Tag: TIF

Some things I think…

For a brief moment, I think there is no complicated legislation pending before the Council. Soccer, transit, transit oriented development, freezing tax increment financing, and an anemic operating budget are all in the rear view mirror. Amazon, the Church Street Park land swap, and next year’s more anemic budget aren’t here yet.

I know this lull won’t last. I’ll take this chance to throw out some quick thoughts about several topics:

  • The “no economic incentives for Amazon until employees get their raise” resolution before the Council on December 4 is a sideshow. If you’re against the Amazon incentive, just vote against it when it comes before the Council. The current fiscal year is nearly half over. Employees didn’t get their cost of living increase. I worked hard for a different result…but it’s too late to do anything about it until the next budget season. Again, my advice is to handle budget issues in the budget. And, if you can’t vote for the Amazon incentive, just vote ‘no’ whenever it comes before us.
  • In an ironic twist, I hear through the grapevine that the administration might not resist this resolution because Amazon wouldn’t get any money for a few years (i.e., not until after the 2019 Metro elections), and by then employees would have gotten a cost of living increase. It’s ironic because it is hard to imagine the cost of living increases happening without an increase in the property tax rate. So, if they say “no big deal, the COLAs will happen before Amazon gets money,” it will essentially acknowledge an intent to raise the property tax rate after August 2019 but before they pay Amazon an incentive.
  • If my colleagues want something in exchange for approving the Amazon incentive, they ought to have their eyes on the enormous amount of sales tax revenue being collected out of the Council’s control at the Convention Center Authority. Last summer, the administration raided this stockpile to the tune of $10 million per year. There’s more to be had there…and that would be a more meaningful and long-lasting win.
  • Metro’s annual audited financials will be released in a few weeks. State law allows an ongoing audit to be discussed in an audit committee executive session. So, as a member of the Metro Audit Committee, I’ve seen a draft of the audit in an executive session. Due to a change in accounting rules, Metro’s unfunded retiree benefits obligation has to be restated this year. I’ve already been talking for a while about this completely unfunded obligation going over $3B this year. With the new accounting rules, the number in the audit is going to be around $3.9 billion. That means Metro is going to cruise straight through the $3 billion range and cross over $4 billion in 2019.  That’s a lot of unfunded retiree benefits.
  • About the ongoing Tax Increment Financing Study Group, I think we are on track to recommend some meaningful changes. We’ve got a robust web page up. Follow the link there to “TIF Committee Document Library” and you’ll find just about anything you could want to know about TIF generally and also about how it is used here in Nashville. Here’s a video of our November 20 meeting.
  • While we work on the TIF study group, I think deeper changes are needed at MDHA. The Tennessean’s Nov. 21 reporting about conflicts of interest was pretty brutal. I think they need re-invention and not incremental change.
  • I get lots of people asking me who will run for Mayor in 2019. I only know rumors, which means I don’t know anything. As reported in the Scene in September, here’s what I am looking for in a candidate for Mayor:

“We Nashvillians are an optimistic bunch, and for good reason,” says Mendes. “But we need a dose of honesty injected into our politics — honesty about inequalities that hold us back and honesty about deals that move Nashville forward. I’ll be looking for a candidate who believes in a better Nashville and who believes that citizens truly are partners in government. Partial truths and con jobs need to end.”

I hope everyone has a happy holiday season!

 

Bob

Update on BL -1319 about tax increment financing…

There’s a tax increment financing reform bill (BL2018-1319) on 3rd and final reading next week. The bill is here. Council Director Jameson’s analysis is here. My prior posts about -1319 are here and here. It might also be useful to read this about the issues from the proposed Donelson transit-oriented development that fell just a few votes short of passing in August.

The summary is that -1319 would re-balance how much of new property tax revenue from redevelopment districts is used to pay development loans versus how much is used for Metro’s operating budget. In 2016, the Council passed a bill to have Metro withhold “debt services taxes” from new TIF loans. So, since 2016, for new TIF loans, Metro has been required to set aside about 15% of property tax revenues from the new TIF projects to pay for Metro’s own long term debt. This has left the other 85% of new tax revenue being available to pay development loans. I know everyone would agree that this 2016 law hasn’t created the slightest speed bump to Nashville’s economy. Now, -1319 would expand on this principle so that Metro would also keep “schools fund taxes” for new TIF properties. This would expand the hold back from 15% to about 46% — with the other 54% still being available to pay development loans.

As Metro continues to look hard at radically expanding the use of tax increment financing in transit oriented development all across the city, it is critical that we have a balance between supporting development and paying for basic government functions.

Before -1319 passed unanimously on 2nd reading last week, two Council members asked why -1319 can’t wait until the recently passed tax increment financing study group completes its work (which should be late spring 2019). I responded by saying that, no matter what the  study group comes up with, it will be important to re-balance how the new tax dollars are split between development loans and the operating budget. I still feel this way, but wanted to explore the objections of my two colleagues.

As a result, I negotiated with MDHA (through a lawyer they have working on this) for a TIF moratorium through June 30, 2019. We agreed that for that time there would be no new TIF loans (unless Council, MDHA, and the Mayor all agreed) and there would be no new redevelopment district legislation introduced. From my perspective, if I was being asked by some to hold off on -1319 while the study group does its work, then I would want to know that everyone’s pencils would be down and there would be no new loans and no new TIF district legislation while the study group does its work. MDHA agreed. But the Mayor’s office would not.

The clear implication is that there are plans in the works to introduce a new redevelopment district between now and June 30. Presumably, the intent is for this new redevelopment district to exist for decades into the future under today’s ground rules rather than a new set of ground rules. As a result of the Mayor’s office saying no, I expect:

  1. MDHA will likely fall in line with the Mayor’s office and work against -1319 even though I had a compromise worked out with MDHA.
  2. Some will argue that “well, this won’t actually get any more money for schools.” I haven’t yet figured out how this can possibly be. If you specifically hold back money for schools instead of development loans, then how can it not result in more money for schools??
  3. Some will argue that -1391 will kill tax increment financing as a useful development tool. For those people, I’d note that taking out the 15% for debt services taxes a few years ago didn’t slow down the economy at all. And if -1319 passes, a majority of the tax revenue from new TIF properties would still be available for development loans. This isn’t anti-development by any means.

I will pursue passage of -1319 next week.

(written in a hurry…please excuse typos…)

About TIF reform

In getting my thoughts together about my upcoming tax increment financing reform legislation, I put together a memo about how TIF works, how our 2016 reform impacted TIF, and how some of my proposed 2018 reform would work.

Here’s the memo.

The abbreviated version is…tax increment financing diverts property tax revenue from some property mostly in the downtown area. Absent diverting the funds, that money would ordinarily be divvied up among Metro’s several operating “Funds” (e.g., the “General Fund,” the “Schools Fund,” etc…). Instead, the property tax revenue from these TIF properties is used to pay for development loans. I don’t think this is inherently good or bad. It is a tool that can be used well or poorly.

In 2016, the Council passed a law that, for new TIF loans, required Metro to retain about 15% of these tax funds instead of diverting all of the funds to pay development loans. Metro will now have to keep that 15% and use it to pay long term bond debt.

The current legislation would expand this concept and require Metro to also retain the “Schools Fund” portion of the taxes from new TIF properties (about 31% of the property tax revenue). Metro would keep the 15% to pay bond debt and the 31% to fund our schools. After this, the majority of the tax funds from new TIF properties would still be available to pay for development loans.

I won’t go into detail here, but this isn’t a crazy concept. All over the country, cities and counties are reassessing whether tax increment financing should use all of the new tax money from development or leave some meat on the bone for an operating budget. Here’s one article from a few days ago to get you started.

Will the Council get the Donelson TOD right?

I’m prepping for the Council meeting this week and see the proposed Donelson transit-oriented development district up for 3rd reading again.

I’ve worked hard trying to make this legislation better over the last half year or so. I have decided however to vote against it. I hastily put together two posts about this before the 4th of July holiday. One critiques the financial assumptions underlying the plan, and the other explains why I’ll vote against it. The summary is that this legislation would intentionally spur $300 million of development over a decade without Metro getting any revenue for important services in return. I think this would be irresponsible. A few weeks later, I’m still a ‘no’ on this…but I want to take another crack at talking about how weak the financial assumptions are.

This Metro Council and prior Councils are often accused of too easily letting tax revenue get side-tracked into development dollars. This Council and prior ones also are accused of just going along to get along – especially on complicated financial matters. This legislation is a good example of what successive Councils have passed. A year ago, I think this Council would’ve passed this too. I hope we go a different path now.

To get projects like this created, you start with a great goal. Here, Donelson understandably and deservedly wants a library and coherent development for its historic downtown area. That is a great goal. And then you present the Council with a 22 page single space plan that has lots of details and looks very official. From there, momentum is gathered and legislation is passed.

But let’s look at the financial assumptions behind the proposed plan

This proposed tax increment district will capture ALL new property tax revenue in the district. This is true for existing buildings and new construction in the district. All increases in tax revenue will be side-tracked and none can be used for Metro’s operating expenses until development loans get paid off. This is a new way to do tax increment financing in Nashville. Every other TIF district in Nashville only captures new revenue from individual properties that have TIF loans on them. In calculating the revenue from this new approach, MDHA has assumed that tax revenue will grow by 6% per year for each of the first 10 years, and then 5% per year for the remaining 20 years of the proposed plan. These assumptions are wrong.

(Please be careful to distinguish between appraised property values and tax revenue…they are not the same thing…the former is the value of the property if it gets sold, and the latter is how much tax revenue Metro gets from the property each year…)

First, common sense and our recent collective experience tells us that 5-6% compounding annual growth in tax revenue for every property is not realistic. Metro’s operating budget crunch has been caused in large part by property tax revenue for existing buildings being lower this year than last year. Metro has increased its tax rate only once in a dozen years. Intuitively, it doesn’t make sense to assume 5-6% tax revenue growth compounding year after year for 30 years.

Second, just for a data point, I took a look at the tax records for One Nashville Place, the R2D2 high rise office building downtown at 4th and Commerce. Built in the mid-1980s, its total appraised value in 1990 was $33,299,200.00. With the tax rate at the time of $4.81, the property tax revenue should’ve been $640,677 for 1990.

In 2018, the building’s total appraisal value was $89,245,284.00. Higher for sure, but with the tax rate now at $3.155, the property tax revenue is 2018 was $1,126,275.

In the dead center of downtown Nashville, over these 28 years, this would mean that the appraised value of One Nashville Place increased by about 3.6% per year while tax revenue increased about 2.0% per year. If this is what nearly 30 years of explosive growth downtown gets us, assuming 5 or 6% per year of compounding property tax revenue growth just doesn’t makes sense.

You may ask, “So what? Who cares if some sheet of numbers is wrong?” Here’s why – once you use more realistic tax revenue growth assumptions, there is no new money for Metro’s operating expenses coming from this area for many, many years – probably more than a decade I estimate. This project would intentionally spur $300 million of new development over the next decade and generate no new money for Metro to provide basic government services like schools, police, or fire protection. This would be irresponsible. When coupled with a poorly set property tax rate, this is how Nashville gets A+ gleaming development and has to renege on employee raises.

Finally, remember that these districts are beyond the Council’s control once they are created. If we pass this legislation, the Council will never be consulted on a single TIF loan in the district. If we pass the legislation, the Council can never make changes to the Donelson transit-oriented development plan unless MDHA also agrees to the change. Because of these factors, this legislation has more permanence that most of what the Council does.

I appreciate all of the hard work that has gone into this legislation, but I can’t support it.

Financial assumptions behind Donelson TOD

This is the first of two posts about the proposed Donelson Transit-Oriented Redevelopment District. I have been working for many months to see whether the legislation could be improved so that I can support it. I don’t think I am going to get there and I want to explain why.

This post will talk about some of the nerdy financial assumptions behind the plan. First, the proposed plan asserts that $300 million of new appraised real estate value will be added as a result of the plan. The proposed plan further asserts that only 30 percent of the anticipated new property tax revenue from the district will be needed to pay for a proposed $30 million in new tax increment financing loans.

The MDHA financial assumptions behind the claim that only 30 percent of the expected new tax revenue will be needed to support the proposed $30 million in TIF loans is here. The claim that only 30 percent of anticipated new revenue will be needed to support the TIF loans is critical. The argument is that the proposed Donelson TOD will create enough value to not only pay the TIF loans, but also provide a lot of money for Metro to provide other important government services.

I question the assumptions. First of all, the entire spreadsheet is built around the idea that tax revenue will increase in direct proportion to increases in property value. However, Nashville just learned the hard way during the budget season that this is demonstrably false. Property tax revenue does not track directly with appraised property values.

In fact, I picked four parcels in the proposed Donelson TOD district at random and checked on the taxes they paid in 2014 compared to this year. Two parcels had their taxes go down, and two had their taxes go up. One parcel had its appraised value go up by 40% since 2014 while the tax bill went down by 1.6%. Another property had its appraised value go up by 24% since 2014 while the tax bill went down by 13%. For these properties, the appraised value skyrocketed in just a few years, but there was no corresponding increase in tax revenue.

If Nashville sticks to its current practice (i.e., property value reassessments every 4 years which drive the tax rate down, but only one offsetting rate increase since 2006), the spreadsheet supporting the Donelson TOD is completely busted and, frankly, entirely speculative.

There are other assumptions that seem odd to me. For example, columns (c) through (g) are all about tax revenue from existing buildings. The chart suggests that 2019 revenue will be higher than 2018 for existing buildings, and that the revenue will go up again each year after that. Again, during the budget process, we just got done seeing that, for existing buildings, revenue for 2019 (and probably 2020) will be the same as in 2018. So, column (g) should not be going up for 2019 or 2020. And for the years after that, it is guesswork.

The bottom line for me is that, during the early years of the proposed Donelson TOD, I don’t think the district will generate enough new tax revenue to pay the new TIF loans. And for the first 3-5 years at least, there will not be any extra revenue going to Metro for additional police, fire, school, or infrastructure costs. If Nashville were to decide to create the Donelson TOD, we would be signing up to take on more operational costs for the city without getting any corresponding income to pay for it.

As always, I am happy to entertain counter-arguments. And I would acknowledge that, on a 20 or 30 year time horizon, Metro might be able to recoup these costs assuming the city figures out again how to periodically set its property tax rate correctly. But, there’s no question that, in the early years of a Donelson TOD, there definitely would not be any new revenue for Metro to cover the new operating expenses that would go along with a few hundred million dollars in new buildings.

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.

Storm has been brewing for a while…

People in Nashville are understandably angry about having a tight budget in boom times. But this storm has been brewing for a while.

During the 2015 election season, one of the things that voters all around the county wanted to talk about most was “how come I’ve got problems in my part of town and we spend all that money downtown?” Voters have been ahead of the government on this. This budget season is making people wonder how they knew there was a problem and their leaders didn’t.

My comments in 2015 were centered around the ideas that: (1) economic development spending is not all “good” or all “bad”; and (2)  there simply isn’t enough information available for even well-informed people to have any idea whether particular projects are a good use of funds or not. My argument then was that more information and more transparency would lead to better decisions.

I know I wasn’t alone in this. One mayoral candidate talked about these issues as his central platform, and another two had a heavy dose of these issues.

I also know I wasn’t the only Council member to hear these issues from the community. I’ve tried to make progress on this. My first legislation in office — along with 24 co-sponsors — was tax increment financing reform. The ordinance requires annual property-by-property detailed reporting about TIF projects by MDHA. This legislation also stopped the practice of using property tax dollars from one redevelopment district for projects outside the district. The fact that I had 24 co-sponsors sign onto this shows how much we heard about TIF from the community.

Last summer, I also passed legislation requiring Metro to have a more detailed “debt management policy.” Before this, Metro did have a written policy about how to decide the right amount of long term debt. But, paraphrasing, the previous policy was basically a few sentences that said “Metro considers many appropriate factors in deciding how much debt is appropriate.” The new beefed up written policy — starting at page 5/21 in this PDF — outlines specific factors to be considered and also for the first time acknowledges that Metro’s unfunded retiree benefits obligations should be considered when making decisions about long term debt. (More about the $3 billion unfunded retiree benefits obligations here.)

As a Council, we have also stood in the way of the downtown flood wall for these same reasons. I have felt and continue to feel that there is not popular support around the county for a $125 million downtown flood wall. This project might well be technically sound and perhaps needed to protect Nashville’s lucrative downtown business and entertainment district. But by the time of the 2015 campaign season, and continuing through today, voters have had it with what feels like opaque insider development decisions that mostly impact downtown. We shouldn’t spend that much money on a flood wall without addressing the underlying distrust issues that have been brewing for a while now.

During each of the previous two budget cycles, I have also raised questions about how the percent of the budget that Nashville spends on long term debt could be increasing while we have been in boom times. If your get a raise from $50,000 to $55,000 per year, you’d like to see the part of your paycheck that goes to debt decrease, not go up!! Voters maybe haven’t known the exact numbers…but they have known that something wasn’t quite right.

Back in 2015, these issues concerned me and I told voters that they raised a yellow flag, not a red one, for me. I often said that there was plenty of time to address these issues and make a course correction. The efforts I am describing with legislation, and in encouraging dialogue and consensus on the flood wall before pulling the trigger on a $125 million project, and in talking about Metro’s $3 billion unfunded retiree benefits obligations have all been to nudge the city toward the course correction that we need.

Now it is nearly three years later. The transparency added with the new legislation has been a critical first step. But now we need the data to drive decisions. While nobody wishes for a budget crunch or the other chaos of the last few months, maybe there is a silver lining. Nashville is fundamentally very strong. The current storm give us an opportunity to start the hard work and hard conversations we need to strike a new, better balance in how we deal with debt, development, and funding our retiree benefits.

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.

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

Update From 3/15 Council Meeting

My TIF ordinance passed 2nd reading last night. Two veteran Councilmembers told me (nicely) that I made a rookie mistake by not taking the opportunity to talk about the ordinance so that constituents in the audience and watching on tv would have a better idea of what the new law will do.  My bad – I’ll try to talk more…

At the March 1 meeting, the Rules & Confirmation Committee deferred the appointment of Dr. Feng Li as the County Medical Examiner. The main issue was that he didn’t live in Davidson County, and the Committee wanted to know more about the efforts to recruit a qualified doctor who would live in Nashville. After the March 1 meeting, Dr. Li decided to move into Davidson County. The Committee was pleased with this commitment and approved his appointment yesterday.

At yesterday’s meeting, the Rules & Confirmation Committee deferred two nominees for the Planning Commission for one meeting. These might be the most important appointments that we consider all year, and they deserve careful consideration. I expect the nominees to appear before the Committee at our next meeting. If anyone has questions they’d like us to ask the Planning Commission nominees, please let me know.

The media covered two bills.  One was CM Glover’s ordinance that would have required the Fair Board to reserve 17 weekend dates per year for gun shows until there is either a court ruling or Attorney General’s opinion about whether the Fair Board legally can stop having gun shows.  This ordinance got indefinitely deferred under the Council’s new “Rule 24.”  Under this rule, a committee can indefinitely defer a bill – this effectively kills a bill (with a one-time chance to bring it back to life.)  To bring it back, CM Glover would need to make a written request of the Clerk to place it back on the agenda.  If he gets a majority of CMs to vote at the next meeting to bring it back, it goes back on the agenda for further consideration.

Honestly, I was surprised that the indefinite deferral procedure was used. Practically, I am not sure it makes much difference. If there hadn’t been an indefinite deferral, CM Glover would have needed a majority vote to pass the bill on 3rd reading.  And, now that it has been indefinitely deferred, it still needs a majority vote to bring it back to life.  Either way, if a majority of CMs like it, it will become law.  But setting aside the practicality, using the procedure yesterday definitely stirred up some raw feelings. I’m not sure we need that…still processing…

The other bill that got media coverage was the Lifeway incentive package.  Other than the headline, I think the Scene did a nice job of capturing the difference in perspectives.  CM Cooper was pretty bothered by the developer getting paid to provide additional park space.  His view was that Metro is paying the developer for what is essentially an amenity park largely for their future residential owners.  CM O’Connell, who represents downtown, felt strongly that the incentives were appropriate and that downtown needs green space badly. I liked what CM O’Connell said in the Scene about the Council needing to focus on long term strategy because that will create more change in the long run that trying to re-negotiate individual deals that the Mayor’s office has already made.

(The Scene headline said that this measure “sailed through Council.” I bet the folks pushing for the incentives didn’t feel that way. There was a specially called Budget & Finance Committee meeting about this on March 7 to address a list of concerns raised by multiple CMs in addition to CM Cooper. And, there was also a Council site visit on March 11 to see the site of the proposed park land purchase.)

I voted in favor of this package. It had a $2.5 incentive that went to benefit Lifeway, a 125 year fixture in Nashville that provides lots of high quality jobs and is a good corporate citizen. Compared to what Metro has done for other significant corporate moves, this is not a large incentive.  And, regarding the additional $990,000 to the developer for the park land – it has been reported that the developer told everyone, “We already gave Metro more than an acre of land for green space…we are selling this additional land to Metro at a discount because Metro has asked to get more land…we will not donate it.”  Given this, the Council either could approve the purchase of discounted park land, or play a game of chicken with the developer to find out if the developer would donate the land even though they said they wouldn’t.  I didn’t think daring them to not sell the land for a downtown park was the right choice.  This whole analysis brings me back to what CM O’Connell said in the Scene.  Citizens win the incentives game by setting the long term ground rules, and not by haggling over individual deals that have already been negotiated.

I typed this update pretty late in the evening…please forgive any typos…

“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.

Notes from 3/1 Council Meeting

I want to share three things from this week’s Council meeting.

County Medical Examiner Appointment: The Rules Committee was asked to consider the appointment of Dr. Feng Li as County Medical Examiner. The Committee voted to defer its decision for one meeting. The issue was that, while Dr. Li seems highly qualified, he does not live in Davidson County.

Metro has a contract with Forensic Medical Management Services, PLC, to provide forensic pathology services for Davidson County. Dr. Li is the CEO of FMMS, and they apparently do not have any employee pathologists who both live in Davidson County and are qualified for the County Medical Examiner position. State law allows for a doctor outside the county to serve in this position if it is “not possible” to find someone in the county to accept the position.

FMMS ran a job opening announcement for 22 days on the leading national medical examiner organization’s web site, and was unable to find an interested, qualified candidate.

The Committee voted to defer because it wanted to learn more about the search for a qualified candidate who lives in the county. Also, since Dr. Li is the CEO of FMMS, I am asking for Dr. Li to comment on the April 2015 Metro internal audit of the Medical Examiner’s office. I expect that Dr. Li’s appointment will most likely be approved by the Council, but these are questions that should be answered first.

BL2016-149: Infrastructure for Lifeway Project:  This ordinance would obligate Metro to spend up to $3,490,000 for the construction of public infrastructure improvements in the area around a new Lifeway building in the North Gulch area. As part of the deal, Metro will get a 1+ acre park that is supposed to connect to our greenway system. You can see more details in the Council Agenda Analysis, at pp. 10-11. This ordinance passed on second reading after an extensive discussion.

On the one hand, I think there was widespread agreement that Lifeway is a wonderful 125 year citizen of Nashville. We were told that Lifeway provides 1,100 jobs that have an average annual compensation of $53,000, and that Lifeway generates tens of thousands of room nights of hotel bookings each year. So, this isn’t like Dell swooping into town with no track record here. Lifeway is a legit long-time interested and engaged Nashville employer.

Also, there is no tax increment financing. Metro’s obligation would be to build water, street, and other infrastructure.

On the other hand, there was several Councilmembers who expressed frustration over why this particular infrastructure project should have priority over other projects, and over why building this new park should have priority over other new parks around the city. There were also questions about whether Lifeway would really move out of the city if Nashville were to decline to pay for this infrastructure.

These are all good and fair questions, and I’m glad that Lifeway and the administration promised answers to all of them before this ordinance gets to third reading.

As I see it, there are really two issues going on here.  One issue is a completely legitimate long-term complaint – you really can’t find a prioritized list of water infrastructure projects, or park projects, anywhere. So, for example, if any district councilmember has a piece of land in her district that has been acquired to become a park, she really has no earthly idea whether it will be actually built into a park in 2017 or 2018 or 2019 or whenever.

Coincidently, at a Budget & Finance Committee meeting this week, the administration described how they intend to create such a prioritized list that would address this problem. They described that it will take maybe as long as two or three budget cycles to turn what is currently a wish list of projects into a prioritized list that will reliably let people know when a project will happen.  For now, until Metro develops this prioritized list, we will be subject to criticism whenever a new project seems to just pop up.

The second issue is whether Nashville thinks it is a good idea to pay for this infrastructure.  Is Lifeway a good investment for Nashville? Is paying for this infrastructure a better use of $3+ million than something else? I plan to keep an open mind as we receive the rest of the promised information, but my instinct is that this is a really nice opportunity to get needed infrastructure at the base of our important Charlotte corridor, obtain an important greenway connection that otherwise will not be available to us, and help build the inevitable connection between the North Gulch and Germantown.

I think there will be another long discussion about this on third reading on March 15.

BL2016-157: Tax Increment Financing:  This is the ordinance that Councilmember Gilmore and I filed to change the ground rules for tax increment financing. (previous post here)  This passed first reading yesterday. Second reading will be on March 15. I’m thankful that the feedback on this has been very positive, and that we have more than 20 co-sponsors. I’m looking forward to seeing become law.

New TIF Ordinance

The new TIF ordinance that Councilmember Erica Gilmore and I filed will be considered by the Council for first reading on March 1, 2016. Both MDHA and Metro Legal agreed on the text of the ordinance before it was filed. If passed by the Council, the ordinance would change the ground rules for tax increment financing in Davidson County in three important ways, and also allow MDHA’s Envision Cayce plan to proceed as scheduled.  The three changes are that Metro will get its 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.

Metro will get tax revenue back more quickly

There are three provisions that will help Metro get its property tax revenue back more quickly.  First, 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.  Second, for any new TIF loans going forward, Metro will be able to retain the portion of property tax revenue that is meant to pay Metro’s own bond debt obligations.  I think that this should reduce or eliminate the potential risk that TIF financing could ever erode Metro’s ability to service its own debt.  Third, if MDHA refinances a TIF loan to reduce its loan payments, the amount of tax increment funds it receives will also decrease – with any excess tax increment going back to Metro.

Metro will have more say in tax increment projects

There are three provisions that will allow Metro to have more control over some types of projects funded by tax increment dollars.  First, going forward, tax increment funds may not be used to support projects outside of the specific redevelopment district where the property is located without prior Council approval.  Second, going forward, if MDHA is selling land it owns in a redevelopment district, and it got that land from Metro (as opposed to federal funds), absent Council approval, the land sale proceeds must be used in the same redevelopment district or returned to Metro.  The third change is technical.  For redevelopment districts created after 2006 (i.e., Cayce Place, and Bordeaux), MDHA currently has the power under state law to collect tax increment funds for every parcel of property in the entire district.  MDHA has never exercised this power.  The ordinance would establish that Metro will only allow tax increment funds to be used by MDHA for properties that actually are being redeveloped (as opposed to all properties in the district regardless of whether they are redeveloped).

We’ll have greater transparency

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.  The first report would be due 90 days after the ordinance is passed.

The ordinance will approve the Rutledge Hill land sale

In the ordinance, the Council would be specifically approving that MDHA may use the proceeds from the sale of 3 parcels in the Rutledge Hill Redevelopment District as part of the Cayce Place Redevelopment Plan.

During the mayoral and council campaigns last summer, people all over the county wanted to talk about tax increment financing, and whether it has been used fairly, or if it has been a giveaway to developers. My response was always that I didn’t think we, as citizens, had enough visibility into how our property tax dollars have been used for individual economic redevelopment projects.  My sense from the start has been that I might not have any complaint about the vast majority of Nashville’s economic redevelopment decisions over the last ten years – but I simply couldn’t tell because there hasn’t been enough readily available information for a reasonably well-informed citizen to make sense of what has been happening.  My goals with this ordinance are to help Metro get its tax revenue dollars back sooner, to give voters (through their directly-elected Metro Council representatives) more authority regarding tax increment projects, and to create thorough annual reporting about how these property tax dollars are being spent.

I want to thank the Mayor’s office, Councilmember Gilmore, the more than 20 Councilmembers that have agreed to co-sponsor this ordinance, Jim Harbison from MDHA, and Jim’s leadership team for being willing to not only talk about these issues, but agree on all of these important changes.  I am hopeful that the Council supports this ordinance.

 

Mayor’s press release (Feb. 24, 2106)

Tennessean (Feb. 25, 2016)

Nashville Business Journal (Feb. 25, 2016)

Coverage on WTVF-News Channel 5 (Feb. 24, 2016)