Amendment One

Ruby,

From what I can tell based on reviewing the 3 websites Anita referenced, there are really two questions that need to be addressed. One, should you support Amendment One on the November ballot--understanding that it has statewide impact. Two, do you support your local government's use of self-financing bonds.

I'll be interested in further discussion here, but my initial response is to support the amendment because it will benefit low income communities--those who do not have the property values and tax base to lure in developers.

BUT, I don't *think* I would support the use of these bonds in Chapel Hill or Carrboro. We have a strong enough economy already so I don't think I would endorse a local end run around a public bond referendum. While that end run may be necessary in other communities based on need and less informed/involved citizenry, the conditions here in Chapel Hill/Carrboro don't seem to be compatible with the intent of the legislation. I'm still listening though and reserve the right to change my mind! :)

This is probably a stupid question (uninformed at best), but why does a town need to financially support initiatives of private developers, such as Carrboro's main street project? The developer will be making the profit off rents, etc. and while the town will benefit through tax revenues, they also have to support the infrastructure behind the development. I can see supporting the town's ability to grow infrastructure without a bond election, but I'm missing something about supporting private project development.

Although I'm generally a critic of TIFs, see the minutes of the Council meeting from Sept 7, such a financing arrangement can give the local government a great deal of leverage with the developer to get the kind of development best suited to the community. TIFs might work well with the concepts for Parking Lots 2 & 5 in Chapel Hill -- so goes the argument. In a nutshell, the Town doesn't want to give up ownership of the lots, and wants to create a great deal of public space and parking. These are important interests in order to maximize success of the Council's goal to provide an economic spark for neighboring properties as well as the entire downtown area. Public space and parking are hard for developers since they eat into the cost of development. Having the Town subsidize the cost of public space and some of the parking can keep the project financially feasible for the developer. Theoretically, the TIF allows the Town to provide the subsidy and pay it off using the increased property taxes generated by the rest of the development.

This argument might not sell you on Amendment One; I'm not sold on it for other reasons beyond those implicated by our local developments.

Everything old is new again!

"140. It is true governments cannot be supported without great charge, and it is fit every one who enjoys
his share of the protection should pay out of his estate his proportion for the maintenance of it. But still it
must be with his own consent- i.e., the consent of the majority, giving it either by themselves or their
representatives chosen by them; for if any one shall claim a power to lay and levy taxes on the people by
his own authority, and without such consent of the people, he thereby invades the fundamental law of
property, and subverts the end of government. For what property have I in that which another may by
right take when he pleases to himself? "

"142. These are the bounds which the trust that is put in them by the society and the law of God and
Nature have set to the legislative power of every commonwealth, in all forms of government. First: They
are to govern by promulgated established laws, not to be varied in particular cases, but to have one rule
for rich and poor, for the favourite at Court, and the countryman at plough. Secondly: These laws also
ought to be designed for no other end ultimately but the good of the people. Thirdly: They must not raise
taxes on the property of the people without the consent of the people given by themselves or their
deputies. And this properly concerns only such governments where the legislative is always in being, or at
least where the people have not reserved any part of the legislative to deputies, to be from time to time
chosen by themselves. Fourthly: Legislative neither must nor can transfer the power of making laws to
anybody else, or place it anywhere but where the people have. "

I expect out-of-control taxation in Chapel Hill to play a much larger part in the 2005 elections. It's 'good intentions' like this amendment that place burdens on our community that are neither in the 'ultimate good' of what should be our 'consenting' community.

According to the proposed legislation the project to be funded by a TIF must be designated as a development project, which is defined as "A capital project that includes capital expenditures by both private persons and one or more units of local government and that increases net employment opportunities for residents of the development district or within a two-mile radius of the project, whichever is larger, and increases the local government tax base."

From what I've understood about the CH parking lot projects and the Carrboro Main Street project, there is more focus on supporting existing businesses and creating affordable housing than on creating new employment opportunities. Have I missed something?

I only barely understand how bonds work, but my question about this is: Other than avoiding the apparent will of the electorate and getting funding faster than usual, what does Amendment One accomplish?

From the DTH. Interesting comments by Cary and Wake Co officials.

http://www.dailytarheel.com/vnews/display.v/ART/2004/09/27/41580cb078799

Sorry for the lengthy comment but my column of 9/11 covers many of these issues:

Reconsider Amendment One backing

DAN COLEMAN Columnist
Chapel Hill Herald
Saturday, September 11, 2004
Final Edition
Editorial Section
Page 2

Last Tuesday, the Chapel Hill Town Council endorsed an ill-considered constitutional amendment that is being foisted on the people of North Carolina. There is an all-out push this year to gain approval for "Amendment One," which would allow cities and counties to issue what are being called "self-financing bonds."

More commonly known as tax increment financing (TIF), this is a method that authorizes local governments to issue bonds to subsidize development and to do so without placing them on a ballot for voter approval. North Carolina voters rejected TIF amendments in 1982 and 1993.

TIF bonds are a bet against the future value of a property. With TIFs, government spends that future value now on improvements that often amount to little more than a subsidy for private developers. The TIF is undertaken in the hope that future revenues will be sufficient to pay off the bonds, a risky proposition.

TIFs lock in the current tax rate on a property to be developed. The value of subsequent improvements is not subject to regular property tax. Instead, the equivalent of that tax (the "tax increment") is diverted to repay the subsidy.

One of the risks associated with this kind of financing is the gamble that the improvements will actually be made and that they will maintain value over a period of many years sufficient to pay off the bond.

Town Councilman Mark Kleinschmidt was troubled by the resolution's claim that self-financed bonds do not raise taxes. He pointed out that this is only true if everyone fulfills their responsibilities and the project works out as planned.

But even when legal requirements are in place to force developers to stick to their TIF commitments, they can often abandon those obligations with little more than a slap on the wrist in return. There are too many instances where taxpayers have had to bail out economic development projects.

TIFs are promoted with the loftiest of expectations. Originally formulated to help cities improve "blighted" areas, the term blighted has been stretched to include just about anything a developer might imagine.

Chicago has spent $62 million in TIF funds to subsidize national retailers such as Home Depot, Borders and Starbucks. A study of a New Orleans TIF found that it would require Wal-Mart to pay 38 percent less than it otherwise would in property taxes.

In addition, there is uncertainty as to whether TIFs are even needed. Proponents presume that development will not occur without incentives, but there is no proof that this is the case.

After a 10-year study of Iowa TIFs, Iowa State University researcher David Swenson concluded that "[tax] increment spending has not yielded measurable and distinct economic or social outcomes."

A major problem with TIFs is that, while most are authorized by municipal government, they affect all entities that depend on property taxes. If Chapel Hill or Carrboro issue self-financing bonds, the county and school system will have their revenues from the TIF projects held back as well. In fact, of all governing bodies, schools often take the hardest hit.

Chapel Hill is one of scores of North Carolina municipalities that have endorsed Amendment One.

But not all of them mindlessly signed on to the boilerplate resolution provided by its proponents. Monroe, for example, changed the language to remove the clause claiming there would be no increase in property taxes.

The reason municipalities support this is simple: TIFs give them an easy way to raise funds.

But there is a fundamental principle of democracy that says what is easiest for government is not always best for the people. There are many cases where public scrutiny and a direct vote provide an important safeguard. That is why general-obligation bonds are voted on as ballot issues.

Despite the Orwellian sleight of hand that removed the word "tax" from the title of the amendment, there is nothing "self-financing" about tax increment financing. TIFs are essentially a shell game. Like the deficit spending of the Bush administration, they avoid raising taxes for today's expenditures by obligating future governments. Both TIFs and deficits can be effective fiscal policy tools if used sparingly and wisely. Unfortunately, such wisdom is in short supply.

It might be possible to fashion TIF legislation that defined clear social goals, gave all stakeholders a voice and adequately assigned risk to the developer. It's just hard to imagine those requirements coming out of the N.C. General Assembly.

In many states and municipalities, those concerned with economic justice must be constantly vigilant against abuses of the TIF system (for example, see www.ncbg.org in Chicago). There is no need to open that door in North Carolina.

It is not too late for the Town Council to rescind its hasty and ill-considered endorsement of Amendment One.

Terri, Your concern for less affluent towns is actually a reason to vote against Amendment One. That Amendment would allow them to move more quickly into riskier debt, perhaps sometimes in desperate all-or-nothing mindsets.

Mark K. is right. Common consensus is that this is a good thing, especially for local community needs. N.C. is one of the few States not to take advantage of this vehicle. If folks don't like the way elected officials are managing local developments, they can be voted out.

According to the NC Amendment One website, the 'need' for TIFs in NC is to build the infrastructure that will attract new development. I understand Dan's point that the tool may be used for other, posssibly nefarious, purposes and that wouldn't be good. But, Dan, how else do you see getting infrastructure built? If Orange Co were to put out a bond referendum to install water/sewer throughout the northern portions of the county, wouldn't there just ensue a debate about whether that money would be better spent on schools? Wouldn't the Chapel Hill/Carrboro/south Orange majority be able to over-ride such a proposal since it wouldn't benefit them but the 'minority' northern Oange residents?

I was at a statewide and state-sponsored tourism conference in Charlotte last spring, and this amendment was being sold to us as good for tourism, as it would allow smaller communities to invest in infrastructure to attract tourism. In some counties in the western part of the state, tourism is pretty much the only industry, so it sounds good on the surface. They also made a big point about how NC was one of only two states that didn't have this option.

My understanding, though, was that the real push for this was coming from Charlotte and Raleigh so they can finance major developments like stadiums and arenas (projects of dubious public value, in my opinion).

I might have my info wrong... anyone know?

If folks don't like their elected officials unilaterally saddling the tax payers with huge bond payments, they can vote them out....Bobby, sounds like closing the barn door, etc.

We're already seeing backdoor unilateral taxation via 'fees' (a horse of another color) like the recent stormwater utility fee. These fees, unlike property taxes, are free floating, arbitrary and ungrounded in reality, unlike property taxes which are (supposedly) based on the 'real' (heh heh) value of something.

When you see the way the $3.3 billion UNC improvements bond is being squandered, and think of the future outlays required to service it, you should realize that making it easier to issue bonds is not a good idea. Considering that voter approval of bonds hasn't really served as a check to their passage (at least around here), keeping that small hurdle - community approval - is good governance.

There's a time, Bobby, for voting officials out, say next election cycle because of their ethical lapses, but considering the depth of financial trouble TIFs could bring (and the difficulty in measuring their effectiveness - Global Trans Park ring a bell?), why cede this right?

I'm voting NO on Amendment One.

Here's why:

General obligation bonds allow a municipality to pledge its taxation authority to the bond holders (the people who buy the bonds). In order to pledge (mortgage) the Town's taxation authority, we have to get the voters to specifically authorize it. I support that.

Pledging the Town's taxation authority is a major decision. It gives the bond holders the power to force the Town to raise taxes, if necessary, in order to pay off the bonds. The bond holders can literally go to court and get a court order to force a local government to raise its tax rate. In some respects, by issuing general obligation bonds we give some of our Town's sovereignty to the bond holders. We ought to have to get specific permission from the Town's voters before we do that.

Amendment One will give local governments an easy backdoor to duck out of instead of facing the voters to explain the need for the bonds.

Oh and Bobby, you can always vote out the elected officials, but you can never vote out the bond holders.

I've spent a fair amount of time in small but growing beach communities lately and their biggest problem is funding infrastructure, specifically water and sewer lines. Without that infrastructure they can 1) proceed with development, in an effort to increase the tax base so that they can build infrastructure OR 2) find some kind of creative financing such as what I am interpreting the TIFs to be. If they have to go with a general obligation bond, they won't grow because they don't have the ratings or the tax base needed to support the size of the bond. If they try to grow without a sound infrastructure, they can do major damage to the environment and possibly public health.

I understand everyone's concerns about bypassing public endorsement, but if what I understood from reading the background (both pro and con), then the smaller, rural communities are in a quandry without something like TIFs. I don't see this as an issue for Orange Co; I wouldn't support this type of funding if one of the Orange Co elected bodies tried to use it.

But this is a statewide amendment, and I would encourage everyone to think about what other communities besides ours may need before casting a no vote.

If rural counties need funds for infrastructure, why don't we support them ala the poorly thought out InvestNC
program.

I'd much rather the state issue 30-year low interest development loans to rural counties than try to attract large companies with
questionable incentives.

Terri,

You write about some small communities now: "they won't grow because they don't have the ratings or the tax base needed to support the size of the bond."

Whether a referendum-endorsed bond or a TIF,it's still money borrowed and owed. And if they don't have business borrowing it one way, it seems highly risky to enable a few individuals to borrow it another way, in the names of all those in said tax base.

I'm reminded of developing countries that borrow(ed) tons of money for what prove(d) to be useless projects (at best), resulting in mounds of debt burdening every last inhabitant of those countries.

Exactly so, Jeff. TIF's are still going to be general obligation bonds. They are just going to be general obligation bonds that are not approved by the voters.

If you haven't got the credit, then you shouldn't borrow the money. The NC Local Gov't Commission will still regulate whether the TIF's may be issued, so the only thing that will make this process easier is that local gov'ts won't have to go to the voters.

The original proponents of this proposal simply want to do away with bond referenda because they know that most voters will be opposed to corporate welfare.

Aside from the fact that TIFs are a way to increase debt without subjecting that to voter approval, and regardless of how you feel about "corporate welfare," there are two strikingly insidious aspects of this amendment:

1) The General Assembly apparently didn't trust us to actually review the text of the amendment on our ballot; what you'll see in November is a 150-word advertisement for a 450-word amendment. It begins: "... to promote local economic and community development projects." Who's going to be against jobs and progress?

As if the blatant deception wasn't enough reason to vote against it (is it really *that* hard to actually print the amendment on our ballots?)...

2) Ordinarily, when development associated with new businesses, etc., occurs, property values rise, and the additional tax raised from the land goes to basic local services -- police, fire, water, schools. Rather than just hoping that the tax value of land will rise with development, what Amendment One's TIFs will allow is for the tax value of the land within a development district to be raised *before* devlopement occurs -- and that increased tax revenue be set aside exclusively to secure and pay off that bond. So, for the folks inside the district, it's a tax increase without raising the tax rate.

However, even once the bond-financed development is completed and the tax value has (perhaps) risen to what it was predicted to be, there's still the matter of the bond to pay off... which can take years or decades -- years in which the town cannot avail itself of the increased tax-value of the land. That's years in which the increased services which the "development district" needs -- police, fire, water, schools -- have to be paid for by taxpayers *outside* the district -- thereby raising the tax burden on everyone else as well.

North Carolina municipalities, when compared with others nationwide, have fairly strong credit ratings, and we already know that our taxes are too high to consistently attract new businesses to our state. Do we really want to risk both damaging our credit *and* increasing taxes further by voting for Amendment One?

Ahem. In March, I posted this about the growing movement to approve a TIF amendment, as well as other follies of state-financed corporate welfare:

http://orangepolitics.org/2004/03/the-one-two-punch/

It should be noted that both the Common Sense Foundation and the John Locke Foundation have editorialized, investigated and generally shouted their opposition to the amendment, as John Hood points out in a follow-up post.

For starters, we should strike "self-financing bonds" from our vocabularies, as they are no such thing.

I won't argue with WillR on his points. In fact, I agree with them largely. Maybe I'm just worn out a bit on the taxation issues and rising costs in the area; it is hard to get the point across to local leaders in my view.

Last night the Council Committe on Parking Lots 2&5 and the entire Council received a financing feasability analysis for the proposed downtown developments. I was pleased that the financing structure will not include use of TIFs.

Local governments already have a way of financing bonds without citizen approval--certificates of approval (COPS). The review process for TIFs, including the creation of a development financing district which must be subjected to a public hearing, seems much more regulated and secure to me than COPS.

Summarizing some key points:

1) no one has demonstrated that TIFs bring about development that would not have occurred otherwise.
2) private development should be "self-financing", including necessary infrastructure.
3) there is no guarantee in the language of the proposed amendment that TIFs would serve the public good rather than the private
4) the promotion of Amendment One is an exercise in newspeak and lies, especially the lie that the bonds are "self-financing."

Terri: Perhaps the reason that [small] beach communities can not raise money for infrastructure improvements via conventional credit mechanisms is because it is insane to build infrastructure there! There is a large chance that the newly built infrastructure will be washed out to sea or damaged by a hurricane long before they can themselves pay off.

On the amendment issue as a whole: Who pays the bill if the private venture goes broke or leaves town? This is especially important for single use items like stadiums. I doubt the debt holders will chaclk it up to bad luck.

True, Terri. However please note that COP's bear higher interest rates for the municipality.

The higher interest rate is because:

a) municipal bonds pay tax exempt dividends to the bond holders, whereas (I think) COPs do not.

and

b) COP holders do not have the right to force a municipality to raise taxes in order to pay for the COPs and therefore they are a riskier investment .

TIF's will be a low-interest method for circumventing the wishes of the voters.

My understanding is that the risk of TIF's is borne by the bondholder and the funding source for the private development, not the taxpayers. TIF's do not encumber the taxpayers in the same way that voter approved bonds do. With general obligation bonds--the kind we currently issue by a voter referendum---- our community pledges to the bondholders it will use the community's full faith and credit to repay the bonds. With TIF bonds, we do not pledge to the bondholders our full faith and credit. Self-financing bonds prohibit the bondholders from forcing the community to raise taxes to pay off the bonds.

Mark--my understanding is that COPs are riskier for banks; I'm not sure about the risk to the community--still researching.

So far in this discussion, the argument against TIFs is (primarily) the exclusion of citizens in decision making--a point I think is very important. My point in bringing up COPs is that if town officials want to get around a citizen input, they already have to tool necessary to do so. Amendment One doesn't really create a new opportunity for unsupported taxation--that opportunity already exists through COPs, as well as the levying of fees.

Since TIFs don't create a new mechanism for bypassing citizen input, since they are less risky than COPs, I'm not sure I understand why so many of you are so adamant against this amendment.

I agree with Duncan's and others objection to providing tax incentives to attract new business--especially in a relatively wealthy county such as Orange. But, despite Josh's flippant response about just not building at the beach, I think this *state-wide* amendment needs to be viewed for its utility to other less privileged communities. In Beaufort and Southport, this type of financing could be used to extend water and sewer lines where developers are going to build whether Josh likes it or not. In Beaufort, the huge influx of development, using septic systems, has created a potential public health problem. In other communities, they have already raised the tax rates so high that long-term landowners are selling because they can't afford to pay their taxes. Yes, the problem comes through the failure to manage development, but we're talking about poor, maybe even, poverty stricken communities. They shouldn't have their options restricted because the city officials in Mecklenburg want to misuse the tool in order to build a stadium.

I also *think* but am not completely sure just yet that the whole requirement to create a development financing district puts certain constraints on the use of TIFs that are not available for COPs or fees.

Anita, In plain English, are you saying that citizens (or officials in their name) would be co-signing a loan and then have the option to remove their signature retroactively? It doesn't seem plausible.

For those who know as little as I did about this process. To issue a TIF, the governance unit would have to:

1. first create a development financial district that is strictly regulated based on "new employment opportunities" and some other feasibility factors.

2. develop a plan to payback the bond using the any of the following sources:

a. The property taxes from the increased value of district property
b. The proceeds from the sale of property in the development financing district
c. Net revenues from public facilities in the district (other than public utility systems)
d. Other nontax sources of revenue of the local government

3. Hold a public hearing on the project and the payback plan (it is feasible that citizens could object and the officials could proceed anyway, but those officials may never get elected again)

4. Get approval from the Local Government Commission.

While Anita is technically correct, my source in the legislature says no community would default on a loan if their pledged payback sources failed because of the negative financial consequences. However, the failure rate on these bonds, from what I understand, is very low--and in NC they will be more strictly regulated than in other states (per my source in the legislature).

Dan, to your points

1. It's almost impossible to prove or disprove that claim--how can you possibly prove what MIGHT have happened if something else HADN'T happened??? What I see is that TIF's have allowed many communities to identify areas where they want development to occur and have provided incentives for that development to occur on a timetable that works for the community. It's enabled communities to be proactive and take a leadership role in what happens in their communites.

2. You have to take a larger look out there--not all communities are as desirable as Chapel Hill and can make all these requirements of developers who might want to do business there. In fact, in many communities around our state that are not as fortunate to be on some magazine's "top 10 list", some infrastructure ---such as water and sewer lines, roads, sidewalks, and such----has to be subsidized up front by tax money before the completed project generates the tax revenue to "pay" for those improvements. Often it neccessitates a tax levy on existing property to pay for the improvements. A TIF bond gets the bondholders to "front" the money to the municipality to pay for the improvements and assume some of the financial risk of the project.

3. The public good is served by the quality of the public officials who are elected. The structures in place for TIF funding allow fora lot of community input and requires property owners' approval before declaring an area an economic zone eligible for TIF funding. We trust our elected officials to make lots of decisions that we don't get to directly vote on--for example, I don't get to vote on the Town's budget or a tax increase--my 9 member Town Council makes that decision for me.

4. My reading of the amendment is directly contrary to yours about this matter--everything I have read has said that the bondholders CANNOT force the taxpayers to pay off the bond if the project goes south. Because the bonds aren't directly guaranteed by the taxpayer, their rating is adjusted accordingly. I would like to see what source material you are using that leads you to a different conclusion and am willing to reconsider my reading of the issue if the facts warrant.

Jeff, I think what is being pledged to pay back the bond is the tax revenue specifically from the project, not a general obligation. The way I read it, It would take a vote of the taxpayers to approve repaying the bond through other sources. I think of it as a "specific obligation" bond, not a general one.

That said, I can see Terri's point that there might be some pressure on the electorate to pay off the bond to preserve the community's financial reputation. According to what i've seen so far, there hasn't been an issue of default ( "in 50 years no local bond approved by a local development commission has defaulted" www.amendmentone.org) --but I haven't been able to find out yet if that' s because they have all worked, or if it's because a community stepped in and paid off a bad bond through general tax revenues. I will try to find out that information and post it here.

It can also be built in that the bond is insured in case of default, and the local government can put a lien or foreclose on the private property to collect the taxes owed.

Anita, Citizens in a town either owe the money, or they don't. If they fail to authorize repayment, they've got a big problem. I suspect that you understand that. It's way too easy for specific interest groups to snow-job an electorate, and Amendment One would just make that easier.

Again, I think you have it exactly, Jeff.

My point is that municipalities ALREADY HAVE A WAY TO ISSUE SUCH BONDS. They just have to go to the voters. Who is afraid of that?

I am against Amendment One for the simple reason that it is too complicated for the average person to understand.

I hope John Hood will forgive me for reprinting this portion of his column from May, which echoes much of what Dan wrote in his column, but expands on some other points. Plus, I think it's useful to point out that free-market libertarians are just as appalled by the TIF proposal as some folks on the left:

==========

by John Hood
The John Locke Foundation

(an excerpt)

TIF proponents deny that there is a risk to taxpayers. Since property owners surrounding a project would be paying off the bonds, through higher tax collections from their presumably more-valuable real estate, the general taxpayers are said not to be on the hook. This argument is at least naïve if not disingenuous. For one thing, the process of drawing TIF districts is hardly amicable in other states, and is never voluntary. That is, some taxpayers do indeed get roped into having their taxes pay off bonds for projects they may well oppose. Property values rise for a variety of reasons. It is by no means a straightforward math problem to “prove” that yet another new parking deck, or a money-losing civic center, is the reason why properties rise in value.

More generally, TIFs are supposed to be worth the trouble because they enhance local economies in some way. But careful research in states with a long history of using TIFs has failed to show this. For example, two researchers at Iowa State University examined their state's growing use of TIFs. From 1989 to 1999, the number of TIFs localities more than doubled, and the total value of property within TIF districts rose from $650 million to $4.2 billion. But property values rose outside the districts, too.

“The TIF ultimately is supposed to increase and enrich the tax base through job growth, population retention or growth, earnings gains and trade enhancement,” the researchers concluded. “But between 1989 and 1999, our analysis shows TIF-increment spending at the county level has not yielded measurable and distinct fiscal, economic or social outcomes.” They also found that the system was, in effect, forcing taxpayers outside of TIF districts to shoulder a disproportionate cost of providing regular government services to a growing population.

A similar study by Heartland Institute scholars of TIFs in the Chicago area found that their use was, at best, simply shifting development and job creation around within the city, not creating net new jobs. Statewide, a separate study by Lake Forest College and University of Illinois researchers found that Illinois cities without TIFs grew faster than cities with them.

The issue of TIF bonds for “public” development is intertwined with a larger one about government assistance for business. The main reasons why politicians want more ways to issue debt without a public vote are 1) it's a way for private companies to gain access to tax-free bonds and 2) there are money-losing projects, such as sports arenas, that companies want to exploit but not have to pay for.

In both cases, to provide corporate welfare is to warp the market. Why should projects with political connections be able to attract investment capital from deserving private-sector projects simply on the basis of a tax break? And why should any taxpayers be compelled to finance the activities of multi-million-dollar sports teams or tourism industries?

TIFs don't represent the potential downfall of North Carolina, but they will set a bad precedent and, like so many other dubious government schemes, they will raise public expectations of economic growth that in all likelihood will not be met. Here's hoping the N.C. House debates the issue more thoroughly.

-30-

Hood is president of the John Locke Foundation and publisher of Carolina Journal, in print and on the web at www.CarolinaJournal.com.

There is an assumption embedded into the Locke Foundation article that the NC legislation would duplicate the mistakes of other states rather than learning from those mistakes in order to make the tool more effective. I'm not a lawyer so wading through the text of the legislation is like reading a foreign language. I would be interested in hearing from a lawyer with an open mind about this amendment.

Are the problems other states have encountered with TIFs due to the concept of TIF or is it the implementation? Does the NC implementation replicate or address the problems other states have had? What other tools do economically depressed communities (low tax base) have for building or upgrading basic infrastructure such as water and sewer?

You're asking the wrong question, I think. To me, the question is, Do public incentives to private corporations ever make sense? There are all sorts of public incentives we dole out to corporations and industries in North Carolina in the hope of attracting them to poor areas of the state. The Lee Act funds, for instance, which provide tax breaks for a set period of time for each new job created in a certain area (the formula is complex).

That program – an experiment – is roundly considered a failure by folks on the right and the left and the center: only 4% of the jobs claimed under the act (and thus, earning the companies tax credits) were found to have been attributable to the act's incentives, and most of the money has gone to areas of the state that need it the least.

You can read more about that at www.cfed.org

Dr. Roy Cordato has written this regarding public incentives for private business in North Carolina:

"A recent study in the journal Policy Sciences of the effectiveness of North Carolina's economic incentives to attract international business noted, “North Carolina has developed one of the most aggressive programs in the United States for attracting and retaining industry.” In spite of this, when internationally owned companies in N.C. were asked to rank factors that attracted them to the state or would keep them from relocating they typically ranked economic development policies as the least important. These include tax incentives, government assistance programs, government financing programs (low interest loans, industrial revenue bonds, etc.), and state government marketing assistance programs. Ranked highest by the companies were factors such as labor force availability; quality transportation and quality of life factors such as K-12 education and recreational and cultural activities; and business climate, which included tax burden, the level of regulation, and the attitude of local government officials toward business in general."

The thing is Duncan, when I read about TIFs I don't read 'tax incentive'. I read partnership--or the ability of a local government to create infrastructure that benefits new businesses as well as residents. In your quote above it says "Ranked highest by the companies were factors such as labor force availability; quality transportation and quality of life factors such as K-12 education and recreational and cultural activities."

I used to live in North Florida--a very very poverty stricken area of this country. The local beach communities I've been visiting in NC have similar qualities. These communities have terrible infrastructure--from schools, to water/sewer lines, to (hah) public transportation. Given these conditions and the criteria you use for attracting new businesses, these areas of poverty are facing an impossible task. They need to build infrastructure in order to expand their tax base, create new jobs, etc.

So again, I ask the question of those of you who are against this amendment, what other tools do you see poor communities using to help build (expensive) infrastructure?

Hi all,
Someone who undersands TIFs better than
I do please explain something.

When private developers (residential,
commercial, office, etc) develop property,
the tax value of that property increases, and the town receives more revenue which it uses to provide services to the
residents, tenants and employees of the
new development. With TIFs, the tax
revenue is used not to fund services,
rather it is diverted to pay the debt service on the bonds. So who pays for the new town services?

If services to the new development are
subsidized by the rest of the taxpayers,
why are such bonds called "self-financing"?

What am I missing here?

Interesting thread.

I'm from Chatham County and we're a good example of a poor community that could not pass a general obligation bond even if Mother Theresa and Billy Graham both supported it.

I am on the learning curve about Amendment One because I think public sector finance is a valuable AND dangerous tool. As I see it, TIFs are a tool to empower local governments to entice and create development (or redevelopment) in places where strict profit motives would not generally bring investors. I also see it as a means for local government to offer incentives for private investors to do something for the common good. On the other hand, smart folks in Chatham (such as my mother) oppose it strictly because they do not trust the current batch of County Commissioners.

Mark Chilton, I'm glad to read your opinion, but I'd like to hear more details of your decision not to vote for the TIFs.

For example, how is it that you come to differ with these folks? http://www.ncsmartgrowth.org/archive/amendmentone.pdf

Thanks,

John Bonitz

For the sake of discussion, I'd like to pose a hypothetical application for TIFs.

Suppose you live in a rural county where the board of commissioners ten years ago bought some land for an "industrial park." In the intervening years there has never been enough money to invest in the roads, water mains, sewer service, powerlines, and broadband needed to actually attract industry. So you've got a great big open field but you aren't deriving any benefits.

Your neighbor on the right is opposed to spending any more money on it cause he's adamantly opposed to government expenditures, period. Your neighbor on the left is opposed to spending any more money on it because she's adamantly opposed to growth of any sort - especially in her back yard. So general obligation bonds have a snoball's chance in hell of passing.

Yet, your neighbor across the street is out of work. In fact, both neighbors across the street are unemployed. Lots of folks in your county need jobs, and you know in your gut that if you could just get some streets and pipes into that "industrial park" you might be able to stem the flow of sprawling McMansions being built under the guise of "job creation."

Why wouldn't you want to empower your local government to be able to issue a bond for a project that will in all likelihood generate more than enough tax revenue to pay for itself?

Mind you, this is just a hypothetical...
;-)

Thanks in advance for feedback!

John Bonitz

Amendment None

Gosh, I have probably said too much about this already, but I will push my luck and address it one more time.

John Bonitz' Hypothetical

I hear that problem, John. I guess the issue in your hypothetical is that the majority of the voters don't support the expenditure. I agree that Amendment One will allow the County Commission to build the infrastructure anyway, but I am not sure that that's good. It is un-democratic to circumvent the voters in that way.

Also, I can just as easily imagine the shoe on the other foot. We have seen poor eastern NC counties (time and again) go after economic development in the form of prisons, hazmat incinerators, medical waste incinerators etc. How will we all feel when TIF's are being used to circumvent voter opposition to developments of that kind?

Or how about this: Last year I sat in on a very small class looking at a federal economic development tool called the New Markets Tax Credit (NMTC's). This class included among its students fromer NC Governor Jim Hunt. It was an interesting class and Gov. Hunt's presence added much to the discussion. At one point he asked whether the NMTC's could be used to finance the construction of a Wal-Mart in a small eastern NC town. Answer: Yes. Gov. Hunt clearly thought this would be a good thing.

The Real Reason for Amendment One

Meanwhile, in urban centers, we repeatedly see heated debates about the value of convention centers, sports arenas and performance halls. Some are probably good ideas and others are not. But if the voters are against issuing bonds for the project, then the project can't get bond funding. Amendment One will solve that ‘problem.' Why should we give the entertainment/sports industry yet another way to cirumvent the will of the voters? That is CLEARLY what this proposal is actually about.

So Where Do We Get the Money?

Terri and others on this thread would like to think of all the potentially beneficial uses of TIF's, but there are as many bad possibilities as good ones. And we have to look at the likelihood of how non-voter approved TIF's will be used. Will the availability of TIF's really transform poor communities? Do you think that local elected officials see things so much differently than the voters in those communities? Usually, the elected officials are just as fiscally conservative as the voters. The well-heeled backers of Amendment One pretend that TIF's will transform downtown Siler City, but the fact is that their intention is more to use TIF's to build sports arenas in Charlotte.

Terri, you ask where poor communities can get the funding to extend the infrastructure that they need. But you yourself have mentioned a variety of non-voter approved debt instruments available to local governments. But local governments will still have to pay back the money whether the money is borrowed with voter approval or not. TIF's don't change that. There are a number of USDA Rural Development programs that assist local communities with grants and subsidized loans for these purposes. There are also federal Community Development Block Grant funds for this. The problem is that there is not enough funding of that kind. But TIF's will do nothing to change that.

The Real Problem with Amendment One

Sometimes when the citizens vote down bonds, I disagree with them. Other times I agree. But either way, there is a reason why voters have the authority to approve or disapprove GO bonds. It is because their taxation authority (and therefore their sovereignty) is being mortgaged; mortgaging our taxation authority ought to require voter approval (regardless of how meritorious the project is).

It's not the Tax Increment Financing that is the problem. It is the dodging of the voters that is. If we can show in a compelling way that TIF's will pay for themselves, then we should not be afraid to go to the voters for approval. TIF's and other sorts of bonds may be a tough sell in many areas of North Carolina, but maybe the voters actually know what they want. That is one of the fundamental assumptions behind democracy.

You see, the problem is not TIF's – it is Amendment One.

Mark--I take your points. But how far are you willing to go with voter approval? Is it only with debt that voters should have a say? I'm not being combative here--I really want to pursue to issue of voter decision making. On another thread you endorsed the leaf blower ban. Should that be put to a vote? Where is the line between the role of elected officials and the role of the voter?

Terri

Good question. And of course, there is no 'right' answer. The USA is mostly a representative democracy and not a direct democracy unlike ancient Greece where every citizen could vote on every legislative issue. By contrast, almost all legislative decisions in the US are made by elected representatives. But there are reasons why General Obligation bonds are different.

General Obligation bonds are fundamentally different from any other thing that local governments do. Issuing GO bonds puts the power of setting the municipality's tax rates partly in to the hands of private investors (the bond holders). They can potentially go to court to force the municipality to raise taxes - just as the bank can go to court to force you to sell your house if you default on your mortgage. This is what I mean when I say that we are mortgaging our taxation authority.

Philosophically, before we hand over a part of our taxation authority as a town, we should have to show that the voters directly authorized us to do so. That has been the rule in NC for at least 70 years. And that is the reason why the law is written the way it is. Past legislators and voters thought this issue was so important that they put it into the North Carolina Constitution - so that changing that rule would not be taken lightly.

There's an old legal saying: "Reason is the soul of Law, and when the Reason changes, the Law must also change." There's a lot of truth in that. But when it comes to Amendment One, I don't see how the Reason has changed, and therefore I don't see why the Law should change.

My apologies if I am being a pain in the butt about this. I'll try to stop posting on this topic.

Mark--I'm not sure why you are concerned about the amount of posting--I for one appreciate the time you are taking to help me be better informed. I also imagine many others are learning from my persistent question asking. :)

To that end, I guess I'm still seeing the payback on the TIFs differently than you do. According to the legislation there are 4 sources that can be used to *plan* for the payback:

1. The property taxes from the increased value of district property
2. The proceeds from the sale of property in the development financing district
3. Net revenues from public facilities in the district (other than public utility systems)
4. Other nontax sources of revenue of the local government

If a council was arrogant enough to plan a stadium through TIF, then the net revenues and increased property values from that stadium would be the payback source. I understand that this does create a risk if the stadium doesn't generate sufficient revenues/tax value, but as I understand the proposal, in that case the property could be sold instead of increasing the tax burden on everyone in the town. I also understand that everyone in town's property tax would increase if the stadium was successful due to the assessment process.

To me the voters should be deciding on whether or not they want their property value to increase instead of whether or not they are willing to take the risk of the stadium failing. But that's because my research shows a very low incidence of failure.

This is very tricky, complicated stuff and I know that I don't understand the full implications of the amendment. I believe in democracy, but I also don't want to become like California with all those voter initiatives. I may also more prepared to trust elected officials than others. Call me Pollyanna!

Terri, I bet no one really understands the full implications of the amendment.

You are completely correct about how the TIF's are intended to be paid back, but of course they may not always work out the way they are planned. No one takes out a mortgage with the intention of letting the property get foreclosed either. Well, almost no one.

But the point is not how likely a default is, but rather whether the taxpayers are on the hook if there is a default. Unless I seriously misunderstand TIF's (and that's possible), the taxpayers are on the hook in the event of default (as Jeff Vanke says above, 'either the town owes the money or it doesn't'). And I think that the bond holders will still have the same remedies available to them (ie getting a court order forcing a town-wide tax increase if necessary). So the taxing authority is still being pledged (and therefore, I think, the voters should have their say-so on it). [NOTE: I am wrong here, see comment at 3:57pm 9/30/2004 below]

And I guess it is true that the town could seek to pay off the bonds by selling the stadium or whatever, but it is likely to be a short-sale (below the amount owed) because if it didn't work with TIF financing in that dollar amount, then it surely won't work with higher interest rate bank loans. And if the TIF's are used to pay for sewer lines and sidewalks . . . well, what will you give me for this here used sewer line?

Of course, we don't expect any municipality to default and probably none will, but NC municipalities did default on a LOT of debt back in the 1930's. And NC municipal bond ratings went into the toilet back at that time. NC worked long and hard to get its local governments' credit ratings back to where they are today. The state and most of its municipalities have outstanding S&P bond ratings now (including especially Carrboro and Chapel Hill).

The municipal bond defaults of the Great Depression are the reason that we have the NC Local Government Commission today. And (I think) those defaults are also the reason why voters must approve GO bonds before a municipality can issue them. And (I think) bond holders were given the power to force tax increases (if necessary) at that time as well, also for the simple purpose of encouraging the investors to buy the bonds. As a North Carolina GO bond holder, one almost CANNOT lose because of the pledging of tax authority.

Wow, this has got to be more than most folks ever wanted to know about NC municipal bond law. But my point is this: All of these principles are inter-related. Hopefully, I have drawn out the inter-realtionship of all of the following ideas:

1) If municipalities have good credit ratings (bond ratings), then they can borrow money at lower interest rates (which saves taxpayers on interest costs).

2) In order to create investor confidence in NC municipal General Obligation bonds (and therefore keep bond ratings high and interest rates low), we give investors the right to legally compel tax increases (which they pretty much never have to use).

3) In order to justify giving up a small piece of our municipal sovereignty (taxing power), we get clear and democratic authority directly from the voters.

The fact that there will practically never be any actual default doesn't matter. The fact that general property tax funds will practically never be used to pay off TIF's also doesn't matter. The fact is that Amendment One will allow a pledge of general property tax revenues (if necessary) [NOTE: I am wrong here, see comment at 3:57pm 9/30/2004 below] and will give up some taxing authority (if necessary) and will do so without the submitting the particular issue to voter approval.

In that way, Amendment One directly undermines the philosophical basis for number 2 and number 3 above (the need to seek voter approval before mortgaging the taxing authority).

I can only mortgage my own house. I can't mortgage yours, no matter how certain I am that I will pay the bank back. Likewise, without direct voter approval of GO bonds (or TIF's), the taxing authority is not ours to mortgage.

And that is how the law has been in North Carolina for a long, long time and personally, I think there is some really good logic behind it.

All of that said, I have to admit that although I am an attorney, I am not a bond attorney. And I agree with you, Terri, that it would be interesting to hear what a bond attorney thinks of all of this. I will email Bob Jessup (a local bond attorney) and ask him his opinion. With luck I might convince him to post his thoughts here.

It seems that one of our core disagreements here, Terri, is about the ability of a town to recoup the funds; "the property could be sold," you write. NOBODY is going to go buy Global Trans Park for the $1 billion (or whatever) that went into it. And failed property-development ventures can happen on a much smaller scale, too.

For example, if you own a mid-sized house and spend tens of thousands to dress up the interior, any real estate appraiser can tell you that your "investment" (which is really your leisurely consumption) will make little to no difference in the resale price.

Hey thanks, Mark.

I'm glad to see that you are thoroughly circumspect about this and other fiscal matters. I have a similar distrust of initiatives that do not involve the voters. I've seen first hand how much better the solutions can be when more brains contribute. But the notion of democracy relies upon an informed and active electorate. This damned piece of land is out of sight, out of mind, and nobody in Chatham is gonna do anything about it. Meanwhile, the tax money we invested a decade ago goes wot waste, the land lies fallow, and we forfeit good clean industrial jobs to Lee County.

Also, surely you're no stranger to the need for elected officials to lead people, sometimes even when the people are reluctant or resistant.

I'm still very curious about these Carrboro neighbors of yours who endorsed the TIFs. http://www.ncsmartgrowth.org/contact.html
and here's the board of directors...
http://www.ncsmartgrowth.org/board.html

I'm gonna try to email them about this.

Also, I'm still not convinced that the Amendment (or the implementing legislation) does not sufficiently safeguard against TIFs being used for sports arenas, convention centers, etc. (I'm assuming that's why the NCSGA endorsed it, based on the text of their resolution.)

If I find those safeguards sufficient, I think I would vote for it.

Still researching.

Thanks,

John Bonitz

Thank you Mark for taking so much time to help me (and hopefully others who are lurking) understand this. You're partway through writing a book on bond financing!