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Published December 17, 2006
LANSING STATE JOURNAL

Return on your investment? How your tax dollars pay for economic development

By Alan Miller and Jeremy W. Steele Lansing Community Newspapers and Lansing State Journal

Eastwood Towne Center, risen from a grassy field three years ago, quickly grew to generate more than $1 million in annual property tax revenue.

But local schools, the bus system and other community services don't see the benefits of much of that increased value.

Instead, it's earmarked for such things as "streetscaping" - lights, curbing, facades - or water and sewer lines only within special zones. Or it just sits in the bank - untouchable by taxpayers - until a new economic development project is conceived.

And that pot of new money may not be available for general community use until 2030. Even then, officials could decide to continue restricting its use.

This scenario, in varying scales, is repeated across mid-Michigan through a little-understood mechanism called tax increment financing created 30 years ago to battle blight and spur growth.

"It's a good economic tool, as long as it's not abused," said John Czarnecki, vice president for community development at the Michigan Economic Development Corp. and former chairman of the East Lansing Downtown Development Authority.

Today, the results are mixed. Many authorities, charged with managing and dispersing the funds, do generate significant improvements, such as East Lansing's City Center condos, retail and office complex. But some result in questionable efforts, such as the $200,000 Eaton Rapids spent without a vote by its governing board on consulting fees to plan a 400-seat theater and a regional performing arts center outside its designated area. And others have accrued sizable bank balances, such as Vevay Township's $277,355, but without a plan in place or projects in mind.

Last year, about $13 million in local property tax revenue was captured by special taxing authorities, in the process shortchanging Lansing Community College, public transportation, libraries and other services in order to pay for economic development projects, according to an investigation by Lansing Community Newspapers and the Lansing State Journal.

Other findings include:

• County and municipal governments had to forego more than $9 million in property taxes to these authorities last year.
• Education takes a hit, with the state's K-12 School Aid Fund contributing $55.7 million to cover lost tax revenue to schools.
• Lax state oversight leaves local authorities largely unregulated.
• Authorities are like slot machines that never pay out. Despite contributing hundreds of thousands each year to the development authorities, taxing bodies don't reap the full financial benefit of increased tax revenue until the authorities are dissolved.

Few tax increment finance plans end. Instead, many are perpetually extended, said MEDC's Czarnecki: "That was never the intent of the law."

A good investment?

Economic development officials argue the financing tool is one of the few ways local governments can pursue projects that boost struggling areas and bring jobs to the region.

The idea is that all the taxing jurisdictions in an area can pool some of their tax revenue to take on a project that none could afford alone, Czarnecki said.

"Then when it's paid off, we all stand to benefit," he said.

An example is Delhi Township's efforts to get RSDC, an automotive steel distribution facility, to relocate just off College Drive in 1999. The Delhi taxing authority built the water and sewer infrastructure that the township couldn't then afford on its own, said Al McFadyen, executive director of Delhi's DDA.

And although the township doesn't reap increased property tax revenue, the community got one of its largest employers - RSDC has 350 workers.

How it works

There are three main types of local authorities that collect a share of these taxes for public projects: downtown development authorities (DDAs), tax increment financing authorities (TIFAs) and local development financing authorities (LDFAs).

Within the authority's borders, county and municipal governments, libraries, schools and other taxing units collect the taxes that were generated before the authority was formed. The authority gets the growth in tax revenue from that year forward.

For example, if $5,000 in property tax was collected on a parcel prior to a DDA being created and taxes go up by $1,000 afterward, the taxing bodies share the $5,000 and the DDA gets the $1,000.

Local cities, villages and townships approve the initial creation of their DDA, LDFA and TIFA boards, appoint the members and approve or deny the renewal of their missions when their time lines expire.

Authority boards are usually unpaid, largely self-governed and must file annual audit reports to the state. Some have one or two paid staffers.

Counties and other local taxing bodies were given more oversight of the creation of new authorities in 1994, said Sue Pigg, director of the Ingham County Economic Development Corp.

Ingham County closely scrutinizes authority startup proposals before giving up its share of new tax revenue, she said.

"They want to make sure the communities that plan to capture tax increases are actually doing so with a plan in mind for specific economic-based outcomes," Pigg said. "That minimizes some concerns that these are just another way to grab money out of other people's pockets."

Meridian Township's DDA, formed last year, is the newest authority in Ingham County and only the third to be created in the tri-county area after 1994.

Desperate communities

The financial climate was different when most taxing authorities were created in the 1980s. Now community governments feel more acutely the loss of even the smallest revenue.

Last year, Clinton, Eaton and Ingham county governments diverted nearly $4.3 million to development authorities.

"When we established them, times were good and the county wanted to be able to help the municipalities if at all possible," said Leonard Peters, chairman of the Eaton County Board of Commissioners. "Since then, it does hurt the county."

Last year, Eaton County eliminated nine positions, including jobs in the Sheriff's Department, MSU extension and the district court, said county Controller John Fuentes.

At the local level, cities, villages and townships also are increasingly eyeing DDA and LDFA funds as state and federal dollars dry up. For instance, Leslie officials are using DDA money to renovate a downtown building to house a new police station.

Two local authorities - in Lansing and Delhi townships - have agreed to return some money to the taxing bodies, but only after threats of litigation to recover revenue.

"Every community is desperate," Czarnecki said.

Schools, too, are suffering although changes in state law are phasing out authorities' use of school dollars. Still, the state School Aid Fund lost $55.7 million last year.

"If you say you got 10 new businesses and closed advanced placement programs in the schools, is that a good trade-off?" said Lynn Johndahl, executive director of think tank Michigan Prospect and former chair of the state House Taxation Committee.

Other taxing bodies, such as the Capital Area District Library, feel it as well. More than $500,000 was diverted from CADL last year for use by development authorities.

CADL Director Sue Hill said voters don't realize when they vote for a library millage that all of the revenue may not be going to the library. "They are not voting for these other organizations that they may or may not be aware of," she said.

Lack of oversight

Aside from the audit reports, there's little state oversight of actions and spending by these authorities.

The Vevay Township board has met six times in the last five years, but has collected more than $277,000 in property taxes. Township Supervisor Ronald Weesies said the 16-year-old DDA, is in a "wait-and-plan" mode.

Leslie's DDA is paying for swimming pool renovations, and Art in the Park is sponsored by the DeWitt DDA.

The city of Lansing's authority collects nearly $5 million a year ($1.4 million from the city) in property taxes but spends most of it to pay the mortgages on the Lansing Center and the Veterans Memorial Courthouse.

State Treasury Department spokesman Terry Stanton said it would cost the state too much to monitor all of Michigan's more than 350 authorities.

He said the public should report suspected problems, fraud or misappropriations to local prosecutors or the state tax commission.

McFadyen, executive director of the Delhi Township DDA said the authorities are not unregulated.

"We're not completely free agents," he said. "Our plan had to be approved by the township board."

Contact Jeremy W. Steele at 377-1015 or e-mail jwsteele@lsj.com. Contact Alan Miller at 627-6085 or e-mail alanmiller@gannett.com.