Richmond Wants to Redevelop Its Coliseum Using Tax Increment Financing, but How Does It Work?
Richmond Mayor Levar Stoney has proposed a $1.5 billion redevelopment of the downtown arena and the surrounding Navy Hill neighborhood.
In order to fund the redevelopment, Stoney has proposed using a financing structure called tax increment financing. It would draw on new tax and private development in downtown to pay for a new Richmond Coliseum.
VPM's Roberto Roldan recently sat down with David Merriman -- a professor of public administration at the University of Illinois at Chicago and an expert advisor to the Navy Hill Development Advisory Commission -- to better understand how tax increment financing works.
Roberto Roldan: So one of the things that residents have heard a lot about is this 80 block special taxing district that the city wants to create in order to pay for a new downtown arena here in Richmond. This way of financing economic development projects is called tax increment financing. Professor Merriman, can you explain in simple terms how this works?
David Merriman: The basic way it works is that you freeze the taxable value in an area as the base value, and then as that value appreciates grows over time - the property tax revenue that's generated from the growth in value - is returned to that specific geographic area, the TIF district, and is used only for economic development purposes.
Roldan: So then how does tax increment financing affect existing tax revenues that a local government collects?
Merriman: Well, initially it has no effect because you still get the revenue from the base value. But presuming that there would have been some growth in the area that's the TIF district, over time there's no additional value and no additional revenue that it's going into the general fund. And so things like supporting schools or transportation, those funds have to be found from some other place.
Roldan: Here in Richmond, our mayor Levar Stoney and the developers argue that even though about $300 million from downtown is going to be diverted from the general fund, they're still going to be about $1 billion of new revenue from new development. As someone who's researched these kinds of deals, how often are these things meeting those kinds of performance projections?
Merriman: I don't have a specific number on that. On average, they do not perform better than areas without a TIF. There's been a lot of academic studies of it. You know, most of them are relatively pessimistic. A lot of the times the TIF simply results in subsidizing economic development that would've happened anyway.
Roldan: And what does failure look like for these TIF projects? When I'm out reporting? I think that's always a big concern that I hear from residents.
Merriman: TIF bonds very, very rarely default. So, in general, if you have lenders that are willing to make a loan based on TIF bonds, you don't usually see failure. But look at projects that have difficulty in meeting their expectations. I guess the best example for people in Richmond to look at might be to look at the Foxconn deal, which is a deal in Racine, Wisconsin. It’s a very, very large TIF deal involving a manufacturer from Taiwan, the Foxconn company. They promised initially a very large investment and in a very short period of time they've backed off what that investment will be. So, it's very common for developers to promise very large investments and then to scale back those investments once they get promises of incentives.
Roldan: In your research on these TIF deal case studies, you weren't just looking at bad examples, right? You were also looking at what makes a good deal. So when does this kind of financing of economic development makes sense?
Merriman: So, I think the good use of a TIF district is when this city really needs a commitment from a developer to have a continuing long term interest in an area, investments in an area. And the developer needs the city to do its part as well. So you have these two parties and they both need to make a long term commitment. That's really the essence of the TIF district: that the city is saying we're going to take this money and we promise you every dollar generated from this increment will be plowed back into the economic development of this area. So from a developer's point of view, that's a secure source of financing. I think for the ordinary run of the mill, sort of one time tax incentive to get a firm to agree to locate in an area, I don't think TIF is a good tool. But it can be if there's a long term development plan and you need both parties to do a significant part of the heavy lifting.