Public needs more oversight of tax increment financing

May 27, 2008

RALEIGH – North Carolina can avoid future failures like the Randy Parton Theatre, if legislators reform the rules for so-called tax increment financing, or TIF. That’s according to a new John Locke Foundation Spotlight report that outlines four potential reforms.

Click here to view and here to listen to Daren Bakst discussing this Spotlight report.

Those reforms would give the public a vote on proposed TIF projects, improve the oversight process, offer basic financial protections and make the costs and purposes of the projects clearer, and protect taxpayers against projects that create improper private benefits and conflicts of interest.

“The common theme running through the four recommendations is the desire for good government,” said report co-author Daren Bakst, JLF Legal and Regulatory Policy Analyst.

“The TIF process should be transparent, starting with the local government’s decision to seek TIF financing,” said co-author Joseph Coletti, JLF Fiscal Policy Analyst. “Since a TIF provides a targeted incentive to private-sector business, taxpayers have a right to know the details.”

Voters narrowly approved tax increment financing in 2004. A TIF-financed public project is designed to encourage nearby private development. In theory, tax revenue from the private development would pay off the debt from the public project. Under current law, local governments can proceed with a TIF project without holding a public referendum. Bakst and Coletti expose problems linked to this financing arrangement.

“North Carolina’s experience to date with TIFs has been nothing short of a disaster,” Bakst said. “The state’s first project, the Randy Parton Theatre in Roanoke Rapids, has been both a financial failure and a source of controversy and alleged corruption. Beyond the specifics of the Parton case, state policymakers need to consider systemic flaws with TIFs that made it possible for the project to get off the ground in the first place.”

The first systemic flaw is the lack of voter oversight, Bakst said. “Requiring voters to approve TIFs would make a major difference in providing much-needed oversight,” he said. “There is nothing inherent in TIFs that requires ignoring the will of the people. The language of Amendment One says nothing to preclude the General Assembly from requiring a vote of the people. In fact, the amendment’s language clearly contemplated the need for a vote. A referendum could be required if the legislature passed a bill to this effect.”

The second problem is linked to the current system for overseeing proposed TIF projects, Bakst said. “These projects now require approval from the state’s Local Government Commission, but the current TIF statute creates what can fairly be described as a rubber-stamping process,” he said. “Lawmakers could change the rules to guarantee a more meaningful oversight process.”

“The TIF law should place the burden of proof on the local government to show why the project should be approved,” Bakst said. “Right now, the LGC is required to grant approval if a TIF project meets certain criteria.”

A third reform would require the Local Government Commission to root out any improper private benefits or conflicts of interest linked to the TIF financing, Bakst said. “The TIF statute should direct the LGC to ensure that inappropriate private benefits are not the real reason the project has been proposed in the first place.”

The fourth issue is tied to basic financial protections, Bakst said. “If the incremental tax revenue from proposed private projects is unlikely to bear the full cost of paying off the tax increment-financed bonds, the TIF statute should require the LGC to reject the project,” he said. “Another requirement would force the LGC to reject a TIF project if that project is unlikely to attract enough private development to generate significantly more property tax revenue than if the TIF had never existed.”

Roanoke Rapids is still trying to figure out how to pay for the $21.5 million Randy Parton Theatre project. Bakst and Coletti’s report spells out the “lowlights” of that project, including the firing of namesake performer Randy Parton’s theater management company after fewer than six months of performances. Roanoke Rapids paid the company $750,000 in connection with his dismissal. A Roanoke Rapids city council member and a member of the N.C. Department of Transportation have both resigned due to issues related to the project, according to the report.

“North Carolina has experienced far too many government scandals in recent years,” Bakst said. “Unfortunately, the current TIF process is conducive to unethical and possibly illegal behavior. TIF projects can be created behind the scenes with very little oversight. There also can be a significant amount of money at play in these projects.”

“TIF projects need more oversight from the voters and from the Local Government Commission,” Coletti said. “Cities and counties should also be required to review their projects carefully. Simple changes outlined in this new report would improve TIF projects and, more importantly, create a more honest and open government.”

Daren Bakst and Joseph Coletti’s Spotlight report, “Common-Sense TIF Reforms: Ways to Avoid Randy Parton Theatre-Like Debacles and Other Disasters,” is available at the JLF Web site. For more information, please contact Bakst at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].