ST. ALBANS CITY — State auditor Doug Hoffer has reviewed the St. Albans City tax increment financing (TIF) district and concluded that the city or its attorney made errors in three areas.
Hoffer, with a supporting memo from the state attorney general’s office, claims the city should not have set aside some of the initial loan proceeds to use to make payments on the TIF bonds should the increment be insufficient to make those payments in the initial years of the TIF.
Increment is the tax revenue the city receives on the increased property value of lots within the TIF district. For example, if a property increase in value by $500,000 after the creation of the TIF, then up to 75 percent of the education property taxes and up to 100 percent of the municipal taxes on that $500,000 may be used to repay TIF bonds. The city may use that increment to repay debt for 20 years after the creation of the TIF.
Hoffer has also raised questions about the city’s use of TIF funds to pay for site work at the Hampton Inn site and the tax exempt status of the parking garage.
Hoffer acknowledged that in other types of capital borrowing municipalities are allowed to set aside some funds for future payments. But the attorney general’s office says the rules are different for TIF.
The city, said Hoffer, “didn’t understand that TIF was different.”
The city also had a legal opinion saying the city could set the funds aside.
TIF districts are overseen by the Vermont Economic Progress Council (VEPC). The city has already reached an agreement with VEPC to repay the funds spent on bond payments back to a working capital fund. Those payments will be made from increment.
Repaying the funds used to make payments – $1 million, according to Hoffer – was the city’s intent all along, said city manager Dominic Cloud.
During initial meetings about the TIF the city included its plan to set aside some loan proceeds in case the increment was insufficient to cover the bond payments in the early years of the TIF. However, that intention was not included in the city’s TIF application.
Hoffer also argued it should not be allowed. “If you borrow $20 million, that $20 million has been approved for improvements.” By making bond payments with some of it “you are not investing that money,” he said.
Brownfield cleanup was identified in the city’s TIF application as a primary use of TIF funds, in particular in the city’s core block and the Fonda site. That cleanup was a major part of the cost of the redevelopment of the core block, which includes construction of the parking garage, the new state office building on Federal Street, and the Hampton Inn.
Hoffer said the city went beyond brownfield cleanup to do site work, removing soils which were insufficient to hold the weight of the hotel and replacing them.
The city, Hoffer said, never asked VEPC if that use of TIF funds was allowed. While Hoffer believes it crosses a line from doing work necessary to attract development to using public funds to benefit a particular developer, he acknowledged that the rules are unclear.
He raised similar questions about the use of TIF funds to pay a real estate developer who put together the hotel deal.
Cloud said hiring a broker is both a legitimate use of the funds – a so-called “soft cost” associated with the project – and the responsible thing to do. Negotiating a multi-million dollar deal without that advice would have been irresponsible, he said. The city also agreed to pay the broker a $100,000 fee when the deal was complete. If the deal hadn’t been finalized, the broker wouldn’t have been paid, regardless of the time and effort put into the project.
As for the garage, determining whether or not it is taxable is not simply a question of ownership but use, Hoffer said.
Because spaces in the garage are leased – some to the hotel and a large block to the state for its workers – it is not tax exempt, in the view of Hoffer and the attorney general’s office.
The city disagrees, saying that because no one business or person has exclusive use of a parking spot, the public is, in fact, able to use all of the spots. It’s an issue the city may decide to litigate, Cloud said, but only if the final determination of the value of the garage is large enough to merit the costs of a legal challenge.
If the value of the garage, paying the taxes may be less expensive than a legal challenge to the state’s position.
“It’s insane you can qualify for a TIF for a garage because it has no market value and thus has to be built by a municipality, yet it’s taxable,” Cloud said.
Hoffer maintains the city must pay increment to itself on the garage.
He also says that revenue from the operation of the garage should be used to make TIF bond payments because that use was included in the application. Cloud said that revenues from the garage were to be used to make TIF payments if needed, and they haven’t been needed. Instead, the city has been using those funds to pay for operation of the garage, parking enforcement and as a reserve for future maintenance. The last was a promise made to voters at the time of the garage’s construction.
This audit was focused on compliance with the rules, as required by statute. It not determine whether or not the TIF has “worked,” that is whether or not the TIF created economic and grand list growth.
Hoffer maintains that it isn’t possible to tell if a TIF is performing as promised because there is no way to know what development would have occurred absent the TIF. That makes any TIF district’s success impossible to determine in his view.
He calls it the “but for” problem, as in but for the TIF, this would (or would not) have happened.
The auditor rejects the idea that its possible to compare pre- and post-TIF conditions to determine success, claiming the conditions would have changed regardless.
Former St. Albans City Mayor Liz Gamache, who led the city during the TIF’s creation disagrees. “I think performance is a really important piece of the story,” she said.
Hoffer did concede that TIF has been a crucial piece of economic development in the city, but declined to attribute all of the city’s growth to TIF, pointing to other tools, such as tax credits for Mylan Technologies, that have been part of the process.
Cloud was very clear about the value of the TIF in the city’s growth. “Without the TIF, they don’t happen,” he said of projects which have been central to that growth – the garage, the new state office building, the hotel, expansion of Mylan Technologies, and the Ace Hardware store.
Hoffer and Gamache both agree that the rules around TIF could be clearer. “We do have ground to improve the rules and the laws,” said Gamache, noting that this is not the first time a municipality’s interpretation of the TIF rules has differed from the auditor’s.
VEPC’s interpretation, too, differs from Hoffer’s and the attorney general’s in some areas, such as whether or not the city could use some bond proceeds to make payments.
Gamche was also clear on the value of TIF. “TIF is a powerful economic development tool. We don’t have enough economic development tools in Vermont,” she said, adding it would be to everyone’s benefit to create a stronger TIF process.
But there would need to be flexibility in the rules, as being able to adjust plans as conditions change is a key part of a successful TIF, in Cloud’s view. From the beginning, the city was clear that some of the projects outlined in its TIF application might not come to pass, depending on funding.
The anticipated cleanup of the Fonda site, for example, hasn’t happened, with the city reluctant to make that investment without clear interest from a future user of the site.
However, TIF funds were used to clean up pollution on the site of what is now Ace Hardware and are being used for brownfield cleanup and parking creation to support a new 25,000 square foot office building and two new multi-unit residential buildings downtown. Neither of those projects was part of the original TIF proposal.
Whatever changes may happen to the TIF rules, Cloud is clear the city followed them. “The statutory definitions are really clear,” he said. “We can do what we did.”
The city, both Cloud and Gamache said, was always transparent about the TIF. “We worked really hard to be open and transparent,” said Gamache, pointing to formal and informal meetings held, coverage in the Messenger, one-on-one meetings with residents, and other ways the city sought to explain the TIF to voters.
“I’m really proud of the TIF in St. Albans. I’m proud of the community coming together,” said Gamache. “I wouldn’t want to change the way we did things.”
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