Tax Increment Financing in New Orleans April 2003 Tax Increment Financing in New Orleans

BGR Board of Directors BGR Economic Louis M. Freeman, Chairman Development Committee David Guidry,Vice Chairman Terrel J. Broussard Dionne M. Rousseau, Secretary Jean C. Felts Lynes R. Sloss, Treasurer Louis M. Freeman Lauren Anderson David Guidry Kim M. Boyle Maurice L. Lagarde III Terrel J. Broussard Roderick K. West Robert W. Brown Sterling Scott Willis Bertel Dejoie Ann S. Wink Patricia C. Denechaud Jean C. Felts BGR Project Staff Russell S. Hoadley Janet R. Howard, President & CEO George D. Hopkins, Jr. Patricia E. Morris, Director of Research Jan S. Jobe Stephen Stuart, Research Analyst Hans B. Jonassen Peter Reichard, Research Analyst Yvette Jones Amy T. Pease, Publications Maurice L. Lagarde III Helen L. Williams, Executive Assistant Betty V. Lauricella Carolyn W. McLellan Acknowledgment Robert W. Merrick William A. Oliver This report is the first of BGR’s studies on Roger W. Peck the use of economic development incentives R. Hunter Pierson, Jr. in the City of New Orleans. BGR greatly Robert D. Reily appreciates the financial support of the Gregory St. Etienne individuals, companies and foundations that Roderick K. West made this study possible. The findings, Sterling Scott Willis conclusions and recommendations in this Ann S. Wink report are those of BGR and do not neces- Leonard Vance Wormser sarily reflect the views of its financial Mary K. Zervigon supporters. Honorary Board BGR William A. Baker, Jr. Bryan Bell The Bureau of Governmental Research is Harry J. Blumenthal, Jr. a private, nonprofit, independent research Edgar L. Chase III organization dedicated to informed public Richard W. Freeman, Jr. policy making and the effective use of Ronald J. French, M.D. public resources for the improvement of Paul M. Haygood government in the Greater New Orleans Diana M. Lewis metropolitan area. M. Hepburn Many Anne M. Milling This report is available on BGR’s website R. King Milling www.bgr.org. George H. Porter III, M.D. Edward F. Stauss, Jr. Bureau of Governmental Research 225 Baronne Street, Suite 610 New Orleans, Louisiana 70112 Phone (504) 525-4152 Fax (504) 525-4153 [email protected] www.bgr.org Table of Contents

Executive Summary ...... 1

I. Introduction ...... 7

II. What is TIF? ...... 7

III. TIF in the United States ...... 8

IV. Why Do Local Governments Use TIF? ...... 11

V. Criticisms of TIF ...... 12

VI. Special Issues with Sales TIF ...... 14

VII. Louisiana TIF Statutes Relating to New Orleans . . . . .15

VIII. TIF Use in Louisiana ...... 20

IX. Future TIF Use in New Orleans ...... 24

X. Recommendations ...... 27

Appendix A - St. Thomas TIF

Appendix B - World Trade Center TIF EXECUTIVE SUMMARY A Brief Critique Recently, the City of New Orleans has TIF provides cash-strapped municipali- turned its attention to a widely used ties – of which New Orleans surely is local economic development tool: tax one – with a means of making invest- increment financing (TIF). Last fall the ment in infrastructure and economic City Council approved the City’s first development projects under severe sales TIF district in connection with the financial and political constraints. TIF redevelopment of the former St. Thomas has tremendous political appeal in that housing project. Another financing plan it can be implemented without raising with TIF-like characteristics utilizing the taxes and, in many cases, without hotel occupancy tax is under considera- obtaining voter approval. It has a cer- tion in connection with the proposed tain conceptual beauty in that the conversion of a portion of the World investment is, in theory, self-financing Trade Center into a hotel. A bill to cre- and the development supporting it ate a TIF district for the Lake Forest would not have occurred otherwise. Plaza Shopping Center site was recently Under closer scrutiny, the underlying introduced into the State Legislature. premise that a TIF is self-financing is Another to create a TIF district for a open to question. Because of the diffi- large portion of eastern New Orleans culty of making long-range projections, has been filed. In May, City Council will it is difficult to assess whether develop- consider a TIF-like arrangement for a ment in an area would have occurred Lowe’s Home Improvement Warehouse. without TIF. It is even more difficult to Recognizing the importance of the issue, determine whether, and to what extent, City Council has begun to develop gains in a TIF district are offset by stag- policies and procedures to govern the nation, decline, or reduced growth in use of TIF. other areas and businesses. To the extent that other areas and businesses What is TIF? are negatively impacted, the existing TIF is a financing mechanism that revenue base of the local government enables a local government to capture is reduced. In addition, successful TIF new tax revenues generated in a desig- districts can increase a local govern- nated area and reinvest them in that ment’s operating costs without providing area to fund improvements. The local additional operating funds to the local government freezes the tax base in the government. The end result in that case TIF district at the pre-development level is a transfer of the additional operating for a period of years.1 Taxing bodies costs to residents outside the TIF continue to receive the taxes on the pre- district. development base, but the incremental taxes are applied to infrastructure and Given the many unknowns surrounding other improvements designed to spur the performance of TIF districts, and the private sector development. In theory, types of dislocations that can occur, it is the TIF district finances its own revital- exceedingly dangerous to view TIF as ization and eventually generates larger free money. Rather, TIF should be con- tax revenue for the community sidered an allocation of future resources as a whole. and assessed with a stringency befitting

Tax Increment Financing in New Orleans 1 other long-term investments of future t Sales TIF districts are more likely revenue. The investment should be than property TIF districts to cap- made only if it is effective, efficient, ture revenues unrelated to TIF equitable, and in furtherance of a investment, thus reducing current defined public policy. tax revenues available to the jurisdiction. For reasons discussed below, property TIF, the most widely used form of TIF, is t Because sales TIF districts need preferable to sales TIF. Unfortunately, large, creditworthy retailers or because of the nature of the local tax shopping centers to generate sig- structure, property TIF is less practical nificant tax increments, the quest in New Orleans than in other jurisdic- for a TIF source can lead to land tions. In Louisiana, property TIF can use distortions, unnecessary subsi- only capture taxing bodies’ ad valorem dies for big retailers, and a distor- millage that is not dedicated to a special tion of a local government’s invest- purpose. In 2001, undedicated millage ment priorities. for the City of New Orleans was 14.91 mills out of 169.29 total mills collected t Subsidizing a retail operation with in New Orleans. Thus, for every $1 mil- TIF revenues gives it an unfair lion of incremental assessed value (or advantage over its competitors. $6.6 million of fair market value), only $14,910 out of $169,290 in total proper- t Unless contractually constrained, ty taxes paid would be available for a the retailer can enjoy the TIF sub- TIF district. If the general millages of the sidy and deprive the local govern- Orleans Parish School Board and ment of projected benefits by Orleans Levee Board are subject to cap- departing when the TIF period ture (a matter which is unclear), an ends. additional $15,500 would be available There are other factors that suggest that for TIF. The homestead exemption and TIF might not provide the most effective the exemptions enjoyed by nonprofits, solution to blight or economic develop- government, and some industries fur- ment issues. Regardless of the type of ther diminish the potential of property TIF, because the repayment obligation is TIF use by reducing the tax base. limited to a specific funding source, TIF debt is more expensive than general The tax structure, combined with obligation debt. Whether the premium requirements for voter approval of bonds paid to limit the obligation is worthwhile backed by property tax increments (but will depend on the particular circum- not for bonds backed by sales tax incre- stances. In some cases, such as the St. ments), skews the use of TIF toward Thomas TIF, it is clear that the City sales TIF. This is unfortunate, because could save millions of dollars in tax sales TIF suffers from more serious revenue by issuing lower-interest gener- problems than does property TIF: al obligation bonds. The capacity to t Sales tax revenues are more volatile issue such debt exists under the City’s than property tax revenues, a fact debt limit, which is 35% of gross that makes sales TIF debt financ- assessed value, or $816.8 million as ing riskier and more expensive.

2 Bureau of Governmental Research of Dec. 31, 2002. Debt outstanding as of businesses routinely turning to the of late February was $473.4 million, or City for subsidies and the prospect of 58% of capacity. freezing the tax base for a huge swath of the City. As in the use of other economic development incentives, the effective, efficient, As noted above, the effective use of and equitable use of TIF depends on the property TIF in New Orleans is severely wisdom, financial sophistication, and limited by the prior dedication of most integrity of those involved in the pro- of the tax revenues. Ironically, the cess. To the extent that decisions are widespread use of sales TIF would cre- based on sophisticated analysis, made ate a similar limitation on government’s with an unwavering focus on the public future flexibility by converting unre- good, and implemented through skillful stricted tax revenues into dedicated negotiation, the chances of successfully taxes. In addition, the proliferation of using TIF increase. To the extent that long-term dedications will contribute to decisions are driven by relationships, the balkanization of government within political deals, and other agendas, or the City, even as the community focuses that the government lacks the high increasingly on regionalism. level of expertise needed to analyze and implement complicated transactions, Given the potential expenses, risks, TIF is likely to be an expensive mistake and abuses associated with TIF, the that results in an unnecessary transfer City should use TIF cautiously and only of wealth to private entities. in tightly circumscribed conditions. BGR believes that the City should aban- The potential problems associated with don completely the use of TIF and TIF- TIF are more than theoretical. New like arrangements based on sales and Orleans’ two TIF districts – one hotel occupancy taxes and restrict the approved for the St. Thomas redevelop- use of TIF based on property taxes to ment and another under consideration public infrastructure and pre-develop- for the proposed World Trade Center ment improvements in blighted areas. hotel – provide case studies of the problems. A summary of the problems asso- Strict parameters for the use of TIF ciated with these TIF districts can be should be established at the state level found on pages 21 to 23 of this report. through revision of TIF statutes and at More detailed information is available the local level through the adoption of in the appendices. stringent policies and procedures. Specific recommendations for changes The trend with respect to TIF is disturb- in legislation and the establishment of ing. In just the past month, City City policies and procedures for the use Council has received a proposal for a of TIF are set forth below. TIF-like arrangement for a Lowe’s, a bill has been introduced to create a TIF district for Lake Forest Plaza shopping mall, and another bill has been filed to create one for eastern New Orleans. Collectively and individually, they raise serious concerns, including the specter

Tax Increment Financing in New Orleans 3 RECOMMENDATIONS environmental clean-up. TIF should not be used to provide funding for privately owned pro- State Legislation jects and assets. t State law should impose severe limitations on TIF based on sales t State law should limit the duration and hotel occupancy taxes, limiting of TIF districts. their use to “main street” programs designed to revitalize commercial City Policies and centers of smaller municipalities. The use of sales TIF for large-vol- Procedures ume, major retail stores and shop- BGR recommends that the City imple- ping malls should be prohibited. ment the following recommendations regardless of whether state law is t The state should eliminate TIF leg- changed. islation designed to accommodate specific projects. It should estab- Master Planning lish a cohesive set of general laws t Before allowing additional TIF dis- to replace the multitude of statutes tricts, the City should develop and on the books. adopt a city-wide economic devel- t State law should limit the use of opment plan. Any TIF district TIF to blighted areas and require should conform with, and promote local governments to make a find - the objectives of, the economic ing that an area is blighted. The development plan. statutes should define the specific t As part of the economic develop- characteristics of blighted property ment plan, the City should develop and define a blighted area in quan- a city-wide master plan for TIF. It titative terms. should designate areas of the City t State law should include a mean- that are eligible for TIF and estab- ingful “but for” test conditioning lish detailed criteria and priorities the use of TIF on a finding that TIF for authorizing TIF districts within is necessary for appropriate, future them. The plan should be based on redevelopment (as opposed to a an in-depth expert analysis of the specific project) to occur in a desig- City and should be prepared and nated area. adopted after city-wide public hearings. t State law should limit TIF expenditures to prep work needed to make t The TIF master plan and all TIF the urban landscape more attrac- developments should conform with tive for investment. Eligible costs the master plan for the City. should include expenditures for t To encourage prioritization and public improvements, such as careful targeting of projects, the streets and sewer and water sys- City should establish a cap, based tems, demolition, site preparation, on a dollar amount or a percentage property assembly, and of the City’s General Fund, on the

4 Bureau of Governmental Research amount of taxes that can be divert- Review Process ed from the General Fund to TIF t The City should require detailed districts. supporting documentation that will enable it to determine whether a Criteria for TIF proposed TIF district is necessary, viable, and rewarding. Basic docu- t In view of the problems associated mentation would include cost-ben- with their use, the City should efit analyses and financial feasibili- abandon the use of TIF based on ty studies prepared for the City by sales taxes or hotel occupancy independent consultants. In the taxes. case of public-private partnerships, t The City should identify, and desig- the City should gather additional nate as eligible for TIF, blighted or detail through the developer’s/ brownfield areas that offer the owner’s financial statements, greatest potential for development, detailed projections (including cash assuming an appropriate amount flow and revenues and expenses), of public funding. Blight should be rate of return and profitability defined in meaningful, quantitative analyses, and, where appropriate, terms to reduce the risk of the independent market studies. unnecessary use of TIF. t The analysis of a proposed TIF dis- t To limit the use of TIF to areas in trict should include a comparison which development would not oth- of the cost of tax increment erwise occur, the City should con- financing against alternative dition the use of TIF on a finding financing methods, including the that TIF is necessary for appropri- issuance of general obligation ate, future redevelopment (as bonds. opposed to a specific project) to t The City should establish a uni- occur in the designated area. form system for evaluating and t The City should establish stringent, approving TIF districts. minimum standards for consider- t The evaluation should include care- ing TIF districts. These should ful scrutiny and evaluation of cost- include, among other things, benefit and other analyses. Factors requirements for significant equity such as the duration of the TIF investment by the developer/ and the percentage of incremental owner, high ratios of private to taxes subject to reinvestment in public investment, and a finding the district should be pegged to the that projected net benefits to the projected costs and benefits, in City exceed projected costs by a accordance with predetermined significant margin (e.g., 200 to standards. 300%). The criteria should be viewed as minimum eligibility t To protect the interest of the City’s requirements, rather than as residents and taxpayers, the City authorization for any transaction should obtain advisors or staff with that satisfies them. the sophisticated financial, legal,

Tax Increment Financing in New Orleans 5 and managerial expertise needed to duration of a TIF district and its evaluate, implement, and monitor bonds exceed the shorter of 20 such districts effectively. years or the expected life of the project supporting the TIF. Requirements to Ensure t TIF funds should be redirected to Objectivity and Accountability the City’s General Fund after the t Developers and owners of TIF pro- TIF period expires or when they are jects should be required to provide otherwise not required for the TIF the City with the information nec- district generating them. Cross- essary to compare projected bene- subsidization of other TIF districts fits with actual benefits on an should not be permitted. ongoing basis.

t The City’s TIF policy should include Transparency provisions to reduce the life of the t All meetings relating to TIFs should TIF if the developer fails to meet be conducted in accordance with projections, provided that obliga- both the letter and the spirit of the tions under TIF bonds are not open meetings law. Practices that impaired. undermine transparency, such as one-on-one briefings and behind- t TIFs for projects should include closed-door negotiations between arrangements that allow the public councilmembers and potential to recoup, to the extent possible, developers/owners, should be its investment from the develop- avoided. er/owner if the projected public benefits do not materialize. t All documentation relating to TIFs should be available to the public. Minimizing Investment and Maximizing Return t City Council should provide the public on an annual basis with a t The City’s TIF policy should require report on TIF districts, including a significant equity investment by the amount of public funds dedi- the developer/owner comparable to cated to TIF and the performance the investment that would be of the various districts. required by a private lender.

t TIF investments should be structured to allow the City to recapture all or a portion of the public subsidy to the extent practicable, through mechanisms such as long- term ground leases, subordinated loans, and revenue participations.

t The life span of a TIF district should be restricted to a reasonable period. In no case should the

6 Bureau of Governmental Research I. INTRODUCTION t reviews the perceived benefits of TIF, as well as the pitfalls and Recently, the City of New Orleans has potential abuses associated with turned its attention to a widely used the mechanism, local economic development tool: tax increment financing (TIF). Last fall the t describes Louisiana law, City Council approved the City’s first TIF district in connection with the rede- t reviews the TIF approved for the velopment of the former St. Thomas former St. Thomas site and the TIF housing project. Another district with proposed for the World Trade TIF-like characteristics has been pro- Center, and posed in connection with the conversion of a portion of the World Trade Center t makes recommendations concern- into a hotel. A bill to create a TIF dis- ing state law and the future use of trict for the Lake Forest Plaza Shopping TIF in New Orleans. Center site was recently introduced into the State Legislature. Another to create a TIF district for a large portion of east- II. WHAT IS TIF? ern New Orleans has been filed. In May, TIF is a financing mechanism that City Council will consider a TIF-like enables a local government to capture arrangement for a Lowe’s Home future incremental tax revenues in a Improvement Warehouse. Anticipating designated area and reinvest them in additional TIF proposals, the City that area to fund public improvements. Council has begun to develop policies Basically, the local government freezes and procedures to govern the use of the tax base in the TIF district at the TIF in the future. pre-development level for a period of years.2 Taxing bodies continue to receive As local governments have struggled to the taxes on the pre-development base, deal with increased blight and dimin- but the incremental taxes are applied to ished resources, TIF has increased in infrastructure and other improvements popularity. However, whether it is effec- designed to spur private sector develop- tive and efficient has been the subject ment. In theory, the TIF district finances of growing debate. Proponents of the its own renewal and eventually gener- mechanism maintain that TIF creates ates greater tax revenue for the commu- more jobs, greater property values, more nity as a whole. tax revenues, and revitalized blighted areas. Critics dispute the effectiveness The establishment of a TIF involves a of TIF as an economic development tool number of decisions, including: and raise questions about the cost and equity of the financing mechanism. t the designation of the geographic area for the TIF district, In this report, BGR: t the development of a plan for t provides an overview of the use of improvements in the district, TIF around the United States, t the designation of the tax increment to finance the improvements,

Tax Increment Financing in New Orleans 7 t in some cases, the establishment of Today, 47 states and the District of a TIF authority, and Columbia authorize the creation of new TIF districts. The most active users of t the designation of the financing the financing mechanism include mechanism. California and several Midwestern states. About three-fourths of California These are discussed more fully below. cities have now established redevelopment agencies, the authorities that can 6 III. TIF IN THE UNITED use TIF. As of the late 1990s, Minnesota had established more than STATES 1,700 TIF districts; Wisconsin, more than 800; Illinois, more than 400.7 The A. Overview use varies widely among cities. Chicago has more than 120 TIF districts; New In 1952, California became the first York City has none. state to authorize TIF, allowing redevelopment agencies to use TIF to provide a local match for federal funding of urban B. Variations on a Theme 3 renewal projects. The mechanism TIF statutes vary widely as to the crite- enabled cities to force other tax recipi- ria for designating a TIF district, permis- ent bodies in the improved area to con- sible uses, the types of taxes used, the tribute to the cost of urban renewal. maximum term for a district, and the Prior to that time, the cities alone bore required procedures. the cost of the local match, while all tax recipient bodies benefited from the increased tax base. 1. Designating a TIF District Use of TIF begins with the establish- Nationwide, TIF did not gain widespread ment of a TIF district, the geographic popularity until the 1970s. In that area in which incremental taxes will be decade, the federal government began captured and applied to improvements. reducing the amount of funds available TIF districts can be drawn tightly for urban renewal. States and cities, around one development project or seeking to fill the gap with tax increas- broadly around an entire neighborhood. es, met with opposition.4 In addition, Two of the more common requirements the imposition of tax and expenditure – a finding of blight and satisfaction of limits on local governments, such as the “but for” test – are discussed below. California’s Proposition 13, severely restricted the ability of local govern- Blight. Reflecting the genesis of TIF as ments to raise property taxes and issue a tool for urban revitalization, 18 states debt. The trends of federal spending condition the use of TIF on a finding of cuts and voter opposition to new taxes blight. In 15 of the 18 states, blight is continued in the 1980s and 1990s, defined in qualitative terms by reference leading many states to adopt TIF to characteristics such as the presence legislation to facilitate infrastructure of abandoned buildings and excessive and economic development.5 vacancies. The other three states quantify blight. For example, Alabama requires at least 50% of the buildings

8 Bureau of Governmental Research in a redevelopment district to fit the 2. Permitted Uses statutory criteria for blight.8 Louisiana The purposes for which TIF revenues does not require a finding of blight. can be expended vary from state to state. All 47 TIF states authorize the use Over the years, the blight requirement of TIF funds for public works and has often been loosely interpreted, lead- infrastructure and a variety of site ing to the use of TIF in suburbs and preparation and pre-development activi- other areas that are not blighted. ties. Some of the more common activi- Several states that require a blight ties include property assembly, demoli- finding, including California and Illinois, tion, clearing and grading of land, and have sought to strengthen the connec- administrative expenses. tion between TIF investment and urban redevelopment by enacting stricter Only five states restrict the use of TIF standards. funds to infrastructure, site preparation, and pre-development activities. The “But For” Test. Seventeen states and other 42 states have added building the District of Columbia require local renovations as eligible uses. governments to determine that development would not occur “but for” the TIF. Of the 42 states, 33 also allow new The test is formulated differently in the building construction for a variety of various statutes. purposes. These include 15 states in which private use or ownership is Twelve of the 17 states require a finding explicitly allowed by the statutes. that TIF is necessary for any redevelopment to occur. Illinois, for example, pro- Many states allow a wide range of devel- hibits approval of a TIF redevelopment opments in a TIF district. These may plan unless the “municipality finds that include affordable housing, manufactur- the redevelopment project area on the ing plants, hotels, sports stadiums, whole has not been subject to growth downtown improvement, and historic and development through investment renovations. Some states impose by private enterprise and would not rea- requirements to address particular sonably be anticipated to be developed issues of concern. California and Texas, without the adoption of the redevelop- for example, set aside portions of TIF ment plan.”9 revenue for the construction or rehabilitation of affordable housing in The other five states and the District of the TIF district. Columbia focus on whether the specific development would occur. Nebraska, for Louisiana allows a broad array of devel- example, requires the local government opment projects in a TIF district. to find that “the redevelopment project in the plan would not be economically 3. The Designated Tax Increment feasible without the use of tax increment financing.”10 Property tax is the dominant source of revenue for TIF. Forty-seven states and Louisiana does not impose a “but for” the District of Columbia authorize TIF test. based on property taxes.

Tax Increment Financing in New Orleans 9 BGR found that 13 states and the 5. Required Documentation District of Columbia currently authorize State statutes vary as to the type of doc- the creation of new TIF districts based umentation required for TIF. Although on sales taxes. Some of these states per- most require formal redevelopment mit the use of sales TIF for broad pur- plans, the contents of the plan vary poses similar to those for which proper- from state to state. Plans may include ty TIF can be used. Others restrict sales the following: TIF to a more limited universe of pro- t Purpose and objectives of the TIF jects. For example, Wyoming and the District of Columbia limit the use of t Official finding of blight in the sales TIF to downtown districts; Kansas proposed area allows sales TIF only for historic the- aters, auto racetracks, and multi-sport t The TIF district’s boundaries athletic complexes. t Proposed land use California withdrew the authority to t Proposed development activities create sales TIF districts in 1993 out and project timetables of concern that automobile dealerships, t Sources and uses of public and large-volume retailers, and other sales private financing for these costs tax generators were receiving unneces- t Terms of TIF bonds sary subsidies, and that the sales tax potential of projects was driving land t Economic impact or cost-benefit use and TIF decisions.11 Illinois is analysis phasing out the use of sales TIF, which t Estimate of tax impacts on local was based in that state on state sales governments taxes.12 t Other public costs A few states allow TIF for employment, t Timeframe for paying off the TIF hotel occupancy, and various entertain- In conjunction with the redevelopment ment taxes. Maine, for example, allows plan, some states require local govern- the reimbursement of a certain percent- ments to prepare special studies. age of state employment withholding Examples include economic and finan- taxes to be captured by a TIF district. cial feasibility studies and neighborhood and environmental impact analyses. Louisiana allows TIF for property, sales, While such studies can provide useful and, in certain cases, hotel occupancy information, they are also imprecise and taxes. subject to manipulation. Accordingly, they must be used cautiously. 4. Limits on the Duration of TIF Districts Some of Louisiana’s TIF statutes indi- At least 25 states with TIF statutes rectly incorporate a requirement for an impose limits on the duration of the economic development plan. Others, TIF. With few exceptions, the time limits such as the sales TIF statute for New range from 20 to 30 years. Louisiana Orleans, do not. The state does not statutes do not limit the term to a require any studies. specific number of years.

10 Bureau of Governmental Research 6. Financing Options TIF is perceived as a good mechanism TIF improvements can be made and for encouraging and leveraging public- financed through a number of options. private partnerships to address issues One option is for the local government of unemployment, poverty, and blight. to issue debt to finance an up-front By funding public infrastructure investment. A second option is for the improvements and demolition, site local government to make and pay for preparation, property assembly, and improvements on a cash basis as incre- environmental clean-up costs, local gov- mental tax revenue is collected. This is ernments make the urban landscape commonly referred to as “pay-as-you-go” more attractive for private investment. financing. The third is for a developer to In a successful TIF district, the initial fund projects up-front and receive reim- public-private investment attracts addi- bursements as TIF proceeds are tional private investment, multiplying received. the benefits of the initial investment.

Louisiana’s property and sales TIF Self-Financing Investment. Much of statutes applicable to New Orleans at the popularity of TIF stems from the large allow the local government to issue self-financing nature of the mechanism. revenue bonds. They are silent as to In a pure TIF, the local government’s pay-as-you-go financing and reimburse- repayment obligation is limited to the ment of the developer. incremental taxes generated in the TIF district. In theory, these incremental revenues have been generated by the IV. WHY DO LOCAL TIF investment. Thus, the public suffers GOVERNMENTS USE no loss of revenues; it pays for the development out of funds that it would TIF? not have otherwise received. Proponents of TIF cite the following benefits, some of which apply to other Limited Obligation. The limited nature economic development tools. of the obligation also contributes to TIF’s appeal. Because TIF indebtedness Expected Benefits. As the above does not constitute a general obligation, history indicates, TIF provides cash- the local government is not liable if the strapped local governments with a anticipated revenue stream does not means of making infrastructure and materialize. In addition, TIF bonds gen- other capital improvements. It enables erally do not count against the munici- local governments to undertake revital- pality’s debt limit.13 ization and economic development projects that, given political realities, Political Appeal. TIF has tremendous would not be feasible otherwise. If the political appeal for a variety of reasons. projects are carefully conceived and Most importantly, it allows local govern- executed, the community enjoys multi- ments to make the desired investment ple benefits: increased employment, without raising tax rates or cutting cur- improved environment, additional pri- rent expenditures. In most states, the vate investment, increased tax revenues, investment can be made and supporting 14 and civic pride. debt issued without voter approval.

Tax Increment Financing in New Orleans 11 Flexibility. TIF also provides local In addition to increasing the costs of governments with significant flexibility government, TIF can transfer financial and control over the investment of burdens from certain groups of resi- future tax revenue. In addition, TIF dents to others. When taxes generated avoids the bureaucracy associated with within a TIF district are retained for intergovernmental revenue transfers.15 physical improvements, taxpayers out- TIF’s local focus can lead to swifter side the district pick up the tab for any government action to assist private increased government services in the development than would otherwise be redevelopment area. Those outside the possible. 16 district also cover the TIF district’s pro rata share of the local government’s Equitable Sharing of Development overhead and other general operating Costs. Prior to the development of TIF, costs. the municipality or county was the only local tax recipient body to bear the cost Negative Impact on Other Businesses. of redevelopment. Other taxing bodies TIF can also confer benefits on certain that would ultimately benefit from the businesses at the expense of others. increased tax base made no contribu- For example, a successful TIF-supported tion. TIF legislation in many states retail development will draw business distributes costs more fairly by forcing away from retail businesses located overlapping tax recipient bodies to share outside the TIF district. A TIF for a in the TIF investment. hotel can provide the owner with a competitive pricing edge and draw guests away from non-subsidized hotels. V. CRITICISMS OF TIF The advantages provided by the public As the use of TIF has proliferated, the subsidy raise serious equity issues that mechanism has come under attack for must be carefully evaluated. being ineffective, inefficient, and inequitable. Critics claim that TIF Reduced Operating Revenues. In addi- has harmful side effects that negate or tion, to the extent that a business in a reduce benefits. These include the TIF district attracts sales from business- following: es outside the district but inside the local jurisdiction, the existing revenue Increased Costs Transferred to base of the local government is reduced. Others. TIF can impose significant The general fund is deprived not only of financial burdens on local government the incremental revenues in the TIF dis- by increasing operating costs (such as trict, but also of the tax revenues that it fire and police protection) without pro- would have received from adversely viding offsetting resources. The problem affected businesses. is particularly acute in states that provide for the capture of the tax incre- Negative Impact on Other Areas. As ment that would otherwise have gone to an unintended consequence, TIF dis- overlapping tax bodies, such as school tricts can have a negative impact on systems. unsubsidized areas by drawing investment and revenues away from them. This is particularly true where there is limited demand for a good or service.

12 Bureau of Governmental Research To the extent that development in the Expensive Funding. TIF bonds can be TIF district is offset by stagnation or an expensive funding source. Because decline elsewhere in the taxing jurisdic- they are project-based or otherwise tion, the local government is engaged payable from restricted sources, such in a zero-sum game. bonds can command a far higher interest rate than general obligation bonds. Intra-Regional Competition. On the This is the downside of limiting the obli- regional level, TIF is sometimes used as gation to repayment from a specified a weapon in bidding wars for business source, rather than pledging the full development. The use of TIF by local faith and credit of the government. governments to lure businesses from a neighbor leads to a zero-sum game for Unwarranted Private Subsidy. When the region and state: one community TIF is used to fund public infrastructure wins, one loses, but there is no net improvements, such as streets and gain.17 sewer and water systems, and to pay for demolition, site preparation, property Some states have enacted laws to assembly, and environmental clean-up address the piracy issue, particularly costs, it represents a public investment with respect to retail stores: in the prep work needed to make the urban landscape more attractive for t California prohibits any form of investment. TIF becomes more problem- financial assistance to an automo- atic when it is used to provide capital bile dealership or large volume for privately owned projects and assets. retailer relocating from one com- In that case it acts as a circuitous tax munity to another in the same abatement, redirecting public money to market area, unless the two com- a developer/owner. munities enter into a sales tax- sharing arrangement.18 TIF is supposed to create conditions that encourage economically viable t Illinois prohibits the use of TIF to development. It is not intended to com- subsidize a retailer relocating with- pensate for financial weaknesses in a in a 10-mile radius, unless the developer/owner or inadequacies in the closed store is inadequate, obso- financial structure of a transaction (e.g., lete, or no longer in a viable retail inadequate equity investment). Nor is it location.19 intended to offset the lack of demand for a service or a product. t Maine’s employment TIF program requires a finding that the TIF Loss of Benefits. The benefits of TIF development will cause no sub- can be lost if the project is improperly stantial harm to existing Maine structured. For example, as a spin-off businesses.20 In addition, a partici- effect, TIF is supposed to create other pating retail business must demon- sources of revenue for a city. When TIF strate that it receives 50% or more is used in tandem with other incentives of its revenue from out-of-state that abate or divert other types of taxes, sales or that increases in its sales the community loses the additional ben- will not include sales shifted from efit of revenue streams that the TIF other Maine businesses.21

Tax Increment Financing in New Orleans 13 development would otherwise generate There are, however, concerns with sales (e.g., when incremental property and TIF that are not present (or are less pro- sales tax revenues are both diverted). nounced) in the case of property TIF. These concerns include the following: Fragmentation of the Tax Base. Allowing too many TIF districts can lead Land Use Distortions. Because the to a fragmented tax base in which the amount of revenue generated by a sales districts and neighborhoods experienc- TIF district depends on sales volume, ing growth lock up the incremental tax the mechanism favors the inclusion of revenue they create.22 high-volume retailer establishments, such as malls, big box stores and car Complex Analysis and Oversight. TIF dealerships, in the TIF district. The need is a complicated financing mechanism. for large retailers to support the TIF can To work effectively and efficiently, it lead to distorted land use decisions, requires a significant, long-term com- with the decision being driven more by a mitment of municipal resources and a perceived need for a subsidy of a given high level of professional expertise for size than by sensible planning. Concern evaluation, implementation, and admin- over distorted land use was one of the istration.23 Such expertise runs the factors that led California to repeal gamut from finance and accounting to authorization for sales TIF.24 real estate development. In addition, successful evaluation depends on the Subsidies for Big Retailers. The quest accuracy and rigor of the underlying for large revenue sources can result in markets, cost-benefit, and other impact unnecessary subsidies for big retailers. studies. This is both ineffective and inequitable, since it results in both a waste of public Some of the criticisms leveled at TIF dollars and provides businesses with a can be mitigated or avoided through subsidized competitive advantage. This cautious, appropriate use of the TIF was another factor that led California to mechanism. terminate sales TIF authorization.25

Capturing Non-incremental and VI. SPECIAL ISSUES Unrelated Revenues. Instead of creat- WITH SALES TIF ing new revenues, sales TIF districts merely shift business from other entities Sales TIF districts can under some cir- in the region, or even worse for the local cumstances provide far larger tax rev- jurisdiction, from other businesses with- enue streams than property TIF districts in its boundaries. Losses suffered by would. This is true in areas with low those businesses actually result in a assessments, large amounts of exempt loss of current tax revenues available to property, or limitations on the types of the local jurisdiction. property taxes that can be accessed for TIF. In those circumstances, sales TIF Factors other than the TIF district may be more feasible than property TIF. improvements (e.g., an upturn in general economic conditions or changes in personal spending habits) may be fueling the increase in taxes. In that

14 Bureau of Governmental Research case, the local jurisdiction is diverting size local governments. The result is a from the general fund revenues that are crazy patchwork of provisions that can not attributable to the TIF investment. be understood and reconciled only if one performs a demographic analysis of the Less than Optimal Value. Because municipalities and parishes in sales TIF districts require a significant Louisiana. generator of sales taxes, they are more likely to be used for retail development The TIF statutes applicable to New than for other uses, such as manufac- Orleans are set forth in the state’s turing and high-tech exports, that gen- Cooperative Economic Development erally have a greater economic impact.26 Law. That law addresses the use of TIF This can result in a commitment of by both economic development corpora- community resources to an economic tions and by local governmental subdivi- development strategy that is less than sions. optimal. The risk is particularly pro- nounced in the case of local govern- Under the general statutes applicable to ments that turn to sales TIF because of New Orleans, the City can establish TIF structural weaknesses in their property districts and issue revenue bonds tax base. payable from or secured by property or sales tax increments. TIF bonds based Unstable Revenues. A sales tax base is on property taxes must be approved by inherently less stable than a property the voters; voter approval is not required tax base. 27 Sales TIFs are more suscep- for bonds based on sales taxes. The dif- tible to revenue fluctuations caused by ferent voting requirements, along with local economic declines, competition legal constraints on the capture of prop- from stores outside the district, and erty tax revenue, skew the use of TIF general changes in shopping patterns. toward sales taxes. This makes it riskier and more expensive to finance debt issues based on TIF. There are also two special interest TIF statutes directed at special areas in the Loss of Benefits. Unless contractually City: Algiers, through a special provision constrained, the retailer can enjoy the in a TIF law that applies to local govern- TIF benefits and deprive the local gov- ments with less than 200,000 people; ernment of projected benefits by depart- and the World Trade Center property, as ing when the TIF period ends. a special taxing district. Two other special interest TIF statutes have been proposed for the Lake Forest Plaza shop- VII. LOUISIANA TIF ping mall in eastern New Orleans and STATUTES RELATING for the large area of New Orleans east of the Industrial Canal. TO NEW ORLEANS Louisiana statutes contain a confusing array of provisions on the use of tax A. Property TIF increment financing. The statutes con- La. R.S. 33:9032 authorizes local gov- sist of provisions that apply generally to ernmental subdivisions to issue revenue local governments and provisions on the bonds payable solely from incremental same subject that apply only to certain property taxes collected in an economic

Tax Increment Financing in New Orleans 15 development area. The tax increments the power to establish an economic can be used to finance or refinance an development area, subject to approval of economic development project or to pay the chief executive officer or governing for the costs of an economic develop- authority of a local government. La. R.S. ment project. The costs of an economic 33:9034 contains no provision specify- development project are broadly defined ing the process for dedicating incremen- in La. R.S. 33:9035 to embrace “all rea- tal tax revenues to a TIF district. sonable or necessary costs incurred incidental to or in furtherance of an eco- B. Sales TIF nomic development project …, providing that any such costs are reasonably The use of sales TIF by New Orleans is related or attributable to an approved governed by La. R.S. 33:9033.3. The economic development plan.” statute is much more detailed than the corresponding property TIF statute. The tax increment consists of the incremental ad valorem tax revenues La. R.S. 33:9033.3 applies to municipal- collected for any or all taxing authorities ities with a population between 190,000 from property in an economic develop- and 215,000 or with a population in ment area; however, it does not include excess of 400,000, and to parishes with tax revenues previously dedicated for a a population between 400,000 and special purpose. 475,000 as of the latest decennial cen- sus (the “Designated Municipalities”). The bonds require voter approval. The Currently, the populations of limitation of tax revenues to undedicat- Shreveport, New Orleans, Jefferson ed ones and the requirement for voter Parish, and East Baton Rouge Parish approval are significant differences from fall within those ranges. the TIF statutes of most states. As is discussed more fully below, these The statute authorizes the Designated restrictions seriously restrict the useful- Municipalities to issue revenue bonds ness of property TIF in New Orleans. that are either payable from revenues generated by economic development La. R.S. 33:9032, which is only half a projects with a pledge of sales tax page long, lacks the type of detail that is increments for any shortfall, or payable normally found in statutes authorizing solely from incremental sales tax rev- bond issues. The statute does not con- enues generated in an economic devel- tain any direction concerning the desig- opment area. The municipality is also nation of an economic development area authorized to pledge the revenues from or the process for dedicating of tax any millage levied for economic develop- increments. The establishment of an ment or any other funds available for economic development area is cir- economic development. Incremental cuitously addressed through other sales tax revenues are restricted to provisions in the state’s Cooperative those of the local government and do Economic Development Law. not include tax revenues dedicated for Specifically, La. R.S. 33:9034 gives local a special purpose. governments the powers, rights, duties, and obligations of an economic development corporation. The powers include

16 Bureau of Governmental Research Sales TIF bonds can be used to finance D. Special Provision for or refinance all or any part of an eco- Algiers nomic development project. “Economic Legislation passed in 2002 provides spe- development project” is broadly defined cial property and sales TIF authority for to embrace “any and all projects suit- all municipalities and parishes with able to any industry determined by the 200,000 people or less. The new law, La. municipality or, as appropriate, the R.S. 33:9038.1-9038.9 (the “Small issuers of revenue bonds, to create Jurisdiction Statute”), also applies to economic development.” Algiers. It is unclear exactly how the The total amount of principal and inter- statute relates to the property and sales est falling due in any calendar year can- TIF statutes that apply to New Orleans not exceed 75% of the amount of the at large. pledged sales tax increment that the The Small Jurisdiction Statute allows municipality estimates will be received the City, or with the City’s consent, an in the first full calendar year after the industrial development board or public economic development project has been trust with jurisdiction in Algiers to issue completed. The statute does not specify revenue bonds payable from or secured how the remaining increment can be by incremental property, sales, or hotel used. occupancy tax revenues. The City estab- The sales TIF statute requires a munici- lishes the district from which the incre- pality that proposes to issue sales TIF ments are to be pledged and deducted. bonds to designate the boundaries of Property TIF may capture all incremen- the TIF district and the portion of local tal property taxes, if this does not result sales taxes to be used for the tax incre- in a violation of dedications or other ments. No voter approval is required for limitations and if all affected tax recipi- the issuance of the bonds. ent bodies consent to the capture of the Neither property nor sales TIF bonds are incremental property taxes. Revenue subject to any statutory debt limitations bonds secured by property taxes must or restrictions. There is no statutory also be approved in a special election for limit on the duration of a TIF district. qualified electors within the proposed boundaries of the TIF district. If there are no electors, as in the case of vacant C. Issuance of TIF Bonds or purely commercial land, no election by Economic Development is required. Corporations In contrast to TIF districts established As noted above, bonds secured by tax in larger jurisdictions, the small govern- increments can be issued by economic ment TIF districts may capture all development corporations with the incremental state and local sales and consent of the affected governmental hotel occupancy taxes in the district, entities. Interestingly, the law does not if the appropriate tax recipient bodies state whether the consent of voters is consent. State sales tax increments required for economic development corporations to issue revenue bonds secured by property TIF.

Tax Increment Financing in New Orleans 17 cannot exceed the pledged local Street. The taxing district includes the increment. No voter approval is required 33-story World Trade Center building, a for the issuance of the bonds. parking garage, and adjacent land.

The annual debt service for both proper- The legislation’s stated purpose is to ty and sales TIF bonds is limited to a facilitate cooperative economic develop- percentage of tax increments. At the end ment among the City, the World Trade of the life of a TIF, any unspent incre- Center of New Orleans Inc. (WTCNO), ments set aside for debt service reserves and a developer, WTC Development Ltd., must be deposited in a trust fund to to renovate, restore, and develop the “promote other economic development World Trade Center property and to opportunities.” In addition, incremental implement a lease between WTCNO revenues can be deposited in a special and WTC Development Ltd. trust fund to loan, grant, donate, or pledge for other economic development The World Trade Center taxing district projects. is authorized to levy and collect its own hotel occupancy tax in lieu of the hotel The districts can levy up to five mills of occupancy tax in Orleans Parish at a property tax, up to 2% of sales taxes, rate that is at least equivalent (currently and up to 2% of hotel occupancy taxes, 13%). The taxes can be used to pay or any combination, on property within revenue bonds issued by the district or the district. The statute does not man- any other financing of the property, date specific uses for these taxes. As is including loans or mortgages, bonds, the case of property taxes, a special or certificates of indebtedness. election for qualified electors is required. The tax can be levied through an ordi- The Small Jurisdiction Statute is more nance adopted by the district’s three- disturbing than the statutes generally member board of commissioners, com- applicable to New Orleans in several posed of the City Council president, the respects. First, it eliminates the require- president of New Orleans Building ment for city-wide voter approval of Corp., and the managing director of property TIF bonds: the only vote administration of WTCNO. Approval by required is for voters in the district who the affected hotel tax recipients is not would benefit from the redirection of tax required for the capture. increases. Second, it allows the capture of state sales taxes. Third, it gives local The district will dissolve one year after governments the option of placing tax the earlier of the repayment of revenue increments in a trust fund for other bonds issued by the district or the ter- economic development projects. mination of a lease between WTCNO and WTC Development Ltd.

E. World Trade Center The statute prohibits the hotel from Taxing District advertising below-market room rates; it La. R.S. 33:9038.21, enacted in 2002, does not specify how the market rate is created a special taxing district for the to be determined. World Trade Center at the foot of Canal

18 Bureau of Governmental Research F. Lake Forest Plaza TIF taxes generated by development in the Proposal district, as long as the capture is legal and the tax recipient bodies consent. During the spring session, the State Legislature will consider a bill (S.B. 808) The Small Jurisdiction Statute would to create a TIF district for the Lake also allow the district to levy and collect Forest Plaza Shopping Center in eastern up to five mills of property tax, 2% of New Orleans. The purpose of the district sales tax, and 2% of hotel occupancy is broadly stated as “renovation, restora- tax. TIF bonds backed by property tax tion, and development within the dis- increments and additional tax levies trict.” The purpose would be accom- require approval of qualified electors in plished through cooperative economic the TIF district, if any live there. development among the district, the City, and the owners of businesses and S.B. 808 also contains a cryptic provi- property within the district. The dis- sion defining a “general sales tax incre- trict’s governing board would consist of ment” as a portion of the general sales the president of City Council, and the tax increment determined and collected state senator and state representative by the Lake Forest Plaza District in lieu whose legislative districts include the of other such taxes levied by other tax- proposed TIF district. ing authorities. The import of the provision is unclear, since neither the term The bill would authorize the district to “general sales tax increment” nor the levy and collect its own hotel occupancy term “general sales tax” is used else- tax at a rate at least equal to the hotel where in the bill. However, the provision occupancy tax rate in Orleans Parish. It opens the door to a possible capture of is in lieu of any hotel tax other than a non-incremental sales taxes. tax on a per-head or per-person basis. The tax may be levied without the approval of the hotel tax recipient bod- G. New Orleans East TIF ies. The district may pledge the tax col- Proposal lections to pay revenue bonds that it A bill to create a special taxing district issues. It may also pledge the collections for all of eastern New Orleans (H.B. to “any purpose” set forth in the legisla- 1737) has been pre-filed, but not for- tion. Such financing may include loans, mally introduced, for this spring’s mortgages, bonds, or certificates of legislative session. The bill would create indebtedness. The bill includes a prohi- the New Orleans East Tax Increment bition on advertising below-market room Financing District, bounded by the rates. Industrial Canal, Lake Pontchartrain, and the Orleans Parish line. The bill also grants the Lake Forest Plaza district the TIF powers granted The purpose of the district is “to provide small municipalities and parishes under for the orderly planning, development, the Small Jurisdiction Statute. As noted acquisition, construction, and effectua- previously, that statute allows capture tion of the services, improvements, and of any incremental property or sales facilities to be furnished by the district.”

Tax Increment Financing in New Orleans 19 The district would be governed by a VIII. TIF USE IN board of commissioners consisting of members appointed by state legislators LOUISIANA for eastern New Orleans, City Councilmembers from districts D and E, A. Sales TIF in Other and the Mayor, and five members Cities appointed by the other members from a The use of TIF outside New Orleans has list provided by the appointing parties. been limited to a handful of sales TIF The bill authorizes the district to create districts established to subsidize con- economic development areas and to struction of retail development or build issue revenue bonds for economic devel- infrastructure for retail. Two cities, opment projects. The bonds would be Ruston and Monroe, established sales guaranteed by or payable from sales tax TIF districts capturing both state and increments collected in an economic local sales tax increments. development area designated by the dis- Monroe has issued several series of trict. It is unclear which tax increments bonds for roads and infrastructure for are covered, since the bill excludes dedi- two retail areas, with large, national cated revenues and sales taxes collected retailers, such as Wal-Mart, Home by the state or any political subdivision Depot, Lowe’s, and Target. Most other than the district. The bill does not recently, it issued $9.25 million of give the district authority to levy any bonds with a maturity of 19 years and taxes. an interest rate of 5.49%. The sales TIF provisions appear to be In 2001, Ruston issued $2 million of based on the language of the TIF statute bonds to fund engineering studies for for New Orleans, R.S. 33:9033.3. The road construction to service a retail area major difference is that the district, and with a Wal-Mart, auto dealerships, and not the City, has the power to designate other stores. Ruston expects to repay the sales tax increment and issue the bonds out of incremental state sales bonds. taxes, without using local sales taxes, The bill would authorized the district to an option no longer available. It plans to use property tax increment financing as issue additional bonds to design and provided elsewhere in Cooperative build the roads. Economic Development Law. This could Lake Charles created a TIF district in substantially impact future city property 1996 for Prien Lake Mall. The city, tax revenue, because eastern New school board, and law enforcement dis- Orleans encompasses 65% of the city’s trict agreed to reimburse the mall devel- land.28 oper for expansion costs in an amount Eligible projects that may be undertaken not to exceed $8,000,000. in the district are the same as those Shreveport created a 92.4-acre down- allowed in R.S. 33:9033.3. town entertainment TIF district in 1999 and spent $1 million of general funds on streetscape improvements. The first $1 million collected by the TIF district,

20 Bureau of Governmental Research which captures incremental revenues the cost to the public (including interest from the city’s 2.5% sales tax, will reim- and other costs) will equate on a burse the city for those improvements. per-low-income-unit basis to almost $348,000 (excluding infrastructure) and $420,000 (including infrastructure). B. TIF in New Orleans Only two TIFs in New Orleans have sig- Low-Priority Use of Funds. The nificant history and information avail- revenues from the TIF district are being able for analysis: a TIF for the St. used to finance market-rate housing – a Thomas redevelopment, which was troubling application of public funds in approved by City Council last fall, and a city that suffers from a lack of decent the proposed TIF for a hotel in the low-income housing. World Trade Center, which continues to be negotiated by the City. BGR takes no Expensive Financing. The cost of the position with respect to the merits of TIF bonds is extraordinarily high. The either development. City has authorized the issuance of bonds with an anticipated interest rate of 8 to 8.5%. Although for technical rea- 1. St. Thomas sons the stated maturity is 45 years, the The St. Thomas TIF district includes the City anticipates retiring the bonds in a former St. Thomas public housing site maximum 13.5 years. The interest rate and an adjacent parcel of land on which exceeds the rate for bonds issued by a Wal-Mart Super Center will be con- local governments with ratings compa- structed. The district was formed to rable to New Orleans (currently around assist with the financing of a HOPE VI 4.5%) by a significant margin. The inter- redevelopment project for St. Thomas. est differential between $20 million in The district will capture future City bonds, payable over 13.5 years and sales tax revenues (2.5%) from the Wal- bearing interest at 8.5% and bonds Mart Super Center. The incremental bearing interest at 4.5% would be $7.1 taxes from Wal-Mart will not be diverted million (or $5.8 million discounted at to Wal-Mart, but will be used instead to 3% for inflation). repay $20 million of debt incurred to finance the construction of two mixed- If the bonds remain outstanding for the income rental portions of the former St. stated maturity, which the City does not Thomas site, known as CS1 and CS2. anticipate, the interest payments alone Further discussion of the St. Thomas could total $67 million. Under that TIF is presented in Appendix A to this worst-case scenario, the citizens of New report. Orleans would divert $87 million from the general fund to pay for $20 million The St. Thomas TIF raises the following in debt. concerns: Reduced Sales Tax Revenue. The St. Private Subsidy. The St. Thomas TIF is Thomas TIF district will result in a loss part of a package of substantial subsi- of sales tax revenues currently flowing dies to a private developer. For the con- to the City’s General Fund. As a result struction of CS1, one of the mixed- of the loss of tax revenues from other income rental portions of the project, businesses, the City estimates a sales

Tax Increment Financing in New Orleans 21 tax loss in the range of $402,000 to the hotel occupancy tax levied in $554,000 a year for the life of the Orleans Parish. The rate will be equal to bonds. This loss in sales tax revenue is that of the replaced tax, currently 13%. in addition to the total annual debt ser- Based on the hotel developer’s revenue vice paid by the TIF district over 13.5 projections, the district has the potential years, which could average approxi- to capture approximately $48 million of mately $2.5 million per year. The addi- taxes in the first decade of the hotel’s tion of $2.5 million to the City’s General operation. Fund could translate into hiring 75 new police officers. The tax can be used to pay revenue bonds issued by the district or any Multiple Subsidies. In addition to the other financing of the property. sales TIF, the City is foregoing most of According to current reports, the district the future property taxes from the plans to issue $40 million in revenue mixed-income rental housing, and is bonds, with a maturity not to exceed 30 redirecting to CS1 the property taxes years and an expected interest rate of from Wal-Mart for 20 years. In general, 8.5 to 9.5%. In addition, TIF bondhold- jurisdictions using TIF anticipate ers would receive an additional distribu- increases in other tax streams to tion equal to 50% of net income from help justify a TIF district. the hotel. Further discussion of the World Trade Center hotel project and Historic Restoration Incorporated (HRI), TIF is presented in Appendix B of this the developer of the project, claims that report. the TIF is justified by significant net benefits, which according to a cost-ben- The World Trade Center TIF suffers from efit analysis prepared by MetroSource the following problems: LLC for the Industrial Development Board of New Orleans, would equal Inadequate Private Equity. The public approximately $110 million for the City is being asked to compensate for inade- over a period of 50 years. HRI projects quate equity investment in a project. increased sales tax revenues of $125 The City claims the developer’s equity million (on a net present value basis, contribution is $1.5 million; the devel- using a 2% inflation factor) for the City, oper claims $5.2 million. Neither Orleans Parish School Board, and the amount is adequate for a $140 million Regional Transit Authority over 25 hotel project. Currently, lenders are will- years. ing to loan 50% to 60% of a hotel project’s cost, expecting developers to piece together the remainder in equity and 2. World Trade Center subordinated debt. There is a funding In 2002, the State Legislature created a gap for which the developers are seeking special taxing district for a proposed public funding. In essence, the City and hotel development in the first 18 floors other tax recipient bodies are putting up of the World Trade Center building at the equity, while the return on their the foot of Canal Street. The taxing dis- investment is going to the TIF bondhold- trict differs from a traditional TIF dis- ers and the developer. trict in that it will levy and collect a site- specific hotel occupancy tax in lieu of

22 Bureau of Governmental Research Inadequate Return on Investment. rate that the City could expect to pay for Under the lease executed before the TIF general obligation bonds (currently was introduced, the City would receive around 4.5%) by a significant margin. 50% of net revenues from the World The difference in total interest expense, Trade Center property. The World Trade based on similar amortizations over the Center of New Orleans Inc. (WTCNO), stated maturity of the bonds, could be the nonprofit organization that leases $48.2 million (or $31.6 million discount- the property from the City and will sub- ed at 3% for inflation). It should be lease a portion to the developer to build noted that the City’s share of foregone the hotel, currently expects the City’s taxes for these payments would equal 50% share to equal $861,000 to $1.9 only 11.5% of the total. million per year for the first decade of hotel operation. Reduced Tax Base. As a result of the loss of hotel-motel taxes from other The addition of the TIF dramatically hotels, the City and other hotel tax reduces the value of the World Trade recipients would lose revenues that cur- Center lease to the City and the commu- rently flow to them. The City has esti- nity. The hotel tax capture is projected mated the tax loss at $2.8 million in the to cost the City between $462,000 and first year, but the developer disputes $635,000 per year for the first decade of this amount, arguing that other market hotel operation, leaving the City with a factors will reduce lost tax revenues to a net amount of $399,000 to $1.3 million negligible amount. per year. Collectively, the City and other hotel tax recipients would forego an esti- Unfair Competitive Advantage. mated average of $4.8 million per year Opponents maintain that the district in hotel occupancy taxes. would provide the hotel developer with an unfair competitive advantage, allow- Negative Impact on Critical Services ing it to reduce room rates by transfer- and Economic Engines. The district ring a significant cost to the public. would divert revenues from other pro- Proponents respond that their room jects and entities that provide important rates will track those of other large, services or contribute significantly to competing hotels downtown and that economic development in the City and the TIF investment is necessary to make the region. These include the Orleans the city-owned World Trade Center Parish School Board, the Ernest N. usable in any form of commerce. Morial Convention Center, the Regional Although the TIF legislation prohibits Transit Authority, the Louisiana the hotel from advertising below market- Stadium & Exposition District, the New rate rooms, preventing the hotel from Orleans Tourism Marketing Corp., and offering reduced room rates would be the New Orleans Metropolitan difficult, if not impossible. Convention & Visitors Bureau. To the extent that these entities lose future revenues, the City as a whole suffers.

High Cost of Debt. The cost of the TIF bonds is extraordinarily high. The anticipated rate of 8.5 to 9.5% exceeds the

Tax Increment Financing in New Orleans 23 IX. FUTURE TIF USE Given the many unknowns surrounding the performance of TIF districts, and the IN NEW ORLEANS identifiable types of dislocations that As noted at the outset of the report, can occur, it is exceedingly dangerous to TIF is one of a number of economic view TIF as free money. Rather, TIF development tools available to local should be considered an allocation of governments. It provides cash-strapped future resources and assessed with a municipalities – of which New Orleans stringency befitting other long-term surely is one – with a means of making investments of future revenue. The investment in infrastructure and eco- investment should be made only if it is nomic development projects under effective, efficient, equitable, and in fur- severe financial and political con- therance of a defined public policy. straints. TIF has tremendous political appeal in that it can be implemented For reasons discussed in Section VI, without raising taxes and, in many property TIF, the most widely used form cases, without obtaining voter approval. of TIF, is preferable to sales TIF. It has a certain conceptual beauty in Unfortunately, because of the nature of that the investment is, in theory, self- the local tax structure, property TIF is financing and the development support- less practical in New Orleans than in ing it would not have occurred other- other jurisdictions. In Louisiana, proper- wise. ty TIF can only capture taxing bodies’ ad valorem millage that is not previously Under closer scrutiny, the underlying dedicated to a special purpose. In 2001, premise that a TIF is self-financing is this millage for the City of New Orleans open to question. Because of the diffi- was 14.91 mills out of 169.29 total mills culty of making long-range projections, collected in New Orleans. Thus, for it is difficult to assess whether develop- every $1 million of incremental assessed ment in an area would have occurred value (or $6.6 million of fair market without TIF. It is even more difficult to value), only $14,910 out of $169,290 determine whether, and to what extent, in total property taxes paid would be gains in a TIF district are offset by stag- available for a TIF district. It is unclear nation, decline, or reduced growth in whether the general millage of the other areas and businesses. To the Orleans Parish School Board and extent that other areas and businesses Orleans Levee Board would be col- are negatively impacted, the existing lectible for the TIF. If they were, it would revenue base of the local government increase the capture by $15,500 per $1 is reduced. In addition, successful TIF million of incremental assessed value. districts can increase a local govern- The homestead exemption and the ment’s operating costs without providing exemptions enjoyed by nonprofits, gov- additional operating funds to the local ernment, and industry further diminish government. The end result in that case the potential of property TIF use by is a transfer of the additional operating reducing the tax base. costs to residents outside the TIF district. The tax structure, combined with requirements for voter approval of bonds backed by property tax increments (but not for bonds backed by sales tax incre-

24 Bureau of Governmental Research ments), skews the use of TIF toward directed to less promising developments sales TIF. The latter suffers from more because they produce large streams of serious problems than does the property sales taxes and do not require voter TIF: approval.

t Sales tax revenues are more volatile There are other factors that suggest that than property tax revenues, a fact a TIF might not provide the most effec- that makes sales TIF debt financ- tive solution to blight or economic devel- ing riskier and more expensive. opment issues. Regardless of the type of TIF, because of the limited nature of the t Sales TIF districts are more likely obligation, TIF debt is more expensive than property TIF districts to cap- than general obligation bonds. Whether ture revenues unrelated to the TIF the premium paid to limit the obligation investment, thus reducing current is worthwhile will depend on the partic- tax revenues available to the juris- ular circumstances. In some cases, such diction. as the St. Thomas redevelopment, it is clear that the City could save millions of t Because sales TIF districts need dollars in tax revenue by issuing large, creditworthy retailers or lower-interest general obligation bonds shopping centers to generate and targeting key areas for infrastruc- significant tax increments, the ture investment. The capacity to issue quest for a TIF source can lead to such debt exists under the City’s debt land use distortions and unneces- limit, which is 35% of gross assessed sary subsidies for big retailers. value, or $816.8 million as of Dec. 31, 2002. Debt outstanding as of late t Subsidizing a retail operation with February was $473.4 million, or 58% of TIF revenues gives it an unfair capacity. advantage over its competitors. As in the use of other economic develop- t Unless contractually constrained, ment incentives, the effective, efficient, the retailer can enjoy the TIF sub- and equitable use of TIF depends on the sidy and deprive the local govern- wisdom, sophistication, and integrity of ment of projected benefits by those involved in the process. To the departing when the TIF period extent that decisions are based on ends. sophisticated analysis, made with an Furthermore, a reliance on sales TIF unwavering focus on the public good, may distort the City’s investment priori- and implemented through skillful nego- ties by directing public dollars into tiation, the chances of successfully investments that do not offer the great- using TIF increase. To the extent that est return. Retail development may decisions are driven by relationships, receive tax dollars that could have been political deals, and other agendas, or directed to alternative developments that the government lacks the high level with a greater potential for impact on of expertise needed to analyze and the economy, such as businesses that implement complicated transactions, export goods to out-of-town customers. TIF is likely to be an expensive mistake It would be unfortunate if funds were that results in an unnecessary transfer of wealth to private entities.

Tax Increment Financing in New Orleans 25 The potential problems associated with TIF based on property taxes to public TIF are more than theoretical. The St. infrastructure and pre-development Thomas TIF and the TIF under consider- improvements in blighted areas. ation for the World Trade Center provide case studies of the problems associated Strict parameters for the use of TIF with TIF. should be established at the state level through revision of TIF statutes and at The trend with respect to TIF is disturb- the local level through the adoption of ing. In just the past month, City Council stringent policies and procedures. has received a proposal for a TIF-like Specific recommendations for changes financing for a Lowe’s, a bill has been in legislation and the establishment of introduced to create a TIF district for City policies and procedures for the use Lake Forest Plaza shopping mall, and of TIF are set forth below. another bill has been filed to create one for eastern New Orleans. Collectively and individually, they raise serious concerns, including the specter of businesses routinely turning to the City for subsidies and the prospect of freezing the tax base for a huge swath of the City.

As noted above, the effective use of property TIF in New Orleans is preclud- ed as a practical matter by the prior dedication of most of the tax revenues. Ironically, the widespread use of sales TIF would create a similar limitation on government’s future flexibility by converting unrestricted tax revenues into dedicated taxes. In addition, the proliferation of long-term dedications will contribute to the balkanization of government within the City, even as the community focuses increasingly on regionalism.

Given the potential expenses, risks, and abuses associated with TIF, the City should use TIF cautiously and only in tightly circumscribed conditions. BGR believes that the City should abandon completely the use of TIF and TIF-like arrangements based on sales and hotel occupancy taxes and restrict the use of

26 Bureau of Governmental Research X. RECOMMENDATIONS environmental clean-up. TIF should not be used to provide funding for privately owned State Legislation projects and assets. t State law should impose severe limitations on TIF based on sales t State law should limit the duration and hotel occupancy taxes, limiting of TIF districts. their use to “main street” programs designed to revitalize commercial City Policies and centers of smaller municipalities. The use of sales TIF for large-vol- Procedures ume, major retail stores and shop- BGR recommends that the City imple- ping malls should be prohibited. ment the following recommendations regardless of whether state law is t The state should eliminate TIF leg- changed. islation designed to accommodate specific projects. It should estab- Master Planning lish a cohesive set of general laws t Before allowing additional TIF dis- to replace the multitude of statutes tricts, the City should develop and on the books. adopt a city-wide economic devel- t State law should limit the use of opment plan. Any TIF district TIF to blighted areas and require should conform with, and promote local governments to make a find- the objectives of, the economic ing that an area is blighted. The development plan. statutes should define the specific t As part of the economic develop- characteristics of blighted property ment plan, the City should develop and define a blighted area in quan- a city-wide master plan for TIF. It titative terms. should designate areas of the City t State law should include a mean- that are eligible for TIF and estab- ingful “but for” test conditioning lish detailed criteria and priorities the use of TIF on a finding that TIF for authorizing TIF districts within is necessary for appropriate, future them. The plan should be based on redevelopment (as opposed to a an in-depth expert analysis of the specific project) to occur in a desig- City and should be prepared and nated area. adopted after city-wide public hearings. t State law should limit TIF expenditures to prep work needed to make t The TIF master plan and all TIF the urban landscape more attrac- developments should conform with tive for investment. Eligible costs the master plan for the City. should include expenditures for t To encourage prioritization and public improvements, such as careful targeting of projects, the streets and sewer and water sys- City should establish a cap, based tems, demolition, site preparation, on a dollar amount or a percentage property assembly, and of the City’s General Fund, on the

Tax Increment Financing in New Orleans 27 amount of taxes that can be divert- Review Process ed from the General Fund to TIF t The City should require detailed districts. supporting documentation that will enable it to determine whether a Criteria for TIF proposed TIF district is necessary, viable, and rewarding. Basic docu- t In view of the problems associated mentation would include cost-ben- with their use, the City should efit analyses and financial feasibili- abandon the use of TIF based on ty studies prepared for the City by sales taxes or hotel occupancy independent consultants. In the taxes. case of public-private partnerships, t The City should identify, and desig- the City should gather additional nate as eligible for TIF, blighted or detail through the developer’s/ brownfield areas that offer the owner’s financial statements, greatest potential for development, detailed projections (including cash assuming an appropriate amount flow and revenues and expenses), of public funding. Blight should be rate of return and profitability defined in meaningful, quantitative analyses, and, where appropriate, terms to reduce the risk of the independent market studies. unnecessary use of TIF. t The analysis of a proposed TIF dis- t To limit the use of TIF to areas in trict should include a comparison which development would not oth- of the cost of tax increment erwise occur, the City should con- financing against alternative dition the use of TIF on a finding financing methods, including the that TIF is necessary for appropri- issuance of general obligation ate, future redevelopment (as bonds. opposed to a specific project) to t The City should establish a uni- occur in the designated area. form system for evaluating and t The City should establish stringent, approving TIF districts. minimum standards for consider- t The evaluation should include care- ing TIF districts. These should ful scrutiny and evaluation of cost- include, among other things, benefit and other analyses. Factors requirements for significant equity such as the duration of the TIF investment by the developer/ and the percentage of incremental owner, high ratios of private to taxes subject to reinvestment in public investment, and a finding the district should be pegged to the that projected net benefits to the projected costs and benefits, in City exceed projected costs by a accordance with predetermined significant margin (e.g., 200 to standards. 300%). The criteria should be viewed as minimum eligibility t To protect the interest of the City’s requirements, rather than as residents and taxpayers, the City authorization for any transaction should obtain advisors or staff with that satisfies them. the sophisticated financial, legal,

28 Bureau of Governmental Research and managerial expertise needed to duration of a TIF district and its evaluate, implement, and monitor bonds exceed the shorter of 20 such districts effectively. years or the expected life of the project supporting the TIF. Requirements to Ensure t TIF funds should be redirected to Objectivity and Accountability the General Fund after the TIF t Developers and owners of TIF pro- period expires or when they are jects should be required to provide otherwise not required for the TIF the City with the information nec- district generating them. Cross- essary to compare projected bene- subsidization of other TIF districts fits with actual benefits on an should not be permitted. ongoing basis.

t The life span of a TIF district should be restricted to a reasonable period. In no case should the

Tax Increment Financing in New Orleans 29 APPENDIX A A. Background The redevelopment of the St. Thomas ST. THOMAS TIF site has a long and contentious history. In this Appendix, BGR presents a brief After several years of discussion, a description of the St. Thomas redevelop- HOPE VI application to redevelop the St. ment and the proposed TIF. It takes no Thomas site was submitted in 1996 to position with respect to the merits of the the U.S. Department of Housing & redevelopment plan, or the social and Urban Development (HUD) by the environmental disputes that it has Housing Authority of New Orleans spawned. (HANO). HOPE VI is a federal grant program that enables public housing Last year City Council approved the cre- authorities to partner with private devel- ation of the City’s only sales TIF district. opers to replace severely distressed pub- The district, which includes the former lic housing with new housing at a lower St. Thomas public housing site and an density. adjacent parcel of land owned by Riverview Retail Development Company In 1997, HUD awarded HANO a $25 LLC (Riverview Retail), will assist with million HOPE VI grant to implement the the financing for the redevelopment of planned redevelopment. HANO awarded the former St. Thomas site as a HOPE the development contract to Creative VI project. Riverview Retail is owned in Choice Homes Inc. In 1998, HUD part by Historic Restoration declared the development contract null Incorporated (HRI), the HOPE VI private and void and instructed HANO to developer. reopen the process for selecting a developer. The contract was awarded to HRI. The City Council also authorized the The current development plan calls for capture and dedication of future City the construction of 1,088 on-site hous- sales tax revenues (2.5 cents) from a ing units, 150 low-income, off-site hous- Wal-Mart Super Center to be built on ing units at scattered sites, and a Wal- the adjacent parcel. The incremental Mart on a site adjacent to the St. taxes from Wal-Mart will be used to Thomas site. repay $20 million of debt incurred to finance the construction of two mixed- Under HRI’s approved redevelopment income rental housing portions of the plan, the former St. Thomas site will be former St. Thomas site, known as CS1 divided into seven components, with dif- and CS2. Based on information from ferent ownership and financing struc- HRI, up to $10.5 million of the $20 mil- tures. They include: two mixed-income lion bond issue will be used for expens- rental developments (CS1 and CS2), for- es related to CS1. The remainder of the sale homes (with an affordable housing proceeds will be devoted to expenses component), a residence for low-income related to CS2, the second phase of elderly persons, an upscale continuing rental housing. care retirement community, luxury condominiums, and a group of renovat- ed historic buildings. Of the 1,088 on-

Appendix A, p. 1 Bureau of Governmental Research site units planned for the St. Thomas other low-income and market-rate units. site, a total of 304 will be affordable or HUD guidelines require that the project low-income housing units. use HOPE VI and other HUD public housing grants to produce at a Publicly available information concern- minimum the number of public housing ing most phases of the development is units that could be built without other very sketchy. Detailed information is public or private financing. All units, available only for the early phases, regardless of financing, must be compa- including the predevelopment, CS1, and rable in size, location, external appear- the Wal-Mart. Important terms, such as ance, and distribution on the site. the ownership and proposed financing, have been described in only general The St. Thomas TIF district was intro- terms for the remainder of the project. It duced into the redevelopment plans is clear, however, that the improvements after HRI had been selected as the on the former St. Thomas site will be developer. Unfortunately, it suffers from privately owned. The land will be either many of the potential problems identi- privately owned or leased by HANO to fied earlier in this report. Some of the private entities for 99 years at nominal more serious deficiencies of the TIF dis- rates. trict and the process by which it was approved are discussed below. The total cost of development, including the Wal-Mart, is estimated at approximately $320 million. Public funding B. TIF Analysis makes up more than $90 million of this HRI claims that the St. Thomas site amount, with at least $50 million com- cannot be redeveloped without the TIF. ing from federal sources, including Relying on a report prepared by HOPE VI demolition and revitalization MetroSource LLC, it claims benefits to grants, a HUD Section 202 elderly hous- the City totaling $110 million over a 50- ing grant, HANO contributions, and an year period. HRI projects increased sales undetermined amount of low income tax revenues of $125 million (on a net housing tax credits; $8 million from present value basis, using a 2% inflation state capital outlay funds; and $32.6 factor) for the City, Orleans Parish million from the City of New Orleans. School Board, and the Regional Transit The latter includes city infrastructure Authority over 25 years. bond proceeds, TIF and PILOT bond proceeds, and HOME Investment An analysis of the MetroSource study is Partnership funds controlled by the beyond the scope of this report. It City. should be noted, however, that the MetroSource report purports to project HOPE VI developers operate under a benefits over a 50-year period and does series of federally imposed constraints. not take into account all of the public The HOPE VI money is restricted to costs of the project. funding construction of public housing units, site preparation, project adminis- Subsidy to a Private Entity. As noted tration, and resident relocation. Housing above, TIF bond proceeds are to be used may consist of 100% public housing for costs associated with CS1 and CS2, units or a mix of public housing and the mixed-income rental components of

Tax Increment Financing in New Orleans Appendix A, p. 2 the St. Thomas redevelopment. CS1, the other public costs are set forth below. first phase of the development, consists An annotated schedule is set forth as of 296 units, of which 122 are designat- Appendix A-1. ed for low-income renters. COST TO THE PUBLIC OF CS1 The estimated cost of con- (All figures in millions of dollars) struction of CS1, exclusive of infrastructure, is $44.8 HOPE VI Loan $12.4 million. Of this amount, TIF Payments 14.9 $31.3 million (70%) is provided from public funds. Wal-Mart PILOT (to support The estimated cost of con- tax-exempt bonds) 5.4 struction of CS1, inclusive 4% Low Income Housing Tax Credits 6.0 of infrastructure, is $53.5 million. Of that amount $40 Interest income (on HOPE VI escrow) 0.1 million (75%) is provided HOPE VI, HANO, state and local from public funds. (All funds for CS1 infrastructure 8.7 infrastructure and other predevelopment costs for the CS1 share of lost sales tax revenue entire St. Thomas project from Wal-Mart competitors 3.7 are being paid exclusively from public funds.) TOTAL COST TO THE PUBLIC $51.2 The funds provided up-front for construction costs repre- The above estimate is extremely conser- sent only a portion of the total cost to vative in two respects. First, as is dis- the public. When interest and other cussed more fully below, the cost of the costs are taken into account, the cost to TIF could exceed the number used the public exceeds $51 million. This above by tens of millions of dollars. equates on a per-low-income-unit basis Second, it does not include the value of to almost $348,000 (excluding infras- additional subsidies for which BGR is tructure) or $420,000 (including infras- unable to make reasonable estimates. tructure). When the cost to the public is These subsidies include interest savings allocated to all units in CS1, it equates from tax-exempt bonds, the value of to almost $144,000 per unit (excluding reduced taxes for CS1, and the value of infrastructure) and $173,000 per unit the land on which CS1 is being built. (including infrastructure). Under the terms of the agreement for payments in lieu of taxes (PILOT) for The public contributions to CS1 come CS1, the low-income units will be taxed from a number of programs and at $1 a unit, and the market-rate units sources, including federal, state and city at $100 a unit. HANO is making the grants and the diversion of future sales CS1 land available at a nominal annual and property taxes from the City’s rent of $1 per unit for 99 years. General Fund. The amounts and sources of the public contributions and Available financial information for CS2, the other phase of the redevelopment using TIF funds, is less detailed. It is

Appendix A, p. 3 Bureau of Governmental Research clear, however, that CS2 will include than that from the market-rate units, multiple subsidies, including public the carrying costs for such housing funding for infrastructure and site would also be lower. The construction of preparation, HOPE VI funds, low income the low-income housing in CS1 is paid housing tax credits, TIF funds, reduced for entirely with public funds, all infras- property taxes, and nominal land rent. tructure costs are paid with public funds, and only nominal property taxes Poor Use of Public Funds. As the above and land rent are payable on the low- numbers indicate, and HRI has stated, income units. the TIF revenues will be used to finance market-rate housing. The application of High Cost of TIF Debt. City Council TIF funds for this purpose is very trou- has authorized the issuance of $20 mil- bling in a City that suffers from a lack lion of TIF bonds with a maximum of decent affordable housing for low- maturity of 50 years and an interest income residents and from a shortage of rate not to exceed 8.6%. Although for operating funds for basic services. It technical reasons the stated maturity is becomes almost inexplicable when one 45 years, the City expects to reduce the considers that, as a result of the diver- maturity through prepayments to 13.5 sion of most of the property taxes to years. The City anticipates an interest operating costs, the market-rate hous- rate of 8% to 8.5%. ing will not even contribute significantly to the tax base. Several aspects of the proposed bond issue are exceedingly disturbing. First, Two reasons have been offered to justify the anticipated interest rate for the TIF a TIF for market-rate housing. The first bonds (8 to 8.5%) significantly exceeds is that market-rate units must be the rate for bonds issued by local gov- offered at below-market rent in order to ernments with ratings comparable to induce middle-income residents to live New Orleans. That rate currently hovers next door to low-income ones. Leaving around 4.5% for 30-year issues. While aside the fact that “market rate” is in BGR recognizes that the high rate that case a misnomer, it should be results from the limited repayment obli- noted that the market-rate properties gation, the fact remains that the money are already receiving other subsidies is very expensive. The magnitude of the (e.g., reduced property taxes and the cost can be illustrated by comparing the nominal land rent to HANO) that reduce total interest expense for a $20 million operating costs. TIF enables the owners bond, payable in equal, semi-annual to further reduce operating costs by installments over a 13.5-year period and transferring to the public the carrying bearing interest at a rate of 8.5%, cost for a large portion of the debt for against interest expense for a similar CS1. bond bearing interest at a rate of 4.5%. The difference in total interest expense The other reason offered in defense of would be $7.1 million (or $5.8 million the subsidy is that the market-rate discounted at 3% for inflation). housing must support the operating costs of the low-income housing on an Second, the cost of the TIF bonds could ongoing basis. While the revenue from be far higher than the public has been the low-income housing would be less led to believe. Because state law cur-

Tax Increment Financing in New Orleans Appendix A, p. 4 rently limits annual debt service for period and except for $25,000 a year, sales TIF bonds to 75% of the sales will be diverted from the general fund to taxes received in the first full year of finance $3.6 million in bonds for CS1. operation (estimated at $1.7 million for While these bonds are outstanding, the debt service), the bonds will have a stat- City will receive only $25,000 in annual ed maturity of 45 years. The City, based PILOT payments. on Wal-Mart’s sales projections, expects to reduce the maturity dramatically by Reduced Sales Taxes. The St. Thomas applying 80% of TIF revenues above TIF district illustrates a major downside $1.7 million to prepayment of the of using TIF in conjunction with retail bonds. However, if the funds for prepay- development: the loss of tax revenues ment fail to materialize, the interest from other businesses. The study prepayments alone could total $67 million. pared for City Council indicates that Under that scenario, the citizens of New Wal-Mart will capture a portion of its Orleans would divert $87 million from sales from other businesses in New the General Fund to pay for $20 million Orleans and that this will cause sales of debt. tax revenues attributable to those sales to drop by an estimated $402,000 to With the application of excess TIF rev- $554,000 a year until the bonds are enues, the total annual debt service repaid.29 paid by the TIF district over 13.5 years could average approximately $2.5 mil- Inadequate Information. City Council lion per year. This foregone revenue to and the public’s efforts to understand the City’s General Fund constitutes an the massive and complex St. Thomas opportunity cost for the City. The addi- redevelopment were hampered by a lack tion of $2.5 million to the General Fund, of key financial information. The City for example, could translate into 75 new never received information as basic as police officers. the developer’s financial statements. In addition, at the time that the City gave Diversion of Multiple Revenue final approval to the TIF bonds, current Streams. The financing for the St. budget information was available only Thomas development illustrates how the for the infrastructure, Wal-Mart, and layering of subsidies can reduce the first phase of rental housing. The only public’s return on a TIF investment. As available cost-benefit analysis, which noted above, to support the HOPE VI had been prepared for the Industrial project, the City is foregoing sales taxes Development Board in 2001, was from the Wal-Mart to support the TIF inaccurate because of alterations in the bonds. Unfortunately, other tax streams projections for housing and the retail generated by the St. Thomas redevelop- development. Much of the data on the ment are also being used to support the later phases of the redevelopment was development. not publicly updated after January 2002. As noted above, the property taxes on CS1 and CS2 have been drastically Constrained Review. The concept of reduced through a PILOT. In addition, TIF for the redevelopment of St. Thomas Wal-Mart’s property taxes have been set was first introduced into the HOPE VI at $300,000 to $450,000 over a 20-year redevelopment plans by HRI in 2000.

Appendix A, p. 5 Bureau of Governmental Research City Council introduced the legislation to establish the TIF District in January 2001, but it did not hire a consultant, Lambert Advisory, to conduct an analysis of CS1 and the need for TIF until early 2002. It approved the district and dedicated the sales tax revenues in April 2002, shortly after it received the consultant’s analysis, reserving the right to negotiate and making the dedication contingent on its final approval of certain documents. Negotiations continued until November 2002, when the TIF district was made effective.

Lambert Advisory’s report was conduct - ed nearly five years after the HOPE VI Grant had been awarded and more than two years after HANO and HRI had entered into a redevelopment agreement. As the City’s consultant noted, major decisions had been made and infrastructure was being installed. As a result, an option that could have been explored if the review had occurred earlier — redesigning the project — was deemed foreclosed. The inquiry dealt with what could be done under the existing circumstances, as is reflected in the consultant’s conclusion that TIF was “the only immediately available option.”30

Distortions to Land Use. The need for a large sales tax generator to generate TIF revenues clearly affected the City’s planning and zoning decisions. The need to produce a certain amount of tax revenues was one of the arguments put forth to justify the construction of a 200,000-square-foot store and to eliminate the restrictions recommended by the City Planning Commission.

Tax Increment Financing in New Orleans Appendix A, p. 6 Appendix A-1

COST TO THE PUBLIC OF CS1 1 (All figures in millions of dollars)

HOPE VI Loan 2 $12.4 TIF Payments 3 14.9 Wal-Mart PILOT (to support tax-exempt bonds) 4 5.4 4% Low Income Housing Tax Credits 5 6.0 Interest income (on HOPE VI escrow) 6 0.1 HOPE VI, HANO, state and local funds for CS1 infrastructure 7 8.7 CS1 share of lost sales tax revenue from Wal-Mart competitors 8 3.7

TOTAL COST TO THE PUBLIC $51.2

1. Figures, unless described otherwise If the HOPE VI loan is analyzed as a below, are from “Preliminary Financing loan, the public contribution would Terms and Conditions for CS1,” dated exceed the $12.4 million included in the October 22, 2002, and submitted to the table. The contribution would include State Bond Commission. That document the difference between the interest paid details the sources and uses of funding to HANO and market-rate interest. available for CS1 as of the time of City Assuming a 6% differential, the value of Council and State Bond Commission the interest differential would be $17.1 approvals last fall. million (discounted using a 3% inflation rate.) That number would be offset by The table does not include public contri- $3.8 million (the amount in current dol- butions for which BGR is unable to lars of the future principal repayment), make reasonable estimates, such as for a net contribution of $13.3 million. interest savings on tax-exempt bonds, 3. Estimate from HRI’s financial advisor. the value of reduced property taxes, and the value of CS1 land. 4. A payment in lieu of taxes (PILOT) for Wal-Mart has been approved by the 2. According to the terms of the Industrial Development Board. The City Development Agreement between HANO will receive annually $25,000 of the and HRI, as amended, HANO will loan PILOT to distribute to taxing bodies. The HRI $12.4 million based on the HOPE remainder of Wal-Mart’s PILOT, begin- VI grant. The loan is the functional ning at $275,000 equivalent of a grant. Interest, which is a year and gradually increasing to payable at a rate of 1% per annum, will $425,000 a year over 20 years, will be be reinvested by HANO in the project to used to pay off about $3.6 million in supplement the allowable expense level tax-exempt bonds approved for CS1. (i.e., the maximum operating cost allowed for HUD subsidy of public hous- The total cost of the Wal-Mart PILOT ing units). Principal is payable at the reflects BGR’s calculation of the amount end of 40 years. of the PILOT required to retire the debt.

Appendix A-1, p. 1 Bureau of Governmental Research The revenue stream is discounted for inflation at an assumed annual rate of 3%.

5. Low Income Housing Tax Credits could be considered either public or private money. For St. Thomas, the credits will be sold by HRI to private investors, generating the $6 million equity contribution to the project. However, these investors will ultimately use the tax credits against their federal income tax payments. Because of this, BGR has treated the credits as a public contribution.

6. Estimate from HRI’s financial advisor.

7. Infrastructure costs for the project total $19.4 million, according to Preliminary Financing Terms. The portion of infrastructure cost for CS1 was calculated based on its estimated 45% share of total street frontage (the percentage estimated by City Council’s consultant. All infrastructure costs were publicly funded.

8. BGR calculated lost sales tax revenue by taking Lambert Advisory’s estimated maximum of $554,000 per year over 12 years and discounting the total by 3% for annual inflation. This amounted to $5.5 million. The share applicable to CS1 was determined by multiplying the total by 67%, or the ratio of 122 CS1 low-income units to the total of 182 low- income units in CS1 and CS2.

Tax Increment Financing in New Orleans Appendix A-1, p. 2 APPENDIX B solve the building’s occupancy problems. To do this, it needed a lease WORLD TRADE extension.

CENTER TIF In 1998, with City and WTCNO lease According to current reports, WTC negotiations ongoing, WTCNO through a Development Ltd., the developer chosen public bid process selected WTC for the World Trade Center hotel, wants Development Ltd. as the hotel developer. the World Trade Center taxing district to WTC Development Ltd. is 50% owned by apply the revenues from its hotel occu- WTC Investment LLC, a partnership of pancy tax to repay $40 million in rev- local investors George Kleinpeter, Jr., enue bonds with a maturity not to Larry Sisung, Jr., and William exceed 30 years, and an expected inter- Hindman, Jr. Thirty-eight percent is est rate of 8.5 to 9.5%. In addition, the owned by Pelican Investment Holdings bondholders will receive an additional LLC, a group of 10 local minority distribution equal to 50% of net income investors, and 12% by Pelican Venture from the hotel. Holdings LLC, a group of three women.*

A. Background WTC Development Ltd.’s bid contem- plated a total project cost of $70 million In 1963, the City through the New for 635 rooms, half of the current cost Orleans International Trade Building estimate of $140 million. WTC Corporation, entered into a lease for the Development Ltd. was to contribute World Trade Center to the World Trade $500,000 in equity to the hotel project. Center of New Orleans Inc. (WTCNO), a Another $20 million in equity was to nonprofit organization that promotes come from the parent company of the international trade and economic devel- prospective hotel operator, Crowne opment. The lease was for a term of 56 Plaza. The balance of the financing was years, ending in 2019, at a price of $1 a to be private debt. No public funding year. WTCNO agreed to operate and was mentioned. manage the center and to pay off revenue bonds issued to finance the con- In 2001, New Orleans International struction of the building. The bonds Trade Building Corp. transferred the have been repaid. World Trade Center and the related lease to New Orleans Building Corp. Through the 1970s and early 1980s, the (NOBC). In that year, City Council building thrived amid a bustling New approved a new lease of the World Trade Orleans economy. But the growth did Center land, building, and parking not last; the mid-1980s collapse of the garage to WTCNO for 99 years. It also oil industry and reductions in local approved a sublease of the first 18 operations of shipping companies hurt floors of the building, the 31st floor, and occupancy at the World Trade Center. In other property to WTC Development Ltd. 1994 WTCNO proposed converting a for 99 years. While both 99-year leases portion of the building into a hotel to were executed in 2001, they do not go

* According to a memorandum from the hotel developer to NOBC, the members of Pelican Investment Holdings are Bobby Major Jr., Douglas M. Evans, Ronald Guidry, Darren Mire, George V. Rainey, Dale M. Valdery, Gilbert C. Jackson, Mitchell Dasher II, Virgil Robinson, and Marshall Truehill. The members of Pelican Venture Holdings are Angela Barthe, Alana Villavaso, and Susan Campbell.

Appendix B, p. 1 Bureau of Governmental Research into effect until the opening of the hotel. the outside elevator. The developers are Until the effective date, only a few obli- not obligated to reimburse WTCNO for gations apply, such as an annual pay- these expenditures if the hotel is not ment of $50,000 a year from WTCNO to built. NOBC until hotel construction begins. The hotel’s rent to WTCNO is calculated In the primary lease, WTCNO agrees to as follows: pay NOBC rent equal to 50% of the net revenues from the garage, hotel, and Year Rent 1 $250,000 office space. The net revenues (gross revenues minus the buildings’ operating 2 $500,000 expenses) are adjusted for certain credits and subject to a minimum of 3 $750,000 $50,000 a year, inflation adjusted. 4 3% of gross revenue for WTCNO projects City revenues ranging third year from $861,000 to $1.9 million a year for the first decade of the lease. 5 3.5% of average gross revenue for third and fourth years The lease also requires WTCNO to invest 6-7 3.5% of average gross revenue up to $1 million of its 50% share of net for preceding three years revenues in trade development programs for New Orleans residents and business- 8-99 4% of average gross revenue es. The programs are financed with the for preceding three years first $1 million of net revenues above an Note: Table compiled by BGR from adjustable baseline amount, which information in the hotel sublease starts at $1,075,309. The programs are operated by WTCNO but approved by NOBC. Gross revenues consist of hotel room rentals, hotel-related parking and valet The City and NOBC have agreed to charges, and revenue from entertain- reimburse half of WTCNO’s pre-lease ment or restaurant operations. In addi- expenses incurred preparing for the tion, the developer will pay a percentage hotel, regardless of whether the hotel of rents received from any sub-tenants. is built. As of April 2003, WTCNO had spent about $1.6 million. According to WTCNO projections reviewed by City Council in 2001, begin- In the sublease between WTCNO and ning in the fourth year, the lease pay- WTC Development Ltd., the developer ments to WTCNO should amount to at agrees to convert the first 18 floors of least $1.5 million a year. The rent pay - the World Trade Center into a hotel and ments are projected to rise to $2.5 mil- to reimburse WTCNO for pre-hotel lion by the 10th year of hotel operation. development expenditures not covered by the City. WTCNO has spent $3.6 In 2001, prospective operator Crowne million so far in pre-hotel development Plaza ceased to be a participant in the expenditures, which include a new World Trade Center deal. In the spring sprinkler system, fire alarms, roof of 2002, the developer with the support repairs, new boilers, and removal of of WTCNO and NOBC approached the

Tax Increment Financing in New Orleans Appendix B, p. 2 State Legislature to create the special lenders are willing to loan 50% to 60% taxing district to provide public financ- of a hotel project’s cost, expecting devel- ing. No public money had been contem- opers to piece together the remainder in plated in the original bid. equity and subordinate debt. There is a funding gap for which the developers Since the creation of the legislation, are seeking public funding. In essence, developers have signed a letter of intent the City and other tax recipient bodies with Westin Hotels & Resorts to operate are putting up the equity, while the the hotel. Recently, the Nagin adminis- return on their investment is going to tration, which inherited the World Trade TIF bondholders and the developer. Center lease, initiated negotiations to change the terms of the City’s deal. Inadequate Return on Investment. Under the lease executed before the TIF was introduced, the City would receive B. Analysis 50% of net revenues from the World Proponents of the World Trade Center Trade Center property. WTCNO current- TIF argue that hotel projects of this ly expects the City’s 50% share to equal magnitude cannot be done in the cur- $861,000 to $1.9 million per year for rent economic environment without the first decade of hotel operation. substantial government subsidies. They also claim that the TIF will enable the The addition of the TIF dramatically City to increase its rental revenues from reduces the value of the World Trade the building (currently $1 a year) and Center lease to the City and the commu- receive increased sales and other local nity. As a result of the TIF, the City’s taxes, additional jobs and investment anticipated lease revenues would be off- from construction and operation of the set by the City’s share of the hotel occu- hotel, and other benefits. The revenue pancy taxes diverted to the hotel project. from the hotel project would also bolster These taxes are estimated to range from a prominent trade organization. They $462,000 to $635,000 per year for the also argue that the World Trade Center first decade of hotel operation, leaving building is functionally obsolete and the City with a net amount of $399,000 cannot be effectively utilized without a to $1.3 million per year. In essence, the $28 million investment in outside stair- City’s increased investment reduces the wells and other improvements to bring it return to the City. up to code. To support the hotel, the City and the The project raises a number of grave other hotel tax recipients would collec- concerns for the public: tively forego an estimated average of $4.8 million per year in hotel occupancy Inadequate Private Equity. The hotel taxes. During the first decade of the is woefully undercapitalized. According project, the direct public investment in to NOBC, the developer has contributed the project is expected to exceed the only $1.5 million in equity for a $140 rental income in each year. million project. According to the developer, the equity contribution is $5.2 Negative Impact on Critical Services million. Either amount is inadequate for and Economic Development Engines. a hotel project of this size. Currently, The TIF would divert revenues from

Appendix B, p. 3 Bureau of Governmental Research other projects and entities that provide hotel development, this expansion does important services or contribute signifi- not directly justify the use of such a cantly to economic development in the large public subsidy. City and the region. These include the Orleans Parish School Board, the Ernest High Cost of Debt. The developer wants N. Morial Convention Center, the the World Trade Center taxing district to Regional Transit Authority, the issue $40 million of bonds with a matu- Louisiana Stadium & Exposition rity not to exceed 30 years and an inter- District, the New Orleans Tourism & est rate of 8.5 to 9.5%. The proposed Marketing Corporation, and the New interest rate is roughly double the cur- Orleans Metropolitan Convention & rent rate of 4.5% for general obligation Visitors Bureau. To the extent that bonds. Interest payments on $40 million these entities lose future revenues, the in bonds amortized in equal, semi- City as a whole suffers. annual installments over 30 years at an interest rate of 9.5% would total approx- Over the first 10 years of hotel opera- imately $81.5 million. The same bonds tions, local tax recipients would forego amortized at the current 4.5% rate for approximately $48 million in hotel occu- general obligation bonds would require pancy taxes. The breakdown of the fore- interest payments of approximately gone taxes by recipient appears at the $33.3 million. The difference in total bottom of this page. interest expense would be $48.2 million (or $31.6 million discounted at 3% for WTCNO argues that its mission to pro- inflation). It should be noted that the mote international trade and economic City’s share of foregone taxes for these development is just as deserving of state payments would equal only 11.5% of the assistance as the work of the hotel tax total. recipients. While WTCNO’s membership and operations would expand indirectly Reduced Tax Base. NOBC estimates through new rental revenue from the that 70% of the World Trade Center hotel’s expected sales would be taken

Hotel Tax Recipient Rate 10-year tax capture

State General Fund: Convention & Visitors Bureau 1.0% $ 3,728,000 Convention Center IV, Hornets, Saints 1.0% $ 3,728,000 Convention Center 3.0% $ 11,184,000 Orleans Schools 1.5% $ 5,592,000 City 1.5% $ 5,592,000 RTA: Canal Streetcar 0.6% $ 2,237,000 Convention Center Phase IV 0.2% $ 746,000 N.O. Tourism Marketing Corp. 0.2% $ 746,000 Louisiana Stadium & Exposition District 4.0% $ 14,912,000 Total 10-year Tax Capture 13.0% $ 48,465,000

Source: BGR calculations, based on numbers provided by NOBC

Tax Increment Financing in New Orleans Appendix B, p. 4 from other hotels. With $4 million in hotel taxes expected to be captured in the first year of hotel operations, this would result in a loss of resources currently received by hotel tax recipient bodies equal to $2.8 million.

The developer disputes NOBC’s estimate. The developer claims that while 60% of expected sales at the hotel cannot be directly attributed to new demand created by the World Trade Center hotel, this 60% figure would be reduced to a negligible amount by new convention business, aggressive marketing by competing hotels, and attraction of visitors who would normally stay in suburban markets during major events, such as Mardi Gras or Jazz Fest.

Loss of Benefits. The TIF is not the only public subsidy for the development. In addition, through a proposed restoration tax abatement, the developers would not pay ad valorem taxes on the hotel for a period of 10 years.

Unfair Competitive Advantage. Opponents maintain that the district would provide the hotel developer with an unfair competitive advantage, allowing it to reduce room rates by transferring a significant cost to the public. Proponents respond that their room rates will track those of other large, competing hotels downtown and that the TIF investment is necessary to make the city-owned World Trade Center usable for any form of commerce. Although the TIF legislation prohibits the hotel from advertising below market- rate rooms, preventing the hotel from offering reduced room rates would be difficult, if not impossible.

Appendix B, p. 5 Bureau of Governmental Research ENDNOTES 1 Minter, N.L., “Tax Increment Financing,” 14 Johnson, C.L., “The Use of Debt in Tax Urban Land (May 1991), p. 38. Increment Financing,” in Johnson and Man, p. 71. 2 Minter, p. 38. 15 Klacik and Nunn, p. 16. 3 Dardia, M., “Subsidizing Redevelopment in California,” Public Policy Institute of 16 Dougherty, M.J., “Amendment 1: California (February 1998), p. ix. County and Municipal Option 4 Economic Development Agreement,” Man, J.Y., “Introduction,” Tax Increment The West Virginia Public Affairs Financing and Economic Development: Reporter, Vol. 19, No. 4, (Fall 2002), p. Uses, Structures, and Impact, 2001, 3. eds. Johnson, C.L., and Man, J.Y. (Albany, New York: State University of 17 Man, p. 5. New York Press), p. 1. 18 California Government Code §53084 5 National Association of Counties, “Tax and California Health & Safety Code Increment Financing: An Alternative §33426.7. Economic Development Financing Technique,” (2000), pp. 1-2. 19 Illinois Code, 65 § 5/11-74.4-3. 6 Dardia, p. 2. 20 Maine Revised Statutes, 36 § 6756. 7 Illinois Tax Increment Association, 21 Maine Revised Statutes, 36§ 6753. “Number of TIFs in the Midwest.” www.illinois-tif.com/images/ 22 Klacik and Nunn, pp. 16-17. midwest.gif 23 Man, p. 6. 8 Alabama Code, § 11-99-4. 24 California Legislative Analyst’s Office, 9 Illinois Code, 65 § 5/11-74.4-3. “Redevelopment”; and Mikesell, p. 59.

10 Nebraska Revised Statutes, § 18-2116. 25 Mikesell, p. 59.

11 California Legislative Analyst’s Office, 26 Ward, R. C., “To TIF or Not to TIF: “Redevelopment After Reform: A Debating the Issues,” Development Preliminary Look,” December 29, 1994, Strategies Review, (Summer 2000) p. www.lao.ca.gov/redevelopment_after_ 3. reform.html; and Chapman, J., “Tax Increment Financing and Fiscal Stress: 27 Mikesell, p. 66. The California Genesis,” in Johnson and Man, p. 120. 28 New Orleans City Planning Commission, 1999 Land Use Plan. 12 Mikesell, J.L., “Nonproperty Tax www.new-orleans.la.us/cnoweb/ Increment Programs for Economic cpc/1999_dist_nine.htm Development: A Review of the Alternative Programs,” in Johnson and 29 Lambert Advisory LC, “St. Thomas Man, pp. 60-61. HOPE VI & Wal-Mart Evaluation Report to New Orleans City Council,” 13 Klacik, J.D., and Nunn, S., “A Primer April 11, 2002, p. 7. on Tax Increment Financing,” in Johnson and Man, p. 16. 30 Lambert Advisory, p. 28.

Tax Increment Financing in New Orleans Bureau of Governmental Research 225 Baronne St., Suite 610 New Orleans, Louisiana 70112-1704

IN THIS REPORT...

Recently, a widely used local economic development tool – tax increment financing or TIF — has captured the attention of New Orleans’ city government. A TIF district has been approved for the St. Thomas redevelopment and another is under consideration for the proposed World Trade Center hotel. TIF, as it is commonly known, is a financing mechanism that enables a local government to capture new tax revenues generated in a specific area for reinvestment in that area. In theory, the investment is self-financing and the development supporting it would not have occurred otherwise.

Carefully conceived and executed, TIF can produce significant benefits— such as increased employment, improved environment, and increased tax revenues— that would not have otherwise occurred. However, TIF, particularly based on sales tax revenues, can also produce serious distortions and inequities. Misused, it is likely to be an expensive mistake that results in an unnecessary transfer of wealth to private entities.

Unfortunately, the trend with respect to TIF is disturbing. In just the past month, City Council has received a proposal for a TIF-like financing for a Lowe’s, a bill has been introduced to create a TIF district for Lake Forest Plaza Shopping Center, and another bill has been filed to create one for a large portion of eastern New Orleans. Collectively and individually, they raise serious concerns, including the specter of businesses routinely turning to the City for subsidies, the prospect of a frozen tax base for a huge swath of the City, and a balkanized tax structure. Now is the time for the City to take stock of the risks associated with TIF and to develop a comprehensive program to ensure that TIF is used effectively, efficiently, and equitably. BGR hopes that City Council, which is currently developing procedures, will carefully consider the contents of this report.