Columbia ponders increased use of popular public financing method

Thursday, April 26, 2012 | 6:00 a.m. CDT; updated 7:13 p.m. CDT, Thursday, April 26, 2012

COLUMBIA — Brick columns welcome passersby to the sleepy Northgate Village on a mid-April Saturday afternoon. Aside from the occasional hum of an air conditioner, the melody of wind chimes and a whistle blown at a soccer match at nearby Macken Park, the North Kansas City neighborhood is relatively quiet.

See the data for yourself

The Missourian used data submitted by cities statewide to the Missouri Department of Economic Development to compile this report. To read about that process and view the tax-increment financing data for yourself, go to The Watchword, a Missourian blog focused on public affairs.

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Two neighbors stop to chat, one on the front steps of her town house and another in a porch swing. A family is grilling lunch in their shallow front yard, while others pitch washers in the back, unworried by darkening skies.

Ryan Tull, a resident of one of the Northgate's New Urbanism-style town houses , stopped for a moment to talk about the attractions of the neighborhood, which imparts a nostalgic, 1950s' feel.

“The park is a real gem,” said Tull, a project manager for Rainen Cos. that is in charge of developing nearby apartments and senior housing.

The tranquility of Northgate Village belies years of legal wrangling and continuing concerns about attracting business to the area. The community was approved as part of a tax-increment financing project by North Kansas City in February 2000. Crews broke ground on the subdivision in November 2002, eventually razing 666 apartments built during the post-World War II housing boom to make way for town houses, single-family dwellings, apartments and senior housing.

Tax-increment financing, commonly referred to as TIF, freezes property values at a certain level and earmarks the taxes collected on subsequent property assessments, or the "increment," to pay for further development in the area. For example, property that is assessed at $100,000 before development begins and $400,000 after it is complete will have the taxes that would be paid on that additional $300,000 of value funneled into an account. Money in that account can be used for further improvements.

State law requires cities and developers to demonstrate that ventures assisted by these funds would be impossible without public assistance. In Columbia, city officials have been discussing an increased use of the method to fund projects that include neighborhood improvements in the First Ward.

Tull moved to Northgate six years ago with his wife. The couple now have two children, and aside from the occasional noisy neighbor and razzing from Missouri fans (Tull cheers for Kansas), Tull said Northgate is a great place to live. He praises the achievement of local schools specifically.

“Everyone says you have to move out into the suburbs to find good schools, but we've got Triple-A schools right here,” Tull said.

Plans for financing in Columbia

At a pre-City Council meeting on Feb. 20, City Manager Mike Matthes and council members expressed a renewed interest in tax-increment financing as a means of encouraging development here.

Their interest mimics an ongoing statewide trend, according to data available from the Missouri Department of Economic Development. The data also raises questions about whether tax-abatement programs such as TIF promote favoritism, skew spending priorities and, when overused, erode revenue for cities, counties, schools and other entities that rely on property taxes. 

At the February meeting, First Ward Councilman Fred Schmidt expressed interest in using the financing more extensively to address First Ward problems that he said “have been festering for years.”

Plans to develop a TIF district that would encompass the entire First Ward remain in their infancy. Schmidt, however, said the approach would allow the city to improve urban density, provide infill housing, bury power lines along Business Loop 70 and pursue a backlog of stormwater retention measures.

“The whole ward would benefit from this,” Schmidt said.

Matthes also has said that the council should consider using such districts, which cover a wider swath of land and more varied zoning than that encompassed by existing projects in town, to take advantage of the economic boost commercial development provides to funnel money toward public projects. 

“You’d almost have a stair-step-type plan, you might say, where you have commercial at the front, then maybe housing in the middle, then maybe public infrastructure at the end because they’re not going to spin off any increment,” Matthes said. 

Schmidt said the money that flows in from commercial development could be used to fund the efforts of nonprofit groups such as Columbia Builds Youth to build affordable housing in the First Ward. It also could be used to address stormwater improvements, which Schmidt called “woefully underfunded,” and other maintenance projects.

“It’s easy to sell a new road; it’s hard to get people to want to maintain an old road,” Schmidt said.

On April 13, rain intermittently pelted the streets and scarce sidewalks in the neighborhoods surrounding Sexton Road and Garth Avenue. Currents of rainwater rushed toward storm drains but pooled several inches deep at intersections. Standing water was common along Jefferson Street, with pools bubbling in two adjacent yards on the 1000 block.

Jill Lucht, a resident of the West Ash neighborhood and research associate at MU’s College of Agriculture, Food and Natural Resources, said the biggest problem, however, lies below the surface, where stormwater invades the sewer system and causes overflow into basements.

“I do think stormwater and the sewer system should be the first priority,” Lucht said about her ideas for potential proceeds from a First Ward TIF. 

Lucht and her husband, Bill McKelvey, moved into their house on Aldeah Avenue in March 2008, uninformed of the sewer problem by the previous owners. After suffering three sewer backups and "bleaching everything" after each one, the couple decided to install a back-flow preventer in their basement, a practice that was becoming common in the neighborhood.

While the device ended Lucht's sewer problems, it created a new one for others. Lucht said she felt guilty about unloading a burden on her upstream neighbors, but the financial concern weighs just as heavily on her conscience.

“We’re lucky, because my husband and I both work on campus, and we have good jobs,” Lucht said. “(A back-flow preventer) costs about $800 to $900. … Many people in the First Ward can’t afford to fix it.”

Expanding use in Missouri

Matthes cited Independence as a community that has enjoyed success with TIFs. Independence boasts 17 operating districts, running the gamut from neighborhood developments to the construction and infrastructure support of a Hy-Vee grocery store and a golf course with below-ground industrial storage space. The projects are not all commercial. One calls for the renovation of Mt. Pleasant Cemetery.

Each year, cities with ongoing TIF projects are required to submit to the state a report listing vital statistics. These include the number of jobs created, any parcels obtained through the use of eminent domain and a listing of the school districts whose property tax payments are affected by the project.

While districts are common in large metropolitan areas with a great deal of residential and commercial development interest, the data suggests other areas of the state are employing the method, too. Outside St. Louis and Kansas City, two hubs of urban renewal, use of tax-increment financing has been booming over the past five years. The number of projects registered with the state outside Missouri’s two largest cities more than doubled from 102 in 2007 to 219 in 2011. In addition, the reports say the resulting projects have created 44,704 jobs.

But Judith Stallmann, a professor in MU's Division of Applied Social Sciences, cautions against reading these statistics through rose-colored glasses.

“You can’t count every success as due to the TIF,” Stallmann said. “That’s not just a problem of TIF, it’s a problem of most types of economic development incentives.”

Applications for TIF projects must demonstrate that the project would not occur without public assistance. Stallmann said cities should make this determination with care, and even then there’s the possibility of approving projects that may have occurred anyway.

But Michael B. Smith, the assistant city administrator in North Kansas City who oversaw the Northgate Village project, said the standards that have to be met to create a district provide clear evidence that the project would not occur without help.

“You’ve got to be able to provide data that shows, 'but for the use of this instrument' … the project can’t go forward,” Smith said.

Schmidt said the determination of whether development would have occurred anyway is “the crux of the debate for all tax incentives.” Still, he said, Columbia's projects — the renovation of The Tiger Hotel and the construction of a DoubleTree Hotel to replace The Regency on Broadway — illustrate responsible use of the program.

“One could argue that those two downtown hotels wouldn’t have occurred without the TIF,” Schmidt said.

Stallmann and colleague Thomas Johnson produced a list of best practices in October for communities considering incentive programs. One consideration cities must make, Stallmann and Johnson wrote, is that projected and actual benefits often vary.

They cited a 2002 study that indicated firms in Ohio that received public assistance announced plans to hire an average of 91 new employees, but in the end they employed an average of only 51. In addition, cities are not required in their annual reports to list the types of created jobs.

The difficult vetting process becomes more important as city officials contemplate whether to extend the use of tax-increment financing, Stallmann said. Competition for public assistance among businesses vying for consumer attention can ensue.

“If your neighbor is using a TIF, and you’re right next door — as occurs along the I-70 corridor — you need a TIF in order to compete,” Stallmann said.

Competition created a boom in projects in California, which pioneered the use of tax-increment financing in the 1950s. Last year, amid concerns about eroding revenue for schools and other taxing entities, the California legislature dissolved all its financing districts.

According to reports submitted to the Missouri Department of Economic Development in 2011, more than $1.7 billion has been raised to cover the costs of  TIF projects statewide. Of that, about $433 million has been spent on public infrastructure such as streets, sidewalks and utilities.

Nearly $130 million remained in those projects' accounts at year-end. That unused money would make up around 2 percent of the more than $5 billion the state budgeted for elementary and secondary education in 2012.

Schmidt said he has proposed a modified TIF district to Matthes that would limit the impact on taxing entities, including Columbia Public Schools, by splitting the proceeds of the TIF increment down the middle, giving half to the taxing entities and investing the other half in public projects.

Defining a district: "blight" and "conservation"

Matthes has identified tax-increment financing as one of the most useful tools for a community to defend against decay.

“(TIF) does prevent and eliminate blight,” Matthes said at the Feb. 20 meeting. “It does increase property value and tax revenue over time. These are all established facts from decades of use throughout the country.”

The process of establishing a TIF district, similar to the establishment of an enhanced enterprise zone, requires designating areas as “blighted,” in need of “conservation” or marked for economic development, according to the language in state law.

Columbia’s two projects are classified under the conservation moniker, which is used for areas where a majority of buildings are more than 35 years old and conditions put the property in danger of becoming blighted. Schmidt said he would like to see that trend continue.

The Northgate Village plan in North Kansas City is classified as a conservation project. In 2007, 350 residences were bulldozed, according to the annual report filed with the state, and one parcel of land was acquired through the use of eminent domain.

Smith said the process of approving the plan, the city’s only TIF project, involved first looking at what needed to be done and then determining if it would be eligible. He added that the legal requirements to establish a district make it clear that the area targeted is in need of attention.

“If we’re looking at an area, and it’s meeting that criteria, then it’s an area that needs improvement,” Smith said. “It’s not functioning well. It’s not doing the property around it any good.”

Smith said officials decided the existing Northgate property, with apartments built in the 1940s and designed to last 30 to 40 years, qualified for the conservation designation. The city, he said, wanted to keep the value of surrounding property from plummeting as a result of the apartments becoming blighted. It acquired the property through eminent domain in January 2002.

The apartment owner sued the city at both the county and federal levels. In its extensive coverage of the dispute, The Kansas City Star detailed the inadequacies of the existing apartments: dangerous wiring, crumbling walls and inoperable plumbing. In December 2002, the city and apartment owner agreed to a deal that paid the owner $14 million for the property in exchange for dropping the lawsuit. Smith said occupants received money from the city to relocate based on a number of factors.

“It was a very simple, calculated allowance that the resident didn’t have to do anything to get,” Smith said. 

The North Kansas City case is an anomaly, however. The city received a large inflow of cash following the opening of a Harrah’s casino, which was used for several development projects.

Today, much of the land cleared at Northgate has been redeveloped. One lot to the north of Tull’s town house, however, remains empty. A single-lane street divides a weedy field. A sign urging interested parties to reserve a town house sprouts up among the dandelions. Tull said it is disappointing the lot remains empty almost a decade after reconstruction began but that it's a sign of the down economy.

There also is an evident lack of commercial interest in the area, despite its proximity to Burlington Street, an artery into downtown Kansas City. A lone Ruby Tuesday sits on a block designed to house several businesses.

Schmidt said the Columbia City Council must always carefully weigh the benefit to the community and individual property rights when determining whether to use eminent domain. He said the current debate in Columbia about an enhanced enterprise zone, also known as an EEZ, and an accompanying blight declaration could make it tricky to establish TIF districts.

“TIF is going to be hard to sell to a public upset about EEZ,” Schmidt said.

Public input and oversight

Stallmann said the general lack of transparency in the TIF financing process could lead to public mistrust. A number of complicated equations are involved in establishing a district, and the approval process is handled by a council- and tax entity-approved commission, rather than an elected body.

“The state auditor every year publishes reports about several different types of districts,” Stallmann said, referencing transportation development districts and other tax-abatement programs. “And every year it says there’s not enough transparency going on here.”

The Missouri State Auditor's office has produced an audit report on transportation development districts annually since 2006, listing failures in reporting revenues and filing necessary reports. The office also conducted an audit of enterprise zones statewide in September 2010. However, there have not yet been any audits tackling tax-increment financing exclusively.

The city of Columbia does provide a list of members of the Tax Increment Financing Commission on its website, along with members of all its boards and commissions.

The Missouri General Assembly tackled the transparency issue in 2009, when a new law requiring greater TIF project-reporting standards took effect. Cities that do not submit annual reports to the state are now penalized by a five-year moratorium on creating new districts. Cities across Missouri seemed to get the message. The number of reported projects in Missouri outside Kansas City and St. Louis jumped from 109 at year-close 2008 to 245 at year-close 2009, only seven of which were established that year.

Two of those projects listed in 2009 were in Columbia and are among the most recent reports the city has prepared. In July of that year, the City Council and TIF Commission approved The Tiger Hotel and a project for mixed-use development by 10th and Locust, LLC, as TIF projects.

Since then, 10th and Locust's original plans for the building have been altered by the developer, who cited a lack of interest in renting office space or opening a street-level grocery store.

At the time, Deputy City Manager Tony St. Romaine said the city would not approve tax-increment financing for the project without a grocery store, which satisfied the program's public benefit requirement.

Columbia Assistant Finance Director Lynn Cannon said there is some confusion among cities about whether the annual reports are necessary when no change in project status has occurred during the reporting period.

“It's not clear in the statute,” Cannon said. “It may be a matter of interpretation.”

Mayor Bob McDavid, Sixth Ward Councilwoman Barbara Hoppe and Schmidt made a point at the February meeting to question whether any decision by the commission would come before the council for a hearing to ensure public involvement in the process.

“I’m very intrigued by this opportunity for infill housing, as long as we have the proper safeguards,” McDavid said. Both he and Schmidt mentioned a preference for renovating rather than demolishing homes and rebuilding.

West Ash Street resident Lucht said that beyond stormwater and sanitary sewer projects, her secondary priorities for spending potential TIF revenue would include sidewalk construction and measures to reduce property crime. Still, those afternoons when her husband had clean-up duty are at the forefront of her mind.

“There’s probably someone in my neighborhood right now with human manure in their basement,” Lucht said as heavy rain fell.

A civic-minded developer

Matthes has said that public-assistance development projects, by their nature, usually attract developers interested in civic renewal.

“The market won’t build a house here because you can’t make money on it,” Matthes said, as an example, during the February meeting. “So the TIF subsidizes the construction so that the builder can make some money — it’s never as much as you might make other places — but you usually find a developer who’s got a bit of a civic portfolio.”

This faith the city puts into the developer finds its way into commercial developments, too. City officials had long sought a means for redeveloping The Regency on Broadway but had been unable to make it work until Dave Parmley stepped up to take on the project.

The council approved a redevelopment plan for the Regency site on Feb. 21, 2011. It enables up to $3.2 million of the $17.5 million project cost to be covered by tax-increment financing. The Regency plan is indicative of the city's use of TIF to date — focusing on specific projects, rather than the district-based approach Matthes has been pitching.

St. Romaine said the city takes on no liability for the Regency project until development is under way and the district's assessed value begins to rise. State law requires the council and the developer to hold a public hearing every five years to evaluate a plan's progress.

Over on Eighth Street, the redevelopment plan approved for The Tiger Hotel project was amended last year when Glyn Laverick, head of Columbia Hotel Investments Inc., purchased the hotel from Tiger Columns, LLC. One year later, the development remains in progress as The Tiger Hotel attempts to rebrand itself once again as boutique lodging.

"We meet frequently with the city manager's office as well as other city departments to update them on progress as well as reviewing the best ways to work together on key issues affecting the project," Laverick said in an email about the hotel's collaboration with the city.

St. Romaine said in February that the city can try to abolish obstacles for developers who lack the resources available to the hotel developers. For example, it could consider discounting or eliminating the city's $10,000 TIF application fee.

Such measures would likely be targeted at attracting developers such as Northgate's Hunt Midwest and others interested in smaller-scale projects.

Plans for use of potential TIF money vary. Schmidt said a district could be drawn around Business Loop 70, creating a revenue source for burying power lines. Last summer, the Downtown Leadership Council suggested TIF would be a way to pursue beautification recommended in a 2010 report targeting the North Village Arts District and the intersection of Broadway and Providence Road. At a meeting between Boone County commissioners and city officials on April 2, Southern District Commissioner Karen Miller suggested once again exploring a downtown grocery through the financing method.

Matthes urged the council and the public in February to consider the complexities involved in getting projects off the ground and to remember that quality planning and community development take time.

“TIF projects generally require a long-term view,” Matthes said. “They don’t happen quickly.”

Supervising editor is Scott Swafford.

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Mike Martin April 26, 2012 | 4:16 p.m.

Think blight and eminent domain aren't related? Read this April 24 story from the KC Star. It's about the "benevolent" North Kansas City this Missourian article addresses:

Meierotto Midwest Jewelers’ planned North Kansas City development came closer to reality this month when the City Council approved a tax abatement and declared blighted the properties that now stand where the project would go.

Representatives for the gas station and office building spoke against the project, arguing that their properties are not blighted, according to the minutes of the April 3 City Council meeting.

But the council declared the properties blighted and said the city needs to acquire them to remove the blight.

(Report Comment)
Christopher Foote April 26, 2012 | 5:21 p.m.

@Mike Martin,

That was my thought as well. I think the EEFs are not so dissimilar from Kelo
The city declares a lower middle class neighborhood blighted, property values drop, a private development comes in with a tax credit. Who would sign-up to transfer a portion of the value of their property to a developer so the developer can realize a tax credit. The deal is doubly bad, because the tax base that goes to pay for the infrastructure is not as large as it should be, thus city residents further subsidize the project by having less money to spend on infrastructure maintenance.
It is another example of the transfer of wealth to the top of the food chain, at the expense of the much maligned "47%".

(Report Comment)
Jeremy Calton May 9, 2012 | 2:07 p.m.

When I look around this city and wonder where our money could best be spent, I'm sure I see the same need as everyone lodging.

Without the middle classes subsidizing an overpriced boutique hotel that the middle classes' out-of-town visitors can't even afford to stay in, how would the rich have managed to get this hotel remodeled to their satisfaction?

(Report Comment)
Ellis Smith May 9, 2012 | 2:40 p.m.

Columbia, Missouri is a city with a claimed population of 100,000, but it has an operating philosophy barely adequate to serve a city of only 40,000-50,000.

Other than that, everything is just fine. :)

(Report Comment)

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