When the Navy Hill development plan was initially announced (in what seems like centuries ago), I was very skeptical of the project’s use of TIF, or tax increment financing. I’ve since become more comfortable with the idea in general. But in order to evaluate whether it’s a good idea here in RVA, it would help to know the dangers.
First, just as a reminder: a TIF uses future revenue from a thing to pay for that thing. More specifically:
Most often, a local government creates a TIF “district” of some kind. (This is a virtual district - there are no “Welcome to the Downtown TIF!” signs or anything.)
The government freezes the tax valuation in the district at the current rate. So if the district’s properties are currently worth $50M, delivering an annual property tax of $5M (made up numbers, of course), that’s how much will go to the general tax fund in future years.
Any increase in valuation – due to inflation or, hopefully, economic development in the area – generates new tax revenue that goes into the TIF fund. So if the property valuation becomes $60M, generating $6M in property tax, $5M still goes to pay for schools and roads; but the “increment” of $1M goes to the TIF.
The local government uses the TIF as a line of credit to pay for infrastructure improvements, to renovate city properties, or to subsidize private development. The idea is that these amenities or improvements will generate enough new tax revenue to pay for themselves, and then hopefully generate even more tax revenue in the future.
Everybody wins! Only, sometimes they don’t – or, at least taxpayers don’t. There’s considerable skepticism about TIF, particularly coming from Chicago where TIF districts draw in a third of the city’s tax revenue.
So how do TIFs go wrong? And can we avoid it here?
On my view, there are at least three, and maybe four, ways that TIFs fail to deliver:
First, TIFs go wrong when they are “speculative;” a locality could set up a TIF district in the hopes of attracting economic development, but then the promised development doesn’t arrive or would have happened anyway. (This is a problem shared by many other economic development tools.)
The city says they’ve avoided that with Navy Hill: they’ve already got a commitment from private developers to invest over $900M in the hotel, apartments, etc. And they also say the city won’t borrow a dime for the arena until the developers sign their commitments; in fact, the investors who will loan the money to the city would be crazy to invest without that commitment to develop. (Investors never do crazy things! But fine.)
The second way TIFs go wrong is when they are designated to go to a “blighted” district, but then remain in place years after the district has been gentrified. The TIF becomes a kind of slush fund for developers to continue to improve private developments that no longer need city money, or a kind of “shadow budget” for glitzy projects.
That’s seemingly not the case here: the TIF is designated for a clear purpose, paying back the arena loan. I should note, however, that it’s unclear to me from the TIF ordinances how the TIF fund would be dissolved; this is something the city should clarify, as we don’t want a “Zombie TIF” sucking up money long after the arena loan is paid off.
The third way TIFs go wrong is much more of a concern here: a “failed” TIF that does not generate enough revenue to pay back the improvements it supposedly paid for. Here the city and developers still have a lot of work to do. The city included a financial analysis in the package it handed over to City Council, but where the revenue projections come from is unclear. The worry is that this analysis is based on earlier (flawed) projections.
If the projections fall short, the city claims, it’s only the bond investors who would lose out. And the city is right in claiming that a default on the arena loan shouldn’t have any effect on the city’s bond rating or ability to borrow elsewhere, despite my worries.
What I am still worried about is that the city’s Economic Development Authority (the government body that actually pays back the loans) could put pressure on the city to make up any shortfall, although the city staffers I’ve spoken to are skeptical. It’s true that based on the language of the ordinances, the city is under no obligation to come up with more money. This is different from the 6th Street marketplace, for example, an earlier downtown project that failed and that DID carry an obligation.
The final way a TIF could go wrong is probably the most difficult way to estimate: “opportunity costs,” the economic term for the loss you take from not being able to do something else.
The first set of opportunity costs for the city here could be financial. Because the TIF district here is so large, the project grabs some revenues that would be there anyway to pay for the arena. The city says that the payoff in terms of economic development will be tremendous, and well worth the cost. But if you’re skeptical, you see the project as diverting city funds that should be used for more important purposes like schools.
The other opportunity costs comes from the development pipeline this project generates – the “but for” argument that is often used to justify TIF districts. The city’s argument is that all the private development they’ve lined up would not happen BUT FOR the arena. But what if that’s not true – what if the city could issue smaller RFPs for apartments on city blocks? If the city’s tourism people think a new convention center hotel is justified, why wouldn’t a private developer want to build it without the arena? Won’t VCU be expanding their dorms and research space anyway?
The bottom line here is that any questions about the worthiness of the deal have much less to do with the TIF mechanism, and much more to do with the bigger underlying assumptions the city is making about revenue and development. The newly appointed City Council commission would do well to focus in on these questions as they investigate the deal.