Chasing Development
Why do some municipalities seem to be chasing development, even to the point of paying developers sizable grants? Understanding how state law dictates a municipality's allowable tax levy is helpful to see the incentives that push people in that direction.
First, some term definitions. "Tax levy" is the total dollar amount that the village collected in property tax last year. "Total valuation" is the sum total of property valuation in the village. The "tax rate" is then the levy divided by the valuation. That tax rate is then multiplied by your property's valuation to get your tax amount due. A bit oversimplified, but it'll do.
Next, state law does not allow municipalities to just set the levy at whatever they want. You can interpret that as well-intentioned: the state wants to keep a local government from crushing its residents with huge increases or huge rates. Or you can look at it as micromanaging. I can see both sides and I'll land in the middle. Some constraints would be good, and some room to maneuver would be good as well.
So what is allowed? Well, the formula is pretty simple:
What was your tax levy last year?
Debt is treated separately, so add the increase/decrease amount of debt payments vs last year. (If last year debt payments were $1M and this year they will be $1.1M, then you get to add $100K to the levy total.)
Now here's where your eyebrow will rise and dots will start to connect:
Calculate the percentage of NET NEW CONSTRUCTION (NNC) divided by your TOTAL VALUATION. Then add up to that number to your tax levy. So for example, if you added $1M in net new construction and your prior year's total village valuation was $10M, then you can legally raise your total tax levy by 10%.
If you had no NET NEW CONSTRUCTION, your tax levy stays flat to last year, EVEN IF INFLATION WAS STUPID HIGH. Too bad, so sad.
If you think like I do that to understand most human behavior is to understand the incentives, you start to see why there's so much pressure to develop.
Before being too generous, budgeting is hard and being good at it means being able to make good but tough decisions. Budgets are always tight and every department of an org always needs more than there is to give. Tough decisions at budget time are a guarantee. When build-like-crazy is used to reduce tough decision-making, that's the wrong reason to build.
What's really broken in the calculation is the absence of any inflation adjustment. Not every cost is affected by inflation, but enough of them are that never developing would see your village budget's purchasing power slowly erode until you were forced to go to referendum to get more. The municipalities that are completely built out, like Wind Point, have this challenge. Caledonia, on the other hand, has plenty of open space and a state-mandated human incentive to use it.
[Before you go further, if you don’t know what a TID is, you need to stop and read this first.]
And now for a little Advanced TID shenanigans to complete the incentive puzzle.
Development that happens in a TID is included in the NNC number even if the TID is still open.
The TID's net new valuation, though, is NOT included in the total village valuation.
So watch what happens.
Year 1, 10 properties, $10K each in valuation = $100K total valuation. Tax rate of 1.5% means tax levy is $1500, each property's bill is $150.
Year 2, 2 new properties in a TID are built, also $10K each in valuation. NNC is $20K, or 20% of valuation, so levy can increase to $1800 (20% more than $1500). But it's the non-TID properties only that have to pay that $1800, so everyone's bill is $180 this year. The TID property pays the same amount but that money has to go to paying down the TID's debts.
Rinse and repeat for 19 years.
...but wait, it's not over being crazy. When the TID closes, state law allows 50% of the TID new construction valuation to be added AGAIN to the NNC number. Yay me, one less tough decision to make in the upcoming budget.
If you read that about 5 times and really digest it, you see the incentives:
More development is always good financially
More development makes budgeting easier
Developer incentives don't affect the calculations, they just delay when tax revenue goes into the general fund
Taking on more debt is fine, until you get close to the state-mandated cap, because you automatically get to raise taxes to cover debt payments
Underperforming TIDs are disappointing but no more than that. You can always just start another one.
Wrapping this up, there are some people who believe for ideological reasons that all development is good, and they are currently being encouraged by state law. More jobs, more indirect benefit, more, more, more, let freedom ring. When you see Caledonia's budget and debt growth (coming soon, I promise), you see these incentives everywhere. When you adopt this ideology, it never ends. The treadmill is always moving and you just keep chasing the next development dollar. You stay at it with such unquestioning fervor that the chasing becomes the goal.
Conversely, I think there are people who dislike all development and will resist reflexively.
Then there's the group in the middle that says "Let's just make smart choices. What's in it for the residents? And can we deliver? What are the risks?" Open minded but cautious. Non-ideological.
Really really wrapping this up with a provocative statement: those that push hard for any and all development do so they can raise your taxes, not lower them.