Headlines in the Midlands
Private Sector: City TIFs are Bad Business?
By Ron Aiken
News Editor, MidlandsBiz.com
Two years ago, two multi-million dollar tax increment financing districts – or TIFs – were approved by Columbia City Council but roundly rejected by the two taxing agencies it needed approval from, Richland County Council and Richland School District 1.
Arguments over the amount of money involved ($153 million for the Innovista TIF alone), hard feelings from the county over the city's management of previous TIF revenue (the two bodies settled their dispute out of court in 2007 for $6 million) and concerns over the ability and role of the city to lure new or keep existing private development all led both Richland 1 and Richland County Council to say thanks, but no thanks.
Undeterred TIF supporters, of which there are many in key Columbia leadership positions, kept working behind the scenes, however. In periodic negotiations through working groups over the past two years the plan has, by all accounts, received the tentative buy-in of both previously opposed entities after changes were made and concessions granted. On Aug. 21 the city approved the new intergovernmental agreement (IGA) governing the Innovista and Renaissance, or North Columbia, TIFs. Richland County and Richland 1 are expected to vote on the matter in November.
Besides lowering the amount being asked for from $190 million in 2010 to $110 million ($70 million for Innovista, $40 million for North Columbia); establishing an oversight committee; and reducing the amount of participation (from 100 percent to 75 percent) and time frame (from 25 to 15 years), the IGA also ensures that the city bears the full burden of repaying the bonds should the projected property-tax revenue not materialize.
In other words, should both TIFs fail to attract the growth needed to service the debt, neither the county nor school district has any financial responsibility whatsoever to assist in paying them off. That burden would fall to the city, which has pledged future water and sewer revenue as surety toward the bonds. It is precisely that worst-case scenario that has former city council members, private sector analysts and a former state Secretary of Commerce concerned.
To TIF, or Not to TIF?
In principle, what TIFs do is allow municipalities to spur private development in areas designated as "blighted" by issuing bonds to pay for infrastructure – water, sewer, utility lines – by pledging future property-tax revenues from those areas as payment.
The process is a common method used nationwide for assisting areas that need serious help, but where critics cry foul with Columbia's proposal is that both are too big, both rely on flawed, uneven projections and together, both constitute far too big a bite of the future tax apple to make sense today.
Across the country, TIFs are in trouble as the Great Recession has taken its toll on new development. In cities such as Chicago that once used TIFs with so much success they became a de facto slush fund for the mayor, their effectiveness in today's reticent economy is less than certain.
In a story in the July 18 issue of The Chicago Reader, author Ben Joravsky notes shrinking budgets have meant slumping TIFs. While the city's TIFs are budgeted to take in $454 million this year, that's down 11 percent from projections and down $100 million from five years ago.
"Most notably, the last big downtown TIF, the LaSalle Central, will take in zero money," Joravsky wrote. "That could spell trouble, since the city anticipated collecting $12.5 million in each of the next three years and is already on the hook to pay millions in subsidies to MillerCoors, United Airlines and other profitable firms."
It is precisely those kind of projections that first led Ben Johnson, research director for CBRE Columbia, to undertake his own analysis of the Innovista TIF's financial assertions. What he found was more than surprising: the Innovista TIF's revenue projections – the ones just approved by city council and set to be approved by the county and school district – are built, fundamentally, on pre-recession economic estimates from USC and the private-sector Economic Research Associates (ERA) compiled back in Spring 2006.
Rather astonishingly, Johnson says the extent to which the university has updated its analysis, modeled current economic conditions and evaluated the effect of five years' worth of recession since it first was prepared consists solely of two, single-page letters written in 2009 and 2012 by Doug Woodward, USC Division of Research and Professor of Economics, affirming previously drawn conclusions.
In Woodward's Dec. 15, 2009, letter addressed to attorney Bill Boyd of the Waterfront Steering Committee, he acknowledged the recession but dismissed its impact on the 2006 study undertaken by his then-colleague Donald Shunk, who has been an economist at Coastal Carolina University since 2007.
"I have reviewed Innovista studies by Dr. Donald L. Schunk (Economic and Fiscal Benefits of Innovista-April, 2006) and the Economic Research Associates (Evaluation of Innovista Development Potential-April 12, 2006)," Woodward writes. "I believe the essential conclusions of these reports holds up, even in difficult economic times."
Woodward goes on to say that "...it might be useful to have an update on Columbia's growth prospects and the potential for development in the Innovista. Even so, I would expect that the findings of the previous reports would not change much."
When asked again in 2012 to present an updated opinion to Boyd and the Waterfront Steering Committee on Innovista's economic outlook, Woodward produced a one-page, three-paragraph letter.
"My conclusions today are much the same as they were in late 2009: namely, that the findings in these two studies remain as valid today, as they were when they were originally produced."
For a working professional in the Columbia commercial real estate field today, such declarations are alarming, to say the least.
"I couldn't believe it," Johnson said. "There were a number of questions about the TIF Districts that were coming up in sales meetings and from other colleagues, and I decided that I wanted to know more about it. As a researcher for commercial real estate, I have access to the market information readily available, and I contacted the city for their assumptions.
"They've claimed the information that critics of the plan have used is out-of-date, but it's the same information they're using, and the values they use just don't hold up to what's happening in the market right now at all."
As an example, Johnson points to recent market transactions downtown that clearly demonstrate what value the Columbia marketplace will bear at present and what it won't.
"In the last two weeks, the Bank of America Plaza was put under contract out of foreclosure, and the rumored value is between $95 and $100 per square foot," Johnson wrote in an e-mailed response to MidlandsBiz.com. "Additionally the Meridian Building sold last week at a price of $60 million or $180 per square foot. However, because of the tax law, the buildings value will only be able to be revised up to $45 million, or $135 per square foot.
"Therefore, both of these numbers are well below the $152 per square foot of value for office properties required by the initial analysis to repay the TIF bonds. The second argument of course is the amount of office property that is required to be built in the Innovista district over the next fifteen years is nearly the same amount that was built in the entire Central Business District over the last fifteen years, which were part of the biggest real estate bubble the economy has experienced. Those are facts. If there is a counter argument with actual facts it should be presented, but thus far the opposition has not presented actual math, merely general statements."
Former South Carolina Secretary of Commerce Joe Taylor also believes the city's economic projections contained in the TIFs don't bear scrutiny.
"There are major problems with the financial assumptions," Taylor said. "In order to repay the bonds, the city has assumed above-average historical growth in commercial development downtown and in the tax base during the next 15 years.
"The harsh reality is that there are no major projects currently under construction in the TIF areas that cover 1,000 acres in Columbia's downtown. The timing is terrible. We are still not in a positive real estate economy, and we are likely several years from real recovery.
"And no one has looked what the effect will be on bond repayment by having two TIFs compete for new investment, not to mention how that all will be affected by the proposed penny-on-the-dollar sales tax. The city is taking on too much, too fast."
What's the Worst that Could Happen?
Optimistic projections aside, opponents allege the City of Columbia is a poor steward of its resources as it is. They cite a shaky financial history only recently improved, a development office with a track record of questionable loan practices and sub-standard returns and question the wisdom of putting an aging, ill-managed and under-maintained water and sewer system on the hook for the next 15 years to fund new infrastructure that few, if any, private developers are clamoring for – and all at a time when existing, business-ready infrastructure downtown sits empty.
Former Columbia city councilman Kirkman Finlay, who ran unsuccessfully for mayor against Benjamin in 2010 and now is seeking election to the state House of Representatives for District 75, was on council when its finances were in a shambles following years of shoddy bookkeeping from various in-house departments, one of which was under investigation by the U.S. Department from Housing and Urban Development. Even now, after years of efforts to improve internal procedures, six of the city of Columbia's active 32 commercial loans granted since 2006 were in default as of March 5, according to an article in The State newspaper, for a default rate of nearly 19 percent, above the national average of 15 percent.
"Back then we were successful in steering the car away from the ledge and getting the city on sound financial footing," Finlay said of efforts that led to the city's having its credit upgraded in 2011 by Moody's Investors Service and Standard & Poor. The improved ratings allow the city to borrow money at lower interest rates. "But now it looks like the city is hell-bent on turning the car right back around and stepping on the gas. Just because we got the rating straight two years ago does not mean it's time to go break it again."
But borrowing heavily is precisely what Columbia mayor Steve Benjamin hopes to do as he aggressively shops for municipal funding sources to kick-start private development in an interest-rate friendly economic climate.
"The soundest investment, particularly in the times in which we live, is infrastructure," Benjamin said. "It's how to put the city and community to work and you'll never find money cheaper than it is now. Capital markets are active. This is the market in which every well-run city and county are seeking refinancing of long-term debt because money is cheaper now than it's been in a lifetime."
On that note Benjamin is correct.
"Local-government interest rates remain near the lowest in a generation," reported an Oct. 3 story on Bloomberg.com by Matthew Winkler and Mark Niquette. "The yield on 20-year general-obligation bonds to 3.67 in the week ended Sept. 27, according to a Bond Buyer index. In January the rate fell to 3.6 percent, the lowest since 1967."
Still, the question of whether to borrow just because one can is open for debate, especially when betting the future financial health of one's water and sewer system on controversial projections, hopeful speculation and incomplete economic modeling, critics allege.
"What I've yet to hear from people who support imperiling water and sewer funds to back these TIFs is what is their plan for a worst-case scenario?," Finlay said. "The better part of prudence in any investment is to analyze both the best- and worst-case scenarios, but where are those numbers? Has anyone run them? If they have, they're keeping them to themselves."
TIF supporters such as former Innovista director, Waterfront Steering Committee member and private businessman John Lumpkin believe water and sewer funds won't have to be touched to service TIF bond debt because too many safeguards are in place to ensure that projected property-tax revenues will more than meet that need.
"I don't see where it's a risk," Lumpkin said. "The previous Vista TIF had no impact on water and sewer. The successful TIFs in Greenville and Charleston didn't, either. Theoretically, if you have water and sewer as a backstop, it's like a credit enhancement to underwrite the transaction."
Benjamin, who was one of only two council members to vote against the TIFs with Leona Plaugh, agreed with Lumpkin that future water and sewer rate hikes to service TIF debt are a long shot at best.
"Almost every bond issue, when you have a highly rated water and sewer [system], is backstopped with water and sewer," Benjamin said. "It's a credit enhancement issue that any city across the state, or cities that produce their own power, use to make them more attractive to lure investors.
"I can't think of any scenario in which the backstop has had to kick in in the last 20 years or so."
For TIF critics, such reasoning isn't good enough. Just because something has yet to happen, they argue, doesn't mean it won't, as the recession has proven again and again in the private sector since 2008. Failing to plan for such contingencies, they claim, is irresponsible and misleading.
"Let me put it this way – if there was nothing to suggest that water and sewer would need to be touched, the bank wouldn't require the city to guarantee it," Finlay said.
"On the contrary, there is everything to suggest it's at risk, because if the projections were that good, they wouldn't need a credit enhancement. The reality is that the numbers are so shaky that the bank requires a solvent guarantor. The credit agencies have spoken on the numbers, and they said 'No' to the project without a water and sewer guarantee."
Lee Bussell, Chernoff Newman CEO and current president of the Greater Columbia Chamber of Commerce, has been pushing development toward the river for years, supports both TIFs and also believes concerns that water and sewer rate hikes are on the table are cynical and don't take into account the adjustments made to the TIF governing process outlined in the new IGA.
"One of the main differences between this TIF and any TIF that has ever been done is that when the three bodies sign the intergovernmental agreements, it's not giving the authority to issue bonds to pay for infrastructure," Bussell said. "It's an enabling piece of legislation that said once projects that can pay for those bonds have been identified, you can issue the bonds.
"The only way water and sewer funds would ever be used is if the city were to default on the bonds, meaning they don't have another source to pay them. We're not depending on that backstop. We'll know that a project that's going to generate that revenue has already been identified and is willing to develop if the public infrastructure is there. This way, there's a lot more safeguards than in the past, a lot more accountability and transparency."
Columbia City Councilwoman Tameika Isaac Devine has led the charge for the city since it first came before council two years ago and has been a tireless supporter, even organizing a bus trip to blighted areas in both TIF districts to educate her colleagues and others about the severity of the problem and scope of the opportunity. She believes the changes made to the new IGA, especially the oversight committee, mean bonds won't be issued unless specific projects are in place, thereby eliminating the guesswork rampant in the city's economic projections.
"Bonds don't get issued until projects are ready to go online," Devine said. "We believe we have enough expertise at the table and a ramp-up period to be able to build in money generated prior to debt service that would alleviate our need to go to water and sewer if things don't transpire, if taxes don't come in."
Supporters believe the TIFs represent the best chance to change the face of Columbia for the better and that the best chance to do so in a lifetime is right now.
"If ever there was a project TIFs were developed for, this is it," Bussell said. "It has so much potential to unlock new construction, new job creation and new development in a way that will basically provide an accelerated corridor from where we are now to the river and help a part of town in North Columbia that needs it.
"The one single thing that can change this city more than anything else would be riverfront development, and I think the TIF is the single-most important way to make that happen and get us to the water."
For Lumpkin, the proposition is simple.
"If not now, when?," said Lumpkin. "If not us, who? We have a chance to do what Greenville did with the Reedy River and what Joe Riley in Charleston did with King Street. This is what can set us apart for years to come."
For skeptics of the city's TIF proposal, the promise of that dream, one that hasn't come true in economies far healthier than the current one, isn't enough to risk tying up the majority of new tax revenue in those areas for 15 years and backing a $110 million check with a water and sewer system not up to the job without major rate hikes no one has produced numbers for.
"Cities are failing in this country," Finlay said. "Cities are declaring bankruptcy. If you haven't modeled the negative impacts if all this private development that's supposedly out there waiting in the wings doesn't come through, you're not doing your due diligence.
"Nobody wants to see Columbia succeed more than I do. If people think the large size of this TIF is the only way to see transformative change, oh please. The university and Michelin and Boeing are doing things without TIFs. I'd argue that [the] Cross Hill [Market] will be more transformative to the city of Columbia than this TIF will be, and at zero cost to taxpayers with all the property taxes on the rolls.
"TIFs can be fine for smaller projects, but with the size of these and the numbers it'll take to repay it without tapping water and sewer, they're betting on an economic boom that nobody has proved will happen."
Benjamin says despite what critics say and despite what the future may hold, investing in infrastructure is the right thing to do.
"Some people don't think any investment in the city is a wise investment," Benjamin said. "But we have to continue to invest, and the way we've been doing it lately on local businesses is the way to keep tax dollars circulating in the local economy.
"I've been very cautious with this, but at the end of the day, working together to develop quality infrastructure in these key areas as well as drive economic development for years to come is an awesome and admirable goal that needs to be at the very top of our priorities."
Ron Aiken is a freelance writer and editor based in Columbia, S.C. His award-winning journalism has appeared in newspapers, magazines, websites and books across the country.