Donald C. Fry: The Myths and Realities of TIFs

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Earlier this week the Baltimore City Board of Finance unanimously approved a $535 million tax increment financing, or TIF, for the proposed redevelopment of Port Covington, more than 200 acres of mostlyempty industrial land that Sagamore Development Company wants to remake into a bustling hub of homes, stores, waterfront parks and a new headquarters campus for Under Armour.  

With the finance board’s approval, the proposal moves on to Baltimore Mayor Stephanie Rawlings-Blake, who is expected to introduce it next week to the City Council for consideration.  

The funds that Sagamore is asking Baltimore City to provide under the TIF agreement would be used for public infrastructure improvements to Port Covington, including utilities, streets, parks, bike paths, and more.

Admittedly, the phrase “tax-increment financing” doesn't roll off the tongue easily and to some people it may have a particularly bureaucratic ring.

That may be one reason TIFs are sometimes misunderstood by the general public. As a result, from time to time, TIFs get tagged with all kinds of myths and misconceptions.

And so with the Baltimore City Council about to consider and discuss the merits of the TIF proposal, now seems an appropriate time to address some of the common questions and concerns raised when it comes to TIFs in general.

What exactly is a TIF and who ensures they have merit?

A TIF, simply put, is a public financing tool.

It ensures that a significant economic development project with potential to yield substantial benefits, such as jobs, for a city, town or community can move forward.

Legislation to allow local or state government entities to issue TIFs can be found in many states.

This method of financing is not very different than a jurisdiction issuing bonds to pay for new bridges or major repairs to public infrastructure. Money is borrowed in the bond market to pay for an improvement that will serve the public good.

TIF proposals sometimes lead to debate. To some this makes it seem like a TIF proposal is an unusual request or cloaked in secrecy. The reality is that jurisdictions nationwide use TIFs from time to time to support projects that yield future benefits for the greater public good.

For example, in 2008 a $15 million TIF was approved for the redevelopment of Mondawmin Mall in West Baltimore. The Baltimore Development Corporation (BDC) estimates that project supports 930 jobs and generates $960 million in personal income and property taxes combined.

In Baltimore, TIF requests go through a detailed review process as outlined in the city’s TIF policy.

Proposals are first reviewed and analyzed by a coordinating city agency, such as the BDC, with the help of legal and financial experts, including the city’s finance department, outside bond counsel and a third-party consultant, which conducts an analysis on the need for the TIF and the project’s benefit to the city. 

The request then goes to the mayor with a recommendation from the coordinating agency. The mayor decides whether to send the request to the Board of Finance for consideration.

If the Board of Finance approves the TIF concept and the ensuing legislation, it is then introduced in the City Council and sent to the appropriate city council committee where public hearings are held before the legislation returns to the full City Council for a vote. 

Is a TIF a corporate giveaway program?

The short answer is no.

As noted, Tax Increment Financing uses proceeds from the issuance of bonds to finance public infrastructure. Debt payments on the TIF bonds are paid by the incremental (i.e., new) real property taxes generated by the project – hence the name Tax Increment Financing.

A special fund is created into which these incremental real property taxes are placed. Withdrawals are made from this special fund to cover debt payments on the TIF bonds. 

Although carefully underwritten so that the incremental taxes are sufficient to pay the bonds, any gap is covered by the creation of a "special taxing district" in which the developer and property owners in that district pay a “special” tax to make up the difference. Property owners in other parts of the city will never pay the special tax.

All of this underscores the fact that a TIF is not a handout to a corporation or “corporate welfare,” but just a tool to finance public improvements from future revenues generated by the new development.

Do improvements that result from a TIF-supported project in Maryland affect other city resources, such as state aid for public schools?

To understand the answer to this question keep in mind that Maryland apportions school aid based on the assessable tax wealth of a community. The wealthier a jurisdiction, the more it must contribute to school funding.

In the past some concerns have been raised that TIF-supported projects can drive up property values and result in the state formula reducing school aid.

However, a bill sponsored by Delegate Maggie McIntosh and Senator Nathaniel McFadden, which was passed this year by the Maryland General Assembly, ensures that no jurisdiction loses state school funding from developer agreements, such as a TIF, at least until 2019.  By that time, state officials expect that a new school funding formula will be in place through recommendations from a legislative commission required to report next year.

Should developers pay for infrastructure improvements themselves, instead of seeking a TIF?

Typically, the infrastructure funded by a TIF is public infrastructure, available for public use and enjoyment.  It is the kind of infrastructure that the public sector traditionally builds – roads, utilities, parks, and so on.  Private developers typically pay for the buildings and other amenities associated with a project.  Both public and private investments are essential to make large-scale development projects feasible.

To properly balance public and private investments, the TIF review and underwriting process, includes what is called a “but for” test -- simply put, "but for” the TIF would the project go forward?

This requires an assessment by financial professionals as to whether and to what extent public infrastructure costs can or should be borne by a private developer, and whether the project would be financially feasible without a public investment in the necessary public infrastructure.  Only after this evaluation does a TIF even advance to review by the mayor and City Council.

Government officials in Maryland should not, and do not, throw caution to the wind and let any TIF request move forward on a red carpet. Tough questions should be asked, transparency assured, and proper agreements struck to protect the public interest.

But it is equally critical to keep an eye on the facts – that a TIF is a common and widely-used public finance tool to build public infrastructure and that it does not diminish city resources needed for other legitimate purposes; in fact, projects facilitated by TIFs are shown by far to be net contributors to local economic and financial growth, in both the short and long term.

Let's not get sidetracked by overheated arguments about backroom deals or claims of corporate welfare when considering a TIF and the economic benefits it can provide.

Donald C. Fry is President and CEO of the Greater Baltimore Committee. He is a frequent contributor to Center Maryland.
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Donald C. Fry has been the president and CEO of the Greater Baltimore Committee (GBC), the central Maryland region's most prominent organization of business and civic leaders, since November 2002.

Under Don’s leadership, the GBC is recognized as a knowledgeable and highly credible business voice in the Baltimore region, Annapolis and Washington, D.C. on policy issues and competitive challenges facing Maryland. Its mission is to apply private-sector leadership to strengthening the business climate and quality of life in the region and state.

Fry served as GBC executive vice president from 1999 to 2002. From 1980 to 1999 Fry was engaged in a private law practice in Harford County. During this time he also served in the Maryland General Assembly. He is one of only a handful of legislators to have served on each of the major budget committees of the General Assembly.

Serving in the Senate of Maryland from 1997 to 1998, Fry was a member of the Budget and Taxation Committee. As a member of the House of Delegates from 1991 to 1997 Fry served on the Ways and Means Committee and on the Appropriations Committee.

Fry is a 1979 graduate of the University of Baltimore School of Law. He earned a B.S. in political science from Frostburg State College.