TIF Reform

In 2004, North Carolina voters narrowly approved a constitutional amendment referred to as Amendment One. This amendment permits local governments to use a form of public debt financing called tax increment financing (TIF). The stated purpose of TIF is to promote private economic development in designated districts through the development of public improvement projects.

To put it simply, by developing a public improvement project, such as water and sewer lines, this allegedly will help attract private developers who otherwise would have ignored an area. The public improvement project would be financed through the extra property tax revenue (incremental revenue) that would exist due to the new private development.

The Myth of TIF: Not Free Money

Because incremental tax revenues pay the TIF debt instead of general revenues as in a certificate of participation or general obligation bond, TIFs do not affect a overnment's credit rating. This, however, makes repayment less assured, so lenders charge higher fees and interest, making TIFs the most expensive way to borrow money (see Chart 1 below for a comparison of public debt instruments).

Advocates say TIF bonds (TIFs) do not impose a cost on taxpayers. This is not true. While it is true the government does not pay TIF debt from the general fund, this is only because the revenue never makes it to the general fund in the first place. This has no cost in the same way that having taxes deducted from a paycheck has no cost to the employee.

When using TIFs, the tax revenue is used to pay off the debt at the expense of paying for other needed services. If the private development would have occurred anyway, the local government loses revenue that could have gone to pay for critical services instead of paying for the debt incurred by the TIFs.

Lack of Oversight Leads to Disaster

North Carolina's experience to date with TIFs has been nothing short of a disaster. The first TIF project was the Randy Parton Theatre in Roanoke Rapids. It has been both a financial failure and a source of controversy and alleged corruption (see Chart 2 below for a list of the lowlights of the project).

Roanoke Rapids reversed the whole concept of TIFs. Instead of the public improvement project (i.e., the theater) helping to lead to new private development, the city used the TIFs so that existing development would help with the theater. The Local Government Commission (LGC) that is supposed to provide oversight on TIF projects also failed to do its job properly (the LGC is a nine-person state commission that approves local government bonds).

Require a Vote

Requiring voters to approve TIFs would make a major difference in providing much-needed oversight. Amendment One expressly stated "these instruments of indebtedness may be issued without approval by referendum." Because of the use of the word "may" instead of "shall" in the constitutional language, a referendum certainly could be required if the legislature passed a bill to this effect.

There is nothing inherent in TIFs that requires ignoring the will of the people — TIFs simply are a form of financing that can exist with voter approval just like general obligation bonds. The legislature can and should require that voters have a voice when it comes to TIFs.

Fix the LGC Rubber-Stamping Process

The TIF statute creates what can fairly be described as a rubber-stamping process. There are two sections outlining the TIF approval process. The first section simply permits, but does not require the LGC to consider relevant matters regarding a TIF proposal. The second section is even worse because it requires the LGC to approve a TIF if certain conditions are met.

The statute should instead be changed so that the LGC is required to review the critical issues regarding TIFs — meaningful oversight by the LGC should not be optional as it is now. As a general matter, when there is a TIF or a bond project, a city or county should be required to prove the merits of the project to the LGC. There should not be a presumption, as currently exists in the TIF statute, that the project is appropriate.

Further, TIFs need a high degree of scrutiny because the projects, as of now, do not require voter approval, unlike general obligation bonds. Since most TIFs do not specifically pledge funds from the general tax base, they also may not receive the same scrutiny from local government officials.

Recommendations

The whole issue of tax increment financing can get very confusing. The recommendations, fortunately, are nothing more than common-sense and easy-to-understand policies for honest and open government:

1) Vote: The best form of oversight is to permit citizens to vote on TIFs.

2) Real LGC Oversight: The LGC needs to have real oversight powers and not be a rubber stamp for local governments.

3) Ethics: There are too many ways for self-dealing to take place when it comes to TIFs — the TIF statute needs strong protections against conflicts of interest and other possible ethical risks.

4) Transparency: The public is provided far too little information about the true nature of TIF projects, including the risks of the projects. The TIF statute should have strong protections to ensure the public has accurate and detailed information about TIFs.