Des Moines racks up record debt on development tax breaks. But is it necessary?

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1 Des Moines racks up record debt on development tax breaks. But is it necessary? Lee Rood, 6:40 p.m. CT Sept. 6, 2017 Updated 12:32 p.m. CT Sept. 7, 2017 (Photo: Michael Zamora/The Register) The city of Des Moines is shouldering more long-term debt than ever as it fulfills economic incentive deals with developers and major employers roughly $309.1 million last year. In the past five years, city leaders have approved at least 57 projects, mostly downtown, that will require incentives for up to 30 years, a Reader's Watchdog probe has found. City leaders defend their robust use of tax-increment financing during the biggest growth spurt in Des Moines' history, saying it has helped secure or create thousands of jobs, dramatically built up infrastructure and jump-started millions in new tax revenue. It s not a coincidence that Des Moines started using TIF more aggressively and the vitality of downtown followed, City Manager Scott Sanders said. "Des Moines proper was losing out on a lot of opportunity until (the city) decided to work more with developers." But the record price tag for long-term deals comes as Des Moines residents are facing significantly higher property tax bills this year and local officials have been discussing the possible need for a local option sales tax. Residents and businesses must cover the greater cost of city services because new revenue generated by TIF projects in the area will be siphoned off to help pay for them, typically for 10 to 20 years. At least 44 of the 57 projects brokered by the city in the past five years promise that new tax revenue generated by developments will be rebated back to companies or toward debt tied to those projects. Some tax experts nationally say the city is extending the TIFs for longer than is financially beneficial or necessary.

2 And experts such as Dave Swenson, an associate scientist in the Department of Economics at Iowa State University, insist big paydays for major employers such as the deal Apple announced this month in Waukee aren t needed in the metro when growth is expected to continue for years to come. "By all accounts, people and businesses want to come to Des Moines, Swenson said. "What you should be in a position of doing now is to try to smartly manage growth." The downtown HyVee grocery store complex received tax increment financing for 15 years as well as other incentives. (Wednesday, Nov. 23, 2016) (Photo: Michael Zamora/The Register) Competing inside the metro City managers make no bones about the fact that land-locked Des Moines is using incentives to lure competition from other Iowa cities, including the western suburbs. Sanders said the city cannot "cut its way to prosperity," so it needs to incentivize more growth. But the widespread use of long-term financial deals, especially downtown, has been questioned repeatedly by readers during this year s Watchdog series on Des Moines neighborhoods. Residents and developers have asked why future taxes are being committed downtown when other neighborhoods struggle to transform. Des Moines public school officials say the state's school funding formula helps cover the cost of new students caused by growth. But state and local taxpayers, especially businesses, have to cover increased costs for services because so many new tax dollars are tied up in tax-increment financing. "Existing taxpayers get to pay more," said Thomas Harper, the school district's finance director. "In some cases, you're subsidizing someone else s business who may be in competition." Proponents of the city's approach note that only about 4.3 percent of Des Moines total valuation is tied up in tax-increment debt.

3 Des Moines has a stable AA-plus general obligation bond rating, according to Standard and Poor s. But 36 percent of the city s property valuation is in land owned by nonprofits that do not pay property taxes. And with a 12-cent property tax hike this summer, the city levy is now as high as it was in 2000: About $17.04 for every $1,000 of assessed property valuation. With the city s debt at around $386.5 million, about 70 percent of Des Moines constitutional debt limit has been utilized. That has edged closer to an 80 percent cap imposed by the City Council. They re heavily into it, said Jeff Robinson, a state analyst for Iowa s Department of Management. The Forest Avenue Urban Renewal Area between 32nd and 33rd streets received tax increment financing from the city to redevelop a blighted area for apartments to be completed this summer. (Photo: Lee Rood/The Register) City's debt one-tenth of all statewide Once used to cure slum and blight in targeted areas, taxincrement financing now jumpstarts a wide mix of economic development projects across Iowa. In 2010, when the Register investigated abuse of the financing statewide, the amount of TIF debt outstanding across the state was $2.1 billion. In 2016, the amount outstanding had grown to $3.09 billion and Des Moines' portion accounted for about one-tenth of that amount, state figures show. That was about 8.2 percent more than five years earlier, when Des Mones' TIF debt was $285.4 million. Last year, Des Moines rebated $14.4 million to companies that took advantage of TIF financing, up from $12.6 million two years earlier. Those payments often hinge on the amount of new taxes the projects generate. Major local employers such as Nationwide, Wells Fargo and Wellmark have been the biggest beneficiaries historically.

4 But the recipients often promise to create or retain thousands of jobs as part of their agreements with the city. More than half of the projects also benefited from millions in additional targeted incentives from Iowa's Economic Development Authority, Watchdog found. Some of the projects most heavily subsidized by both Des Moines and the state in the past five years include: Renovating Principal s headquarters, which will receive part of the new taxes generated by the project for 15 years, as well as $22.54 million in tax credits it received in 2013 from the state. Renovating American Republic Insurance s downtown headquarters, which is receiving new tax increment rebates for 15 years from the city in addition to $7.6 million in historic preservation tax credits from the state. A $37 million restoration of historic barracks at the Fort Des Moines, which will receive 90 percent of the new taxes generated for 20 years as well as $8.67 million in historic tax credits. Matt Anderson, assistant city manager, said hundreds of projects have been built during Des Moines boom without incentives. As the city s capacity to offer incentives has become more limited, only certain percentages of the projected new taxes generated from a given project are being offered for rebates. If Kum & Go (which is building a new headquarters downtown) pays $100 of new taxes the city never had before, we can grant back 90 percent and still be $10 ahead, he said. Experts: Rein them in Nationally, tax-increment financing districts have cost taxpayers $5 billion to $10 billion in forgone revenue, with little evidence to show they were effective in promoting development, a national tax expert said. We have seen places where it s been overdone and created big budget problems for the state or city, said Daphne Kenyon, a tax policy fellow at the Massachusetts-based Lincoln Institute of Land Policy.

5 Tax-increment financing created so many problems in California that the tool was eliminated in 2010, Kenyon said. It was started up again but with much more restrictive rules. Studies at Lincoln Institute have found growth in tax-increment financing districts is often offset by declines in other nearby areas. And research has shown that growth tends to happen only in the first several years, which has called into question widespread use of tax-increment financing over long periods. In Des Moines, the new hotel convention center for the Iowa Events Center, which is scheduled to open in the fall of 2018, received the most and longest-lasting incentives of any in the last five years, Watchdog found. The project will receive $63 million in state and local incentives. City information provided to the Iowa Department of Management shows public funding for that project will account for 62 percent of the $101 million project more than initially publicized. The 10-story convention hotel is expected to receive roughly $14 million in new property taxes generated by the development to be disbursed over three decades until It also will benefit from $39 million in sales tax rebates from the state for being in an Iowa Reinvestment Zone. Another $6 million was given by Polk County for land acquisition and demolition, as well as $4 million from local business leaders. But Sanders and Anderson said other than major metros or tourist spots, most cities have to heavily subsidize such hotels to make them financially viable. The goal is that the hotel-convention center will help draw millions more in business toward the Iowa Events Center and downtown. Hopefully, what you ll begin to see is that it starts to breed other hotels up on that hill, Anderson said. It ll be like an anchor business at the mall. Sanders contends that public schools, which share in local property taxes with counties, are minimally affected because the new taxes are primarily captured inside an urban renewal district downtown.

6 He said he d like to see the city see five or 10 more years of record growth, but he insisted the city is transitioning toward using fewer incentives. We absolutely are looking at that and putting more pressure on ourselves to get that done," he said. How the city is using TIFs City officials say they are being more choosy about how they use tax-increment financing, trying to encourage investment that would not otherwise occur or might happen elsewhere without it. Typically, the city will commit a certain percentage of new taxes generated by a project in a given urban renewal district for a certain number of years. Those tax dollars are used to pay long-term debt tied to the development or given as direct rebates to companies to help cover costs of new infrastructure and the like. Lenders sometimes factor payments from the city when guaranteeing loans to developers. Critics say there's no proof growth wouldn't happen without such incentive agreements; in fact, some research suggests it slows because of them. Taxpayers, including businesses competing with TIF recipients, cover the immediate costs tied to growth for greater services. Last year, the city would have had $14.4 million more to spend on services if that money was not spent on TIF-related rebates back to companies. Lee Rood's Reader's Watchdog column helps Iowans get answers and accountability from public officials, the justice system, businesses and nonprofits. Contact her atlrood@dmreg.com, on or at Facebook.com/readerswatchdog.