New Jersey’s Revenue Allocation Districts (RADs—the Garden State’s version of tax increment financing) may soon undergo severe deregulation. Senate Bill No. 2299, passed by the Senate Economic Growth Committee, loosens up RAD regulations on multiple fronts. The proposed legislation expands the types of revenue that municipalities may direct within RADs, expands the types of areas eligible to become RADs, and eliminates the requirement that local finance boards approve RAD plans.

The bill expands the permissible sources for incremental revenues. Under the proposed RAD revisions, allowable revenue sources would encompass, among other things, (take a deep breath here) incremental payments in lieu of taxes, payroll and wage taxes, lease payments made to the municipality, sales and hotel taxes, 95 percent of the property tax increment, and income from operation of public facilities. (Full list available here.)

The bill would also allow the creation of RADs in “areas in need of rehabilitation” as well as redevelopment areas. Moreover, under the former RAD Financing Act, proposals were required to undergo two levels of approval—one local and one state. The proposed legislation eliminates the requirement that local finance agencies authorize new RADs. The staggering lack of municipal oversight over the financial impacts of new RADs allowed by the proposed bill is a dangerous turn for local finances. Especially so when one considers that the state legislative fiscal estimate of the bill’s effects on municipal revenue losses and gains is entirely “indeterminate.”

The legislation is supported by the New Jersey Business and Industry Association, the state Chamber of Commerce and the National Association of Industrial and Office Properties, all of whom know a good deal when they see one. “Now is not the time…to worry about upsetting apple carts or to be timid” with economic development strategies, said Senator Raymond Lesniak, chairman of the Senate Economic Growth Committee and the bill’s sponsor.

We’re not so sure about that. In the current economic climate, TIF is proving to be an unwieldy burden for many cities, especially those faced with tight budgets and outright shortfalls. According to Jon Shure, president of New Jersey Policy Perspective, a nonprofit research organization, “This is like going on a diet because you’re starving. While needs are growing, revenue will shrink. Once more, we’ll prove that giveaways are a poor substitute for building prosperity through public investment.”

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.