID and TDD also were established at the former Heer’s property, but with plans for a mixed-use development not gaining traction, that revenue never has been realized.

A TIF and a CID surrounding the Springfield Exposition Center are designed to generate revenue to pay the debt service on the Expo Center, but Smith said according to the management agreement with John Q. Hammons Hotels, the company pays any difference between what the taxes generate and the debt payments.

No crystal ball
Show-Me Institute’s Stokes, who specializes in taxing districts, warns cities that TIFs and TDDs are full of pitfalls. He said while the taxing districts can be effective ways to build public infrastructure, more often than not, they are used to give preferential treatment to certain types of developers.

“Most TIFs involve cities, and sometimes counties, that say we want a certain type of business to go into this location – almost always big-box retail developments. It’s the government planning the economy, and that almost never works,” he said.

Citing a 2011 study from the East-West Gateway Council of Governments, Stokes said special taxing districts are often ineffective. The group added diverted taxes from special taxing districts in the St. Louis area during a 20-year period and found that $5.8 billion in tax subsidies created 5,400 jobs, which means citizens paid $370,000 per job created. He also referenced a 2000 study from the Journal of Urban Economics that reviewed 235 communities in the Chicago area and found those communities not using TIFs grew faster than the communities that did.

“That is not a road to prosperity,” he said.

He added that eminent domain abuses often stem from TIF plans, citing lawsuits brought by individuals from Sugar Creek in the Kansas City area and Arnold, a suburb of St. Louis.

Despite the problems, Stokes said the districts are popular because city leaders want to be seen as working to create development.

Smith said the city of Springfield is currently in the process of designing a TIF for the proposed Springfield Plaza development near the southwest corner of West Sunshine Street and West Bypass, but she stressed that all the risk lies with the private party.

“They will pay for their costs upfront, and if the TIF reimbursement isn’t enough, that’s their risk,” Smith said.