Tag: MDHA

Metro’s Audited Financials as of 6/30/2018

Metro’s Audited Financials for Fiscal Year 2018 were posted online yesterday. This post will run through the top dozen or so things I look at in the audited financials. I’m not going to do a lot of commenting. I’m just trying to lay out where to find accurate technical information for some of the financial topics that get a lot of attention.

The audited financials for FY18 are here. When I make page references, they are to this document.

The auditors gave a “clean” opinion. That’s typical for Metro, reflects well on Metro Finance, and is a good thing.

Balance Sheet. Don’t freak out until you read this full section. The city’s balance sheet, or “Government’s Net Position” is sort of ugly looking this year — with liabilities exceeding assets for government activities by $3.2 billion. That’s nearly $2.5 billion worse than the previous year. It is critically important to understand that there was a change in accounting rules this year which account for nearly all of this change. This year, for the first time, Metro (like all government entities) is required to include its entire retirement benefit obligation on its balance sheet. So that mammoth-looking decrease in net position is because the city’s known retiree benefit obligation must now be shown on the balance sheet.

There is no practical impact on Metro because of this accounting rule change. Auditors and cities and bond rating agencies have known for several years that this accounting rule was coming. Think of this as requiring a different and more accurate presentation of city finances…but there is no change in the underlying information and no day-to-day impact on Metro.

This balance sheet summary is at page A-3:

What happened with revenue in 2018There is a formal description of what caused Metro’s revenue shortfall in FY2018 on page A-9:

There is perhaps a teaser for the upcoming budget season in this description. At the end, the note says that actual expenses for FY18 came in $54 million under budget due to “targeted savings” achieved by Metro. This suggests that Metro’s departments were successful in cutting back on expenses in the second half of FY18. We’ll see if that translates into Metro being able to give promises employee raises in FY20.

Debt.  There is a summary of changes in long-term debt in FY18 at page A-1:

There is also more detailed information about changes in Metro’s general obligation bond debt in FY18 at page A-11:

And there is also a description of the commercial paper program liabilities on page A-11:

Pension and OPEB. Metro’s pensions are well-funded. For example, the biggest of Metro’s several pension funds has $3.117 billion in assets to cover $3.196 billion is liabilities. That’s 97.45% funded. See page B-80. For all of Metro’s pension funds together, the unfunded net pension liability is about $212 million. See page B-76. That page also has a “sensitivity analysis” to show what the net pension liability would be in the actuarial assumptions are off by 1%:

The retiree healthcare benefit obligation (or OPEB) situation is dramatically worse. Metro’s total OPEB liability is $3.9 billion. That’s really big. Here’s the summary at page B-91:

Like with the pension, the audit notes include a sensitivity analysis to see what the OPEB liability might be if certain healthcare costs assumptions are wrong by 1%. This chart shows a range of potential unfunded OPEB obligations as of June 30, 2018. That range is $3.3 billion to $4.6 billion. Here’s the chart:

Folks — at the high end of this range, Metro’s unfunded retiree benefit obligation is now approximately two times the city’s annual operating budget. That is way too high.

Convention Center Authority. There are two tidbits tucked away in the audit notes that are worth remembering. First, the Convention Center Authority can absolutely return some of its enormous dedicated tax funding to Metro if it wants to. This city has somehow managed to give a huge amount of money to a non-elected body and there’s almost nothing we can do as a city to un-ring that bell unless whoever sits in the Mayor’s office renegotiates the deal with the Convention Center Authority. At page B-16, here’s the language that makes it clear the Convention Center Authority can return money to Metro if it wants to:

And, second, what is the Convention Center Authority doing with its money? Among other things, it bought a parking lot at 719 4th Avenue South for $3.9 million. Allegedly, according to page B-113, this is to “be used as a marshalling yard for events and additional parking to supplement the garage as the Music City Center.” However, this property is precisely where the southern end of the downtown tunnel would have been if the transit plan had passed. For people interested in good government, is it a coincidence that the Convention Center Authority (which the Council can’t control at all) bought property in August 2018 that could someday be used for a transit tunnel? Would that expenditure have been approved by the Council?

Here’s the language:

Other interesting stuff.

  • Nashville General Hospital did not get a “going concern” note this year. A “going concern” note is bad. Removing that from Metro’s audit this year doesn’t mean that the hospital’s problems are solved in any way. It does mean that the hospital’s books and records were reliable, accurately reflected their finances, and that the auditors expect that the hospital can operate within its current funding budget from Metro.
  • Most of Metro’s economic incentives are listed in Note 13(G) on pages B-103 to 106. This list does not include economic incentives that might be listed in the separate audits of Metro’s component units (like MDHA). I’ve asked for all of the economic incentives to be described in next year’s audit. I think that will happen.
  • Many of Metro’s tax abatements are listed in Note 16 on pages B-111 and 112. Like the last point, this note doesn’t include information about tax abatements that are included in MDHA’s financials. Again, I think next year, we’ll get all of Metro’s tax abatements listed in this single audit note.
  • Finally, take a look at Section H toward the end of the audit. That’s the statistical section and it shows 10 year financial trends.

Let me know any questions at bob.mendes@nashville.gov or @mendesbob.

 

TIF step-by-step

With the budget crunch this year, many people are asking legitimate questions about when and how tax increment financing (TIF) is used. Some of those conversations are getting bogged down in trying to understand exactly how TIF dollars flow. This post is not about the important questions of how and when to use TIF. This is a technical description of the flow of money in an effort to relieve some of the side questions about how it works.

What happens when MDHA provides tax increment financing? There are two key starting points to know. First, a baseline amount of property tax is established. If a property pays $10,000 per year in property taxes before the new development, that $10,000 is the baseline. When the new building is done, it will generate more taxes — say, $30,000 per year. The difference between the post-development tax bill and the pre-development bill is the “tax increment.” In my example, the tax increment would be $20,000 per year. Second, with TIF, it is MDHA that borrows money from a bank. MDHA then provides the loan proceeds to the developer. The developer will typically use the MDHA loan proceeds as part of its equity in financing a project.

Next, the project is built. The new building then gets its new, final property tax assessment. And then the owner pays the full amount of those property taxes to Metro just like everyone else. However, Metro and MDHA will have made a note of the baseline tax ($10,000) and knows to think about the baseline ($10,000) and the tax increment ($20,000) differently. More about that in a second.

Whenever Metro receives any property tax revenue, it automatically allocates the money to its several Funds — including the General Fund, the School Fund, and the School Debt Service Fund. This bears repeating — every dollar received including the tax increment dollars gets automatically allocated in certain fixed percentages to Metro’s various accounting Funds. When you pay your property taxes, about 41% gets allocated to the School Fund and the School Debt Service Fund, for example. And a TIF project works the same way — about 41% of its property tax payments get allocated to those same two of Metro’s Funds.

Then each year in the budget, each of the Funds has an expense line item where its share of the tax increment from TIF properties is deducted out and given to MDHA. Then MDHA uses this money to pay back the TIF loans.

This technical accounting flow of money among Metro and MDHA does not match up with the conventional perception of TIF loans. The common understanding is that Metro has decided to keep property taxes for TIF properties artificially low and that Metro never sees the money. While the end result that the tax increment is not available for typical government services is the same, the actual mechanism is different. Metro does collect the full property taxes on each TIF property, allocates the tax increment to its various Funds just like all other property tax revenue, then debits the tax increment money out of the Funds and over to MDHA, and then MDHA pays the loans.

As we wade into a budget season where people are looking for money, I know that some are seeing the budget line items for payments to MDHA and asking about it. Again, the sole goal here is to explain the mechanism.  The more important long term question is about how and when to use TIF.

Previous posts related to TIF herehere, and here.

Chasing Down Line 7777

I’ve talked to some MNPS advocates who are bothered annually by Line 7777 in the MNPS budget. It’s called Property Tax Refund and is just over $9 million for the upcoming fiscal year. See page 37 of 42 in the proposed MNPS budget. Here’s what that is…

Property taxes are automatically divvied up to different Metro accounting Funds. Two of those funds are the “Schools Funds” which get about 36.5% of collected property taxes, and the “School Debt Service Fund” which gets about 4.5% of collected property taxes. Again, property tax revenue is allocated automatically to these Funds in these percentages.

However, when MDHA approves tax increment financing for a project, new property tax revenues from that project are pledged for tax increment financing (TIF) loans and are largely not available for use by Metro. For TIF deals before April 2016, none of the new revenues are available to Metro until the TIF loans are repaid (usually in 10-15 years). For TIF deals approved after the Council passed BL2016-157 in 2016, MNPS will get to keep the debt service fund part (4.5%) of the new tax revenues.

So, we have property tax revenues automatically allocated in set percentages to these Funds. But the new revenue from TIF projects mostly needs to be used instead to pay the TIF loans. The technical accounting requires MNPS to receive all the revenue allocated to it, and then to be debited for the portion of MNPS’s allocated property tax revenue that is due to the active TIF loan properties.

Using approximate numbers, from FY2017 (which ended June 30, 2017) to FY2018 (ends June 30, 2018), the budgeted property tax revenue that went to the “Schools Funds” increased about $15 million, from about $298 million to $313 million. For these two years, the property tax revenue that went to the “School Debt Service Fund” increased about $2 million (from $38 to $40 million). In total, overall revenue to MNPS from property taxes increased about $17 million from FY2017 to FY 2018. So that’s great news, right?

HOWEVER — during this same period, the total new property tax revenues for TIF loan properties increased by about $3.6 million. See MDHA reports for the last two years here and here. Remember, MNPD has to “refund” the new revenue it gets from TIF project property taxes. Since MNPS is allocated about 41% of property tax revenue, the additional “refund” to give back in FY2018 was about $1.5 million. (That’s the roughly $3.6 million in total new property revenue that year from TIF properties times the 41% that MNPS is allocated.) That means, in the current FY2018, MNPS got to keep only about $15.5 million of the $17 million in new property tax revenue that was allocated to it.

Mark North pointed out in a 2015 blog post that, back in 2007-2008, the amount of the MNPS refund was $2.3 million. For the current FY2018, with the increased frequency of MDHA TIF loans, the refund had grown to $8.3 million. And for the upcoming fiscal year, the refund apparently will top $9 million.

I haven’t done all the math, but it’s clear that MNPS continues to get substantially more new property tax revenue each year than it has to refund through this arcane and technical process. But the fact is that Line 7777 in the MNPS budget has continued to grow and it does grab attention.

This also squarely points out that Metro is currently using about $9 million per year of property tax revenue to assist with development when that money would otherwise be used by MNPS. Economic development people would say that Metro and MNPS more than make up this amount with increased revenue from our robust economy. School advocates would be quick to point out all the things that could be purchased with $9 million per year for our schools.

Hopefully, this makes sense. Feel free to shoot me any questions at bob.mendes@nashville.gov or @mendesbob on twitter.

Transit/Affordability Taskforce Update

About 5 weeks ago, I wrote about the status of Metro implementing the recent Transit & Affordability Taskforce recommendations related to affordable housing. You can read that post here.

Since then, on March 20, I sent a letter to the Metro Planning Commission expressing concerns about the pending Donelson Transit Oriented Development legislation. That letter is here. In the letter, I listed out 10 things I wanted to see changed by MDHA with the development plan, and listed another 4 things I would like to see from the administration.

I can report progress is being made on the development plan as it relates to affordable housing. It is still a work-in-progress though. I believe the scheduled Metro Planning Commission meeting on April 12 to discuss MDHA’s transit oriented development plan for Donelson will be deferred until April 26. And I believe CM Jeff Syracuse may defer the Council’s public hearing on this, which is scheduled for April 17, until May.

Frankly, now isn’t a great time for a meaningful update because things are mid-negotiation. But with early voting starting today, a lot of people have asked me where things stand. So…here’s an update…

First, some background…

Everyone agrees that high-capacity transit corridors tend to increase property values, which in turn decreases affordability. The question is whether Nashville can build a culture around transit construction that values maintaining, or even increasing, the number of affordable housing units as much as we value the transit infrastructure itself.

To address this important topic, last November, Mayor Barry appointed a Transit & Affordability Taskforce chaired by Bill Purcell and Brenda Wynn. I was asked to chair the affordable housing subcommittee. The taskforce met extensively for nearly two months and issued a lengthy report with many recommendations. Through the process, the affordable housing subcommittee had in mind that plans were underway for a transit oriented development district in Donelson. I think I can speak for the full subcommittee when I say that we considered the proposed Donelson district as an important test case. This is because whatever we create in Donelson will likely be the template for perhaps another one or two dozen similar transit oriented development districts on all of our major transit corridors.

Another bit of background you need to know is about the players. A transit oriented development district is a new concept — there are currently none in Tennessee. To create a district, MDHA’s board must approve a development plan. Then the Metro Council has to approve it. Once approved by the Council, these districts typically last for 30 years!! And they typically give MDHA the power to offer many tens of millions of dollars of tax increment financing.

The final background I will offer is that MDHA’s board approved a Donelson transit oriented development plan in late January. After my March 20 letter, and discussions with me and others, I understand that MDHA’s board approved a revised version yesterday (April 10). I haven’t seen that yet, but I’ve been told what to expect. The development plan still needs to go before the Metro Planning Commission (on April 26, I am expecting) and ultimately the Council (in May).

The current status…

In my March 20 letter, I had 10 items I wanted to see MDHA change in their development plan. As of today, I believe that we have an agreement to add 7 of the suggestions to the plan, that we are still talking about 2 of them, and that 1 has been rejected. Again, if it weren’t for early voting starting and people wanting to know about the status, I wouldn’t want to give a mid-negotiation update — partial information can be more confusing than no information. MDHA is working in good faith with me and others to help build a good template for future transit oriented development. But I don’t have a final revised plan to share with you today.

In my March 20 letter, I also listed 4 things that I would like to see from Metro before we pass the Donelson transit oriented development legislation. With the understanding that it may be another month before the final legislation is before the Council for a final vote, I have to report that none of those 4 things have been accomplished. I will repeat again…it is a month at least until a final vote, so there is time…and clearly our new Mayor has a lot on his plate…and I am only giving an update now because early voting has started and people are asking me for an update. For these reasons, I am not making any final conclusions one way or another about these items remaining incomplete as of today.

People will need to make their own decisions about what this all means for Metro’s commitment to be as serious about affordable housing along transit corridors as it is about the transit infrastructure itself. A glass-half-full view would look at MDHA’s engagement on the taskforce recommendations as a strong positive. A glass-half-empty view would look at the other recommendations and wonder whether affordable housing will always play second fiddle to the transit infrastructure instead of being a co-equal objective.

I am hoping that this update doesn’t create more confusion. Feel free to email me at bob.mendes@nashville.gov or tweet at me @mendesbob with questions or comments. Thanks, everyone.

 

That TIF Ordinance Earlier This Year…

I have a feeling that the TIF ordinance the Council passed earlier this year might be coming up in connection with the Gulch pedestrian bridge.  I wrote about the ordinance a few times earlier this year — this link will get you to those posts.  For purposes of the Gulch pedestrian bridge, there are two parts of the ordinance that matter. I described these in earlier posts:

…going forward, for every TIF loan, MDHA will no longer receive the tax increment for the property after the loan is paid. Instead the tax increment will go to Metro after the loan is paid.

and:

Under this ordinance, MDHA will provide annual reporting about each TIF loan, including the current loan balance, the estimated maturity date, the amount paid in the last year on the loan, the parcels whose tax revenues are pledged to support the loan, and the amount of tax increment funds received by MDHA from each of those parcels.

On July 1, MDHA provided its first annual report under the ordinance.  You can see the Gulch area TIF projects on page 4 of the PDF under “Arts Center.”

These topics are coming up because, in a summary to the Council from the Mayor’s Office earlier this week, we were told that re-captured tax revenue from TIF projects would pay for the bridge:

These properties currently have TIF loans through MDHA which will be paid off over the next several years. As these loans are retired, rather than MDHA keeping the tax revenue for other public purposes, it will return the money to the City to be used to pay for the project.

If you are trying to figure out which current TIF loans will get paid off over the next several years, you can look at that report and compare the loan balance to the tax increment revenue.  For example, the ICON loan was reported to have a balance of about $2.7 million, and reported to be generating about $1.6 million  per year in tax increment revenue. You can assume that loan will be paid in full in short order. Others look like they will take longer.

If you are asking whether this makes the pedestrian bridge a TIF project, the answer is no. Under the new ordinance, once the existing TIF loans are paid, the tax revenue goes to Metro’s General Fund.

If you are asking whether the re-captured property tax increment funds have to be used in the Arts Center Redevelopment District, the answer is no. Again, the re-captured revenue goes to the General Fund for use by Metro.

The way I understand the comments from the Mayor’s Office is that the large Gulch area projects are generating lots of property tax revenue, that Metro will be re-capturing significant additional tax revenues in the coming years as Gulch area TIF loans are paid off, and that the costs of this project are easily covered by that additional re-captured tax revenue.

This argument is a double-edge sword. On the one hand, it is clear that the tax revenue that  will be re-captured from existing TIF loans in the coming years is enough to pay for the bridge project. On the other hand, it is clear that re-captured tax revenue is for the General Fund to be used for general purposes. So, injecting the idea of using former MDHA tax increment funds into the bridge conversation raises the question about whether these new General Fund dollars should be spent in the Gulch.

I would prefer to look at the bridge project on its own merits — is it a good investment to further tie SoBro and the Gulch into an easier-to-navigate economic engine for the whole city, or not?  Are the prices for the land swap being proposed by the Mayor fair, or not?

1st TIF Report from MDHA

Earlier this year, the Council passed an ordinance that changed the way Metro handles tax increment financing in three key ways – Metro will get its property tax revenue back more quickly, Metro will have more say in what projects get tax increment financing, and there will be greater transparency to show us how our tax revenues are being used by MDHA.

I wrote previously about the ordinance herehere, and here.

The ordinance created an annual reporting requirement.  MDHA now will provide annual reporting about each TIF loan, including the current loan balance, the estimated maturity date, the amount paid in the last year on the loan, the parcels whose tax revenues are pledged to support the loan, and the amount of tax increment funds received by MDHA from each of those parcels.

MDHA’s first report is out.  I haven’t looked at it in detail yet — but it does show clearly, for every TIF loan, which parcels of real estate are supporting the loan. If it is online somewhere with Metro or MDHA, I don’t know where — so I am posting it.

 

 

Update From 4/5 Council Meeting

I passed my first ordinance last night. I am probably over-happy about that. I’ve written about it before here and here. This ordinance changes the way Metro handles tax increment financing in three key ways – Metro will get its property tax revenue back more quickly, Metro will have more say in what projects get tax increment financing, and there will be greater transparency to show us how our tax revenues are being used by MDHA. The ordinance also authorizes MDHA to use the proceeds from the sale of 3 parcels of property in the Rutledge Hill Redevelopment District as part of the Cayce Place Redevelopment Plan.

Here are the other items of interest from the meeting:

Planning Commission Nominees: The Rules Committee was 10 minutes late for our 6:30PM Council start time because we asked so many questions of the Planning Commission nominees, Brenda Diaz-Flores and Brian Tibbs. I found both nominees to be well-informed and articulate about a wide range of planning, development, and housing issues.

For Ms. Diaz-Flores, we asked about her relationship with the Planning Department, where she used to work. We wanted to know whether she’d be able to transition to possibly voting against things that her former employer, the Planning Dept., was recommending. She was able to walk us through some specific positions that the Planning Dept. had taken while she was an employee that she would have voted against as a Commissioner. I liked that show of independence.

For Mr. Tibbs, who is an architect, we asked about the types of clients his architecture firm represents. He told us that his firm sometimes represents developers with matters before the Commission, and also does work for MDHA. Mr. Tibbs told us that he would recuse himself from votes where he or his employer had a financial interest in a project, or where his firm does work for an applicant before the Planning Commission. The Committee told Mr. Tibbs that we appreciated that he was sensitive to this issue. I’m glad he committed to recuse himself when he or his firm has an interest.

Though we had to run late to do it, the Rules Committee recommended approving both nominees. The Council approved both.

BL2016-133 (Inclusionary Zoning): This was on first reading. The Council deferred first reading for two meetings, to May 3. From my perspective, the two main camps – the housing advocate community and the development community – are engaged in the classic negotiating tactic called anchoring. That’s where you stake out an extreme position in the hopes of pulling the ultimate compromise position closer to you than to the other side.

On the housing advocate side, there is a significant subset that are arguing hard to just kill the inclusionary zoning bill and start over again. This is counter-intuitive, of course, since the same groups are the ones who initially pushed for inclusionary zoning last year. The “anchor” they have dropped is to argue that the current bill is so weak that it should just be trashed and, instead, the city should focus on creating a comprehensive affordable housing plan. We’ll see how this pans out. In my law practice, when you decide to anchor, you should be willing to accept the risk that everyone else comes to believe that you’ll never compromise and they choose to continue the conversation about compromise without you.

To me, the way forward is not an “either/or” situation. We can and should commit to have Nashville create a comprehensive affordable housing plan. But I think that we should also go ahead and pass some of the legislative pieces that we know we’ll need once a full plan is crafted.

The next step is that the Planning Dept.’s consultant is working on refining his proposals for the financial incentives that are need to make inclusionary zoning work. And, the Council’s Affordable Housing Committee has meetings set, I believe, on April 18 and 25.

RS2015-76 (Fairgrounds and Firearms I): CM Glover had a resolution that would have asked the Fairgrounds Board to rescind its decision to not have gun shows past 2016, and would have forced Metro to cut-off all capital projects funding for the Fairgrounds if the Board didn’t comply. CM Glover has said several times previously that his goal was to keep Metro from getting sued.

Unfortunately, about 30 minutes before Council Committee meetings started, a gun show vendor did sue Metro. I didn’t see a point to passing a resolution that was supposed to prevent litigation that now has already started. The Codes, Fairgrounds, and Farmer’s Market Committee saw things the same way and voted 3-2 to indefinitely defer the resolution.  That was Coleman, Shulman, and Rosenberg in favor of indefinite deferral, and Huezo and Swope against.

BL2016-161 (Fairgrounds and Firearms II): This was CM Glover’s bill that would have required the Fairgrounds Board to set aside 17 weekend days in 2017 for gun shows. This was deferred indefinitely at our last meeting.  For this meeting, CM Glover was using his one-time right to ask for the Council to place his bill back on the agenda. We voted against that – so that bill is now permanently defeated. For better or worse, the Davidson County Chancery Court is now going to be where the next chapters of this story unfold.

RS2016-172 (Supplemental Appropriations): This is a request for about $3.3 million in supplemental appropriations. At the Budget & Finance Committee meeting yesterday, it was clear that some of the supplemental appropriation requests are fully reasonable and are needed for positive, good reasons. And, some others are needed because there is a department or component unit of Metro that really isn’t performing financially as expected. This has been deferred to the next meeting in order for the Council to get more information about which supplemental appropriations require us to exercise additional oversight of a struggling department or unit.

RS2016-170 (Starbuck’s on West End where traffic backs up): Nashville is at the front end of multiple Starbuck’s locations seeking permission to sell beer. We approved one in Green Hills at the last meeting, and two more were up this time – including the one on West End near Vanderbilt across from Bricktops. If you are familiar with the location, that’s where there are always cars spilled out onto West End waiting to get in the drive-thru and often blocking buses and other traffic. This was deferred indefinitely to allow the store to work with Traffic & Parking to improve how that drive-thru interacts with traffic.

BL2016-140 and 141 (Carrolton Station, Men of Valor): With these two bills in CM Vercher’s district, the Planning Commission disapproved the changes to infrastructure and zoning that were being proposed. Metro Legal and Mike Jameson both advised that these two bills would be completely unenforceable if passed. Metro Legal had already advised Codes to disregard the bills if they were passed. Despite these strong legal admonishments, I think the whole Council really, really wanted to pass CM Vercher’s bills because they address serious traffic and density problems in this neighborhood. Because they were disapproved by the Planning Commission, these would have needed a two-thirds majority to pass. That didn’t happen and the bills failed despite CM Vercher’s strong, tenacious efforts.

I did not vote for either of these bills. I truly appreciate and agree with what CM Vercher was trying to accomplish, but with Metro Legal and Mike Jameson advising that the bills were simply not enforceable, I couldn’t vote in favor. It’s a longer story for another day, but the problem with this situation (and with CM Hagar’s quarry situation) is that the State of Tennessee changed the law about “vesting” property rights in January 2015. Nashville is going to have to figure out a way to adapt to that change in the state law, which allows property rights to be vested sooner than was possible previously.

That’s it. If you made it this far, thanks for reading. I appreciate it!

 

Bob

“Debt Service Taxes” In Proposed TIF Ordinance

I was approached this week by a lawyer who told me he is working with one of the bidders on MDHA’s Rolling Mill Hill property. He wanted to talk about how one aspect of my proposed TIF ordinance would work. You can read more about the proposed ordinance here.

The developer’s lawyer was asking whether the “debt service taxes” part of the ordinance would be an inappropriate “curtailment” of tax increment financing. I told him no – there is no “curtailment.” This is a slight adjustment that allows Metro to better meet its own debt obligations.

What is TIF again?

To see how slight the adjustment is, we need a brief recap of how TIF works.

A developer proposes a project. Typically, the developer will tell MDHA, “We have a great project, and we can almost make the financing work, but not quite…can you help us with some tax increment financing?” If TIF is provided, MDHA will borrow money from a bank, and the developer uses the money for the project. Once the project is built, it creates new, additional property tax revenue.  The new, additional property tax is the “increment.”  The developer (or owner) then pays the full property tax bill to Metro each year.

When the Metropolitan Trustee collects the property taxes, Metro gets an amount equal to the pre-development taxes, and MDHA gets the increment.  MDHA then pays the bank loan. If there is a shortfall, and the increment is not enough to make the loan payments, it is typically the developer who will pay the shortfall; the bank that made the loan will usually demand a guaranty from the developer.

What is this new “debt service taxes” provision?

One of the knocks on Nashville’s use of TIF over the years is that, by paying all of the increment to support a small number of developments, Metro is cutting into the tax revenue that would otherwise be available to pay its own long term debt obligations. As a reference point, about 15% of what Metro collects in property taxes is used to pay Metro’s own debt. Up until now, when there has been a TIF loan, that 15% goes to pay the TIF loan instead of paying Metro’s own debt.

You can see how, if Nashville were directing a high enough amount of property taxes into paying TIF loans, it would impact the amount of revenue available to pay Metro’s own debt. We don’t have to debate whether the impact is large of small – it is undeniable that using property taxes to support TIF loans means there is less revenue available to pay Metro’s own debt.

The new “debt service taxes” provision would allow Metro to keep the portion of the increment that is ordinarily used to pay Metro’s debt. The language require that, “All TIF loans authorized by [MDHA] after the effective date of [the law] shall include provisions stating that the debt service taxes shall be retained by the metropolitan government…” At our current Metro debt service levels, this means that after the new ordinance is passed the first 15% of increment will be retained by Metro on new TIF loans.

Does this matter?

There are two perspectives to look at.  From Metro’s perspective, I think that this new provision should reduce or eliminate the potential risk that paying for TIF loans could ever erode Metro’s ability to service its own debt. We’ll be setting aside the proper portion of the increment to pay Metro’s debt. This is fiscally responsible and, in the long run, will support a strong bond rating for Metro.

It is important to look at it from the developer’s perspective too. This will include a lot of numbers – I’m sorry about that. I’m going to use the project that lawyer called me about. In the call, he suggested it would be a $400 million project. I also know that the total amount of TIF that remains available in the Rolling Mill Hill redevelopment district is approximately $31 million. Let’s assume that MDHA were to decide to use the entire $31 million for this project.  (I can’t imagine that they would ever use ALL available TIF dollars on one project…but let’s pretend.)

In order for the developer (who will have to guaranty the loan) to want that large a TIF loan, the developer would have to feel like the expected property tax increment after the project is built will be large enough to make payments on a $31 million loan. When the lawyer who called me suggested my ordinance is a “curtailment”, he was making the point that, because we’ll now set aside the first 15% of the increment to pay Metro’s own debt, there will be less money to pay that TIF loan. There’s no question that this is correct.  But if there is 15% less increment to pay the TIF loan, logic tells us that the size of the loan the tax increment can support should also be 15% less.

That would mean that instead of the increment supporting our hypothetical $31 million loan, the increment might only support a loan that is 15% smaller, or $26.35 million.  This decrease of $4.65 million would lower the overall size of the project from $400 million to $395.35 million. I think we can agree that a 1% decrease in the size of the project shouldn’t kill any deal worth doing.

Remember, I’ve used outlandish numbers and assumed MDHA would put all of its Rolling Mill Hill TIF dollars into one project. More realistically, this wouldn’t happen. My guess is that, by choosing to pay Metro’s own debt first, we are making the choice that a $400 million project might have to get done on $397 or $398 million.

For me, TIF loans are a critically important tool for redevelopment. The proposed ordinance accomplishes two important goals – we are still committed to using tax increment financing for redevelopment, while also making the choice to be sure to pay Metro’s own debt obligations first.

CORRECTION (03/10/2016): An earlier version of this post said that the Tax Assessor collects property taxes. That’s not right. The Tax Assessor assesses the amount of taxes, and then they are collected by the Metropolitan Trustee.

Amend the Rutledge Hill Redevelopment Plan

Last week, I filed an ordinance along with co-sponsor Councilmember Erica Gilmore to amend the Rutledge Hill Redevelopment Plan. The Metro Council passed this redevelopment plan in 1980, and has amended it periodically since then. The new ordinance would make four changes to the redevelopment plan. It would clarify Metro’s intent to have MDHA reinvest any land sale proceeds back into the district, or return the proceeds to Metro. The ordinance would also clarify that tax increment financing can only be used in the Rutledge Hill district, add some annual TIF reporting requirements for MDHA, and correct a typo in the 2014 amendment to the plan.

If you want to see a quick summary of the reasons for the proposed changes to this redevelopment plan, you can look at these slidesHere’s the longer explanation…

FIRST, SOME BACKGROUND

Under state law, housing authorities like MDHA have two distinct jobs – housing and economic development. There is one statute that grants MDHA broad powers in connection with housing (TCA Section 13-20-104). For housing, MDHA has the unilateral power to investigate housing conditions, create and implement plans to improve low income housing, and to buy and sell land for these purposes.

There is a different statute section that describes MDHA’s powers for economic redevelopment (TCA Section 13-20-202). This statute gives MDHA certain powers to carry out a “redevelopment project.” These powers are expressly limited to the goal of carrying out the redevelopment project. Unlike with housing (where MDHA can make and execute its own plan), MDHA may not start a redevelopment project unless the local governing body, the Metro Council, first approves a “redevelopment plan” that complies with state law.

Because of these state laws, MDHA never engages in economic development unless the Metro Council first passes a redevelopment plan. MDHA’s powers in connection with redevelopment may only be to further the “redevelopment project” that is described in a properly approved “redevelopment plan.”

In 1980, the Council passed an ordinance creating the Rutledge Hill Redevelopment Plan, which roughly covers the area going south of Broadway for about a half mile and east of Fourth Avenue. Rolling Mill Hill and the Trolley Barns are in the district. Metro’s redevelopment plan has been amended multiple times over the years, most recently in 2014. Under the terms of the plan, MDHA has the power to engage in tax increment financing in this district.

To get the ball rolling when the district was created in 1980, Metro gave real estate to MDHA. The original 1980 redevelopment plan explained that, “to provide MDHA with a substantial land resource with which to begin…” redeveloping the area, Metro gave the property once used as Howell Park and the property that was once a portion of South Park to MDHA at no cost.

WHY ASK FOR ANOTHER AMENDMENT?

In November 2015, I heard that MDHA had started the process to sell one of the parking lots north of the Trolley Barns. MDHA owns this parking lot as part of its economic development role – it is part of the Rutledge Hill Redevelopment District. At the time, the complaint I heard from some was that MDHA’s request for proposals from developers did not require any affordable housing. I asked MDHA about it.

MDHA said that it needs to sell this property for maximum dollar in order for MDHA to be able to make a required equity contribution for its upcoming Envision Cayce project. (Think about when you buy a house – you need to put some money down; you can’t borrow 100% of the cost – MDHA is saying it needs cash quickly so it can put some money down for Envision Cayce.) While I like the concept of Envision Cayce, when I heard this explanation, my reaction was to wonder if it is okay to move land sale proceeds from one redevelopment district to another.

My understanding was that Metro approves a redevelopment plan for a blighted area, and MDHA is supposed to execute the plan. To help that process along, MDHA is often granted the power to use tax increment financing to encourage economic development. MDHA then collects the tax increment until it has paid for anything it borrowed or financed to accomplish the economic development. It seemed odd to me for MDHA to sell property in a presumably incomplete redevelopment district where it continues to collect the tax increment, and use the land sale proceeds outside of the district.

I am new to government. I figured I was mistaken; and that I was missing some piece of the puzzle. So, I asked MDHA to explain the legal authority. Here’s their letter back to Mike Jameson. Despite the letter, my sense is that, when it comes to redevelopment districts, MDHA may only act in furtherance of the redevelopment plan passed by Metro.

WHAT ARE THE PROPOSED CHANGES?

There are four proposed changes. The first would clarify Metro’s intent that any land sale proceeds must be reinvested in the redevelopment district, or returned to Metro.

When I read the original 1980 ordinance, and all of the amendments, I found that the original Rutledge Hill Redevelopment Plan expressly required all proceeds from selling land to be reinvested in the district, or returned to Metro’s General Fund. In the 1986 amendment, this language was deleted and not replaced with any different direction. None of the other amendments have given any direction to MDHA about what it must do with land sale proceeds. My proposed amendment would clarify Metro’s original intent – reinvest land sale proceeds in the district, or return the proceeds to Metro.

The second change fixes a typo. The Tax Increment section of the plan has always been “Section H.” In the 2014 amendment to the plan, it was misidentified as “Section G.” We should fix the typo while we are updating the plan.

The third change also corrects what originally seemed to me like an error in the 2014 amendment. That amendment added new language that would permit the $60 million in tax increment financing allowed under the plan to be used for development in any redevelopment district anywhere in Nashville. This was new language that had never been in the plan before 2014. It says: “Activities or improvements eligible for tax increment financing shall include…other structures or public improvements necessary for carrying out the Rutledge Hill Redevelopment Plan, or other adopted and approved redevelopment plans.”

I thought that this could not be right. But, I have since been told that one of the purposes of the 2014 amendment was to authorize using some tax increment funds from the Rutledge Hill district to finance the new baseball stadium. I believe that we should amend the plan to clarify that tax increment funds from properties in the Rutledge Hill Redevelopment Plan may only be used for projects in that district.

The fourth change would add a requirement for MDHA to give a reasonable annual report to Metro about its tax increment financing activities in the district. You can read the ordinance for the details, but the idea would be for MDHA to report annually on the details of money MDHA has borrowed, financing MDHA has provided for projects in the district, and the amount of tax increment it received.

WHAT ABOUT ENVISION CAYCE?

I anticipate that MDHA will say that this ordinance will undercut its ability to follow through with the Envision Cayce project. I don’t know if that’s true or not. But if it is true, then we need to have a public conversation about it.

When the Cayce Place Redevelopment Plan was passed by the Council last summer, it included a section that described the sources of revenue to finance the costs of the project. (Under TCA Section 13-20-205(b)(1)(B), this is a mandatory requirement for any redevelopment plan that authorizes tax increment financing.) This section did not explain that multiple MDHA properties from another redevelopment district would be sold to pay for the project.

I am not against the project. My position on Envision Cayce has been and remains that I am all for it – depending on whether we as a city can be sure that the low-income housing will be maintained permanently.

Before I filed this ordinance, I spent a lot of time thinking about the fundamental human dignity of public housing residents. In the end, my goal is to have a public conversation about how land in economic redevelopment districts is being sold, and how the proceeds will be used outside the district. No matter how righteous the proposed end use of the cash, we need to think about what it means if the value of any publicly owned property in any economic redevelopment district can be used for any purpose that MDHA deems appropriate anywhere in the city.

LATE UPDATE

Since I filed this ordinance, Jim Harbison from MDHA asked to meet to discuss this. He stated his willingness to ask MDHA’s Commissioners to authorize seeking amendments to both the Cayce Place and Rutledge Hill redevelopment plans to clarify their request to use land sale proceeds from one district in another, and to use tax increment funds from Rutledge Hill outside of the district area. Mr. Harbison also told me about ongoing dialogue between MDHA and Metro about creating a robust annual TIF reporting requirement. I look forward to seeing these efforts move forward.  I told Mr. Harbison that, pending seeing what they draft, my ordinance will continue to move forward.

My goal remains to see a public conversation about whether MDHA land sale proceeds can be used outside of a redevelopment district, about whether tax increment funds can be used outside of a redevelopment district, and what annual reporting would be appropriate to give the public more insight into how tax increment funds are being used.

 

Thoughts?  Email me at bob.mendes@nashville.gov.

Bob Mendes represents all of Nashville as a Council-At-Large member of Nashville’s Metro Council. He is Chair of the Council’s Charter Revision Committee, a member of the Metropolitan Audit Committee, and a member of the Council’s Budget & Finance Committee, Rules & Confirmations Committee, and Ad Hoc Affordable Housing Committee. Bob also practices business law at Waypoint Law PLLC. Bob’s complete bio is here. You can follow Bob @mendesbob.