In Kansas City, subsidized development projects designed to pay their own way with “guaranteed” revenue streams are requiring local government bailouts and cash advances to stay afloat. The city—already strapped for cash and expecting a $60 to $80 million budget shortfall next fiscal year—just received more bad news for city finances. A recent memo addressed to the City Council and Mayor Mark Funkhouser projects a $9.3 million shortfall in tax revenue dedicated to debt service for tax increment financing (TIF), sales tax increment financing (STIF), and Super TIF projects in the city.

Of the fourteen development projects described in the memo, ten are failing to meet financial performance expectations. The underperforming projects include retail and hotel developments, parking garages and a manufacturing facility. The Power and Light TIF district alone is falling short of break-even revenues by $4 million. The city has no choice but to make up the difference in stopgap funding and appropriations from the city’s general fund.

Despite many warning signs (also here and here) Kansas City has continued to subsidize even development projects deemed “high risk” by its own Tax Increment Finance Commission. In addition to the problems of weakening tax increments, developers are encountering obstacles to obtaining private financing. The developer of Citadel Plaza recently turned to the city for a cash advance after losing private funding due to destabilized bond markets. With the support of Mayor Funkhouser (who, by the way, ran on a platform of reining in TIF abuse in the city) the council recently approved a $20 million cash advance for the project, in addition to the $40-plus million TIF funds already approved by the city.

We’re seeing headlines from all over the country describing troubled TIF districts. Cities and towns in Texas, Indiana, Illinois, Ohio and California, just to name a few, are being forced to foot the bill for TIF-ed projects that aren’t paying out as planned.

Given current economic conditions, you’d think local governments would reevaluate their heavy reliance on the taxpayers’ credit card to fund risky development projects. State and local financial outlooks for this year and next are abysmal and budgets will likely remain highly unpredictable for a while. It’s high time cities questioned the reasoning behind the long term diversion of sales and property tax revenues to subsidize private development, especially when they’re being forced to cut back on services to meet debt service on these projects. Plummeting tax revenues are wreaking enough havoc on local budgets without the additional financial burden of underperforming TIF districts. The use of TIF is risky under good circumstances, and may be completely untenable in the current economic climate.

This entry was posted on December 5, 2008 at 7:33 pm and is filed under Financial Crisis, Hidden Taxpayer Costs, Property Taxes, Sales Tax, Subsidies, Tax Increment Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.