Tax Increment Financing Memo - Laserfiche WebLink

Home Browse Search

Table 4. Simulation Results Using Various Probabilities of Development without the Use of TIF distribution of the potential risks and rewards of using TIP. For exalnple, Table 3 shows that there is a 50/0 chance of a loss greater than $9.4 million and a gain greater than $3.3 million. There is slightly more than a 900/0 chance of a negative net present value. Figure 1 presents a histogranl of the results for a project's net present value. The distribu- tion has a high peak and is positively skewed, with the greatest probability falling around the mean and the vast majority of results falling within a range fron1 -$10 million to +$2.5 Inillion. One of the questions that motivated this study was, under which conditions would the local governlnent stand the greatest chance of reaping a positive financial impact from TIF? My theoret- ical model indicates that one of the most inlportant variables in deter- mining the financial effects of TIF is the probability that the parcel will be devel- oped without the use of TIP. For the second siInulation, I varied the proba- bility of developlnent. It appears that overoptimisnl about the financial effects of 'I'IF should be a larger concern among policy makers. Table 4 shows the shnu- lation results assuming various probabil- ities of development. There are at least two striking results from these simula- tions. First, even if there is a zero proba- bility of development without the use of TIF, the nledian net present value is negative (approximately -$2.7 million). Even when there is no chance of future development, there is only a 30(Yo chance of a positive financial outcome for the local governnlent. Increases in the probability of development up to 10% produce additional expected finan- ciallosses. However, another interesting result is that the point estinlate of the loss converges toward a stable amount with probabilities of development 6 CURA REPORTER greater than 109'6. This means that after the likelihood of development exceeds a certain amount, the negative financial effect becomes somewhat constant. Therefore, the most likely range of losses on a $15 million TIF project is somewhere between $2.5 million and $6.5 million.3 Another area of potential policy importance is the length of time that the TIF district is allowed to capture incremental revenue from the properties in the TID. As stated earlier, redevelop- ment districts in Minnesota that use TIF are allowed to capture increment for a period up to 25 years. However, in other states (and for other types of districts in Minnesota), the time limits differ. The impact of this policy decision on local government financial condition is shown in Table 5. Table 5 presents the results for the base case of a 25-year TIF capture and an alternative 10-year TIP capture. The mean and median results are significantly greater for the 10-year capture limit. This suggests that time limits might be an effective tool for easing the financial burden of TIF inlposed on local governlnen ts. Conclusions This study illuminates at least four important points about the effect of TIF on local governnlent finances. Pirst, given a realistic set of policy assump- tions, TIP most likely produces a net financial loss to a local governn1.ent. Only when the probability of develop- ment without the use of TIF is low and the positive effects of TIP on property values both inside and outside of the 'TIP district become extremely high can 3 The point net present value estimate at a 500/0 probability of development is -$5.4 rnillion, which is not statistically significant at accepted levels (p::: .06). a TIP project be justified in financial terms. Second, although the first conclu- sion holds, there is nonetheless a nonzero probability of a positive finan- cial impact. A single point estimate simply does not capture enough infor- mation for local decision makers to form an opinion about the financial effects of TIP. If events work in its favor, the local government can expect a small financial gain from TIE In short, TIP may be best thought of as a large finan- cial investment by local governments 1:7 ::r o 8" ~ ~ ([) < ([) V) ("\ ::r :J ([) a.: ~ Burnsville~ Heart of the City project, a mixed-use commercial and residential development on Nicollet Avenue, is being constructed through the use of TIF funds.