Tax Increment FinancingTax Increment Financing in New Orleans 1 EXECUTIVE SUMMARY Recently, the City of New Orleans has turned its attention to a widely used local economic development

axncrement

inancingin New Orleans

April 2003

TIF

BGR Board of DirectorsLouis M. Freeman, ChairmanDavid Guidry,Vice ChairmanDionne M. Rousseau, SecretaryLynes R. Sloss, TreasurerLauren AndersonKim M. BoyleTerrel J. BroussardRobert W. BrownBertel DejoiePatricia C. DenechaudJean C. FeltsRussell S. HoadleyGeorge D. Hopkins, Jr.Jan S. JobeHans B. JonassenYvette JonesMaurice L. Lagarde IIIBetty V. LauricellaCarolyn W. McLellanRobert W. MerrickWilliam A. OliverRoger W. PeckR. Hunter Pierson, Jr.Robert D. ReilyGregory St. EtienneRoderick K. WestSterling Scott WillisAnn S. WinkLeonard Vance WormserMary K. Zervigon

Honorary BoardWilliam A. Baker, Jr.Bryan BellHarry J. Blumenthal, Jr.Edgar L. Chase IIIRichard W. Freeman, Jr.Ronald J. French, M.D.Paul M. HaygoodDiana M. LewisM. Hepburn ManyAnne M. MillingR. King MillingGeorge H. Porter III, M.D.Edward F. Stauss, Jr.

BGR EconomicDevelopment CommitteeTerrel J. BroussardJean C. FeltsLouis M. FreemanDavid GuidryMaurice L. Lagarde IIIRoderick K. WestSterling Scott WillisAnn S. Wink

BGR Project StaffJanet R. Howard, President & CEOPatricia E. Morris, Director of ResearchStephen Stuart, Research AnalystPeter Reichard, Research AnalystAmy T. Pease, PublicationsHelen L. Williams, Executive Assistant

AcknowledgmentThis report is the first of BGR’s studies onthe use of economic development incentivesin the City of New Orleans. BGR greatlyappreciates the financial support of the individuals, companies and foundations thatmade this study possible. The findings, conclusions and recommendations in thisreport are those of BGR and do not neces-sarily reflect the views of its financial supporters.

BGRThe Bureau of Governmental Research is a private, nonprofit, independent researchorganization dedicated to informed publicpolicy making and the effective use of public resources for the improvement of government in the Greater New Orleansmetropolitan area.

This report is available on BGR’s websitewww.bgr.org.

Bureau of Governmental Research225 Baronne Street, Suite 610New Orleans, Louisiana 70112Phone (504) 525-4152Fax (504) [email protected]

Tax Increment Financing in New Orleans

Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . .1

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

II. What is TIF? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

III. TIF in the United States . . . . . . . . . . . . . . . . . . . . . . . .8

IV. Why Do Local Governments Use TIF? . . . . . . . . . . . . .11

V. Criticisms of TIF . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

VI. Special Issues with Sales TIF . . . . . . . . . . . . . . . . . . .14

VII. Louisiana TIF Statutes Relating to New Orleans . . . . .15

VIII. TIF Use in Louisiana . . . . . . . . . . . . . . . . . . . . . . . . .20

IX. Future TIF Use in New Orleans . . . . . . . . . . . . . . . . .24

X. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Appendix A - St. Thomas TIF

Appendix B - World Trade Center TIF

Tax Increment Financing in New Orleans 1

EXECUTIVE SUMMARYRecently, the City of New Orleans hasturned its attention to a widely usedlocal economic development tool: taxincrement financing (TIF). Last fall theCity Council approved the City’s firstsales TIF district in connection with theredevelopment of the former St. Thomashousing project. Another financing planwith TIF-like characteristics utilizing thehotel occupancy tax is under considera-tion in connection with the proposedconversion of a portion of the WorldTrade Center into a hotel. A bill to cre-ate a TIF district for the Lake ForestPlaza Shopping Center site was recentlyintroduced into the State Legislature.Another to create a TIF district for alarge portion of eastern New Orleanshas been filed. In May, City Council willconsider a TIF-like arrangement for aLowe’s Home Improvement Warehouse.Recognizing the importance of the issue,City Council has begun to develop policies and procedures to govern theuse of TIF.

What is TIF?TIF is a financing mechanism thatenables a local government to capturenew tax revenues generated in a desig-nated area and reinvest them in thatarea to fund improvements. The localgovernment freezes the tax base in theTIF district at the pre-development levelfor a period of years.1 Taxing bodiescontinue to receive the taxes on the pre-development base, but the incrementaltaxes are applied to infrastructure andother improvements designed to spurprivate sector development. In theory,the TIF district finances its own revital-ization and eventually generates largertax revenue for the community as a whole.

A Brief CritiqueTIF provides cash-strapped municipali-ties – of which New Orleans surely isone – with a means of making invest-ment in infrastructure and economicdevelopment projects under severefinancial and political constraints. TIFhas tremendous political appeal in thatit can be implemented without raisingtaxes and, in many cases, withoutobtaining voter approval. It has a cer-tain conceptual beauty in that theinvestment is, in theory, self-financingand the development supporting itwould not have occurred otherwise.

Under closer scrutiny, the underlyingpremise that a TIF is self-financing isopen to question. Because of the diffi-culty of making long-range projections,it is difficult to assess whether develop-ment in an area would have occurredwithout TIF. It is even more difficult todetermine whether, and to what extent,gains in a TIF district are offset by stag-nation, decline, or reduced growth inother areas and businesses. To theextent that other areas and businessesare negatively impacted, the existingrevenue base of the local government is reduced. In addition, successful TIFdistricts can increase a local govern-ment’s operating costs without providingadditional operating funds to the localgovernment. The end result in that caseis a transfer of the additional operatingcosts to residents outside the TIF district.

Given the many unknowns surroundingthe performance of TIF districts, and thetypes of dislocations that can occur, it isexceedingly dangerous to view TIF asfree money. Rather, TIF should be con-sidered an allocation of future resourcesand assessed with a stringency befitting

2 Bureau of Governmental Research

other long-term investments of futurerevenue. The investment should bemade only if it is effective, efficient,equitable, and in furtherance of adefined public policy.

For reasons discussed below, propertyTIF, the most widely used form of TIF, ispreferable to sales TIF. Unfortunately,because of the nature of the local taxstructure, property TIF is less practicalin New Orleans than in other jurisdic-tions. In Louisiana, property TIF canonly capture taxing bodies’ ad valoremmillage that is not dedicated to a specialpurpose. In 2001, undedicated millagefor the City of New Orleans was 14.91mills out of 169.29 total mills collectedin New Orleans. Thus, for every $1 mil-lion of incremental assessed value (or$6.6 million of fair market value), only$14,910 out of $169,290 in total proper-ty taxes paid would be available for aTIF district. If the general millages of theOrleans Parish School Board andOrleans Levee Board are subject to cap-ture (a matter which is unclear), anadditional $15,500 would be availablefor TIF. The homestead exemption andthe exemptions enjoyed by nonprofits,government, and some industries fur-ther diminish the potential of propertyTIF use by reducing the tax base.

The tax structure, combined withrequirements for voter approval of bondsbacked by property tax increments (butnot for bonds backed by sales tax incre-ments), skews the use of TIF towardsales TIF. This is unfortunate, becausesales TIF suffers from more seriousproblems than does property TIF:

t Sales tax revenues are more volatilethan property tax revenues, a factthat makes sales TIF debt financ-ing riskier and more expensive.

t Sales TIF districts are more likelythan property TIF districts to cap-ture revenues unrelated to TIFinvestment, thus reducing currenttax revenues available to the juris-diction.

t Because sales TIF districts needlarge, creditworthy retailers orshopping centers to generate sig-nificant tax increments, the questfor a TIF source can lead to landuse distortions, unnecessary subsi-dies for big retailers, and a distor-tion of a local government’s invest-ment priorities.

t Subsidizing a retail operation withTIF revenues gives it an unfairadvantage over its competitors.

t Unless contractually constrained,the retailer can enjoy the TIF sub-sidy and deprive the local govern-ment of projected benefits bydeparting when the TIF periodends.

There are other factors that suggest thatTIF might not provide the most effectivesolution to blight or economic develop-ment issues. Regardless of the type ofTIF, because the repayment obligation islimited to a specific funding source, TIFdebt is more expensive than generalobligation debt. Whether the premiumpaid to limit the obligation is worthwhilewill depend on the particular circum-stances. In some cases, such as the St.Thomas TIF, it is clear that the Citycould save millions of dollars in tax revenue by issuing lower-interest gener-al obligation bonds. The capacity toissue such debt exists under the City’sdebt limit, which is 35% of grossassessed value, or $816.8 million as


of Dec. 31, 2002. Debt outstanding as of late February was $473.4 million, or58% of capacity.

As in the use of other economic develop-ment incentives, the effective, efficient,and equitable use of TIF depends on thewisdom, financial sophistication, andintegrity of those involved in the pro-cess. To the extent that decisions arebased on sophisticated analysis, madewith an unwavering focus on the publicgood, and implemented through skillfulnegotiation, the chances of successfullyusing TIF increase. To the extent thatdecisions are driven by relationships,political deals, and other agendas, orthat the government lacks the high level of expertise needed to analyze andimplement complicated transactions,TIF is likely to be an expensive mistakethat results in an unnecessary transferof wealth to private entities.

The potential problems associated withTIF are more than theoretical. NewOrleans’ two TIF districts – oneapproved for the St. Thomas redevelop-ment and another under considerationfor the proposed World Trade Centerhotel – provide case studies of the prob-lems. A summary of the problems asso-ciated with these TIF districts can befound on pages 21 to 23 of this report.More detailed information is available in the appendices.

The trend with respect to TIF is disturb-ing. In just the past month, CityCouncil has received a proposal for aTIF-like arrangement for a Lowe’s, a bill has been introduced to create a TIFdistrict for Lake Forest Plaza shoppingmall, and another bill has been filed tocreate one for eastern New Orleans.Collectively and individually, they raiseserious concerns, including the specter

of businesses routinely turning to theCity for subsidies and the prospect offreezing the tax base for a huge swath of the City.

As noted above, the effective use ofproperty TIF in New Orleans is severelylimited by the prior dedication of mostof the tax revenues. Ironically, thewidespread use of sales TIF would cre-ate a similar limitation on government’sfuture flexibility by converting unre-stricted tax revenues into dedicatedtaxes. In addition, the proliferation oflong-term dedications will contribute tothe balkanization of government withinthe City, even as the community focusesincreasingly on regionalism.

Given the potential expenses, risks, and abuses associated with TIF, theCity should use TIF cautiously and onlyin tightly circumscribed conditions.BGR believes that the City should aban-don completely the use of TIF and TIF-like arrangements based on sales andhotel occupancy taxes and restrict theuse of TIF based on property taxes topublic infrastructure and pre-develop-ment improvements in blighted areas.

Strict parameters for the use of TIFshould be established at the state levelthrough revision of TIF statutes and atthe local level through the adoption ofstringent policies and procedures.Specific recommendations for changesin legislation and the establishment ofCity policies and procedures for the useof TIF are set forth below.


RECOMMENDATIONS

State Legislationt State law should impose severe

limitations on TIF based on salesand hotel occupancy taxes, limitingtheir use to “main street” programsdesigned to revitalize commercialcenters of smaller municipalities.The use of sales TIF for large-vol-ume, major retail stores and shop-ping malls should be prohibited.

t The state should eliminate TIF leg-islation designed to accommodatespecific projects. It should estab-lish a cohesive set of general lawsto replace the multitude of statuteson the books.

t State law should limit the use ofTIF to blighted areas and requirelocal governments to make a find -ing that an area is blighted. Thestatutes should define the specificcharacteristics of blighted propertyand define a blighted area in quan-titative terms.

t State law should include a mean-ingful “but for” test conditioningthe use of TIF on a finding that TIFis necessary for appropriate, futureredevelopment (as opposed to aspecific project) to occur in a desig-nated area.

t State law should limit TIF expendi-tures to prep work needed to makethe urban landscape more attrac-tive for investment. Eligible costsshould include expenditures forpublic improvements, such asstreets and sewer and water sys-tems, demolition, site preparation,property assembly, and

environmental clean-up. TIFshould not be used to providefunding for privately owned pro-jects and assets.

t State law should limit the durationof TIF districts.

City Policies andProceduresBGR recommends that the City imple-ment the following recommendationsregardless of whether state law ischanged.

Master Planning

t Before allowing additional TIF dis-tricts, the City should develop andadopt a city-wide economic devel-opment plan. Any TIF districtshould conform with, and promotethe objectives of, the economicdevelopment plan.

t As part of the economic develop-ment plan, the City should developa city-wide master plan for TIF. Itshould designate areas of the Citythat are eligible for TIF and estab-lish detailed criteria and prioritiesfor authorizing TIF districts withinthem. The plan should be based onan in-depth expert analysis of theCity and should be prepared andadopted after city-wide public hearings.

t The TIF master plan and all TIFdevelopments should conform withthe master plan for the City.

t To encourage prioritization andcareful targeting of projects, theCity should establish a cap, basedon a dollar amount or a percentageof the City’s General Fund, on the


amount of taxes that can be divert-ed from the General Fund to TIFdistricts.

Criteria for TIF

t In view of the problems associatedwith their use, the City shouldabandon the use of TIF based onsales taxes or hotel occupancytaxes.

t The City should identify, and desig-nate as eligible for TIF, blighted orbrownfield areas that offer thegreatest potential for development,assuming an appropriate amountof public funding. Blight should bedefined in meaningful, quantitativeterms to reduce the risk of theunnecessary use of TIF.

t To limit the use of TIF to areas inwhich development would not oth-erwise occur, the City should con-dition the use of TIF on a findingthat TIF is necessary for appropri-ate, future redevelopment (asopposed to a specific project) tooccur in the designated area.

t The City should establish stringent,minimum standards for consider-ing TIF districts. These shouldinclude, among other things,requirements for significant equityinvestment by the developer/owner, high ratios of private topublic investment, and a findingthat projected net benefits to theCity exceed projected costs by asignificant margin (e.g., 200 to300%). The criteria should beviewed as minimum eligibilityrequirements, rather than asauthorization for any transactionthat satisfies them.

Review Process

t The City should require detailedsupporting documentation that willenable it to determine whether aproposed TIF district is necessary,viable, and rewarding. Basic docu-mentation would include cost-ben-efit analyses and financial feasibili-ty studies prepared for the City byindependent consultants. In thecase of public-private partnerships,the City should gather additionaldetail through the developer’s/owner’s financial statements,detailed projections (including cashflow and revenues and expenses),rate of return and profitabilityanalyses, and, where appropriate,independent market studies.

t The analysis of a proposed TIF dis-trict should include a comparisonof the cost of tax increment financing against alternativefinancing methods, including theissuance of general obligationbonds.

t The City should establish a uni-form system for evaluating andapproving TIF districts.

t The evaluation should include care-ful scrutiny and evaluation of cost-benefit and other analyses. Factorssuch as the duration of the TIFand the percentage of incrementaltaxes subject to reinvestment inthe district should be pegged to theprojected costs and benefits, inaccordance with predeterminedstandards.

t To protect the interest of the City’sresidents and taxpayers, the Cityshould obtain advisors or staff withthe sophisticated financial, legal,

and managerial expertise needed toevaluate, implement, and monitorsuch districts effectively.

Requirements to EnsureObjectivity and Accountability

t Developers and owners of TIF pro-jects should be required to providethe City with the information nec-essary to compare projected bene-fits with actual benefits on anongoing basis.

t The City’s TIF policy should includeprovisions to reduce the life of theTIF if the developer fails to meetprojections, provided that obliga-tions under TIF bonds are notimpaired.

t TIFs for projects should includearrangements that allow the publicto recoup, to the extent possible,its investment from the develop-er/owner if the projected publicbenefits do not materialize.

Minimizing Investment andMaximizing Return

t The City’s TIF policy should requirea significant equity investment bythe developer/owner comparable tothe investment that would berequired by a private lender.

t TIF investments should be struc-tured to allow the City to recaptureall or a portion of the public sub-sidy to the extent practicable,through mechanisms such as long-term ground leases, subordinatedloans, and revenue participations.

t The life span of a TIF districtshould be restricted to a reason-able period. In no case should the

duration of a TIF district and itsbonds exceed the shorter of 20years or the expected life of theproject supporting the TIF.

t TIF funds should be redirected tothe City’s General Fund after theTIF period expires or when they areotherwise not required for the TIFdistrict generating them. Cross-subsidization of other TIF districtsshould not be permitted.

Transparencyt All meetings relating to TIFs should

be conducted in accordance withboth the letter and the spirit of theopen meetings law. Practices thatundermine transparency, such asone-on-one briefings and behind-closed-door negotiations betweencouncilmembers and potentialdevelopers/owners, should beavoided.

t All documentation relating to TIFsshould be available to the public.

t City Council should provide thepublic on an annual basis with areport on TIF districts, includingthe amount of public funds dedi-cated to TIF and the performanceof the various districts.



I. INTRODUCTIONRecently, the City of New Orleans hasturned its attention to a widely usedlocal economic development tool: taxincrement financing (TIF). Last fall theCity Council approved the City’s firstTIF district in connection with the rede-velopment of the former St. Thomashousing project. Another district withTIF-like characteristics has been pro-posed in connection with the conversionof a portion of the World Trade Centerinto a hotel. A bill to create a TIF dis-trict for the Lake Forest Plaza ShoppingCenter site was recently introduced intothe State Legislature. Another to createa TIF district for a large portion of east-ern New Orleans has been filed. In May,City Council will consider a TIF-likearrangement for a Lowe’s HomeImprovement Warehouse. Anticipatingadditional TIF proposals, the CityCouncil has begun to develop policiesand procedures to govern the use of TIF in the future.

As local governments have struggled todeal with increased blight and dimin-ished resources, TIF has increased inpopularity. However, whether it is effec-tive and efficient has been the subject of growing debate. Proponents of themechanism maintain that TIF createsmore jobs, greater property values, moretax revenues, and revitalized blightedareas. Critics dispute the effectivenessof TIF as an economic development tooland raise questions about the cost andequity of the financing mechanism.

In this report, BGR:

t provides an overview of the use ofTIF around the United States,

t reviews the perceived benefits ofTIF, as well as the pitfalls andpotential abuses associated withthe mechanism,

t describes Louisiana law,

t reviews the TIF approved for theformer St. Thomas site and the TIFproposed for the World TradeCenter, and

t makes recommendations concern-ing state law and the future use ofTIF in New Orleans.

II. WHAT IS TIF?TIF is a financing mechanism thatenables a local government to capturefuture incremental tax revenues in adesignated area and reinvest them inthat area to fund public improvements.Basically, the local government freezesthe tax base in the TIF district at thepre-development level for a period ofyears.2 Taxing bodies continue to receivethe taxes on the pre-development base,but the incremental taxes are applied toinfrastructure and other improvementsdesigned to spur private sector develop-ment. In theory, the TIF district financesits own renewal and eventually gener-ates greater tax revenue for the commu-nity as a whole.

The establishment of a TIF involves anumber of decisions, including:

t the designation of the geographicarea for the TIF district,

t the development of a plan forimprovements in the district,

t the designation of the tax incre-ment to finance the improvements,


t in some cases, the establishment ofa TIF authority, and

t the designation of the financingmechanism.

These are discussed more fully below.

III. TIF IN THE UNITED

STATES

A. OverviewIn 1952, California became the firststate to authorize TIF, allowing redevel-opment agencies to use TIF to provide alocal match for federal funding of urbanrenewal projects.3 The mechanismenabled cities to force other tax recipi-ent bodies in the improved area to con-tribute to the cost of urban renewal.Prior to that time, the cities alone borethe cost of the local match, while all taxrecipient bodies benefited from theincreased tax base.

Nationwide, TIF did not gain widespreadpopularity until the 1970s. In thatdecade, the federal government beganreducing the amount of funds availablefor urban renewal. States and cities,seeking to fill the gap with tax increas-es, met with opposition.4 In addition,the imposition of tax and expenditurelimits on local governments, such asCalifornia’s Proposition 13, severelyrestricted the ability of local govern-ments to raise property taxes and issuedebt. The trends of federal spendingcuts and voter opposition to new taxescontinued in the 1980s and 1990s,leading many states to adopt TIF legislation to facilitate infrastructureand economic development.5

Today, 47 states and the District ofColumbia authorize the creation of newTIF districts. The most active users ofthe financing mechanism includeCalifornia and several Midwesternstates. About three-fourths of Californiacities have now established redevelop-ment agencies, the authorities that canuse TIF.6 As of the late 1990s,Minnesota had established more than1,700 TIF districts; Wisconsin, morethan 800; Illinois, more than 400.7 Theuse varies widely among cities. Chicagohas more than 120 TIF districts; NewYork City has none.

B. Variations on a ThemeTIF statutes vary widely as to the crite-ria for designating a TIF district, permis-sible uses, the types of taxes used, themaximum term for a district, and therequired procedures.

1. Designating a TIF District

Use of TIF begins with the establish-ment of a TIF district, the geographicarea in which incremental taxes will becaptured and applied to improvements.TIF districts can be drawn tightlyaround one development project orbroadly around an entire neighborhood.Two of the more common requirements– a finding of blight and satisfaction ofthe “but for” test – are discussed below.

Blight. Reflecting the genesis of TIF as a tool for urban revitalization, 18 statescondition the use of TIF on a finding ofblight. In 15 of the 18 states, blight isdefined in qualitative terms by referenceto characteristics such as the presenceof abandoned buildings and excessivevacancies. The other three states quantify blight. For example, Alabamarequires at least 50% of the buildings


in a redevelopment district to fit thestatutory criteria for blight.8 Louisianadoes not require a finding of blight.

Over the years, the blight requirementhas often been loosely interpreted, lead-ing to the use of TIF in suburbs andother areas that are not blighted.Several states that require a blight finding, including California and Illinois,have sought to strengthen the connec-tion between TIF investment and urbanredevelopment by enacting stricter standards.

“But For” Test. Seventeen states andthe District of Columbia require localgovernments to determine that develop-ment would not occur “but for” the TIF.The test is formulated differently in thevarious statutes.

Twelve of the 17 states require a findingthat TIF is necessary for any redevelop-ment to occur. Illinois, for example, pro-hibits approval of a TIF redevelopmentplan unless the “municipality finds thatthe redevelopment project area on thewhole has not been subject to growthand development through investment by private enterprise and would not rea-sonably be anticipated to be developedwithout the adoption of the redevelop-ment plan.”9

The other five states and the District ofColumbia focus on whether the specificdevelopment would occur. Nebraska, forexample, requires the local governmentto find that “the redevelopment projectin the plan would not be economicallyfeasible without the use of tax incre-ment financing.”10

Louisiana does not impose a “but for”test.

2. Permitted Uses

The purposes for which TIF revenuescan be expended vary from state tostate. All 47 TIF states authorize the useof TIF funds for public works andinfrastructure and a variety of sitepreparation and pre-development activi-ties. Some of the more common activi-ties include property assembly, demoli-tion, clearing and grading of land, andadministrative expenses.

Only five states restrict the use of TIFfunds to infrastructure, site preparation,and pre-development activities. Theother 42 states have added building renovations as eligible uses.

Of the 42 states, 33 also allow newbuilding construction for a variety ofpurposes. These include 15 states inwhich private use or ownership isexplicitly allowed by the statutes.

Many states allow a wide range of devel-opments in a TIF district. These mayinclude affordable housing, manufactur-ing plants, hotels, sports stadiums,downtown improvement, and historicrenovations. Some states imposerequirements to address particularissues of concern. California and Texas,for example, set aside portions of TIFrevenue for the construction or rehabilitation of affordable housing inthe TIF district.

Louisiana allows a broad array of devel-opment projects in a TIF district.

3. The Designated Tax Increment

Property tax is the dominant source ofrevenue for TIF. Forty-seven states andthe District of Columbia authorize TIFbased on property taxes.


BGR found that 13 states and theDistrict of Columbia currently authorizethe creation of new TIF districts basedon sales taxes. Some of these states per-mit the use of sales TIF for broad pur-poses similar to those for which proper-ty TIF can be used. Others restrict salesTIF to a more limited universe of pro-jects. For example, Wyoming and theDistrict of Columbia limit the use ofsales TIF to downtown districts; Kansasallows sales TIF only for historic the-aters, auto racetracks, and multi-sportathletic complexes.

California withdrew the authority to create sales TIF districts in 1993 out of concern that automobile dealerships,large-volume retailers, and other salestax generators were receiving unneces-sary subsidies, and that the sales taxpotential of projects was driving landuse and TIF decisions.11 Illinois is phasing out the use of sales TIF, whichwas based in that state on state salestaxes.12

A few states allow TIF for employment,hotel occupancy, and various entertain-ment taxes. Maine, for example, allowsthe reimbursement of a certain percent-age of state employment withholdingtaxes to be captured by a TIF district.

Louisiana allows TIF for property, sales,and, in certain cases, hotel occupancytaxes.

4. Limits on the Duration of TIFDistricts

At least 25 states with TIF statutesimpose limits on the duration of the TIF. With few exceptions, the time limitsrange from 20 to 30 years. Louisianastatutes do not limit the term to a specific number of years.

5. Required Documentation

State statutes vary as to the type of doc-umentation required for TIF. Althoughmost require formal redevelopmentplans, the contents of the plan varyfrom state to state. Plans may includethe following:

t Purpose and objectives of the TIF

t Official finding of blight in the proposed area

t The TIF district’s boundaries

t Proposed land use

t Proposed development activitiesand project timetables

t Sources and uses of public and private financing for these costs

t Terms of TIF bonds

t Economic impact or cost-benefitanalysis

t Estimate of tax impacts on localgovernments

t Other public costs

t Timeframe for paying off the TIF

In conjunction with the redevelopmentplan, some states require local govern-ments to prepare special studies.Examples include economic and finan-cial feasibility studies and neighborhoodand environmental impact analyses.While such studies can provide usefulinformation, they are also imprecise andsubject to manipulation. Accordingly,they must be used cautiously.

Some of Louisiana’s TIF statutes indi-rectly incorporate a requirement for aneconomic development plan. Others,such as the sales TIF statute for NewOrleans, do not. The state does notrequire any studies.


6. Financing Options

TIF improvements can be made andfinanced through a number of options.One option is for the local governmentto issue debt to finance an up-frontinvestment. A second option is for thelocal government to make and pay forimprovements on a cash basis as incre-mental tax revenue is collected. This iscommonly referred to as “pay-as-you-go”financing. The third is for a developer tofund projects up-front and receive reim-bursements as TIF proceeds arereceived.

Louisiana’s property and sales TIFstatutes applicable to New Orleans atlarge allow the local government to issuerevenue bonds. They are silent as topay-as-you-go financing and reimburse-ment of the developer.

IV. WHY DO LOCAL

GOVERNMENTS USE

TIF?Proponents of TIF cite the following benefits, some of which apply to othereconomic development tools.

Expected Benefits. As the above history indicates, TIF provides cash-strapped local governments with ameans of making infrastructure andother capital improvements. It enableslocal governments to undertake revital-ization and economic development projects that, given political realities,would not be feasible otherwise. If theprojects are carefully conceived and executed, the community enjoys multi-ple benefits: increased employment,improved environment, additional pri-vate investment, increased tax revenues,and civic pride.

TIF is perceived as a good mechanismfor encouraging and leveraging public-private partnerships to address issues of unemployment, poverty, and blight.By funding public infrastructureimprovements and demolition, sitepreparation, property assembly, andenvironmental clean-up costs, local gov-ernments make the urban landscapemore attractive for private investment.In a successful TIF district, the initialpublic-private investment attracts addi-tional private investment, multiplyingthe benefits of the initial investment.

Self-Financing Investment. Much ofthe popularity of TIF stems from theself-financing nature of the mechanism.In a pure TIF, the local government’srepayment obligation is limited to theincremental taxes generated in the TIFdistrict. In theory, these incrementalrevenues have been generated by theTIF investment. Thus, the public suffersno loss of revenues; it pays for thedevelopment out of funds that it wouldnot have otherwise received.

Limited Obligation. The limited natureof the obligation also contributes toTIF’s appeal. Because TIF indebtednessdoes not constitute a general obligation,the local government is not liable if theanticipated revenue stream does notmaterialize. In addition, TIF bonds gen-erally do not count against the munici-pality’s debt limit.13

Political Appeal. TIF has tremendouspolitical appeal for a variety of reasons.Most importantly, it allows local govern-ments to make the desired investmentwithout raising tax rates or cutting cur-rent expenditures. In most states, theinvestment can be made and supportingdebt issued without voter approval.14


Flexibility. TIF also provides local governments with significant flexibilityand control over the investment offuture tax revenue. In addition, TIFavoids the bureaucracy associated withintergovernmental revenue transfers.15

TIF’s local focus can lead to swifter government action to assist privatedevelopment than would otherwise bepossible. 16

Equitable Sharing of DevelopmentCosts. Prior to the development of TIF,the municipality or county was the onlylocal tax recipient body to bear the costof redevelopment. Other taxing bodiesthat would ultimately benefit from theincreased tax base made no contribu-tion. TIF legislation in many states distributes costs more fairly by forcingoverlapping tax recipient bodies to sharein the TIF investment.

V. CRITICISMS OF TIFAs the use of TIF has proliferated, themechanism has come under attack forbeing ineffective, inefficient, andinequitable. Critics claim that TIF has harmful side effects that negate orreduce benefits. These include the following:

Increased Costs Transferred toOthers. TIF can impose significantfinancial burdens on local governmentby increasing operating costs (such asfire and police protection) without pro-viding offsetting resources. The problemis particularly acute in states that provide for the capture of the tax incre-ment that would otherwise have gone tooverlapping tax bodies, such as schoolsystems.

In addition to increasing the costs ofgovernment, TIF can transfer financialburdens from certain groups of resi-dents to others. When taxes generatedwithin a TIF district are retained forphysical improvements, taxpayers out-side the district pick up the tab for anyincreased government services in theredevelopment area. Those outside thedistrict also cover the TIF district’s prorata share of the local government’soverhead and other general operatingcosts.

Negative Impact on Other Businesses.TIF can also confer benefits on certainbusinesses at the expense of others. For example, a successful TIF-supportedretail development will draw businessaway from retail businesses located outside the TIF district. A TIF for a hotel can provide the owner with a competitive pricing edge and drawguests away from non-subsidized hotels.The advantages provided by the publicsubsidy raise serious equity issues thatmust be carefully evaluated.

Reduced Operating Revenues. In addi-tion, to the extent that a business in aTIF district attracts sales from business-es outside the district but inside thelocal jurisdiction, the existing revenuebase of the local government is reduced.The general fund is deprived not only ofthe incremental revenues in the TIF dis-trict, but also of the tax revenues that itwould have received from adverselyaffected businesses.

Negative Impact on Other Areas. Asan unintended consequence, TIF dis-tricts can have a negative impact onunsubsidized areas by drawing invest-ment and revenues away from them.This is particularly true where there islimited demand for a good or service.


To the extent that development in theTIF district is offset by stagnation ordecline elsewhere in the taxing jurisdic-tion, the local government is engaged in a zero-sum game.

Intra-Regional Competition. On theregional level, TIF is sometimes used asa weapon in bidding wars for businessdevelopment. The use of TIF by localgovernments to lure businesses from aneighbor leads to a zero-sum game forthe region and state: one communitywins, one loses, but there is no netgain.17

Some states have enacted laws toaddress the piracy issue, particularlywith respect to retail stores:

t California prohibits any form offinancial assistance to an automo-bile dealership or large volumeretailer relocating from one com-munity to another in the samemarket area, unless the two com-munities enter into a sales tax-sharing arrangement.18

t Illinois prohibits the use of TIF tosubsidize a retailer relocating with-in a 10-mile radius, unless theclosed store is inadequate, obso-lete, or no longer in a viable retaillocation.19

t Maine’s employment TIF programrequires a finding that the TIFdevelopment will cause no sub-stantial harm to existing Mainebusinesses.20 In addition, a partici-pating retail business must demon-strate that it receives 50% or moreof its revenue from out-of-statesales or that increases in its saleswill not include sales shifted fromother Maine businesses.21

Expensive Funding. TIF bonds can bean expensive funding source. Becausethey are project-based or otherwisepayable from restricted sources, suchbonds can command a far higher inter-est rate than general obligation bonds.This is the downside of limiting the obli-gation to repayment from a specifiedsource, rather than pledging the fullfaith and credit of the government.

Unwarranted Private Subsidy. WhenTIF is used to fund public infrastructureimprovements, such as streets andsewer and water systems, and to pay for demolition, site preparation, propertyassembly, and environmental clean-upcosts, it represents a public investmentin the prep work needed to make theurban landscape more attractive forinvestment. TIF becomes more problem-atic when it is used to provide capitalfor privately owned projects and assets.In that case it acts as a circuitous taxabatement, redirecting public money toa developer/owner.

TIF is supposed to create conditionsthat encourage economically viabledevelopment. It is not intended to com-pensate for financial weaknesses in adeveloper/owner or inadequacies in thefinancial structure of a transaction (e.g.,inadequate equity investment). Nor is itintended to offset the lack of demand fora service or a product.

Loss of Benefits. The benefits of TIFcan be lost if the project is improperlystructured. For example, as a spin-offeffect, TIF is supposed to create othersources of revenue for a city. When TIFis used in tandem with other incentivesthat abate or divert other types of taxes,the community loses the additional ben-efit of revenue streams that the TIF


development would otherwise generate(e.g., when incremental property andsales tax revenues are both diverted).

Fragmentation of the Tax Base.Allowing too many TIF districts can leadto a fragmented tax base in which thedistricts and neighborhoods experienc-ing growth lock up the incremental taxrevenue they create.22

Complex Analysis and Oversight. TIFis a complicated financing mechanism.To work effectively and efficiently, itrequires a significant, long-term com-mitment of municipal resources and ahigh level of professional expertise forevaluation, implementation, and admin-istration.23 Such expertise runs thegamut from finance and accounting toreal estate development. In addition,successful evaluation depends on theaccuracy and rigor of the underlyingmarkets, cost-benefit, and other impactstudies.

Some of the criticisms leveled at TIF can be mitigated or avoided throughcautious, appropriate use of the TIFmechanism.

VI. SPECIAL ISSUES

WITH SALES TIFSales TIF districts can under some cir-cumstances provide far larger tax rev-enue streams than property TIF districtswould. This is true in areas with lowassessments, large amounts of exemptproperty, or limitations on the types ofproperty taxes that can be accessed forTIF. In those circumstances, sales TIFmay be more feasible than property TIF.

There are, however, concerns with salesTIF that are not present (or are less pro-nounced) in the case of property TIF.These concerns include the following:

Land Use Distortions. Because theamount of revenue generated by a salesTIF district depends on sales volume,the mechanism favors the inclusion ofhigh-volume retailer establishments,such as malls, big box stores and cardealerships, in the TIF district. The needfor large retailers to support the TIF canlead to distorted land use decisions,with the decision being driven more by aperceived need for a subsidy of a givensize than by sensible planning. Concernover distorted land use was one of thefactors that led California to repealauthorization for sales TIF.24

Subsidies for Big Retailers. The questfor large revenue sources can result inunnecessary subsidies for big retailers.This is both ineffective and inequitable,since it results in both a waste of publicdollars and provides businesses with asubsidized competitive advantage. Thiswas another factor that led California toterminate sales TIF authorization.25

Capturing Non-incremental andUnrelated Revenues. Instead of creat-ing new revenues, sales TIF districtsmerely shift business from other entitiesin the region, or even worse for the localjurisdiction, from other businesses with-in its boundaries. Losses suffered bythose businesses actually result in aloss of current tax revenues available tothe local jurisdiction.

Factors other than the TIF districtimprovements (e.g., an upturn in gener-al economic conditions or changes inpersonal spending habits) may be fueling the increase in taxes. In that


case, the local jurisdiction is divertingfrom the general fund revenues that arenot attributable to the TIF investment.

Less than Optimal Value. Becausesales TIF districts require a significantgenerator of sales taxes, they are morelikely to be used for retail developmentthan for other uses, such as manufac-turing and high-tech exports, that gen-erally have a greater economic impact.26

This can result in a commitment ofcommunity resources to an economicdevelopment strategy that is less thanoptimal. The risk is particularly pro-nounced in the case of local govern-ments that turn to sales TIF because ofstructural weaknesses in their propertytax base.

Unstable Revenues. A sales tax base isinherently less stable than a propertytax base. 27 Sales TIFs are more suscep-tible to revenue fluctuations caused bylocal economic declines, competitionfrom stores outside the district, andgeneral changes in shopping patterns.This makes it riskier and more expen-sive to finance debt issues based on TIF.

Loss of Benefits. Unless contractuallyconstrained, the retailer can enjoy theTIF benefits and deprive the local gov-ernment of projected benefits by depart-ing when the TIF period ends.

VII. LOUISIANA TIFSTATUTES RELATING

TO NEW ORLEANSLouisiana statutes contain a confusingarray of provisions on the use of taxincrement financing. The statutes con-sist of provisions that apply generally tolocal governments and provisions on thesame subject that apply only to certain

size local governments. The result is acrazy patchwork of provisions that canbe understood and reconciled only if oneperforms a demographic analysis of themunicipalities and parishes inLouisiana.

The TIF statutes applicable to NewOrleans are set forth in the state’sCooperative Economic DevelopmentLaw. That law addresses the use of TIFby both economic development corpora-tions and by local governmental subdivi-sions.

Under the general statutes applicable toNew Orleans, the City can establish TIFdistricts and issue revenue bondspayable from or secured by property orsales tax increments. TIF bonds basedon property taxes must be approved bythe voters; voter approval is not requiredfor bonds based on sales taxes. The dif-ferent voting requirements, along withlegal constraints on the capture of prop-erty tax revenue, skew the use of TIFtoward sales taxes.

There are also two special interest TIFstatutes directed at special areas in theCity: Algiers, through a special provisionin a TIF law that applies to local govern-ments with less than 200,000 people;and the World Trade Center property, asa special taxing district. Two other spe-cial interest TIF statutes have been pro-posed for the Lake Forest Plaza shop-ping mall in eastern New Orleans andfor the large area of New Orleans east ofthe Industrial Canal.

A. Property TIFLa. R.S. 33:9032 authorizes local gov-ernmental subdivisions to issue revenuebonds payable solely from incrementalproperty taxes collected in an economic


development area. The tax incrementscan be used to finance or refinance aneconomic development project or to payfor the costs of an economic develop-ment project. The costs of an economicdevelopment project are broadly definedin La. R.S. 33:9035 to embrace “all rea-sonable or necessary costs incurredincidental to or in furtherance of an eco-nomic development project …, providingthat any such costs are reasonablyrelated or attributable to an approvedeconomic development plan.”

The tax increment consists of the incremental ad valorem tax revenuescollected for any or all taxing authoritiesfrom property in an economic develop-ment area; however, it does not includetax revenues previously dedicated for aspecial purpose.

The bonds require voter approval. Thelimitation of tax revenues to undedicat-ed ones and the requirement for voterapproval are significant differences fromthe TIF statutes of most states. As isdiscussed more fully below, theserestrictions seriously restrict the useful-ness of property TIF in New Orleans.

La. R.S. 33:9032, which is only half apage long, lacks the type of detail that isnormally found in statutes authorizingbond issues. The statute does not con-tain any direction concerning the desig-nation of an economic development areaor the process for dedicating of taxincrements. The establishment of aneconomic development area is cir-cuitously addressed through other provisions in the state’s CooperativeEconomic Development Law.Specifically, La. R.S. 33:9034 gives localgovernments the powers, rights, duties,and obligations of an economic develop-ment corporation. The powers include

the power to establish an economicdevelopment area, subject to approval ofthe chief executive officer or governingauthority of a local government. La. R.S.33:9034 contains no provision specify-ing the process for dedicating incremen-tal tax revenues to a TIF district.

B. Sales TIFThe use of sales TIF by New Orleans isgoverned by La. R.S. 33:9033.3. Thestatute is much more detailed than thecorresponding property TIF statute.

La. R.S. 33:9033.3 applies to municipal-ities with a population between 190,000and 215,000 or with a population inexcess of 400,000, and to parishes witha population between 400,000 and475,000 as of the latest decennial cen-sus (the “Designated Municipalities”).Currently, the populations ofShreveport, New Orleans, JeffersonParish, and East Baton Rouge Parishfall within those ranges.

The statute authorizes the DesignatedMunicipalities to issue revenue bondsthat are either payable from revenuesgenerated by economic developmentprojects with a pledge of sales tax increments for any shortfall, or payablesolely from incremental sales tax rev-enues generated in an economic devel-opment area. The municipality is alsoauthorized to pledge the revenues fromany millage levied for economic develop-ment or any other funds available foreconomic development. Incrementalsales tax revenues are restricted tothose of the local government and donot include tax revenues dedicated for a special purpose.


Sales TIF bonds can be used to financeor refinance all or any part of an eco-nomic development project. “Economicdevelopment project” is broadly definedto embrace “any and all projects suit-able to any industry determined by themunicipality or, as appropriate, theissuers of revenue bonds, to create economic development.”

The total amount of principal and inter-est falling due in any calendar year can-not exceed 75% of the amount of thepledged sales tax increment that themunicipality estimates will be receivedin the first full calendar year after theeconomic development project has beencompleted. The statute does not specifyhow the remaining increment can beused.

The sales TIF statute requires a munici-pality that proposes to issue sales TIFbonds to designate the boundaries ofthe TIF district and the portion of localsales taxes to be used for the tax incre-ments. No voter approval is required forthe issuance of the bonds.

Neither property nor sales TIF bonds aresubject to any statutory debt limitationsor restrictions. There is no statutorylimit on the duration of a TIF district.

C. Issuance of TIF Bondsby Economic DevelopmentCorporationsAs noted above, bonds secured by taxincrements can be issued by economicdevelopment corporations with the consent of the affected governmentalentities. Interestingly, the law does notstate whether the consent of voters isrequired for economic development cor-porations to issue revenue bondssecured by property TIF.

D. Special Provision forAlgiersLegislation passed in 2002 provides spe-cial property and sales TIF authority forall municipalities and parishes with200,000 people or less. The new law, La.R.S. 33:9038.1-9038.9 (the “SmallJurisdiction Statute”), also applies toAlgiers. It is unclear exactly how thestatute relates to the property and salesTIF statutes that apply to New Orleansat large.

The Small Jurisdiction Statute allowsthe City, or with the City’s consent, anindustrial development board or publictrust with jurisdiction in Algiers to issuerevenue bonds payable from or securedby incremental property, sales, or hoteloccupancy tax revenues. The City estab-lishes the district from which the incre-ments are to be pledged and deducted.

Property TIF may capture all incremen-tal property taxes, if this does not resultin a violation of dedications or otherlimitations and if all affected tax recipi-ent bodies consent to the capture of the incremental property taxes. Revenuebonds secured by property taxes mustalso be approved in a special election forqualified electors within the proposedboundaries of the TIF district. If thereare no electors, as in the case of vacantor purely commercial land, no electionis required.

In contrast to TIF districts establishedin larger jurisdictions, the small govern-ment TIF districts may capture all incremental state and local sales andhotel occupancy taxes in the district, if the appropriate tax recipient bodiesconsent. State sales tax increments


cannot exceed the pledged local increment. No voter approval is requiredfor the issuance of the bonds.

The annual debt service for both proper-ty and sales TIF bonds is limited to apercentage of tax increments. At the endof the life of a TIF, any unspent incre-ments set aside for debt service reservesmust be deposited in a trust fund to“promote other economic developmentopportunities.” In addition, incrementalrevenues can be deposited in a specialtrust fund to loan, grant, donate, orpledge for other economic developmentprojects.

The districts can levy up to five mills ofproperty tax, up to 2% of sales taxes,and up to 2% of hotel occupancy taxes,or any combination, on property withinthe district. The statute does not man-date specific uses for these taxes. As isthe case of property taxes, a specialelection for qualified electors is required.

The Small Jurisdiction Statute is moredisturbing than the statutes generallyapplicable to New Orleans in severalrespects. First, it eliminates the require-ment for city-wide voter approval ofproperty TIF bonds: the only voterequired is for voters in the district whowould benefit from the redirection of taxincreases. Second, it allows the captureof state sales taxes. Third, it gives localgovernments the option of placing taxincrements in a trust fund for other economic development projects.

E. World Trade CenterTaxing DistrictLa. R.S. 33:9038.21, enacted in 2002,created a special taxing district for theWorld Trade Center at the foot of Canal

Street. The taxing district includes the33-story World Trade Center building, aparking garage, and adjacent land.

The legislation’s stated purpose is tofacilitate cooperative economic develop-ment among the City, the World TradeCenter of New Orleans Inc. (WTCNO),and a developer, WTC Development Ltd.,to renovate, restore, and develop theWorld Trade Center property and toimplement a lease between WTCNO and WTC Development Ltd.

The World Trade Center taxing districtis authorized to levy and collect its ownhotel occupancy tax in lieu of the hoteloccupancy tax in Orleans Parish at arate that is at least equivalent (currently13%). The taxes can be used to pay revenue bonds issued by the district orany other financing of the property,including loans or mortgages, bonds, or certificates of indebtedness.

The tax can be levied through an ordi-nance adopted by the district’s three-member board of commissioners, com-posed of the City Council president, thepresident of New Orleans BuildingCorp., and the managing director ofadministration of WTCNO. Approval bythe affected hotel tax recipients is notrequired for the capture.

The district will dissolve one year afterthe earlier of the repayment of revenuebonds issued by the district or the ter-mination of a lease between WTCNOand WTC Development Ltd.

The statute prohibits the hotel fromadvertising below-market room rates; itdoes not specify how the market rate isto be determined.


F. Lake Forest Plaza TIFProposalDuring the spring session, the StateLegislature will consider a bill (S.B. 808)to create a TIF district for the LakeForest Plaza Shopping Center in easternNew Orleans. The purpose of the districtis broadly stated as “renovation, restora-tion, and development within the dis-trict.” The purpose would be accom-plished through cooperative economicdevelopment among the district, theCity, and the owners of businesses andproperty within the district. The dis-trict’s governing board would consist ofthe president of City Council, and thestate senator and state representativewhose legislative districts include theproposed TIF district.

The bill would authorize the district tolevy and collect its own hotel occupancytax at a rate at least equal to the hoteloccupancy tax rate in Orleans Parish. Itis in lieu of any hotel tax other than atax on a per-head or per-person basis.The tax may be levied without theapproval of the hotel tax recipient bod-ies. The district may pledge the tax col-lections to pay revenue bonds that itissues. It may also pledge the collectionsto “any purpose” set forth in the legisla-tion. Such financing may include loans,mortgages, bonds, or certificates ofindebtedness. The bill includes a prohi-bition on advertising below-market roomrates.

The bill also grants the Lake ForestPlaza district the TIF powers grantedsmall municipalities and parishes underthe Small Jurisdiction Statute. As notedpreviously, that statute allows captureof any incremental property or sales

taxes generated by development in thedistrict, as long as the capture is legaland the tax recipient bodies consent.

The Small Jurisdiction Statute wouldalso allow the district to levy and collectup to five mills of property tax, 2% ofsales tax, and 2% of hotel occupancytax. TIF bonds backed by property taxincrements and additional tax leviesrequire approval of qualified electors inthe TIF district, if any live there.

S.B. 808 also contains a cryptic provi-sion defining a “general sales tax incre-ment” as a portion of the general salestax increment determined and collectedby the Lake Forest Plaza District in lieuof other such taxes levied by other tax-ing authorities. The import of the provi-sion is unclear, since neither the term“general sales tax increment” nor theterm “general sales tax” is used else-where in the bill. However, the provisionopens the door to a possible capture ofnon-incremental sales taxes.

G. New Orleans East TIFProposalA bill to create a special taxing districtfor all of eastern New Orleans (H.B.1737) has been pre-filed, but not for-mally introduced, for this spring’s legislative session. The bill would createthe New Orleans East Tax IncrementFinancing District, bounded by theIndustrial Canal, Lake Pontchartrain,and the Orleans Parish line.

The purpose of the district is “to providefor the orderly planning, development,acquisition, construction, and effectua-tion of the services, improvements, andfacilities to be furnished by the district.”


The district would be governed by aboard of commissioners consisting ofmembers appointed by state legislatorsfor eastern New Orleans, CityCouncilmembers from districts D and E,and the Mayor, and five membersappointed by the other members from alist provided by the appointing parties.

The bill authorizes the district to createeconomic development areas and toissue revenue bonds for economic devel-opment projects. The bonds would beguaranteed by or payable from sales taxincrements collected in an economicdevelopment area designated by the dis-trict. It is unclear which tax incrementsare covered, since the bill excludes dedi-cated revenues and sales taxes collectedby the state or any political subdivisionother than the district. The bill does notgive the district authority to levy anytaxes.

The sales TIF provisions appear to bebased on the language of the TIF statutefor New Orleans, R.S. 33:9033.3. Themajor difference is that the district, andnot the City, has the power to designatethe sales tax increment and issuebonds.

The bill would authorized the district touse property tax increment financing asprovided elsewhere in CooperativeEconomic Development Law. This couldsubstantially impact future city propertytax revenue, because eastern NewOrleans encompasses 65% of the city’sland.28

Eligible projects that may be undertakenin the district are the same as thoseallowed in R.S. 33:9033.3.

VIII. TIF USE IN

LOUISIANA

A. Sales TIF in OtherCitiesThe use of TIF outside New Orleans hasbeen limited to a handful of sales TIFdistricts established to subsidize con-struction of retail development or buildinfrastructure for retail. Two cities,Ruston and Monroe, established salesTIF districts capturing both state andlocal sales tax increments.

Monroe has issued several series ofbonds for roads and infrastructure fortwo retail areas, with large, nationalretailers, such as Wal-Mart, HomeDepot, Lowe’s, and Target. Most recently, it issued $9.25 million ofbonds with a maturity of 19 years andan interest rate of 5.49%.

In 2001, Ruston issued $2 million ofbonds to fund engineering studies forroad construction to service a retail areawith a Wal-Mart, auto dealerships, andother stores. Ruston expects to repaythe bonds out of incremental state salestaxes, without using local sales taxes,an option no longer available. It plans toissue additional bonds to design andbuild the roads.

Lake Charles created a TIF district in1996 for Prien Lake Mall. The city,school board, and law enforcement dis-trict agreed to reimburse the mall devel-oper for expansion costs in an amountnot to exceed $8,000,000.

Shreveport created a 92.4-acre down-town entertainment TIF district in 1999and spent $1 million of general funds onstreetscape improvements. The first $1million collected by the TIF district,


which captures incremental revenuesfrom the city’s 2.5% sales tax, will reim-burse the city for those improvements.

B. TIF in New OrleansOnly two TIFs in New Orleans have sig-nificant history and information avail-able for analysis: a TIF for the St.Thomas redevelopment, which wasapproved by City Council last fall, andthe proposed TIF for a hotel in theWorld Trade Center, which continues tobe negotiated by the City. BGR takes noposition with respect to the merits ofeither development.

1. St. Thomas

The St. Thomas TIF district includes theformer St. Thomas public housing siteand an adjacent parcel of land on whicha Wal-Mart Super Center will be con-structed. The district was formed toassist with the financing of a HOPE VIredevelopment project for St. Thomas.The district will capture future Citysales tax revenues (2.5%) from the Wal-Mart Super Center. The incrementaltaxes from Wal-Mart will not be divertedto Wal-Mart, but will be used instead torepay $20 million of debt incurred tofinance the construction of two mixed-income rental portions of the former St.Thomas site, known as CS1 and CS2.Further discussion of the St. ThomasTIF is presented in Appendix A to thisreport.

The St. Thomas TIF raises the followingconcerns:

Private Subsidy. The St. Thomas TIF ispart of a package of substantial subsi-dies to a private developer. For the con-struction of CS1, one of the mixed-income rental portions of the project,

the cost to the public (including interestand other costs) will equate on a per-low-income-unit basis to almost$348,000 (excluding infrastructure) and$420,000 (including infrastructure).

Low-Priority Use of Funds. The revenues from the TIF district are beingused to finance market-rate housing – atroubling application of public funds ina city that suffers from a lack of decentlow-income housing.

Expensive Financing. The cost of theTIF bonds is extraordinarily high. TheCity has authorized the issuance ofbonds with an anticipated interest rateof 8 to 8.5%. Although for technical rea-sons the stated maturity is 45 years, theCity anticipates retiring the bonds in amaximum 13.5 years. The interest rateexceeds the rate for bonds issued bylocal governments with ratings compa-rable to New Orleans (currently around4.5%) by a significant margin. The inter-est differential between $20 million inbonds, payable over 13.5 years andbearing interest at 8.5% and bondsbearing interest at 4.5% would be $7.1million (or $5.8 million discounted at3% for inflation).

If the bonds remain outstanding for thestated maturity, which the City does notanticipate, the interest payments alonecould total $67 million. Under thatworst-case scenario, the citizens of NewOrleans would divert $87 million fromthe general fund to pay for $20 millionin debt.

Reduced Sales Tax Revenue. The St.Thomas TIF district will result in a lossof sales tax revenues currently flowingto the City’s General Fund. As a resultof the loss of tax revenues from otherbusinesses, the City estimates a sales


tax loss in the range of $402,000 to$554,000 a year for the life of thebonds. This loss in sales tax revenue isin addition to the total annual debt ser-vice paid by the TIF district over 13.5years, which could average approxi-mately $2.5 million per year. The addi-tion of $2.5 million to the City’s GeneralFund could translate into hiring 75 newpolice officers.

Multiple Subsidies. In addition to thesales TIF, the City is foregoing most ofthe future property taxes from themixed-income rental housing, and isredirecting to CS1 the property taxesfrom Wal-Mart for 20 years. In general,jurisdictions using TIF anticipateincreases in other tax streams to help justify a TIF district.

Historic Restoration Incorporated (HRI),the developer of the project, claims thatthe TIF is justified by significant netbenefits, which according to a cost-ben-efit analysis prepared by MetroSourceLLC for the Industrial DevelopmentBoard of New Orleans, would equalapproximately $110 million for the Cityover a period of 50 years. HRI projectsincreased sales tax revenues of $125million (on a net present value basis,using a 2% inflation factor) for the City,Orleans Parish School Board, and theRegional Transit Authority over 25years.

2. World Trade Center

In 2002, the State Legislature created aspecial taxing district for a proposedhotel development in the first 18 floorsof the World Trade Center building atthe foot of Canal Street. The taxing dis-trict differs from a traditional TIF dis-trict in that it will levy and collect a site-specific hotel occupancy tax in lieu of

the hotel occupancy tax levied inOrleans Parish. The rate will be equal tothat of the replaced tax, currently 13%.Based on the hotel developer’s revenueprojections, the district has the potentialto capture approximately $48 million oftaxes in the first decade of the hotel’soperation.

The tax can be used to pay revenuebonds issued by the district or anyother financing of the property.According to current reports, the districtplans to issue $40 million in revenuebonds, with a maturity not to exceed 30years and an expected interest rate of8.5 to 9.5%. In addition, TIF bondhold-ers would receive an additional distribu-tion equal to 50% of net income fromthe hotel. Further discussion of theWorld Trade Center hotel project andTIF is presented in Appendix B of thisreport.

The World Trade Center TIF suffers fromthe following problems:

Inadequate Private Equity. The publicis being asked to compensate for inade-quate equity investment in a project.The City claims the developer’s equitycontribution is $1.5 million; the devel-oper claims $5.2 million. Neitheramount is adequate for a $140 millionhotel project. Currently, lenders are will-ing to loan 50% to 60% of a hotel pro-ject’s cost, expecting developers to piecetogether the remainder in equity andsubordinated debt. There is a fundinggap for which the developers are seekingpublic funding. In essence, the City andother tax recipient bodies are putting upthe equity, while the return on theirinvestment is going to the TIF bondhold-ers and the developer.


Inadequate Return on Investment.Under the lease executed before the TIFwas introduced, the City would receive50% of net revenues from the WorldTrade Center property. The World TradeCenter of New Orleans Inc. (WTCNO),the nonprofit organization that leasesthe property from the City and will sub-lease a portion to the developer to buildthe hotel, currently expects the City’s50% share to equal $861,000 to $1.9million per year for the first decade ofhotel operation.

The addition of the TIF dramaticallyreduces the value of the World TradeCenter lease to the City and the commu-nity. The hotel tax capture is projectedto cost the City between $462,000 and$635,000 per year for the first decade ofhotel operation, leaving the City with anet amount of $399,000 to $1.3 millionper year. Collectively, the City and otherhotel tax recipients would forego an esti-mated average of $4.8 million per yearin hotel occupancy taxes.

Negative Impact on Critical Servicesand Economic Engines. The districtwould divert revenues from other pro-jects and entities that provide importantservices or contribute significantly toeconomic development in the City andthe region. These include the OrleansParish School Board, the Ernest N.Morial Convention Center, the RegionalTransit Authority, the LouisianaStadium & Exposition District, the NewOrleans Tourism Marketing Corp., andthe New Orleans MetropolitanConvention & Visitors Bureau. To theextent that these entities lose futurerevenues, the City as a whole suffers.

High Cost of Debt. The cost of the TIFbonds is extraordinarily high. The antic-ipated rate of 8.5 to 9.5% exceeds the

rate that the City could expect to pay forgeneral obligation bonds (currentlyaround 4.5%) by a significant margin.The difference in total interest expense,based on similar amortizations over thestated maturity of the bonds, could be$48.2 million (or $31.6 million discount-ed at 3% for inflation). It should benoted that the City’s share of foregonetaxes for these payments would equalonly 11.5% of the total.

Reduced Tax Base. As a result of theloss of hotel-motel taxes from otherhotels, the City and other hotel taxrecipients would lose revenues that cur-rently flow to them. The City has esti-mated the tax loss at $2.8 million in thefirst year, but the developer disputesthis amount, arguing that other marketfactors will reduce lost tax revenues to anegligible amount.

Unfair Competitive Advantage.Opponents maintain that the districtwould provide the hotel developer withan unfair competitive advantage, allow-ing it to reduce room rates by transfer-ring a significant cost to the public.Proponents respond that their roomrates will track those of other large,competing hotels downtown and thatthe TIF investment is necessary to makethe city-owned World Trade Centerusable in any form of commerce.Although the TIF legislation prohibitsthe hotel from advertising below market-rate rooms, preventing the hotel fromoffering reduced room rates would bedifficult, if not impossible.


IX. FUTURE TIF USE

IN NEW ORLEANSAs noted at the outset of the report, TIF is one of a number of economicdevelopment tools available to local governments. It provides cash-strappedmunicipalities – of which New Orleanssurely is one – with a means of makinginvestment in infrastructure and eco-nomic development projects undersevere financial and political con-straints. TIF has tremendous politicalappeal in that it can be implementedwithout raising taxes and, in manycases, without obtaining voter approval.It has a certain conceptual beauty inthat the investment is, in theory, self-financing and the development support-ing it would not have occurred other-wise.

Under closer scrutiny, the underlyingpremise that a TIF is self-financing isopen to question. Because of the diffi-culty of making long-range projections,it is difficult to assess whether develop-ment in an area would have occurredwithout TIF. It is even more difficult todetermine whether, and to what extent,gains in a TIF district are offset by stag-nation, decline, or reduced growth inother areas and businesses. To theextent that other areas and businessesare negatively impacted, the existingrevenue base of the local government is reduced. In addition, successful TIFdistricts can increase a local govern-ment’s operating costs without providingadditional operating funds to the localgovernment. The end result in that caseis a transfer of the additional operatingcosts to residents outside the TIF district.

Given the many unknowns surroundingthe performance of TIF districts, and theidentifiable types of dislocations thatcan occur, it is exceedingly dangerous toview TIF as free money. Rather, TIFshould be considered an allocation offuture resources and assessed with astringency befitting other long-terminvestments of future revenue. Theinvestment should be made only if it iseffective, efficient, equitable, and in fur-therance of a defined public policy.

For reasons discussed in Section VI,property TIF, the most widely used formof TIF, is preferable to sales TIF.Unfortunately, because of the nature ofthe local tax structure, property TIF isless practical in New Orleans than inother jurisdictions. In Louisiana, proper-ty TIF can only capture taxing bodies’ad valorem millage that is not previouslydedicated to a special purpose. In 2001,this millage for the City of New Orleanswas 14.91 mills out of 169.29 total millscollected in New Orleans. Thus, forevery $1 million of incremental assessedvalue (or $6.6 million of fair marketvalue), only $14,910 out of $169,290 in total property taxes paid would beavailable for a TIF district. It is unclearwhether the general millage of theOrleans Parish School Board andOrleans Levee Board would be col-lectible for the TIF. If they were, it wouldincrease the capture by $15,500 per $1million of incremental assessed value.The homestead exemption and theexemptions enjoyed by nonprofits, gov-ernment, and industry further diminishthe potential of property TIF use byreducing the tax base.

The tax structure, combined withrequirements for voter approval of bondsbacked by property tax increments (butnot for bonds backed by sales tax incre-


ments), skews the use of TIF towardsales TIF. The latter suffers from moreserious problems than does the propertyTIF:

t Sales tax revenues are more volatilethan property tax revenues, a factthat makes sales TIF debt financ-ing riskier and more expensive.

t Sales TIF districts are more likelythan property TIF districts to cap-ture revenues unrelated to the TIFinvestment, thus reducing currenttax revenues available to the juris-diction.

t Because sales TIF districts needlarge, creditworthy retailers orshopping centers to generate significant tax increments, thequest for a TIF source can lead toland use distortions and unneces-sary subsidies for big retailers.

t Subsidizing a retail operation withTIF revenues gives it an unfairadvantage over its competitors.

t Unless contractually constrained,the retailer can enjoy the TIF sub-sidy and deprive the local govern-ment of projected benefits bydeparting when the TIF periodends.

Furthermore, a reliance on sales TIFmay distort the City’s investment priori-ties by directing public dollars intoinvestments that do not offer the great-est return. Retail development mayreceive tax dollars that could have beendirected to alternative developmentswith a greater potential for impact onthe economy, such as businesses thatexport goods to out-of-town customers.It would be unfortunate if funds were

directed to less promising developmentsbecause they produce large streams ofsales taxes and do not require voterapproval.

There are other factors that suggest thata TIF might not provide the most effec-tive solution to blight or economic devel-opment issues. Regardless of the type ofTIF, because of the limited nature of theobligation, TIF debt is more expensivethan general obligation bonds. Whetherthe premium paid to limit the obligationis worthwhile will depend on the partic-ular circumstances. In some cases, suchas the St. Thomas redevelopment, it isclear that the City could save millions ofdollars in tax revenue by issuing lower-interest general obligation bondsand targeting key areas for infrastruc-ture investment. The capacity to issuesuch debt exists under the City’s debtlimit, which is 35% of gross assessedvalue, or $816.8 million as of Dec. 31,2002. Debt outstanding as of lateFebruary was $473.4 million, or 58% ofcapacity.

As in the use of other economic develop-ment incentives, the effective, efficient,and equitable use of TIF depends on thewisdom, sophistication, and integrity ofthose involved in the process. To theextent that decisions are based onsophisticated analysis, made with anunwavering focus on the public good,and implemented through skillful nego-tiation, the chances of successfullyusing TIF increase. To the extent thatdecisions are driven by relationships,political deals, and other agendas, orthat the government lacks the high levelof expertise needed to analyze andimplement complicated transactions,TIF is likely to be an expensive mistakethat results in an unnecessary transferof wealth to private entities.


The potential problems associated withTIF are more than theoretical. The St.Thomas TIF and the TIF under consider-ation for the World Trade Center providecase studies of the problems associatedwith TIF.

The trend with respect to TIF is disturb-ing. In just the past month, City Councilhas received a proposal for a TIF-likefinancing for a Lowe’s, a bill has beenintroduced to create a TIF district forLake Forest Plaza shopping mall, andanother bill has been filed to create onefor eastern New Orleans. Collectivelyand individually, they raise serious concerns, including the specter of businesses routinely turning to the Cityfor subsidies and the prospect of freez-ing the tax base for a huge swath of theCity.

As noted above, the effective use ofproperty TIF in New Orleans is preclud-ed as a practical matter by the priordedication of most of the tax revenues.Ironically, the widespread use of salesTIF would create a similar limitation ongovernment’s future flexibility by con-verting unrestricted tax revenues intodedicated taxes. In addition, the prolif-eration of long-term dedications willcontribute to the balkanization of gov-ernment within the City, even as thecommunity focuses increasingly onregionalism.

Given the potential expenses, risks, andabuses associated with TIF, the Cityshould use TIF cautiously and only intightly circumscribed conditions. BGRbelieves that the City should abandoncompletely the use of TIF and TIF-likearrangements based on sales and hoteloccupancy taxes and restrict the use of

TIF based on property taxes to publicinfrastructure and pre-developmentimprovements in blighted areas.

Strict parameters for the use of TIFshould be established at the state levelthrough revision of TIF statutes and atthe local level through the adoption ofstringent policies and procedures.Specific recommendations for changesin legislation and the establishment ofCity policies and procedures for the useof TIF are set forth below.


X. RECOMMENDATIONS

State Legislationt State law should impose severe

limitations on TIF based on salesand hotel occupancy taxes, limitingtheir use to “main street” programsdesigned to revitalize commercialcenters of smaller municipalities.The use of sales TIF for large-vol-ume, major retail stores and shop-ping malls should be prohibited.

t The state should eliminate TIF leg-islation designed to accommodatespecific projects. It should estab-lish a cohesive set of general lawsto replace the multitude of statuteson the books.

t State law should limit the use ofTIF to blighted areas and requirelocal governments to make a find-ing that an area is blighted. Thestatutes should define the specificcharacteristics of blighted propertyand define a blighted area in quan-titative terms.

t State law should include a mean-ingful “but for” test conditioningthe use of TIF on a finding that TIFis necessary for appropriate, futureredevelopment (as opposed to aspecific project) to occur in a desig-nated area.

t State law should limit TIF expendi-tures to prep work needed to makethe urban landscape more attrac-tive for investment. Eligible costsshould include expenditures forpublic improvements, such asstreets and sewer and water sys-tems, demolition, site preparation,property assembly, and

environmental clean-up. TIFshould not be used to providefunding for privately owned projects and assets.

t State law should limit the durationof TIF districts.

City Policies andProceduresBGR recommends that the City imple-ment the following recommendationsregardless of whether state law ischanged.

Master Planning

t Before allowing additional TIF dis-tricts, the City should develop andadopt a city-wide economic devel-opment plan. Any TIF districtshould conform with, and promotethe objectives of, the economicdevelopment plan.

t As part of the economic develop-ment plan, the City should developa city-wide master plan for TIF. Itshould designate areas of the Citythat are eligible for TIF and estab-lish detailed criteria and prioritiesfor authorizing TIF districts withinthem. The plan should be based onan in-depth expert analysis of theCity and should be prepared andadopted after city-wide public hear-ings.

t The TIF master plan and all TIFdevelopments should conform withthe master plan for the City.

t To encourage prioritization andcareful targeting of projects, theCity should establish a cap, basedon a dollar amount or a percentageof the City’s General Fund, on the


amount of taxes that can be divert-ed from the General Fund to TIFdistricts.

Criteria for TIF

t In view of the problems associatedwith their use, the City shouldabandon the use of TIF based onsales taxes or hotel occupancytaxes.

t The City should identify, and desig-nate as eligible for TIF, blighted orbrownfield areas that offer thegreatest potential for development,assuming an appropriate amountof public funding. Blight should bedefined in meaningful, quantitativeterms to reduce the risk of theunnecessary use of TIF.

t To limit the use of TIF to areas inwhich development would not oth-erwise occur, the City should con-dition the use of TIF on a findingthat TIF is necessary for appropri-ate, future redevelopment (asopposed to a specific project) tooccur in the designated area.

t The City should establish stringent,minimum standards for consider-ing TIF districts. These shouldinclude, among other things,requirements for significant equityinvestment by the developer/owner, high ratios of private topublic investment, and a findingthat projected net benefits to theCity exceed projected costs by asignificant margin (e.g., 200 to300%). The criteria should beviewed as minimum eligibilityrequirements, rather than asauthorization for any transactionthat satisfies them.

Review Process

t The City should require detailedsupporting documentation that willenable it to determine whether aproposed TIF district is necessary,viable, and rewarding. Basic docu-mentation would include cost-ben-efit analyses and financial feasibili-ty studies prepared for the City byindependent consultants. In thecase of public-private partnerships,the City should gather additionaldetail through the developer’s/owner’s financial statements,detailed projections (including cashflow and revenues and expenses),rate of return and profitabilityanalyses, and, where appropriate,independent market studies.

t The analysis of a proposed TIF dis-trict should include a comparisonof the cost of tax increment financing against alternativefinancing methods, including theissuance of general obligationbonds.

t The City should establish a uni-form system for evaluating andapproving TIF districts.

t The evaluation should include care-ful scrutiny and evaluation of cost-benefit and other analyses. Factorssuch as the duration of the TIFand the percentage of incrementaltaxes subject to reinvestment inthe district should be pegged to theprojected costs and benefits, inaccordance with predeterminedstandards.

t To protect the interest of the City’sresidents and taxpayers, the Cityshould obtain advisors or staff withthe sophisticated financial, legal,


and managerial expertise needed toevaluate, implement, and monitorsuch districts effectively.

Requirements to EnsureObjectivity and Accountability

t Developers and owners of TIF pro-jects should be required to providethe City with the information nec-essary to compare projected bene-fits with actual benefits on anongoing basis.

t The City’s TIF policy should includeprovisions to reduce the life of theTIF if the developer fails to meetprojections, provided that obliga-tions under TIF bonds are notimpaired.

t TIFs for projects should includearrangements that allow the publicto recoup, to the extent possible,its investment from the develop-er/owner if the projected publicbenefits do not materialize.

Minimizing Investment andMaximizing Return

t The City’s TIF policy should requirea significant equity investment bythe developer/owner comparable tothe investment that would berequired by a private lender.

t TIF investments should be struc-tured to allow the City to recaptureall or a portion of the public sub-sidy to the extent practicable,through mechanisms such as long-term ground leases, subordinatedloans, and revenue participations.

t The life span of a TIF districtshould be restricted to a reason-able period. In no case should the

duration of a TIF district and itsbonds exceed the shorter of 20years or the expected life of theproject supporting the TIF.

t TIF funds should be redirected tothe General Fund after the TIFperiod expires or when they areotherwise not required for the TIFdistrict generating them. Cross-subsidization of other TIF districtsshould not be permitted.

Transparencyt All meetings relating to TIFs should

be conducted in accordance withboth the letter and the spirit of theopen meetings law. Practices thatundermine transparency, such asone-on-one briefings and behind-closed-door negotiations betweencouncilmembers and potentialdevelopers/owners, should beavoided.

t All documentation relating to TIFsshould be available to the public.

t City Council should provide thepublic on an annual basis with areport on TIF districts, includingthe amount of public funds dedi-cated to TIF and the performanceof the various districts.

Appendix A, p. 1 Bureau of Governmental Research

APPENDIX A ST. THOMAS TIFIn this Appendix, BGR presents a briefdescription of the St. Thomas redevelop-ment and the proposed TIF. It takes noposition with respect to the merits of theredevelopment plan, or the social andenvironmental disputes that it hasspawned.

Last year City Council approved the cre-ation of the City’s only sales TIF district.The district, which includes the formerSt. Thomas public housing site and anadjacent parcel of land owned byRiverview Retail Development CompanyLLC (Riverview Retail), will assist withthe financing for the redevelopment ofthe former St. Thomas site as a HOPEVI project. Riverview Retail is owned inpart by Historic RestorationIncorporated (HRI), the HOPE VI privatedeveloper.

The City Council also authorized thecapture and dedication of future Citysales tax revenues (2.5 cents) from aWal-Mart Super Center to be built onthe adjacent parcel. The incrementaltaxes from Wal-Mart will be used torepay $20 million of debt incurred tofinance the construction of two mixed-income rental housing portions of theformer St. Thomas site, known as CS1and CS2. Based on information fromHRI, up to $10.5 million of the $20 mil-lion bond issue will be used for expens-es related to CS1. The remainder of theproceeds will be devoted to expensesrelated to CS2, the second phase ofrental housing.

A. BackgroundThe redevelopment of the St. Thomassite has a long and contentious history.After several years of discussion, aHOPE VI application to redevelop the St.Thomas site was submitted in 1996 tothe U.S. Department of Housing &Urban Development (HUD) by theHousing Authority of New Orleans(HANO). HOPE VI is a federal grant pro-gram that enables public housingauthorities to partner with private devel-opers to replace severely distressed pub-lic housing with new housing at a lowerdensity.

In 1997, HUD awarded HANO a $25million HOPE VI grant to implement theplanned redevelopment. HANO awardedthe development contract to CreativeChoice Homes Inc. In 1998, HUDdeclared the development contract nulland void and instructed HANO toreopen the process for selecting a devel-oper. The contract was awarded to HRI.The current development plan calls forthe construction of 1,088 on-site hous-ing units, 150 low-income, off-site hous-ing units at scattered sites, and a Wal-Mart on a site adjacent to the St.Thomas site.

Under HRI’s approved redevelopmentplan, the former St. Thomas site will bedivided into seven components, with dif-ferent ownership and financing struc-tures. They include: two mixed-incomerental developments (CS1 and CS2), for-sale homes (with an affordable housingcomponent), a residence for low-incomeelderly persons, an upscale continuingcare retirement community, luxury condominiums, and a group of renovat-ed historic buildings. Of the 1,088 on-

Tax Increment Financing in New Orleans Appendix A, p. 2

site units planned for the St. Thomassite, a total of 304 will be affordable orlow-income housing units.

Publicly available information concern-ing most phases of the development isvery sketchy. Detailed information isavailable only for the early phases,including the predevelopment, CS1, andthe Wal-Mart. Important terms, such asthe ownership and proposed financing,have been described in only generalterms for the remainder of the project. Itis clear, however, that the improvementson the former St. Thomas site will beprivately owned. The land will be eitherprivately owned or leased by HANO toprivate entities for 99 years at nominalrates.

The total cost of development, includingthe Wal-Mart, is estimated at approxi-mately $320 million. Public fundingmakes up more than $90 million of thisamount, with at least $50 million com-ing from federal sources, includingHOPE VI demolition and revitalizationgrants, a HUD Section 202 elderly hous-ing grant, HANO contributions, and anundetermined amount of low incomehousing tax credits; $8 million fromstate capital outlay funds; and $32.6million from the City of New Orleans.The latter includes city infrastructurebond proceeds, TIF and PILOT bondproceeds, and HOME InvestmentPartnership funds controlled by theCity.

HOPE VI developers operate under aseries of federally imposed constraints.The HOPE VI money is restricted tofunding construction of public housingunits, site preparation, project adminis-tration, and resident relocation. Housingmay consist of 100% public housingunits or a mix of public housing and

other low-income and market-rate units.HUD guidelines require that the projectuse HOPE VI and other HUD publichousing grants to produce at a minimum the number of public housingunits that could be built without otherpublic or private financing. All units,regardless of financing, must be compa-rable in size, location, external appear-ance, and distribution on the site.

The St. Thomas TIF district was intro-duced into the redevelopment plansafter HRI had been selected as thedeveloper. Unfortunately, it suffers frommany of the potential problems identi-fied earlier in this report. Some of themore serious deficiencies of the TIF dis-trict and the process by which it wasapproved are discussed below.

B. TIF AnalysisHRI claims that the St. Thomas sitecannot be redeveloped without the TIF.Relying on a report prepared byMetroSource LLC, it claims benefits tothe City totaling $110 million over a 50-year period. HRI projects increased salestax revenues of $125 million (on a netpresent value basis, using a 2% inflationfactor) for the City, Orleans ParishSchool Board, and the Regional TransitAuthority over 25 years.

An analysis of the MetroSource study isbeyond the scope of this report. Itshould be noted, however, that theMetroSource report purports to projectbenefits over a 50-year period and doesnot take into account all of the publiccosts of the project.

Subsidy to a Private Entity. As notedabove, TIF bond proceeds are to be usedfor costs associated with CS1 and CS2,the mixed-income rental components of


the St. Thomas redevelopment. CS1, thefirst phase of the development, consistsof 296 units, of which 122 are designat-ed for low-income renters.

The estimated cost of con-struction of CS1, exclusiveof infrastructure, is $44.8million. Of this amount,$31.3 million (70%) is pro-vided from public funds.The estimated cost of con-struction of CS1, inclusiveof infrastructure, is $53.5million. Of that amount $40million (75%) is providedfrom public funds. (Allinfrastructure and other predevelopment costs for theentire St. Thomas projectare being paid exclusivelyfrom public funds.)

The funds provided up-frontfor construction costs repre-sent only a portion of the total cost tothe public. When interest and othercosts are taken into account, the cost tothe public exceeds $51 million. Thisequates on a per-low-income-unit basisto almost $348,000 (excluding infras-tructure) or $420,000 (including infras-tructure). When the cost to the public isallocated to all units in CS1, it equatesto almost $144,000 per unit (excludinginfrastructure) and $173,000 per unit(including infrastructure).

The public contributions to CS1 comefrom a number of programs andsources, including federal, state and citygrants and the diversion of future salesand property taxes from the City’sGeneral Fund. The amounts andsources of the public contributions and

other public costs are set forth below.An annotated schedule is set forth asAppendix A-1.

The above estimate is extremely conser-vative in two respects. First, as is dis-cussed more fully below, the cost of theTIF could exceed the number usedabove by tens of millions of dollars.Second, it does not include the value ofadditional subsidies for which BGR isunable to make reasonable estimates.These subsidies include interest savingsfrom tax-exempt bonds, the value ofreduced taxes for CS1, and the value ofthe land on which CS1 is being built.Under the terms of the agreement forpayments in lieu of taxes (PILOT) forCS1, the low-income units will be taxedat $1 a unit, and the market-rate unitsat $100 a unit. HANO is making theCS1 land available at a nominal annualrent of $1 per unit for 99 years.

Available financial information for CS2,the other phase of the redevelopmentusing TIF funds, is less detailed. It is

COST TO THE PUBLIC OF CS1(All figures in millions of dollars)

HOPE VI Loan $12.4

TIF Payments 14.9

Wal-Mart PILOT (to support tax-exempt bonds) 5.4

4% Low Income Housing Tax Credits 6.0

Interest income (on HOPE VI escrow) 0.1

HOPE VI, HANO, state and local funds for CS1 infrastructure 8.7

CS1 share of lost sales tax revenue from Wal-Mart competitors 3.7

TOTAL COST TO THE PUBLIC $51.2


clear, however, that CS2 will includemultiple subsidies, including publicfunding for infrastructure and sitepreparation, HOPE VI funds, low incomehousing tax credits, TIF funds, reducedproperty taxes, and nominal land rent.

Poor Use of Public Funds. As the abovenumbers indicate, and HRI has stated,the TIF revenues will be used to financemarket-rate housing. The application ofTIF funds for this purpose is very trou-bling in a City that suffers from a lackof decent affordable housing for low-income residents and from a shortage ofoperating funds for basic services. Itbecomes almost inexplicable when oneconsiders that, as a result of the diver-sion of most of the property taxes tooperating costs, the market-rate hous-ing will not even contribute significantlyto the tax base.

Two reasons have been offered to justifya TIF for market-rate housing. The firstis that market-rate units must beoffered at below-market rent in order toinduce middle-income residents to livenext door to low-income ones. Leavingaside the fact that “market rate” is inthat case a misnomer, it should benoted that the market-rate propertiesare already receiving other subsidies(e.g., reduced property taxes and thenominal land rent to HANO) that reduceoperating costs. TIF enables the ownersto further reduce operating costs bytransferring to the public the carryingcost for a large portion of the debt forCS1.

The other reason offered in defense ofthe subsidy is that the market-ratehousing must support the operatingcosts of the low-income housing on anongoing basis. While the revenue fromthe low-income housing would be less

than that from the market-rate units,the carrying costs for such housingwould also be lower. The construction ofthe low-income housing in CS1 is paidfor entirely with public funds, all infras-tructure costs are paid with publicfunds, and only nominal property taxesand land rent are payable on the low-income units.

High Cost of TIF Debt. City Councilhas authorized the issuance of $20 mil-lion of TIF bonds with a maximummaturity of 50 years and an interestrate not to exceed 8.6%. Although fortechnical reasons the stated maturity is45 years, the City expects to reduce thematurity through prepayments to 13.5years. The City anticipates an interestrate of 8% to 8.5%.

Several aspects of the proposed bondissue are exceedingly disturbing. First,the anticipated interest rate for the TIFbonds (8 to 8.5%) significantly exceedsthe rate for bonds issued by local gov-ernments with ratings comparable toNew Orleans. That rate currently hoversaround 4.5% for 30-year issues. WhileBGR recognizes that the high rateresults from the limited repayment obli-gation, the fact remains that the moneyis very expensive. The magnitude of thecost can be illustrated by comparing thetotal interest expense for a $20 millionbond, payable in equal, semi-annualinstallments over a 13.5-year period andbearing interest at a rate of 8.5%,against interest expense for a similarbond bearing interest at a rate of 4.5%.The difference in total interest expensewould be $7.1 million (or $5.8 milliondiscounted at 3% for inflation).

Second, the cost of the TIF bonds couldbe far higher than the public has beenled to believe. Because state law cur-


rently limits annual debt service forsales TIF bonds to 75% of the salestaxes received in the first full year ofoperation (estimated at $1.7 million fordebt service), the bonds will have a stat-ed maturity of 45 years. The City, basedon Wal-Mart’s sales projections, expectsto reduce the maturity dramatically byapplying 80% of TIF revenues above$1.7 million to prepayment of thebonds. However, if the funds for prepay-ment fail to materialize, the interestpayments alone could total $67 million.Under that scenario, the citizens of NewOrleans would divert $87 million fromthe General Fund to pay for $20 millionof debt.

With the application of excess TIF rev-enues, the total annual debt servicepaid by the TIF district over 13.5 yearscould average approximately $2.5 mil-lion per year. This foregone revenue tothe City’s General Fund constitutes anopportunity cost for the City. The addi-tion of $2.5 million to the General Fund,for example, could translate into 75 newpolice officers.

Diversion of Multiple RevenueStreams. The financing for the St.Thomas development illustrates how thelayering of subsidies can reduce thepublic’s return on a TIF investment. Asnoted above, to support the HOPE VIproject, the City is foregoing sales taxesfrom the Wal-Mart to support the TIFbonds. Unfortunately, other tax streamsgenerated by the St. Thomas redevelop-ment are also being used to support thedevelopment.

As noted above, the property taxes onCS1 and CS2 have been drasticallyreduced through a PILOT. In addition,Wal-Mart’s property taxes have been setat $300,000 to $450,000 over a 20-year

period and except for $25,000 a year,will be diverted from the general fund tofinance $3.6 million in bonds for CS1.While these bonds are outstanding, theCity will receive only $25,000 in annualPILOT payments.

Reduced Sales Taxes. The St. ThomasTIF district illustrates a major downsideof using TIF in conjunction with retaildevelopment: the loss of tax revenuesfrom other businesses. The study pre-pared for City Council indicates thatWal-Mart will capture a portion of itssales from other businesses in NewOrleans and that this will cause salestax revenues attributable to those salesto drop by an estimated $402,000 to$554,000 a year until the bonds arerepaid.29

Inadequate Information. City Counciland the public’s efforts to understandthe massive and complex St. Thomasredevelopment were hampered by a lackof key financial information. The Citynever received information as basic asthe developer’s financial statements. Inaddition, at the time that the City gavefinal approval to the TIF bonds, currentbudget information was available onlyfor the infrastructure, Wal-Mart, andfirst phase of rental housing. The onlyavailable cost-benefit analysis, whichhad been prepared for the IndustrialDevelopment Board in 2001, was inaccurate because of alterations in theprojections for housing and the retaildevelopment. Much of the data on thelater phases of the redevelopment wasnot publicly updated after January2002.

Constrained Review. The concept ofTIF for the redevelopment of St. Thomaswas first introduced into the HOPE VIredevelopment plans by HRI in 2000.


City Council introduced the legislationto establish the TIF District in January2001, but it did not hire a consultant,Lambert Advisory, to conduct an analy-sis of CS1 and the need for TIF untilearly 2002. It approved the district anddedicated the sales tax revenues in April2002, shortly after it received the con-sultant’s analysis, reserving the right tonegotiate and making the dedicationcontingent on its final approval of cer-tain documents. Negotiations continueduntil November 2002, when the TIF dis-trict was made effective.

Lambert Advisory’s report was conduct -ed nearly five years after the HOPE VIGrant had been awarded and more thantwo years after HANO and HRI hadentered into a redevelopment agreement.As the City’s consultant noted, majordecisions had been made and infras-tructure was being installed. As aresult, an option that could have beenexplored if the review had occurred earlier — redesigning the project — wasdeemed foreclosed. The inquiry dealtwith what could be done under theexisting circumstances, as is reflected in the consultant’s conclusion that TIFwas “the only immediately availableoption.”30

Distortions to Land Use. The need fora large sales tax generator to generateTIF revenues clearly affected the City’splanning and zoning decisions. Theneed to produce a certain amount of taxrevenues was one of the arguments putforth to justify the construction of a200,000-square-foot store and to elimi-nate the restrictions recommended bythe City Planning Commission.

Appendix A-1, p. 1 Bureau of Governmental Research

Appendix A-1

1. Figures, unless described otherwisebelow, are from “Preliminary FinancingTerms and Conditions for CS1,” datedOctober 22, 2002, and submitted to theState Bond Commission. That documentdetails the sources and uses of fundingavailable for CS1 as of the time of CityCouncil and State Bond Commissionapprovals last fall.

The table does not include public contri-butions for which BGR is unable tomake reasonable estimates, such asinterest savings on tax-exempt bonds,the value of reduced property taxes, andthe value of CS1 land.

2. According to the terms of theDevelopment Agreement between HANOand HRI, as amended, HANO will loanHRI $12.4 million based on the HOPEVI grant. The loan is the functionalequivalent of a grant. Interest, which ispayable at a rate of 1% per annum, willbe reinvested by HANO in the project tosupplement the allowable expense level(i.e., the maximum operating costallowed for HUD subsidy of public hous-ing units). Principal is payable at theend of 40 years.

If the HOPE VI loan is analyzed as aloan, the public contribution wouldexceed the $12.4 million included in thetable. The contribution would includethe difference between the interest paidto HANO and market-rate interest.Assuming a 6% differential, the value ofthe interest differential would be $17.1million (discounted using a 3% inflationrate.) That number would be offset by$3.8 million (the amount in current dol-lars of the future principal repayment),for a net contribution of $13.3 million.

3. Estimate from HRI’s financial advisor.

4. A payment in lieu of taxes (PILOT) forWal-Mart has been approved by theIndustrial Development Board. The Citywill receive annually $25,000 of thePILOT to distribute to taxing bodies. Theremainder of Wal-Mart’s PILOT, begin-ning at $275,000 a year and gradually increasing to$425,000 a year over 20 years, will beused to pay off about $3.6 million intax-exempt bonds approved for CS1.

The total cost of the Wal-Mart PILOTreflects BGR’s calculation of the amountof the PILOT required to retire the debt.

COST TO THE PUBLIC OF CS1 1

(All figures in millions of dollars)

HOPE VI Loan 2 $12.4

TIF Payments 3 14.9

Wal-Mart PILOT (to support tax-exempt bonds) 4 5.4

4% Low Income Housing Tax Credits 5 6.0

Interest income (on HOPE VI escrow) 6 0.1

HOPE VI, HANO, state and local funds for CS1 infrastructure 7 8.7

CS1 share of lost sales tax revenue from Wal-Mart competitors 8 3.7

TOTAL COST TO THE PUBLIC $51.2

Tax Increment Financing in New Orleans Appendix A-1, p. 2

The revenue stream is discounted forinflation at an assumed annual rate of3%.

5. Low Income Housing Tax Creditscould be considered either public or pri-vate money. For St. Thomas, the creditswill be sold by HRI to private investors,generating the $6 million equity contri-bution to the project. However, theseinvestors will ultimately use the taxcredits against their federal income taxpayments. Because of this, BGR hastreated the credits as a public contribu-tion.

6. Estimate from HRI’s financial advisor.

7. Infrastructure costs for the projecttotal $19.4 million, according toPreliminary Financing Terms. The por-tion of infrastructure cost for CS1 wascalculated based on its estimated 45%share of total street frontage (the per-centage estimated by City Council’s con-sultant. All infrastructure costs werepublicly funded.

8. BGR calculated lost sales tax revenueby taking Lambert Advisory’s estimatedmaximum of $554,000 per year over 12years and discounting the total by 3%for annual inflation. This amounted to$5.5 million. The share applicable toCS1 was determined by multiplying thetotal by 67%, or the ratio of 122 CS1low-income units to the total of 182 low-income units in CS1 and CS2.

Appendix B, p. 1 Bureau of Governmental Research

APPENDIX B WORLD TRADE

CENTER TIFAccording to current reports, WTCDevelopment Ltd., the developer chosenfor the World Trade Center hotel, wantsthe World Trade Center taxing district toapply the revenues from its hotel occu-pancy tax to repay $40 million in rev-enue bonds with a maturity not toexceed 30 years, and an expected inter-est rate of 8.5 to 9.5%. In addition, thebondholders will receive an additionaldistribution equal to 50% of net incomefrom the hotel.

A. BackgroundIn 1963, the City through the NewOrleans International Trade BuildingCorporation, entered into a lease for theWorld Trade Center to the World TradeCenter of New Orleans Inc. (WTCNO), anonprofit organization that promotesinternational trade and economic devel-opment. The lease was for a term of 56years, ending in 2019, at a price of $1 ayear. WTCNO agreed to operate andmanage the center and to pay off rev-enue bonds issued to finance the con-struction of the building. The bondshave been repaid.

Through the 1970s and early 1980s, thebuilding thrived amid a bustling NewOrleans economy. But the growth didnot last; the mid-1980s collapse of theoil industry and reductions in localoperations of shipping companies hurtoccupancy at the World Trade Center. In1994 WTCNO proposed converting aportion of the building into a hotel to

solve the building’s occupancy prob-lems. To do this, it needed a leaseextension.

In 1998, with City and WTCNO leasenegotiations ongoing, WTCNO through apublic bid process selected WTCDevelopment Ltd. as the hotel developer.WTC Development Ltd. is 50% owned byWTC Investment LLC, a partnership oflocal investors George Kleinpeter, Jr.,Larry Sisung, Jr., and WilliamHindman, Jr. Thirty-eight percent isowned by Pelican Investment HoldingsLLC, a group of 10 local minorityinvestors, and 12% by Pelican VentureHoldings LLC, a group of three women.*

WTC Development Ltd.’s bid contem-plated a total project cost of $70 millionfor 635 rooms, half of the current costestimate of $140 million. WTCDevelopment Ltd. was to contribute$500,000 in equity to the hotel project.Another $20 million in equity was tocome from the parent company of theprospective hotel operator, CrownePlaza. The balance of the financing wasto be private debt. No public fundingwas mentioned.

In 2001, New Orleans InternationalTrade Building Corp. transferred theWorld Trade Center and the relatedlease to New Orleans Building Corp.(NOBC). In that year, City Councilapproved a new lease of the World TradeCenter land, building, and parkinggarage to WTCNO for 99 years. It alsoapproved a sublease of the first 18floors of the building, the 31st floor, andother property to WTC Development Ltd.for 99 years. While both 99-year leaseswere executed in 2001, they do not go

* According to a memorandum from the hotel developer to NOBC, the members of Pelican InvestmentHoldings are Bobby Major Jr., Douglas M. Evans, Ronald Guidry, Darren Mire, George V. Rainey, Dale M.Valdery, Gilbert C. Jackson, Mitchell Dasher II, Virgil Robinson, and Marshall Truehill. The members ofPelican Venture Holdings are Angela Barthe, Alana Villavaso, and Susan Campbell.

Tax Increment Financing in New Orleans Appendix B, p. 2

into effect until the opening of the hotel.Until the effective date, only a few obli-gations apply, such as an annual pay-ment of $50,000 a year from WTCNO toNOBC until hotel construction begins.

In the primary lease, WTCNO agrees topay NOBC rent equal to 50% of the netrevenues from the garage, hotel, andoffice space. The net revenues (grossrevenues minus the buildings’ operatingexpenses) are adjusted for certain cred-its and subject to a minimum of$50,000 a year, inflation adjusted.WTCNO projects City revenues rangingfrom $861,000 to $1.9 million a year forthe first decade of the lease.

The lease also requires WTCNO to investup to $1 million of its 50% share of netrevenues in trade development programsfor New Orleans residents and business-es. The programs are financed with thefirst $1 million of net revenues above anadjustable baseline amount, whichstarts at $1,075,309. The programs areoperated by WTCNO but approved byNOBC.

The City and NOBC have agreed toreimburse half of WTCNO’s pre-leaseexpenses incurred preparing for thehotel, regardless of whether the hotel is built. As of April 2003, WTCNO hadspent about $1.6 million.

In the sublease between WTCNO andWTC Development Ltd., the developeragrees to convert the first 18 floors ofthe World Trade Center into a hotel andto reimburse WTCNO for pre-hoteldevelopment expenditures not coveredby the City. WTCNO has spent $3.6 million so far in pre-hotel developmentexpenditures, which include a newsprinkler system, fire alarms, roofrepairs, new boilers, and removal of

the outside elevator. The developers arenot obligated to reimburse WTCNO forthese expenditures if the hotel is notbuilt.

The hotel’s rent to WTCNO is calculatedas follows:

Gross revenues consist of hotel roomrentals, hotel-related parking and valetcharges, and revenue from entertain-ment or restaurant operations. In addi-tion, the developer will pay a percentageof rents received from any sub-tenants.

According to WTCNO projectionsreviewed by City Council in 2001, begin-ning in the fourth year, the lease pay-ments to WTCNO should amount to atleast $1.5 million a year. The rent pay -ments are projected to rise to $2.5 mil-lion by the 10th year of hotel operation.

In 2001, prospective operator CrownePlaza ceased to be a participant in theWorld Trade Center deal. In the springof 2002, the developer with the supportof WTCNO and NOBC approached the

Year Rent1 $250,000

2 $500,000

3 $750,000

4 3% of gross revenue forthird year

5 3.5% of average gross revenue for third and fourth years

6-7 3.5% of average gross revenuefor preceding three years

8-99 4% of average gross revenuefor preceding three years

Note: Table compiled by BGR frominformation in the hotel sublease


State Legislature to create the specialtaxing district to provide public financ-ing. No public money had been contem-plated in the original bid.

Since the creation of the legislation,developers have signed a letter of intentwith Westin Hotels & Resorts to operatethe hotel. Recently, the Nagin adminis-tration, which inherited the World TradeCenter lease, initiated negotiations tochange the terms of the City’s deal.

B. AnalysisProponents of the World Trade CenterTIF argue that hotel projects of thismagnitude cannot be done in the cur-rent economic environment withoutsubstantial government subsidies. Theyalso claim that the TIF will enable theCity to increase its rental revenues fromthe building (currently $1 a year) andreceive increased sales and other localtaxes, additional jobs and investmentfrom construction and operation of thehotel, and other benefits. The revenuefrom the hotel project would also bolstera prominent trade organization. Theyalso argue that the World Trade Centerbuilding is functionally obsolete andcannot be effectively utilized without a$28 million investment in outside stair-wells and other improvements to bring itup to code.

The project raises a number of graveconcerns for the public:

Inadequate Private Equity. The hotelis woefully undercapitalized. Accordingto NOBC, the developer has contributedonly $1.5 million in equity for a $140million project. According to the devel-oper, the equity contribution is $5.2million. Either amount is inadequate fora hotel project of this size. Currently,

lenders are willing to loan 50% to 60%of a hotel project’s cost, expecting devel-opers to piece together the remainder inequity and subordinate debt. There is afunding gap for which the developersare seeking public funding. In essence,the City and other tax recipient bodiesare putting up the equity, while thereturn on their investment is going toTIF bondholders and the developer.

Inadequate Return on Investment.Under the lease executed before the TIFwas introduced, the City would receive50% of net revenues from the WorldTrade Center property. WTCNO current-ly expects the City’s 50% share to equal$861,000 to $1.9 million per year forthe first decade of hotel operation.

The addition of the TIF dramaticallyreduces the value of the World TradeCenter lease to the City and the commu-nity. As a result of the TIF, the City’santicipated lease revenues would be off-set by the City’s share of the hotel occu-pancy taxes diverted to the hotel project.These taxes are estimated to range from$462,000 to $635,000 per year for thefirst decade of hotel operation, leavingthe City with a net amount of $399,000to $1.3 million per year. In essence, theCity’s increased investment reduces thereturn to the City.

To support the hotel, the City and theother hotel tax recipients would collec-tively forego an estimated average of$4.8 million per year in hotel occupancytaxes. During the first decade of theproject, the direct public investment inthe project is expected to exceed therental income in each year.

Negative Impact on Critical Servicesand Economic Development Engines.The TIF would divert revenues from

Tax Increment Financing in New Orleans Appendix B, p. 4

other projects and entities that provideimportant services or contribute signifi-cantly to economic development in theCity and the region. These include theOrleans Parish School Board, the ErnestN. Morial Convention Center, theRegional Transit Authority, theLouisiana Stadium & ExpositionDistrict, the New Orleans Tourism &Marketing Corporation, and the NewOrleans Metropolitan Convention &Visitors Bureau. To the extent thatthese entities lose future revenues, theCity as a whole suffers.

Over the first 10 years of hotel opera-tions, local tax recipients would foregoapproximately $48 million in hotel occu-pancy taxes. The breakdown of the fore-gone taxes by recipient appears at thebottom of this page.

WTCNO argues that its mission to pro-mote international trade and economicdevelopment is just as deserving of stateassistance as the work of the hotel taxrecipients. While WTCNO’s membershipand operations would expand indirectlythrough new rental revenue from the

hotel development, this expansion doesnot directly justify the use of such alarge public subsidy.

High Cost of Debt. The developer wantsthe World Trade Center taxing district toissue $40 million of bonds with a matu-rity not to exceed 30 years and an inter-est rate of 8.5 to 9.5%. The proposedinterest rate is roughly double the cur-rent rate of 4.5% for general obligationbonds. Interest payments on $40 millionin bonds amortized in equal, semi-annual installments over 30 years at aninterest rate of 9.5% would total approx-imately $81.5 million. The same bondsamortized at the current 4.5% rate forgeneral obligation bonds would requireinterest payments of approximately$33.3 million. The difference in totalinterest expense would be $48.2 million(or $31.6 million discounted at 3% forinflation). It should be noted that theCity’s share of foregone taxes for thesepayments would equal only 11.5% of thetotal.

Reduced Tax Base. NOBC estimatesthat 70% of the World Trade Centerhotel’s expected sales would be taken

Hotel Tax Recipient Rate 10-year tax capture

State General Fund:Convention & Visitors Bureau 1.0% $ 3,728,000 Convention Center IV, Hornets, Saints 1.0% $ 3,728,000

Convention Center 3.0% $ 11,184,000 Orleans Schools 1.5% $ 5,592,000 City 1.5% $ 5,592,000RTA:

Canal Streetcar 0.6% $ 2,237,000Convention Center Phase IV 0.2% $ 746,000N.O. Tourism Marketing Corp. 0.2% $ 746,000

Louisiana Stadium & Exposition District 4.0% $ 14,912,000Total 10-year Tax Capture 13.0% $ 48,465,000

Source: BGR calculations, based on numbers provided by NOBC


from other hotels. With $4 million inhotel taxes expected to be captured inthe first year of hotel operations, thiswould result in a loss of resources cur-rently received by hotel tax recipientbodies equal to $2.8 million.

The developer disputes NOBC’s esti-mate. The developer claims that while60% of expected sales at the hotel can-not be directly attributed to newdemand created by the World TradeCenter hotel, this 60% figure would bereduced to a negligible amount by newconvention business, aggressive market-ing by competing hotels, and attractionof visitors who would normally stay insuburban markets during major events,such as Mardi Gras or Jazz Fest.

Loss of Benefits. The TIF is not theonly public subsidy for the development.In addition, through a proposed restora-tion tax abatement, the developerswould not pay ad valorem taxes on thehotel for a period of 10 years.

Unfair Competitive Advantage.Opponents maintain that the districtwould provide the hotel developer withan unfair competitive advantage, allow-ing it to reduce room rates by transfer-ring a significant cost to the public.Proponents respond that their roomrates will track those of other large,competing hotels downtown and thatthe TIF investment is necessary to makethe city-owned World Trade Centerusable for any form of commerce.Although the TIF legislation prohibitsthe hotel from advertising below market-rate rooms, preventing the hotel fromoffering reduced room rates would bedifficult, if not impossible.

Tax Increment Financing in New Orleans

1 Minter, N.L., “Tax Increment Financing,”Urban Land (May 1991), p. 38.

2 Minter, p. 38.

3 Dardia, M., “Subsidizing Redevelopmentin California,” Public Policy Institute ofCalifornia (February 1998), p. ix.

4 Man, J.Y., “Introduction,” Tax IncrementFinancing and Economic Development:Uses, Structures, and Impact, 2001,eds. Johnson, C.L., and Man, J.Y.(Albany, New York: State University ofNew York Press), p. 1.

5 National Association of Counties, “TaxIncrement Financing: An AlternativeEconomic Development FinancingTechnique,” (2000), pp. 1-2.

6 Dardia, p. 2.

7 Illinois Tax Increment Association,“Number of TIFs in the Midwest.”www.illinois-tif.com/images/midwest.gif

8 Alabama Code, § 11-99-4.

9 Illinois Code, 65 § 5/11-74.4-3.

10 Nebraska Revised Statutes, § 18-2116.

11 California Legislative Analyst’s Office,“Redevelopment After Reform: APreliminary Look,” December 29, 1994,www.lao.ca.gov/redevelopment_after_reform.html; and Chapman, J., “TaxIncrement Financing and Fiscal Stress:The California Genesis,” in Johnsonand Man, p. 120.

12 Mikesell, J.L., “Nonproperty TaxIncrement Programs for EconomicDevelopment: A Review of theAlternative Programs,” in Johnson andMan, pp. 60-61.

13 Klacik, J.D., and Nunn, S., “A Primeron Tax Increment Financing,” inJohnson and Man, p. 16.

14 Johnson, C.L., “The Use of Debt in TaxIncrement Financing,” in Johnson andMan, p. 71.

15 Klacik and Nunn, p. 16.

16 Dougherty, M.J., “Amendment 1:County and Municipal OptionEconomic Development Agreement,”The West Virginia Public AffairsReporter, Vol. 19, No. 4, (Fall 2002), p.3.

17 Man, p. 5.

18 California Government Code §53084and California Health & Safety Code§33426.7.

19 Illinois Code, 65 § 5/11-74.4-3.

20 Maine Revised Statutes, 36 § 6756.

21 Maine Revised Statutes, 36§ 6753.

22 Klacik and Nunn, pp. 16-17.

23 Man, p. 6.

24 California Legislative Analyst’s Office,“Redevelopment”; and Mikesell, p. 59.

25 Mikesell, p. 59.

26 Ward, R. C., “To TIF or Not to TIF:Debating the Issues,” DevelopmentStrategies Review, (Summer 2000) p.3.

27 Mikesell, p. 66.

28 New Orleans City PlanningCommission, 1999 Land Use Plan.www.new-orleans.la.us/cnoweb/cpc/1999_dist_nine.htm

29 Lambert Advisory LC, “St. ThomasHOPE VI & Wal-Mart EvaluationReport to New Orleans City Council,”April 11, 2002, p. 7.

30 Lambert Advisory, p. 28.

ENDNOTES

Bureau of Governmental Research225 Baronne St., Suite 610New Orleans, Louisiana 70112-1704

IN THIS REPORT...

Recently, a widely used local economic development tool – tax incrementfinancing or TIF — has captured the attention of New Orleans’ city govern-ment. A TIF district has been approved for the St. Thomas redevelopment andanother is under consideration for the proposed World Trade Center hotel.

TIF, as it is commonly known, is a financing mechanism that enables a localgovernment to capture new tax revenues generated in a specific area for rein-vestment in that area. In theory, the investment is self-financing and the devel-opment supporting it would not have occurred otherwise.

Carefully conceived and executed, TIF can produce significant benefits— suchas increased employment, improved environment, and increased tax rev-enues— that would not have otherwise occurred. However, TIF, particularlybased on sales tax revenues, can also produce serious distortions andinequities. Misused, it is likely to be an expensive mistake that results in anunnecessary transfer of wealth to private entities.

Unfortunately, the trend with respect to TIF is disturbing. In just the pastmonth, City Council has received a proposal for a TIF-like financing for aLowe’s, a bill has been introduced to create a TIF district for Lake ForestPlaza Shopping Center, and another bill has been filed to create one for a largeportion of eastern New Orleans. Collectively and individually, they raise seri-ous concerns, including the specter of businesses routinely turning to the Cityfor subsidies, the prospect of a frozen tax base for a huge swath of the City,and a balkanized tax structure.

Now is the time for the City to take stock of the risks associated with TIF andto develop a comprehensive program to ensure that TIF is used effectively,efficiently, and equitably. BGR hopes that City Council, which is currentlydeveloping procedures, will carefully consider the contents of this report.

Documents

Tax Increment FinancingTax Increment Financing in New Orleans 1 EXECUTIVE SUMMARY Recently, the City of New Orleans has turned its attention to a widely used local economic development