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Reining in TIF: Duluth works to use subsidy more sparingly

Local government units stand to forgo more than $149 million in tax collections over the life of Duluth's 19 currently active tax-increment financing districts.

That may sound like a ton of money, but Heather Rand, Duluth's business development director, contends the city is making relatively conservative use of this economic development tool these days.

A 2017 analysis by Ehlers & Associates shows that 2.8 percent of Duluth's property tax base was tied up by tax-increment financing agreements. That's a smaller share of the tax base pie than St. Louis Park, St. Paul, Minneapolis and Bloomington had encumbered, but more than St. Cloud, Rochester and Moorhead had set aside for tax-increment financing purposes.

It's also interesting to note, that of those eight cities, Duluth imposes the lightest property tax burden.

What is TIF?

Tax-increment financing — often referred to by its acronym, TIF — is a form of tax subsidy that captures new taxes generated by a project and uses them to cover certain qualified development costs over a defined period of time.

Rand said she often encounters people who are skeptical of TIF agreements, and sometimes the loudest critics are unclear about exactly how and when the city uses this economic development tool.

One common complaint is that TIF agreements decrease the local property tax base, driving up rates for others.

Rand maintains that's actually inaccurate, because any development must pass a "but for" test before it can qualify for TIF assistance in Minnesota. That means the developer must demonstrate that if not for the provision of certain tax-increment financing, a proposed project could not move forward.

In other words, she notes, the additional tax base would not exist were it not for a TIF package.

That's all well and good on paper, but Keith Nelson, chairman of the St. Louis County Board of Commissioners, said: "The 'but for' test is pretty subjective, in terms of analysis. So long as you call 'but for' subjective, you're being honest about the approach."

Sins of the past

County Commissioner Frank Jewell, a former Duluth city councilor, said the city's use of TIF subsidies in the past rightly raised eyebrows.

"I have a history with TIF that goes back to the John Fedo administration and my time on the City Council in the late '80s and early '90s. Clearly, at the time, I felt that TIF was being abused. It felt like it ended up being a private banking account for elected officials who could get it through," he said.

Keith Nelson said he, too, feels Duluth made "excessive use" of TIF in the past.

"I don't see that as something that has continued in the last several years, but in the past that was something that very much concerned me," he said.

In some cases, Nelson said the creation of successive overlapping TIF districts kept the county from collecting taxes on certain properties for decades longer than the normal 25-year life of a single TIF agreement.

Wayne Parson, Duluth's chief financial officer, agreed that the city used to be much more liberal in its approach to tax-increment financing.

"I do know that if you go back to the '70s, when we created TIF districts, they were very large and encompassed more than just the development. For instance, I think much of downtown was in a TIF district at one time, and all those new taxes then became TIF," he said.

That's changed, according to Parson.

"Now, we're much more focused and project-specific. So like for Maurices corporate tower, it's just those parcels that that development occupies that generate the TIF. We don't go and start grabbing adjacent parcels. So I think that's one big difference from the '70s to now," he said.

Too often, Nelson said the city ignored other options.

"You know, a lot of these projects, they would happen somehow, but if the first tool you run to is TIF, well you're not really giving all the other avenues a fair opportunity," he said.

Tax abatement

One alternative to TIF the city of Duluth has been using with increasing frequency is tax abatement, where taxes on an improved property are waived for a set number of years to produce a specific quantity of savings before the development returns to the tax rolls.

"It's for a shorter duration, and in many cases it can reach the level of participation necessary. But it doesn't pass on the debt to our grandkids," Nelson said.

Jewell noted that the both an affected county and city must sign off on tax abatement agreements, unlike TIF agreements that cities can thrust on other taxing entities, including school districts and counties without their consent.

"I think many county commissioners, in particular, were really disturbed because they would have chunks of money cut out of the income for the county, without any input. That's always irritating, when something gets done to you, as opposed to when you're part of the decision," he said.

Rand said the city gets it.

"When we can, we're going to use other tools. Maybe the gap is such that we only need to use 10 years of tax abatement, instead of setting up a 25-year TIF district. So we would look at that,"

But for certain projects where a significant funding gap must be filled, Rand said TIF remains the better choice.

When to use TIF

"It's very important to myself and this administration that we use TIF as a redevelopment tool very judiciously," Rand said.

She explained that the city typically requires a detailed pro forma from the would-be developer and then hires a consultant to review it. She said that only certain types of development costs qualify for TIF assistance — associated with things like the demolition of blighted buildings, fixing seawalls, dealing with contamination, blasting rock and installing required public infrastructure.

Mayor Emily Larson said city staff also involve St. Louis County officials in the discussion, when TIF is being considered.

"When we use a tool like that, we meet early and often with the county, so that we're not just handing a document over that says: This is what we're doing. It's really about saying: Here's a project. Here's what we believe the gap is. Here's why we think this makes sense. So I think there's more context in how we approach it," she said.

Both Jewell and Nelson attested to improved lines of communication with the city.

"Under Mayor Larson's leadership ... the county has had a much much better working relationship with the city, because they've been communicating with us and reaching out to us and working with us on trying to make things happen," said Nelson, who nevertheless pledged to maintain a critical eye on Duluth's use of TIF.

As certain TIF districts expire and new opportunities come to light, Rand said she won't rule out Duluth using TIF again in the near future. The most recent TIF projects have included the Endi Apartments development on London Road and Kenwood Village Apartments at the corner of Arrowhead Road and Kenwood Avenue.

Rand said she already knows of a few more prospective mixed-use projects and a couple potential business expansions that might be candidates for TIF support. But she said she certainly doesn't want the percentage of the city's property tax base encumbered by TIF to rise above 10 percent, as it has in St. Louis Park.

Brian Hanson, president and CEO of APEX, a regional economic development agency, gives Duluth high marks for exercising restraint in its use of TIF.

"Because it's not overused here in the city of Duluth, it's an effective tool," he said. "I think over time the percentage of our property that was in a tax-increment financing district has gone down quite a bit. I think we're at a sustainable level — having a couple more districts added would be a good thing for the right projects."

Investigative Reporter Brooks Johnson contributed research and reporting to this story.

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