The newsletter of the ISBA’s Standing Committee on Women and the Law
An overview of TIF districts
The stated purpose of the Tax Increment Allocation Redevelopment Act, 65 ILCS 5/11-74.4-1 et seq. (West) hereinafter referred to as the TIF Act, in the State of Illinois is to provide a mechanism for local governmental units in Illinois to spur economic development, in specific geographic areas that are deteriorating and/or declining, by providing gap financing for projects that would not occur without such public assistance. In the firsthand experiences of this author, there appear to be several ways in which the City of Chicago, in its practical utilization of TIF, is failing to adhere to this fundamental purpose for the program and actually may be undermining potential economic development in Chicago’s poorest neighborhoods. First, the City may be creating such a plethora of TIF Districts, and providing TIF assistance to projects that have no true “gap,” to the point where watchdog groups, other taxing bodies, and the general public are increasingly opposed to the continuation of TIF altogether. Similarly, the City may be favoring the creation of TIF Districts and the implementation of TIF-assisted projects in areas of Chicago that are less blighted, rather than more blighted. Third, the City of Chicago appears to be rapidly launching a defensive strategy against the resulting backlash, a strategy of utilizing TIF funds for projects that are popular with TIF opponents but arenot directly related to economic development of Chicago’s more distressed neighborhoods.
Section One: The City of Chicago may be creating such a plethora of TIFs, and providing TIF assistance to projects that have no true “gap,” to the point where watchdog groups, other taxing bodies, and the general public are increasingly opposed to the continuation of TIF altogether.
In the City of Chicago, there are 158 established TIF Districts, with approximately fourteen waiting to be approved. (City of Chicago Department of Planning and Development records, March, 2008). Of those 158 Districts, 77 were created as a “conservation” area; 59 were created as a “blighted” area; and 22 were created as both “conservation” and “blighted” areas. (City of Chicago Department of Planning and Development records, March, 2008).
The TIF Act states:
….; that as a result of the existence of blighted areas and areas requiring conservation, there is an excessive and disproportionate expenditure of public funds, inadequate public and private investment, unmarketability of property, growth in delinquencies and crime, and housing and zoning law violations in such areas together with an abnormal exodus of families and businesses so that the decline of these areas impairs the value of private investments and threatens the sound growth and the tax base of taxing districts in such areas, and threatens the health, safety, morals, and welfare of the public…..
65 ILCS 5/11-74.4-2(a) (West). For purposes of this article, I will examine those TIF districts that are created on the basis of such districts being either “blighted” or “conservation” areas. For an area to qualify as “blighted” area under the TIF Act, five of the following factors must be “present to a meaningful extent and reasonably distributed through out a proposed TIF district so that reasonable persons will conclude that public intervention is necessary.” ILCS 5/11-74.4-3 (West). Those factors are:
(D) Presence of Structures below minimum code
(E) Illegal use of Individual Structures
(F) Excessive Vacancies
(G) Lack of Ventilation, light or sanitary facilities
(H) Inadequate Utilities
(I) Excessive land coverage and overcrowding of structures and community facilities
(J) Deleterious land use or layout
(K) Environmental clean-up
(L) Lack of Community Planning
(M) The total equalized value of the proposed redevelopment project area has declined for 3 of the last 5 calendar years prior to the year in which the redevelopment project is designated or is increasing at an annual rate that is less than the balance of the municipality for 3 of the last 5 calendar years for which information is available…”
65 ILCS 5/11-74.4-3(a) et seq.
For “conservation” areas, the TIF Act requires that 50% or more of the structures in the designated area are 35 years of age or more and that although it has not yet become “blighted”, three or more of the following factors are present and detrimental to the public safety, health, morals and welfare…. 65 ILCS 5/11-74.4-3(b):
(4) Presence of Structures below minimum code
(5) Illegal use of individual structures
(6) Excessive vacancies
(7) Lack of ventilation, light or sanitary facilities
(8) Inadequate utilities
(9) Excessive land coverage and overcrowding of structures and community facilities
(10) Deleterious land use or layout
(11) Lack of community planning
(12) The area has incurred Illinois Environmental Protection Agency or United States Environmental Protection remediation costs……
(13) The total equalized assessed value of the proposed redevelopment project area has declined for 3 of the last 5 calendar years.
65 ILCS 5/11-74.4-3(b) et seq. (West).
The first issue is whether the TIF Act as applied, can be manipulated by municipalities to the extent that almost any area could possibly be classified a TIF District, rendering its initial purpose ineffective for those areas that it was intended to help. The TIF Act was established in January 1977 to “provide municipalities with the means to eradicate blighted conditions by developing or redeveloping areas so as to prevent the further deterioration of the tax bases of these areas and to remove the threat to the health, safety, morals, and welfare of the public that blighted conditions present.” 65 ILCS 5/11-74.4-2(a),(b),(c) (West). Recently, the use of TIF as a development tool in municipalities has been growing rapidly, increasing the likelihood for abuse. For example, in the City of Chicago, reassessments occur every three years by the Cook County Assessor. It appears there has been an increase in the number of TIFs created in the City just before reassessments take effect. The effect is to potentially understate the true value already present in those Districts and thereby capture the increase as “increment” in the subsequent reporting periods.
The statutory criteria are currently broad enough so that with a little creativity, municipalities and private property owners can manipulate the factors to the extent that areas that should not qualify as TIF districts are qualified as such. It also allows for the creation of TIF districts in areas that are already growing in economic development. Neighborhood Capital Development Group, “Who Pays for the Only Game in Town?” (2002). Even though the TIF Act was amended in 1999, to clarify definitions of “blight”, it did not reach far enough to capture and protect the growth of truly bighted areas.
There are at least two obstacles to judicial oversight of TIFs. Because of high transaction costs of litigation, collective action problems among those who are affected by unwarranted TIFs, it is extremely rare for suits to be brought alleging that TIFs have been improperly formed or administered. And, if judicial challenges are brought, there appears to be great judicial deference to the legislative decisions of municipalities that have formed TIF districts. Because of this deference for the municipality’s decisions, the criteria for formation of a TIF District may not be thoroughly examined. There is, effectively, a judicial presumption that the municipality is appropriately analyzing the factors of blight, while there is growing public scrutiny, suspicion and concern that these factors are not being adequately analyzed and that areas are being designated as TIF Districts where the statutory elements are not truly satisfied. Greater judicial scrutiny would provide a needed check and balance and provide greater assurance that the data relied upon by the municipality to justify the need for a TIF is legitimate.
Board of Education, Pleasantdale School District No. 107 v. The Village of Burr Ridge, 793 N.E.2d 856, 341 Ill. App. 3d 1004 (Ill. App. 2003) provides a useful example of the type of judicial scrutiny that should be more widely implemented. Here, at least, the Court found that although the Village of Burr Ridge approved the establishment of a TIF district based upon “blight” factors, the Village’s findings of fact were insufficient to meet the “blighting” factors necessary to qualify the property for a TIF. The facts in the case were undisputed. The Village created a TIF and redevelopment plan on 85 acres of vacant land in one of the wealthiest neighborhoods in the State. Id. At 859. At one time, the vacant land had been occupied by a corporate park with infrastructure improvements. In approving the creation of a TIF, the Village found that the statutory criteria necessary to establish the property as “blighted” had been met. The Board of Education, Pleasantdale School District No. 107, challenged the Village and requested injunctive and declaratory relief. The Court granted the Board’s motion for Summary Judgment which was affirmed on appeal. The Village asserted that the development area met four of the statutory requirements for “blight.” Id @ 861-862. The four factors that the Village relied upon in creating the TIF were diversity of ownership, flooding, obsolete platting and tax delinquencies. Id @ 861. The Court found that the Village’s explanation for meeting the statutory criteria was “weak” and “marginal.” Id @ 860. The Court further found that the four conditions of “blight” relied upon to fit the statutory criteria were not supported by the facts of the case. Id@862. The Court rejected the Village’s expert’s assertion that seven vacant parcels could not be subdivided because it would be “inconvenient” and expensive” as a basis for meeting the obsolescence requirement. The Court concluded that the Village’s argument ignored the statutory guidelines and would lead to the finding that everything could be determined to be “blighted.” Id. @ 863. The Court also found that the Village failed to meet the diversity of ownership requirement because there were only two owners of the property that the Village sought to include in the TIF. Id. @ 864. There was additionally no evidence of flooding. The Court rejected the Village’s argument that since the property was located on a flood map, it was sufficient evidence to meet the criteria. Id. @ 865-66. Further there was no evidence of tax delinquencies for an “unreasonable” period of time hindering development and that when the TIF was established, there were no delinquencies. Id. @ 866. The Court disagreed with the Village’s assertion at oral argument that the municipality’s legislative body’s finding of “blight” was sufficient evidence of “blight.” Id @ 863. The Court stated, “The Department of Revenue guidelines suggest that the qualifying statutory blighting factors should be present to a meaningful extent and reasonably distributed throughout a proposed TIF district so that reasonable persons will conclude that public intervention is necessary. Id@ 863 citing, Henry County Board v. Village of Orion, 278 Ill. App. 3d 1058, 1063; 663 N.E.2d 1076 (1996). Finally, the Court found that the TIF district failed to meet the “but for” test. The Court noted that there must be a showing that the property “would not reasonably be anticipated to be developed without the adoption of the redevelopment plan.” Id @ 867; 65 ILCS 5/11-74.4-3(n) (J) (1) (West 2002). There was evidence of growth and development in the immediate area as well as developers who were interested in developing the property without TIF financing. Id. @ 867. The Court concluded the property would have been developed without the TIF, and the record reflected that developers were interested in developing the property without the TIF, thus failing to meet the “but-for” test. Id @ 868.
The Village of Burr Ridge case exemplifies why the Act needs to be more specific. There should not have to be litigation to ensure that the creation of a TIF district and its justification is credible. It is doubtful that TIFs are not more readily challenged in Court because there are no objections; it is more likely that the costs of litigation are too high. If the Act required that each TIF District had more specific, demonstrable and measurable goals when created, the public might have greater confidence that the creation of the TIF is a good development tool for truly “blighted” areas. There needs to be definitive plans for creating each TIF district. This could be accomplished by establishing measurable goals for development and a plan for how the increment would be used to meet those goals. Creating more detailed plans would also decrease the need to terminate TIF districts that have had no redevelopment after seven years. By having demonstrable goals established at the onset, communities could view whether the goals were being met early on, and determine whether adjustments needed to be made. It could also allow for the City to focus on development recruitment at a higher level.
Section Two: Is the City of Chicago favoring the creation of TIF Districts and the implementation of TIF-assisted projects in areas of Chicago that are less blighted, rather than more blighted?
As noted above, TIF Districts may be formed on the basis of being either “blighted” or “conservation” areas. Upon review of the TIF Districts generating the most revenue for the City of Chicago, they were the TIF Districts that were established as “conservation” areas. SEIU Illinois Council, “16 Largest TIF Districts in 2006” (City of Chicago TIF Report, September 2007). Critical questions that demand greater research and scrutiny are whether, and to what extent, there is a disparity between the rate of economic redevelopment in those areas that were created as “blighted” and those created as “conservation” areas. The City of Chicago’s own preliminary experience has been that growth and tax increment have developed faster in those areas designated “conservation” than they have in those areas designated “blighted.” Id. The logical question becomes whether that growth in conservation areas is related to the natural growth of property tax revenues that would have occurred even without TIF designation and whether this devotion of attention and resources to conservation districts is distracting the City from encouraging economic development in areas that truly would not be developed without TIF assistance. Likewise, are approved TIF projects in conservation areas more likely to substantively fail the but-for test, furthering the diversion of resources from projects in truly “blighted areas. Each of these circumstances would create an even greater market advantage for those areas that can be readily developed without TIF over those that really need TIF assistance in order for redevelopment to occur.
In those areas where the property tax revenues would naturally grow, the TIF standards should be reviewed with greater scrutiny. It is possible that the establishment of a TIF would result in additional growth that would not have occurred otherwise. This is the purpose for establishing a TIF. It seems easier to spur growth that’s legitimate “but for” in those districts that are less deteriorated. Although it could be conveniently be classified as a “conservation” district, there should be stricter guidelines. It is possible that a “conservation” designation can result in additional growth that would not otherwise occur. This too, meets the purpose of the Act. The goal should be to prioritize those areas designated “blighted” with impaired growth instead of those with substantial value as determined by the “but for” test. Although this should be applied to each project, there should be some demonstrable goals. In addition to a demonstrable goal, there should be a reporting requirement more frequently than annually. This would provide an opportunity for review and oversight.
A related and highly significant concern is that by generating a disproportionate and inappropriate amount of TIF in conservation areas (relative to truly blighted areas), the City then has, at its disposal, greater resources to expend in those conservation areas. There would be, in effect, an exponential effect of favoring conservation areas over truly blighted areas, because the blighted areas would have less increment with which to promote additional development projects.
Additionally, the growing trend in the City of Chicago for providing TIF assistance in conservation areas that appear to fail the but-for test increases the hostility against TIF on the part of other tax bodies who take the position that TIFs permit an unnecessary diversion of their tax revenues. As discussed in the following Section, the City of Chicago’s apparent policy response to this hostility may be further undermining redevelopment in truly blighted areas. Specifically, the City’s concession for diverting tax increment from school, park, library and other districts for during the twenty-three year period of each TIF District are to utilize TIF increment for projects that benefit the most vocal of those other taxing bodies rather than utilize increment for true economic redevelopment projects in the City’s most blighted neighborhoods.
Section Three: The City of Chicago appears to be rapidly launching a defensive strategy against this resulting backlash, a strategy of utilizing TIF funds for projects that are popular with TIF opponents but are not directly related to economic development of Chicago’s more distressed neighborhoods.
In its most basic elements, the Tax Increment Allocation Redevelopment Act, 65 ILCS 5/11-74.4-1 et seq. (West) permits one hundred percent of incremental real property tax revenues that are generated during a 23-year period from properties within a designated TIF District to be allocated to a separate fund that would ostensibly be used to finance improved infrastructure within the District and to generate economic development within the District that would not occur absent the TIF assistance. Again, under TIF’s most basic format, the municipality approves the TIF District (for example, the City of Chicago) entirely controls the fund into which all of the incremental tax revenues are directed and does not share any portion of those incremental tax revenues with other taxing bodies that receive a portion of real property taxes in the absence of a TIF. These taxing bodies, of course, include school districts, library districts, park districts and other governmental entities. And while there is debate among economists and industry groups as to whether (or to what extent) the existence of TIF financing increases the tax burdens for City taxpayers as a whole, there is strong popular sentiment that TIF does, in fact, require the “rest of the City” to pay more in taxes.Illinois Civic Federation, “Civic Federation Urges TIF Disclosure in Municipal Budgets” (November 2007).
Perhaps in response to growing public opposition to TIFs, the City of Chicago appears to be increasing the use of incremental tax revenues from TIF Districts to finance projects both within and outside of the District that are unrelated to economic development. One manner in which this is conducted is “porting” TIF increment from one TIF District to another. What is particularly troubling to this author is that the City’s Department of Planning and Development appears to be undertaking such “porting” without public oversight or notice. The TIF Act allows for the use of incremental property taxes from one district to be used to pay for costs in other contiguous districts. 65 ILCS 5/11-74.4-4(q). This is often referred to as “portability.” It is possible that there can be “porting” from an increment rich conservation district to an increment poor or blighted district. I commonly refer to this as the “Robin Hood” porting. There becomes a problem with how the increment is allocated and used. With the creation of many TIFs in one city, the potential for abuse increases as taxes are transferred without oversight or additional notice. They are “ported” on an “as needed” basis. For example, the City of Chicago’s population is roughly evenly divided into Wards. These Ward boundaries change every ten years based upon the United States Census data. Even though the Ward boundaries change every 10 years, the established TIF District remains unchanged. If one TIF boundary encompasses more that one Ward, and both areas use the same increment for development without notice to the other, then the actual amount of increment available for use by each is distorted. This is dangerous on many levels. If many Wards are using the increment from the same TIF, then each Ward has no true accounting. Without a notice requirement, those Wards that are politically “favored” stand to benefit more than the other Ward(s) in the TIF District. It is possible that the favored Ward can use the increment for development to the exclusion of the other Ward and sometimes the creating Ward. Additionally, if there are government agencies monitoring the revenue to divert the increment for its own use, this undermines the community planning process and what the community decided would be its priority in redevelopment. When a TIF District is created there are public hearings, planning sessions and other opportunities for citizens and community organizations to voice their support, concern and/objections. During the creation of a TIF District, the community is intimately involved. After the TIF District has been established, there is no such process for inclusion and input. As there are no concrete guidelines for additional hearings or community approval after the TIF has been approved and before the revenue is “earmarked” for expenditure, projects that were the basis for the creation of the TIF and supported and approved by the community are either put at the end of the expenditure list or ignored altogether. Often when government agencies identify an increment for its own use, it takes priority over the community plan. This is a slap in the face to the community process that was used to establish the TIF and the people that supported it. There need to be rules for “porting” increments from one district to another. The community and the community process should not be used just to meet the criteria for establishing a TIF. The projects identified at the onset should be funded through the increment when that increment is generated. The only way that this author sees to avoid this problem is to spend against the increment before it is generated. This too, can be a problem if there is insufficient revenue to support the levy. The City of Chicago should not be allowed to intercede and supersede the community earmark or have bonds levied against the TIF before the community plan is implemented.
There also needs to be a method for repaying TIF increments that were ported, or an exception for those districts that fail to generate enough increment to support the district. Many costs associated with a TIF are paid to consultants. This should be repaid. There should be some standards established that guide when “porting” can occur and a time frame for doing so. There should also be a limit on the amount of TIF increment that can be utilized for “porting.” Further, the determination of who makes the decision can create a conflict when other governmental bodies seek to use the tax increment for expenses outside of those approved through the community planning process. Often, when TIFs are created, the community planning process allows for the community to have meaningful input as to how the increment will be used. However, the portability clause of the TIF statute bypasses this process and allows for political/governmental intervention. The question then becomes what happens when various governmental bodies earmark uses for the increment that conflict with uses created through the community planning process? Is there an order of priority and who decides? What happens when development designations exceed the proposed increments over the life of the TIF? What happens when the municipality issues bonds based upon those designations that exceed the proposed increments?
The affected citizens and their elected representative should have the right to decide what public improvements the increment will be used for. The affected citizens and taxpayers are an imperative part of the TIF process while it is being created, yet, they are ignored when expenditures occur over the life of the TIF that controvert their stated plan. For those municipalities created with a strong council and weak mayor, the council member should make the determination. They were the ones elected to represent the interests of their area. For those who are critical of the council member prerogative, their electorate has the ability to exercise their power at the polls. Moreover, council members side on behalf of their constituencies over administrations. Either way, clearer reporting and notice requirements would provide some transparency into an otherwise unclear process.
The municipality should be required to make public the list of proposed public improvements and an order of succession should be established. If changes are to be made, there should be notice, at least, to the elected representative. Currently, community-driven plans for TIF funds are diverted to government-driven plans; there are no guidelines for notice to the elected representative when revenue from one area is diverted to another area and the local government halts or ignores local community supported projects in favor of its own projects.
While TIFs are a good development tool for those communities that have failed to attract development, a closer look must be taken as to why that development has not occurred in those areas. By creating too many TIFs, its effectiveness as a development toll is weakened. The vagueness and breadth of the Act allows for TIF to be manipulated without any demonstrable goals or plans for how those goals are to be met and measured. Finally, there must be frequent reporting to provide greater transparency in how tax dollars are being spent.