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Tax Increment Financing Districts: A Double-edged Development Tool

By Beacon Staff

In the throes of a debate over how to best deal with the current $500,000 shortfall in Kalispell’s budget, city council member Tim Kluesner seized on an idea at a recent meeting, proposing that the city borrow some property tax revenue from tax increment finance districts to give the general fund a much-needed cash infusion.

At another point in the same Aug. 18 meeting, council member Bob Hafferman lamented that the Hilton Garden Inn, on Kalispell’s south end, was built within the airport tax increment finance (TIF) district, and the large amount of property taxes the hotel was generating remained unavailable to help the city’s budget crunch.

The remarks by the city council members highlighted what are at once the most beneficial, and most frustrating aspects of TIFs for city officials, not just in Montana but everywhere the funding mechanism is used. When a TIF works, it attracts businesses, elevates property values and generates revenues for the city – but until the TIF sunsets, that tax revenue can only be used in very limited ways. And for the currently cash-strapped Kalispell, TIF money is unlikely to provide a solution.

A TIF is basically a tool cities and states can use to encourage development in a certain area by using the increased property tax revenue in an improved area to finance the debt that was issued, usually through municipal bonds, to make those improvements that are helping raise property values. The difference between the tax revenue an area was originally generating, and the increased amount it generates after being improved is the “tax increment.” The original tax revenues from the area continue to go straight to city, county and state governments.

Only the tax increment money goes into a special fund that, by law, can be used solely to finance improvements within the TIF – which is why city staff was skeptical of Kluesner’s suggestion to borrow money for the general fund. Doing so would be using TIF money outside the TIF, which could violate state law.

In Montana, city officials love TIFs. In Bozeman, Whitefish and Missoula, TIFs have been used to almost completely revitalize the downtowns.

“In 1987 there was a substantial amount of blight in this city,” said Mike Eve, finance director for Whitefish. “Now, it’s hard to fathom, coming in here looking at it, that this would be considered blighted.”

Kalispell is no different, though its downtown TIF, which sunsetted a few years ago, didn’t quite create a downtown as bustling as the other three western Montana cities. Still, Kalispell officials say the downtown TIF went a long way toward boosting the city’s historic district, improving streets, utilities, sidewalks, streetlights and the purchase and rehabilitation of the Museum at Central School. But the use of TIFs remains controversial.

“There has been a lot of misunderstanding in the public about TIFs in general,” Kalispell City Attorney Charlie Harball said. “People don’t understand what a wonderful tool they can be for community development.”

Critics of TIFs question whether they divert money from the tax base, price long-time residents out of certain areas, or provide tax breaks to big businesses moving into areas that would be developing anyway. There is also the fear that governments can use eminent domain to force residents out to make way for businesses.

“We don’t root people up,” Harball said. “We don’t buy their properties up so we can put a business in there.”

Kalispell also shies away from using bonds to extend TIFs beyond their usual 15-year lifespan. In the case of Hafferman’s lament that the south Kalispell Hilton exists in a TIF, Harball said the hotel wouldn’t be there had a TIF not been established and funds used to do environmental cleanup of the site of the hotel beforehand.

“The objection is that development wouldn’t happen without this tool,” Harball said. “The Hilton wouldn’t be there if it weren’t for the TIF.”

And when the TIFs do sunset, the tax rolls benefit. Kalispell’s three current TIFs serve very different purposes. The Westside urban renewal TIF district, created in 1997 and encompassing the corridor along Meridian Road, has slightly more than $1.5 million in the bank, slated for a community land trust to create affordable housing, street overlays, sidewalks, bicycle lanes, enhancements to Greenbriar park, and sewer improvements. The city also used TIF money to purchase part of the Gateway West Mall and the Crop Hail building. Improving those buildings attracted businesses, like TeleTech, that employ more than 550 people, Harball said.

The city’s other urban renewal district, around the city airport, was created in 1996 and currently has $75,211 in the bank, according to Kellie Danielson, Kalispell’s community and economic development director. The airport TIF’s revenue is projected to exceed $400,000 for this fiscal year, but the city is using that money to buy up properties surrounding the airport for its eventual expansion. Danielson pointed to the businesses that have sprung up along the city’s southern entrance, as a result of the TIF district. The Kidsports complex also receives money from the airport TIF, since the athletic facilities south of town were relocated there.

Kalispell’s youngest TIF, Old School Station, is not intended to improve an older area of the city, but to attract light industry and technology firms to a newly developed area south of town. Created in 2006, Old School Station is actually two TIFs, with its light industry section carrying a balance of $3,106, and its technology section holding $6,239.

While a big publicity rollout surrounded Old School Station’s establishment two years ago, there is no sign yet of the production and animation studios, performing arts center and other high-end technology companies promised by developers when the city annexed the 55 acres.

“It hasn’t been a runaway, but in time, it’s coming along,” said Paul Wachholz, one of the principal developers of Old School Station.

But in March, engineering firm Morrison-Maierle moved in, and Senior Vice President Terry Richmond said he is pleased with the advanced cable and phone network infrastructure the TIF provided for in the development.

Danielson also said she has a manufacturing firm she would not name looking very closely at developing in Old School Station. Like nearly all of the other real estate in the Flathead, Old School Station recently reduced the price of its lots.

The TIF district there hasn’t yet proven to be the boon of development it has elsewhere in the valley, but city officials and developers stress that Old School Station is relatively young, and when it comes to TIFs, if you build it, the businesses will come.