"But if it is believed that these elementary schools will be better managed by...any other general authority of the government, than by the parents within each ward [district], it is a belief against all experience." --Thomas Jefferson


Monday, May 21, 2018

Tax Incentives for Development: Eagle Mountain CRA

Not all taxpayer dollars go directly to the schools.  Often developers get tax incentives to build things sooner and increase property values, providing  a rebate, if you will, of their property taxes over a set period of time. The Alpine School Board will be voting on a tax incentive for a company to locate in Eagle Mountain on Wednesday, May 23, @ 8am @ the District Office (575 N. 100 E., American Fork).  You can read about it here.  Here's what almost no one knows and what you need to know. 

Tax Increment Financing
When I first was elected to the Board, one of the things I was completely oblivious to was Tax Incentives for Development, also known as Tax Increment Financing (TIF).  There are many different acronyms that have been used over the years (RDA, UDA, CDA, EDA), and we currently have CRA (Community Redevelopment Agency).  The thinking is that if a developer/corporation comes into an under-developed area and develops it, then the taxes that would have gone to create things like roads, sewers, water lines, etc can be rebated to the developer. The benefit to the community is that it takes less time for the developer to do this, increasing the property value sooner than it otherwise would have, if left on its own with the City providing the infrastructure and development occurring organically.  It is an incentive to grow development and infrastructure.  The developer gets a tax break and the community gets faster development and increased property values, and theoretically property taxation. 

Poor analogy, but in essence, if you finish off the dirt road to your home as part of a rebuild of your property, the City would agree to give you a rebate on the taxes you owe in order to let you cover the cost of that infrastructure.  The City then gets higher property taxes from you sooner than if they waited and you didn't rebuild your home, as soon or ever. 

The way the law is structured, each taxing entity (the City, the County, the Water District, the School District, etc) MAY choose to enter an agreement with a redevelopment agency/developer (RDA).  The terms for this are, often, for the next 20 years, the RDA will get to keep 80% of the taxes it should be paying and the city or county or district will get the remaining 20%, or 50-50 or 75-25, etc. This is part of the negotiations.  After 20 years, everyone pays what they normally would.  The "increment" part is important because the taxing entity gets 100% of what they are currently getting in property taxes.  So the 80%/20% is only on the difference between what the developed value is and the current value when the project began.  So, in the case of Eagle Mountain, the current taxes to the district amount to $42/year.  When the agreement is completed, the amount the district is projected to receive is approximately $2.5M ($500,000/20%) in real property tax.  In the interim, the district would receive the $42 + about $500,000 per year for that 20 year period.

More Info on Eagle Mountain CRA
The other thing to know about the Eagle Mountain CRA is they are requesting not only the 80% in real property as a rebate, but also 100% of the personal property tax during that 20 year period.  So, the estimates assume a total of $5.3M after 20 years in property taxes.  What we do know is this will be a data center owned by a Fortune 100 company.  The City has signed a confidentiality agreement to not disclose the identity of the company.  The project area will be 2 miles square (nearly 500 acres) and all of it will be for a data center.  They project 40 permanent employees for that data center.  However, I have seen some Facebook posts from those in Eagle Mountain who say the project could bring in 1400 jobs in construction and support. 

Sales Tax Exemption
Another important piece is the legislature just passed a law giving data centers an exemption from paying sales tax on the equipment they buy.  The assumption is they will be spending lots of money on keeping, maintaining and replacing equipment, about every 6 years.  The sponsor of the bill, Sen. Howard Stephenson, felt this would be a good incentive to get data centers to locate in Utah while increasing the property tax amount that schools receive.  If you only have 40 employees, and you get a break on sales tax, but pay property tax, this would be an excellent way to increase funding for schools, especially in the lowest funded state in the nation.  It was not envisioned that those companies would try to get a property tax rebate as well through a CRA, since they were already getting no sales tax.

So What's the Concern?
Government Picking Winners and Losers
The biggest concern I have is one of principle.  It isn't good government to have government entities picking winners and losers for tax breaks based on how much they can "provide" to the governmental entity.  Who knows that a competitor might not be just around the corner but isn't in a position to make such incredible demands of a governing board or council.  So, as a matter of principle, I always vote no on these--from the Vineyard RDA in 2011 to the University Mall CDA a couple of years ago.  Others on our board see it differently.  And many citizens do, as well.  At the end of the day, why should a well-connected, rich and powerful company be able to negotiate a better tax deal than you or I or any other small business owner in the state?  A company that is said to be on the Fortune 100 list is not in want of funding to pay property taxes for schools.  I understand, in part, the City wanting them to pay for infrastructure, but the school district is not on the line for that infrastructure. 

Why Encourage Growth When Growth Is A Concern
My second concern is I see no reason to incentivize growth with tax rebates, as it were, in an area where our biggest challenge is growth.  We are struggling to keep up with growth already.  Why would we want to encourage more growth and decrease the amount of taxes those who are coming in will pay? 

Water
A data center needs lots of water.  We live in a desert.  Eagle Mountain City says water will not be a concern.  The data center is paying for water shares and they have enough of that.  I'm still a skeptic.  Our city thinks we have enough water too and we keep issuing building permits, but every summer, I'm still asked to ration my watering.  It may look okay on paper, but the funny thing about water in a desert is there is still only so much that falls from the sky.  This year isn't one where we have more than enough.  I hope the City is correct and that water won't be a problem. 

Apples-to-Apples Comparisons
One of those who emailed on this issue also mentioned that, while he supports this kind of financing, it's important to look at apples-to-apples comparisons.  You don't compare $42/year to $500,000, you compare what amount of development you need to have in order get that $500,000 over the next 20 years, if you open the area up for development.  If you could reasonably get someone to develop that area and the improvements were assessed for $157,000 per acre, then the property tax revenue would equal what is being projected under this proposal.  If the assessed value were greater, then we would get more revenue than under this project.  The assumption that the land isn't being used and won't ever be in the near (20 years) future isn't a completely accurate assumption.  Once upon a time, Lehi was considered undeveloped and in the middle of nowhere.  Also, right now in Highland $150,000/acre isn't an unreasonable amount for just the land.  I realize Eagle Mountain is different, but how much development in buildings and so forth would be needed to reach that $157,000 mark?  And is it possible that this would occur naturally in a few years?  If this company wanted the CRA for 5 years, or maybe 10 years, I think you could make the case that it's unlikely that development would accelerate in the area enough to create that level of return to the tax coffers.  However, in 20 years?  It's very possible.  Again, look at our county just a few decades ago.

Pressure From Elected Officials and How Utah Incentivizes Economic Development
We have had requests for support from the Governor, Rep. Mia Love, Sen. Jake Anderegg, Rep. Jeff Moss, and the Eagle Mountain Mayor and City Council.  We have been told that this project is the number one priority of the Governor and the Governor's Office of Economic Development (GOED).  Additionally, I found out there is a non-profit organization, EDC Utah, that apparently exists and works with GOED to search out and incentivize businesses to come in to the state.  This is done by working with local entities to give tax breaks to these companies, all of which are allowed by law.  The school district is not required to participate in these tax incentives.  But the way this works is everyone else who makes up the 30% of property taxes that don't go to the schools is happy to make these deals, dependent on the school district's 70% being in play.  I don't know how many times I've been told that we have to go along or the entire deal will fall through.  It seems to me that if the entire thing is based on the school district, then we should be the ones who are approached initially, not after everyone else has decide this is a great idea.  (And in this case, we found out on Friday night, with a request to decide last Tuesday.  That wasn't going to happen.) 

A most important point, however, is that no one who is asking for the school district's support is responsible for making sure that our schools are not overcrowded.  There is nothing they have to lose; no risk they have to take.  If the company comes in and generates tax revenue for the state overall or the city?  Great.  If the business being in the city increases the growth of business and housing in the city overall?  Great, they get impact fees to offset the attendant growth.  Except for the school district.  We still have to find a way to accommodate that growth without the benefit of setting money aside for that growth.  We will have to bond.  And if the schools become overcrowded because of this project, not a single person will be willing to look to these tax incentive programs as a problem.  If these programs were sufficient to accommodate growth of the district, then we wouldn't have a problem with growth in Lehi because we've got plenty of these CRAs in that city...to the tune of  $15M per year in tax incentives.  Not enough for an elementary school, but close.

How To Fund Growth In Schools: Can't use impact fees
While I understand the benefit to the City, and if this project were a complete stand-alone that would have absolutely no impact whatsoever on the schools (and how would you prove that), this would make sense.  But we are struggling to keep up with the growth already.  Should this project incentivize additional growth, then that $500,000 per year would be insufficient.  It costs nearly $800,000 just to run an elementary school for a year, not to mention the cost to build and the teachers, etc.  A company that is said to be on the Fortune 100 list is not in want of funding to pay property taxes for schools.  I understand, in part, the City wanting them to pay for infrastructure, but the school district is not in charge of that infrastructure.  If those 1400 support jobs end up bringing in an additional 2 kids per person (2800), that is the equivalent of one very large high school.  Right now, we are projecting we will need to build at least one high school and one junior high by 2025.  So, is it reasonable to assume over the next 20 years that the district will need to build, in addition to what is already projected another high school, maybe 1 or 2 middle schools, and 3-4 elementary schools for those additional 2800 kids?  One high school alone costs $83M.  $10M ($500,000 * 20 years) is only a drop in the bucket in building a single high school, let alone a middle school ($30 - 40M) and multiple elementaries ($20M each).  Unlike the City or the County, the school district does not get to charge impact fees.  What that means is as new development comes in, the city and the county assess a certain amount to go to expand their sewers or their water retention ponds or the police force, etc.  As a district, we have been prohibited by state law for at least 15 years from being able to assess fees to plan ahead for growth that we clearly can see coming.  Instead, we are forced to bond every four years to infuse cash into our system that doesn't already exist to accommodate building new schools.  While impact fees wouldn't necessarily pay for all of the $83M for a new high school, it would be nice to know there was a way to set aside a certain amount based on new growth, just like the cities and the counties do.  Our bonding for growth model is not a model, it's a stop-gap measure.  In a way, it makes us not want to encourage growth in our communities because that growth just means we have to bond and pay for more schools, instead of having something that we can automatically use to set money aside for those schools that we will surely need. 

Additionally, as a district, we only ever project out 5 years.  In part, because we know that 5 years from now, those kids who are born this year, will need a place to go to school.  Everything else is conjecture.  So, to say that Eagle Mountain will not have this area developed to this degree in the next 20 years and that no growth will result for the schools in that same period of time, because of this development, is known only by looking into a crystal ball. 

In my opinion, the school district should not authorize any more tax incentive plans until such time as the state legislature decides to allow impact fees or comes up with a better way of funding school buildings based on a community's growth.  Asking people in Orem or Pleasant Grove to bond to pay for the growth in Eagle Mountain or Lehi isn't a good way of handling checks and balances in government.  And if Lehi or Eagle Mountain were responsible for their own growth, I think there would be fewer problems with overcrowding, and something like this proposal might make sense to the people of Eagle Mountain.  It doesn't make sense to the people in the rest of the district because we need the money to fund growth now, not in 20 years.