Near the end of Mayor Greg Ballard’s administration in 2015, city officials estimated surplus cash in the city’s downtown TIF district could swell to $59.3 million by the end of 2018.
The reality is very different. Tens of millions in spending by Ballard’s team and Mayor Joe Hogsett’s administration, along with some unforeseen events, have drained the TIF’s unrestricted cash balance—the money left to fund extra projects after covering the TIF district’s millions in debt obligations and required reserves.
Projections by Hogsett’s team show unrestricted cash in the downtown TIF will amount to only $800,000 by the end of this year.
The result is that the Hogsett administration has had less money to spend on one-off projects than Ballard’s. The tighter finances also might limit the city’s flexibility in tackling downtown challenges that will require an injection of funds.
For example, when Hogsett was running for office, he told IBJ he was hearing from downtown stakeholders about the need to revamp the struggling Circle Centre mall and increase programming on Monument Circle to boost its status as a family attraction.
Now, according to Hogsett spokeswoman Taylor Schaffer, “while we believe all tools should be considered as we help envision the next chapter for the mall itself, there are no current plans to utilize the downtown TIF.”
The dynamics were different for the Ballard administration, which spent$30 million to $40 million in surplus TIF funds annually for several years. In the three years of the Hogsett administration, annual spending has been $10 million to $14 million.
“There were times there were much more cash dollars available in the TIF,” said Thomas Cook, Hogsett’s chief of staff.
Even so, city officials insist the downtown TIF remains healthy and is raising more than enough money to cover payments on bonds issued to fund economic development projects—the main purpose of a tax-increment financing district.
TIF districts raise money by capturing incremental property-tax revenue. The downtown TIF has helped pay debt that has funded a long list of developments—from Circle Centre mall to the conversion of Georgia Street into a pedestrian plaza—since it was created in 1982 to kick-start downtown’s rebirth.
The downtown TIF’s debt, which totals $730 million, is scheduled to be paid off in 2038. The city projects TIF tax collections this year of $73.6 million, far more than the $51.5 million in required bond payments. But after covering reserves, the city won’t have much of a financial war chest to draw on to fund extra projects.
Both Ballard and Hogsett tapped TIF funds repeatedly for a variety of projects. The expenditures since mid-2015 from the downtown TIF included $4 million to renovate the plaza outside 0the City-County Building, $3.3 million to improve the site of the new Cummins headquarters, $5 million to expand the Indianapolis Cultural Trail, $4 million to improve the Indiana Repertory Theatre, and $6 million budgeted to match federal funding for the new Red Line bus rapid-transit project.
It wasn’t just robust spending that ate up the surplus cash. The city says the downtown TIF lost at least $12 million over two years as a result of Indianapolis Public Schools’ generating less revenue. The loss occurred after the Department of Local Government Finance required the district to spend down reserves and decrease its tax rate.
The city also has passed more revenue from all its TIFs back to taxing units than they otherwise would have received. Since Hogsett took office, the city increased so-called pass-through revenue from its TIFs from 24 percent to 27 percent.
In 2016, the city expanded the TIF’s boundaries to include the Flaherty & Collins 360 Market Square development, the downtown jail, and the site of the former GM stamping plant, which is receiving $4 million in unrestricted TIF funds this year for infrastructure improvements. The moves are expected to strengthen the TIF’s financial position as the new development boosts property values and tax bills.
“It is a major driving factor of why the health of the TIF will be improving in the coming year once that full assessed value comes online,” Cook said of the Flaherty & Collins development.
Also taking pressure off the TIF is a new approach the Hogsett administration is using with developers seeking TIF subsidies for projects.
Under traditional TIF deals, the city assumes the risk of a bond issue and must make up shortfalls if additional property tax revenue generated in the district falls short of debt payments.
With the new approach, the developer is on the hook for any shortfall.
Cook said the administration’s philosophy has been to use the TIF to “invest in projects that have redevelopment impact while at the same time having the private market support its own projects.”
Indy Chamber Vice President Mark Fisher praised the approach. He said that, because downtown is booming, the city is able to shift more risk to the private sector.
“The Ballard administration, even a decade ago, used TIF more as a catalyzer,” he said. “It was much more, ‘We need to move the market.’ I think the Hogsett administration is using TIF much more site-specific, and hopefully they don’t need to use TIF as often as previous administrations have. We’ve reached the tipping point in downtown.”
Fisher said he hopes the TIF is able to build up its surplus cash again “to be able to respond to big opportunities” if they arise, but he called the district overall “healthy.”
“Many would like to see a larger fund balance, but I think the Hogsett administration has taken a very responsible approach, using it when it’s absolutely necessary and putting more of the onus back onto the developer,” Fisher said.
Credit rating pressure
Pressure from ratings agencies also drove the city’s new TIF approach. In October 2016, Moody’s downgraded some of the city’s economic-development-related moral obligation debt, concluding it was “issued for less essential purposes” than vital city services or infrastructure.
Cities use moral obligation bonds as a “credit enhancement” to obtain lower interest rates when they sell bonds. But rating agencies are looking askance at their use unless the purpose is “something you can reasonably expect political actors would raise taxes to pay for,” Cook said. Economic development projects typically don’t pass muster.
Toward that end, the city in 2016 refinanced debt that was issued for the JW Marriott construction back in 2008 and removed the moral obligation credit enhancement.
The Hogsett administration has used the new TIF approach with seven projects totaling $256 million. Those include a $36 million hotel project on the site of the Bethel AME Church at 414 W. Vermont St. and the $39 million redevelopment of a former Ford factory on East Washington St.
Cook said the Hogsett administration has tried to strike a balance in its TIF use.
“There are definitely redevelopment opportunities where it’s completely appropriate to have the downtown TIF be supportive of backing projects that will have a big impact,” he said. “And there are projects that are important and beneficial, but by the way the market is currently operating, we’d like for [developers] to share in that risk because downtown is doing very, very well.”
Adamson said he is pleased with the Hogsett team’s approach.
One of the biggest opponents of the Ballard’s administration’s handling of the downtown TIF was City-County Council Vice President Zach Adamson, who called it a “slush fund for the previous administration.” He also criticized the administration for “obligating debts into the future” and spending down the unrestricted cash balance.
“The developer-backed bonds are a lot more conservative way of incentivizing development,” Adamson said. “They’re more fair and more in line with the intent and original purpose of the TIF. I’m much more comfortable with the direction things are heading in now.”
By city ordinance, the downtown TIF must keep at least $32 million in reserves: $10 million to deal with emergencies, and $22 million for property tax appeals.
The city has also committed to having “150 percent cover” in the TIF for future bond payments. That means, if the city owes $50 million in debt service payments in a given year, it has to bring in $75 million.
“With every decision we make that relates to the TIF, we look at these two to make sure we don’t violate them,” City Controller Fady Qaddoura said. “From a policy perspective, we’re 100 percent comfortable with where the city is in terms of covering our commitments.”
The TIF’s cash balances are also expected to grow.
The unrestricted cash balance is expected to rise to $10.1 million in 2019, and to $41.8 million in 2021, according to the city, although officials stress that those projections are tentative and are built on an assumption of static property-tax rates.
“We’re blessed the downtown TIF is performing from an assessed-value standpoint,” Cook said.
Good signs for the TIF abound, he said. One is Hendricks Commercial Properties’ $260 million redevelopment of the old Coca-Cola bottling plant, a project the city took on zero debt to fund. So far, the city’s only costs include $4 million in utility relocation and environmental remediation.
That project will generate assessed value that “didn’t require $80 million or $90 million of debt,” Cook said. “That’s what we’re most excited about.”