by Kate Duffy, Vermont Business MagazineDowntown Winooski looks much different today than it did a decade ago.Once a blighted mill town, it has been transformed into a modern, vibrant community in what has widely been considered the most ambitious redevelopment project in Vermontâ s history.
New buildings and businesses draw people to the Onion City ‘to work, live, eat or shop, thanks to a $200 million redevelopment begun in 2004.
While the Community College of Vermont, the Vermont Student Assistance Corporation, and the hundreds of new housing and commercial units are the most visible signs of development, city officials say itâ s whatâ s underneath ‘including sewers, water lines, and stormwater drainage ‘that made such a renaissance possible.
â Without that infrastructure, it would have been impossible to build,’City Manager KR â Deac’Decarreau said.
Winooski used a funding tool known as Tax Increment Financing, or TIF, to borrow the money necessary to build that public infrastructure. It borrowed nearly $25 million to upgrade its utilities and add roads, sidewalks and a 900-space parking garage. A TIF assumes such public investment would encourage private development, which would generate enough new property taxes to pay off the debt.
â From my perspective, itâ s fabulous,’Decarreau said of the 20-year loan. â It gives you some ability to do some long-range investment that no downtown could ever do. We could never fund this on our own.â
Now Burlington plans to use this tool for its own downtown redevelopment. Town Meeting Day voters approved a proposal authorizing Burlington to borrow up to $10 million for a downtown TIF district.
â For a downtown to continue to be developed, there are fewer and fewer economic development incentive tools to be used,’said Larry Kupferman, director of Burlingtonâ s Community & Economic Development Office. â The tax credit programs are being diminished primarily due to the federal budget withdrawal from municipalities. This is one tool that a downtown municipality can use to revitalize its downtown.â
Kupferman said the TIF process would allow Burlington to develop its sewer and stormwater infrastructure to make downtown sites more attractive and more affordable for private developers who might be unwilling to undertake such expensive initiatives on their own. The â superblock’around Memorial Auditorium, for example, is being considered for redevelopment using TIF. The city has already started asking developers for proposals and is considering such things as a small hotel and conference center or student housing.
â When youâ re coming down Main Street, itâ s the entrance to our downtown,’he said. â Memorial Auditorium is not an unattractive building to look at, but then you have these vacant blocks where itâ s mostly surface parking.â
Under the TIF, Burlington would contribute an underground parking garage in addition to the sewer and stormwater upgrades. A 100-space garage would cost an estimated $3 million.
â People understand this could be a development incentive for the downtown,’Kupferman said.
But not everyone finds the TIF so appealing.
Art Woolf, an economist at the University of Vermont, said businesses in the TIF district get a lot of benefits at the expense of everyone else.
â They essentially donâ t have to pay taxes,’Woolf said. â Theyâ re paying taxes, but theyâ re being used for their own specific benefits. So who bears the cost of that? The answer is everybody else whose taxes are a little bit higher because of it.â
Woolf also noted the difficulty of predicting how the economy would have grown without the TIF and the additional taxes everyone in the community pays to support it. He said the private development associated with the TIF may well occur even without the public investment, and higher taxes paid by the community may have generated even more economic activity if people had been able to spend it however they wanted.
â The question is, is it worth it? Thatâ s a really hard question to answer. With TIFs, you generally think, we get this money and thereâ s no downside because weâ re just recycling it in the area. Itâ s very difficult to figure out where everybody elseâ s money would have otherwise been spent,’he said.
â Generally speaking, I tend to believe people make better decisions on how to spend their own money.â
Another challenge of TIF would be taking property off the tax rolls that fund education under Act 60.
â The Ed Fund is sacrosanct,’Burlingtonâ s Kupferman said. â You donâ t want to mess with the Ed Fund.â
However, Act 60 funds education on a statewide balance sheet, not through individual municipalities. As the Vermont Economic Progress Council and Department of Taxes noted in its 2012 annual report on TIF Districts, revenue lost from diverting property taxes in one community affects the entire state.
â The statewide property tax does complicate TIF districts, thereâ s no doubt about that,’Kupferman said. â As long as weâ re supporting our civil society with a property tax, when the state has a statewide interest, the interest in municipalities becomes secondary. The stateâ s interest in property tax for education is primary. I donâ t want to pit one against the other. It has to be mutual. In the 20 years a municipality can use those education funds to pay back debt, the state will benefit from that in other ways, basically with increased wages, increased jobs, increased sales tax and rooms and meals taxes. But those things donâ t support the Ed Fund.â
While TIFs have been used around the country for the past 50 years, they only found favor in Vermont in the 1990s. So far the state has had four TIF districts ‘in Winooski, Newport, Milton, and the Burlington waterfront. They are also being considered in Colchester and Hartford, in addition to downtown Burlington.
This is a complicated business ‘something Milton has learned the hard way.
Milton instituted a TIF district in 1998 to entice Catamount Husky to expand there.
â Husky at the time needed a substantial amount of infrastructure improvements to support the business expansion,’Town Manager Brian Palaia said. â The TIF district was a way to fund some of the improvements that needed to be made.â
Palaia says from his perspective, the tool has not been perfect, but it has proven to be an economic advantage to Milton.
â Itâ s not everything that everyone had envisioned it to be,’he said. â Economic expansion of a company and private entities are subject to different forces that are beyond their control. But (Husky) still built a successful business here and they created hundreds of jobs and put money into the economy. The taxes theyâ ve paid have certainly paid for the core improvements that were needed to support the business expansion they had, and itâ s been an economic benefit to the region and the state.â
The two TIF districts in Milton have come under the ire of state Auditor Tom Salmon. His required audit, which came out in January, said the town needs to manage its TIFs better and that it owes the state $3.4 million.
The auditor found that Milton complied with state statutes for the formation of the districts, holding public meetings and obtaining required approvals. However, the Townâ s approach to administering the TIF districts was not always in accordance with statutory requirements.
Of the $4.5 million of incremental property tax revenue used by Milton for TIF district activities, Milton used about $3 million, or 67 percent, for purposes other than debt repayment or prefunding ‘the only allowed uses per statute.
Palaia says using TIF money for a construction project actually saved the town money.
â Because that project was delayed, the TIF revenues were accumulating in that fund,’he said. â Rather than go out and borrow money and incur additional expense for the fund, the town chose to pay some of the construction costs directly, bringing the cost of the debt service down to a lower level. We actually saved people money and made the project more economical. The auditorâ s report found that was an ineligible expense.â
In addition, Milton omitted greater than $1.5 million of the incremental municipal property tax revenue from its calculation of incremental property tax revenue generated by the TIF districts. Because of these mistakes, the town retained $3.4 million of incremental statewide education property tax revenue that should have been remitted to the state.
Palaia said the town disagrees with some of the auditorâ s conclusions and with the methodology used to reach them.
â The town had always consulted with the Vermont Economic Progress Council for how to administer the TIF district,’Palaia said. â That required certain statutory interpretations going back over a 14-year period. We really have a hard time understanding how the auditor came to a contrary conclusion about how the statute is interpreted.â
The audit attributed the underpayment to multiple causes, including (1) the decision made by town officials not to contribute the municipal portion of property taxes of the TIF district because of a perceived state commitment to minimize the cost impact of the TIF districts improvements to Milton, (2) misinterpretation of statutory requirements and (3) a lack of documented policies and procedures relative to TIF district administration.
The auditor also found that the town lacked a systematic mechanism to evaluate whether the TIF districts were meeting intended goals.
The audit recommended that Milton arrange to pay the amounts owed to the state and that the town designate an official to be responsible for developing, documenting and implementing a system to accurately calculate incremental property tax revenue, the amount that may be retained and that this work be reviewed by another individual. The report also recommended that the town designate an official to have responsibility for monitoring TIF district performance against established goals.
â The TIF program is complicated to administer,’Salmon said, â but I am confident that implementation of our audit recommendations will help the Town of Milton to improve the TIF districts’overall management and provide for accurate measurement and reporting of the TIF districts’annual activity.â
Palaia says Milton is challenging the auditorâ s report, engaging another auditor to do a peer review of his report.
â Itâ s a long, drawn-out process,’he said, but one the town believes is necessary to pursue.
The Burlington City Council was so nervous following the Milton audit that it wanted to pull the TIF ballot question from the March vote, for fear that voters would be scared off and reject the plan it, and the business community, so coveted. But outgoing Mayor Bob Kiss insisted the question remain on the ballot. Voters ultimately passed the TIF for downtown by a comfortable margin.
â Because there are relatively few TIFs, there are some things everybodyâ s working out,’Winooskiâ s Decarreau said. â And when you have an economic downturn, they go from small problems we need to work out to bigger problems. Especially with the state committing the Ed Fund to this type of issue, and sources of revenue for education is a huge challenge.â
Decarreau predicted TIFs would become a better tool for development once municipalities and the state get a better handle on how to manage them, and as communities see benefit in the investment ‘something not everyone in Winooski agreed was the right move for the city.
â Anytime you have three people together, youâ re going to have disagreement,’she said. â People didnâ t like the density and they didnâ t like tying up money for 20 years. The TIF was supposed to reduce our taxes, which it will, but only after we pay the loan back.â
At this point, though, she said TIF has been a good tool for the city.
â As your economy cycles up and down, you do have your moment of fear as investment slows down, but youâ ve got to expect that over a 20-year period,’she said. â Youâ re going to have some ups and downs, and youâ d be naïve to think that wasnâ t going to happen. Weâ re doing very well. Weâ re paying our bills, weâ ve got more business, and itâ s got a lot of life, and the development itself has brought life here to Winooski.â
Kate Duffy is a journalist with more than 10 years of experience reporting on businesses and the economy in Vermont. Timothy McQuiston contributed to this report.
Photo:Winooski City Manager KR 'Deac' Decarreau, between Brian Tarrant and Governor Shumlin last June, when MyWebGrocer announced it would re-develop and move into the Champlain Mill. Essentially all the redevelopment in Winooski, including the Mill, is within the city's TIFF district. Also pictured are Mayor Michael O'Brien, Rich Tarrant Jr and Jerry Tarrant. VBM photo.