Sunday, August 1, 2010

Tax increment financning and transit

Last week, the web site portlandtransport.com posted a five-part series of an interview with new TriMet director Neal McFarlane.  The interview touched on numerous topics, but a significant portion of the video dealt with the current financing crisis at the agency (and at many other transit agencies, and state and local governments in general).  One of the more contentious topics was the use of tax increment financing to pay for improvements to transit infrastructure and service. 

The video included several people giving testimony at a TriMet board meeting, in opposition to the practice--including the sheriff of Clackamas County and the chief of Clackamas Fire District, whose territories are served by the MAX Green Line, and the planned Milwaukie extension.  Both of them complained that TIF, which has been used in the past to finance improvements to the transit system, was hampering the finances of their respective departments, by simultaneously creating new demands for service and depriving them of revenue with which to provide that service.  Also appearing in the video was conservative political activist Steve Schopp, who has engaged the producers of the video (and yours truly) in the comment threads at portlandtransport.

And while I disagree with much of what Steve has to say, on this issue he's got a valid point.

What is TIF?

Tax-increment financing (TIF) refers to a means of public financing whereby the portion of property taxes (or other taxes) collected on certain parcels of land, which goes to the general fund, is frozen--with the difference being used to finance capital projects designed to improve the value of said parcels (and bring about some public benefit as well).  Generally bonds are issued to finance the actual project, and the tax-increment is used to pay back the bonds until they are retired.  This is especially important for Oregon, where Ballot Measures 47/50 limit property tax increases to 3% per year; unless the property in question is , or the taxes are to service bonded indebtedness.  TIF seems simple enough, but it has a few issues, even when used "properly":

  • Inflation may not be accounted for--if baseline costs to provide government services are rising due to inflation, but the revenue provided is frozen, cuts to service may result.
  • Sometimes the new development may increase the need for government services, such as turning a brownfield into a dense mixed-use residential zone.  Brownfields seldom need service from the police or paramedics, whereas places where people live often do.
The graph to the side, apparently designed by local TriMet critic (and frequent portlandtransport.com commenter) Jim Karlock for an anti-urban-renewal article at bojack.org, demonstrates how it works.  Whether or not the section labelled "red ink" is truly red depends on how expenses grow or shrink; in a well-designed TIF the red ink is minimal or nonexistent.

When does TIF work?

TIF works best when the following conditions are met:
  • The improvements are largely specific to those parcels being tabbed for tax-increment financing. 
  • The improvements may decrease, or at least minimize the increase, the need for public expenditures
  • The resulting property value increases are of sufficient magnitude that the bonds can be paid of quickly, returning the full value of the tax base to the general fund.
A common use of TIF that meets these requirements is certain types of urban renewal; where blighted neighborhoods are rebuilt.  Urban renewal of this sort satisfies the conditions--specific lots are affected, the improvements are frequently substantial, and the elimination of blight and the related social pathologies may well reduce public expenses.  (This analysis ignores the effects of gentrification--in particular, the beneficiaries of such projects are often landlords and developers, not people who live there who may be forced out due to higher rents or taxes.  But that's another subject).

What about infrastructure?

What about public infrastructure, such as roads, bridges, or transit lines?  At a neighborhood level, TIF (or better yet, Local Improvement Districts, where specific local taxes are levied against a neighborhood to pay for improvements), it can work.  But for major regional infrastructure projects, such as freeways or MAX lines, not so much:

  • Many demands for service are not reduced, and may increase, if the improvements result in more people living in the area (or travelling through).
  • Such things are built on public rights-of-way (whether on easements or owned by the public outright), not on private lots subject to taxation--in other words, the directly affected land is off the tax rolls.  Instead, TIF depends on general increases in the value of nearby properties to work.
  • For large-ticket projects, the size of the TIF district needs to be also large; magnifying the risk to other government functions should the projected increases in value not materialize, or should inflation or other causes increase government expenses unrelated to the project, which must be met with a frozen tax base.
What's the best way to finance major infrastructure projects?  For large capital projects which are regional in scope--the traditional way (an explicit bond measure backed by a specific tax levy) is probably the cleanest way to do it--it doesn't affect existing services, it demonstrates political will to do the project, and it represents a stable source of revenue which makes lenders happy, lowering the cost of financing.

Voterphobia

Unfortunately, TriMet lost a measure in 1996.  Actually it was a statewide measure, Measure 32, that authorized using lottery funds to fund the N/S MAX project and numerous road projects elsewhere--one that was put before voters during the height of the Oregon tax revolt.  But it failed--and since then, TriMet seems terrified to go before the voters to raise money for capital projects (or to use existing bonding authority that it has used but has not exercised).  Instead, we get things like TIFs, bonding payroll tax revenues (the source of much of TriMet's operating budget), and the like to fund capital projects.

Some parting advice

A bit of advice to TriMet.  Your service area includes Portland.  A place which is highly transit-friendly.  The greater Portland metro area, excluding Vancouver, presently sends THREE Democrats to Congress.  I don't expect either Wu or Blumenauer to lose this November; Kurt Schrader is a bit more vulnerable, but the GOP has nominated yet another nutcase.  While the following advice might not fly during the current recession, what with everyone grabbing their wallets, I will nonetheless offer it:

Trust the voters.  The bulk of the populace supports transit, especially if you can convince them that you know what you are doing, and aren't just wasting taxpayer money on patronage projects.  Demonstrate some fiscal soundness, quit f---ing around with crazy financing schemes, grow a pair, and put a bond levy for Milwaukie MAX on the ballot.  Or better yet, put a levy for MLR, Barbur, and improvements for the WES corridor on the ballot, so all three counties get some cake.  Even better than that, put different proposals on the ballot (light rail, BRT) and let the people decide what quality of transit they are willing to pay for.  Or not.

But enough with the current "system" of scraping together funds from a zillion different sources to pay for major infrastructure projects.  It makes it look like TriMet and Metro are trying to hide something; it puts you in hock to a whole lot of folks who don't give a damn about quality transit, and when it results in service cuts, it alienates the demographic you can least afford to alienate--your current supporters. 

As stated previously, the appointment of a new GM is an opportunity, a chance to wipe the slate clean, and break from the past policies of the agency which have been met with much scorn. 

And after all--if you don't trust the voters, why the hell should they--should we-- trust you?

5 comments:

  1. i have to believe a lot of their timidness to a ballot measure is the lack of a sales tax in OR. sales taxes are the only taxes people as a whole are accepting of for things like this. property, income, gas tax are all very unpopular to raise.

    ReplyDelete
  2. That may be part of it. Raising property taxes is difficult due to both measures 5 and 47--while bonded indebtedness isn't subject to either the 1.5% limit (Measure 5) or the 3%/year limit (47/50), it IS subject to the double majority requirements.

    Income taxes are a burden for local governments to collect. Gas taxes are presently limited to maintaining roads, a limitation that the motorist, freight, and automobile lobbies jealously guard.

    ReplyDelete
  3. is urban renewal perfect? certainly not. but i think it is one of the best ways that we have available to pay for certain civic items.

    they just need to let districts retire and not keep renewing them perpetually. and not stretch the limits of what they spend the money on.

    ReplyDelete
  4. One version of TIF is to have a zoning easement in the 1/4 mile around a suburban station on height, multiple use, multiple residencies per lot, with the TIF on a percentage of the increase in property value due to the easement.

    This may be more suited to financing full fledged multimodel station construction than to the right of way construction costs.

    ReplyDelete

Keep it clean, please