NE auditor warns of rapid growth in TIF use across state

Editor’s note: This article has been updated with additional comments from Omaha Mayor Jean Stothert.

OMAHA — More than $500 million in property tax dollars has been used to fund urban redevelopment in Nebraska over the past five years — marking a “significant increase” in the use of tax increment financing, prompting state Auditor Mike ·Welfare warning.

in a 26 page inquiry letter Foley told Nebraska lawmakers on Tuesday that the increasing use of economic development incentives known as TIFs could put further upward pressure on “skyrocketing” local property taxes.

“If anyone tries to claim that the rapid escalation of TIF-funded projects has nothing to do with our state’s increasing property tax obligations, then I am a skeptic,” the auditor said in a press release.

 

Omaha streetcar project highlighted

 

Foley cited examples of how sometimes “loose and inconsistent” interpretations of governing regulations have allowed cities to “not only accumulate large amounts of unwarranted TIF proceeds” but also engage in activities that he said have given rise to legal problems.

He specifically targeted the city of Omaha.

One of the flags Foley raised was the use of TIF in Omaha’s streetcar project.

Foley said it was not his intention “to pass judgment on this $500 million project, which uses TIF on more than 1,100 parcels of prime real estate.”

He said he wanted to shed light on the potential impact of the financing techniques used in the scheme, which is expected to be up and running in 2027.

“At the end of the day, the construction of the Streetcar Project was never free,” Foley said.

Many Omaha government and business officials have praised the downtown-to-downtown trolley line as a way to retain and attract the workforce and accelerate the city’s growth.

Mayor Jean Stothert has said repeatedly that anticipated development and higher property values ​​triggered by the streetcars should generate enough TIF revenue to pay off the bonds without raising taxes.

“Taxpayers will not foot the bill for streetcars, there will be no tax increase, and streetcars will not put the city into debt,” she said at a news media conference in June to update on the rising costs.

Foley called the streetcar project “the largest property tax diversion for an economic development project in Nebraska history.”

“The impact this will have on the budgets of government agencies that rely on property tax revenue remains to be seen,” he said.

The total cost of preparing the corridor and building the tram project is estimated at $459 million. City officials said the TIF will repay $389 million in bond proceeds.

The remainder will be paid for by sources such as utilities.

 

Censorship raises concerns

 

While the debate over TIFs has been long-standing, Foley told lawmakers that the statewide review of related spending and regulations is driven by “several concerns” that have been conveyed to his office.

The financing mechanism was created by the Legislature decades ago and has been hailed by many as key to eradicating urban blight.

Foley noted that others have even described TIF as “an off-budget program that creates the illusion of cost-free financing with no impact on property taxes or municipal revenue.”

Any TIF-funded project must first receive approval from local government and be deemed to be located in a disaster-affected area.

Here’s how it typically works: For up to 20 years, property taxes generated by new improvements on TIF sites are used to help private developers pay for improvements in the area.

This means that incremental tax increases during this period will not flow to the usual property tax recipients, such as schools and local municipalities.

Meanwhile, a parcel of land’s pre-redevelopment value (which existed before TIF approval) is “frozen” during the 15- to 20-year TIF loan period, while the resulting fixed property tax revenue continues to be collected from the owner and distributed as usual . (For “extremely damaged” areas, a longer period of 20 years is allowed.)

After the developer pays off the TIF loan, all property taxes flow to traditional taxpayers.

“The positive impact of TIF financing on economic development is obvious,” Foley said. “However, if overused or abused, this popular financing tool could harm local real estate taxpayers.”

The core issue, he said, is ensuring that the tool’s application appropriately balances economic development needs with citizens’ reasonable property tax burdens.

Foley said in the letter that over the past decade, the number of TIF projects in Nebraska has nearly doubled to more than 1,350 independent businesses, with total asset valuations increasing by more than $6 billion.

He said $121.6 million in property taxes will be used to pay for TIF projects approved by municipalities in 2023 alone, more than double the annual amount a decade ago.

“Arguably, most of those resources could have been used to fund public education and local government obligations,” Foley told lawmakers.

Non-TIF owners may need to “make up the difference” to fund government functions, he said.

Foley said his intention was to educate policymakers about the impacts and status of TIF use without advocating for specific legislative action.

But he did note that the Community Development Act, which governs TIFs, gives cities “undue flexibility.”

Foley said this may be viewed by some as “an open invitation to go beyond the boundaries of TIF, beyond what is ethical or what is good for citizens.”

Stothert disputed Foley’s claims. She said the city of Omaha has been making good use of TIF for reconstruction projects and streetcars.

She called Foley’s statement about $121.6 million in TIF proceeds “misleading,” saying the proceeds could have been used for other public purposes instead of covering the cost of local redevelopment projects.

“This number does not reflect the basic tenet of TIF financing, the ‘unless’ test,” Stothert said. “Without TIF financing, the project would not have been implemented and there would have been no additional property tax revenue. Additionally, TIF projects do involve public Purpose.

 

Investigation spread across the state

 

Over the past few years, state auditors have reviewed and disclosed concerns about TIF projects in the cities of Benkelman and Auburn. The latest review took a closer look at 44 more Nebraska TIF projects in Omaha, Lincoln, Valley, Sidney, Ralston, Waterloo, Beatrice, Broken Bow, Cambridge, Flanders, Gothenburg, Holdridge and Lexington.

In a media release, Foley noted that the Aksarben Village apartment project is “emblematic” of various redevelopment projects in Omaha and said the TIF proceeds were collected after legal deadlines.

He claimed that $1.2 million related to the Aksaben Apartments “was wrongly withheld from other units of local government, which could have used the money to pay for important citizen services”.

The city of Omaha denied wrongdoing in a response to Foley’s letter to state senators. Omaha officials say that while the financing structure for so-called TIF expired projects may cause “confusion” in calculating dates, the process complies with the law.

Foley said that across the state, as many as 17 of the 44 TIF projects reviewed appeared to have been improperly charged tens of millions of dollars. Foley said the revenue “could help lower property taxes in affected communities.”

The audit team highlighted the details of Omaha’s streetcar, saying its financing plan directly affects about 50 city blocks that stretch more than three miles.

Foley said some areas within the TIF financing district are as far as six blocks away from the proposed streetcar route, and conditions do not appear to have deteriorated enough to qualify for a “blighted” district designation.

“Nonetheless, some of the tax liability on these properties was diverted to provide TIF funding for the project,” he said.

In its response to lawmakers, the city of Omaha cited a statute that allows TIF to be used on project sites if more than 50 percent of the project has been declared blight. The city said it has adopted an amendment to update existing plans for redevelopment projects within the Trolley TIF zone to comply with the law.