Process and uncertainty likely to scare off developers
Subjecting big development proposals to popular vote risks killing statewide economic growth, observers say in the wake of a successful effort by Port Washington data center opponents to give citizens the ability to nix the future use of a key financing tool.
Voters in the Ozaukee County city this month approved a referendum giving citizens veto authority over the use of tax increment financing, a development tool used thousands of times in Wisconsin.
Jerry Deschane, head of the League of Wisconsin Municipalities, fears the tactic could spread.
“I sure hope not,” said Deschane, “because tax increment financing is one of the only tools that municipalities have.” And making development proposals dependent on referendums could kill them, he said.
He’s not alone. Kurt Paulsen, who teaches urban planning at the University of Wisconsin-Madison, said he’s already hearing from developers that having to submit a project to a referendum would kill tax increment financing, which uses increased tax revenue resulting from a development to fund the project. “I think it would,” said Paulsen, who’s also a member of Middleton’s plan commission.
And, like Deschane, the professor says that when it comes to attracting large projects to a city, “TIF is the only tool in the toolbox.”
The Port Washington vote, which passed 66 percent to 34 on April 7, was driven by opposition to the $15 billion Vantage Lighthouse data center project now under construction just north of the city on 647 acres of former farmland. Groups opposed to the project have a variety of objections, and are suing to overturn the city’s use of tax increment financing for it.
The referendum question had no bearing on halting the project.
Instead, it requires the city to pass an ordinance that in turn would require any future use of tax increment financing worth more than $10 million to win voter approval in a referendum. No such requirement now exists in Wisconsin. Tax increment financing deals must win approval from the city council of the municipality using them — and from a “joint review board” that includes representatives of the county, school district and tech college affected by the deal.
The data center’s opponents said they want a referendum for “democratic accountability.”
“We are not against development,” said one organizer, Carri Prom. “We are for development that the community understands, supports and has chosen together.”
But decisions about tax increment financing — or annexations and zoning changes often needed to enable a large project — already are made by elected representatives who must face voters every two or four years, Paulsen noted. “That’s the democratic process.”
Tax increment financing has come in for criticism for years from both left and right, as distorting the market’s signals on where development is actually optimal and for being a subsidy to developers and subject to political chicanery.
Originally adopted in Wisconsin in 1975 and used in most other states as well, it has been used more than 2,600 times by Wisconsin municipalities — usually, said Deschane, to pay for infrastructure, sometimes to remediate a polluted site, sometimes for a subsidy to a developer to make a project desired by a city pencil out.
“There’s good TIFs and bad TIFs,” said Dale Kooyenga, head of the Metropolitan Milwaukee Association of Commerce, and the difference can be determined only from examining details — a task that fits poorly in a referendum campaign. His organization is among several, including contractor trade groups and construction unions, suing to halt the Port Washington referendum requirement.
Kooyenga said critics are missing a central feature of TIFs: “You’re not taking money from existing property taxpayers and giving it to the company that’s investing,” he said. Rather, the sum financed is repaid by the added taxes levied on the new development — taxes the city never would collect but for the development taking place. New tax revenue paid on new development for a fixed period pays for the improvements that make the development possible.
In the Port Washington data center project, the amount financed is about $450 million. The site was farmland, and the developer is paying up-front to install water and sewer lines, as well as to upgrade and expand the city’s water and sewage treatment plant and to install an electrical substation. The added taxes levied on what the city estimates will be an additional $2.1 billion in taxable value will reimburse the developer’s outlay over the course of 20 years, along with about $188 million in interest.
“It’s a closed loop,” said Deschane. “Instead of the money coming from across town, it’s coming from the property itself.”
Port Washington Mayor Ted Neitzke — who survived a recall attempt by the project’s opponents — points out that if it didn’t use tax increment financing to install the water and sewer infrastructure, which it will own, the city would likely would have had to issue bonds, loading the repayment costs onto existing taxpayers and putting them on the hook for repayment if the project were to fall through. Now? If the project were halted, Port Washington keeps the infrastructure but doesn’t pay. “Vantage incurs all the financial risk,” he said.
Paulsen said that wider public sentiment against tax increment financing is bound up in distrust of the so-called “but for” calculation — would a project happen without the financing? For many, he said, “they think that’s just window dressing.”
He suggests cities take a more deliberate and public analysis to demonstrate whether a project needs TIF and whether the amount financed is just enough.
Cities should use analytic tools already used in real estate banking, said John Kovari, who teaches public finance and community development at UW-La Crosse. He’s a coauthor of a guide to evaluating TIF deals.
“A roomful of Nobel laureates won’t know what’s going to happen next year, much less 27 years from now,” he said. Yet such predictions are what TIF deals depend on. For cities to reassure the public that taxpayers aren’t getting a bad deal, they should insist consultants apply fiscal benchmarks that banks would use. By better understanding deals, he said, officials can better clarify them for the public.
He also suggests that cities develop firm lists of what they’ll use TIF for — separating any dispute over the nature of a particular project from questions over its finances.
“The complexity of tax increment financing makes it poorly understood,” he said, “and it gets politicized.”
The nature of a project does add controversy.
“It’s not TIF that people are objecting to; it’s what TIF is being used to facilitate,” said Deschane. Restricting financing is a means of limiting data centers, which have come under fire, in part due to since-debunked but widely circulated apprehensions about water use, but also from opposition to new power plants or growth onto farmland.
In Janesville, a developer proposed putting an $8 billion data center on the 250-acre brownfield where a GM automaking factory stood, a site that has sat empty since 2009 because polluted soil has scared off other projects. But groups opposed to the project — and to data centers more broadly — persuaded the city council to put a referendum on the November ballot that, if voters approve, would in turn submit any redevelopment plans for the GM site to voter approval. Notably, the question doesn’t depend on tax increment financing. It simply would give voters a veto over a particular development on the site.
Data centers may be driving such sentiments, but “this is bigger than data centers,” said Kooyenga. If a company needs referendum approval to build, if projects must be ones the community “has chosen together,” as the activist said, there won’t be growth.
For one thing, deals won’t work if a company has to wait for a vote. The months-long process of campaigning for a referendum adds uncertainty, and, said Paulsen, “uncertainty is probably a bigger deal-killer than cost.”
Besides, said Kooyenga, companies are not going to put their reputations on a ballot. If Port Washington’s referendum requirement stands, he said, “There will be no referendums in Port Washington because there will be no interest in doing development in Port Washington.”
“They’ll go to another community,” said Neitzke.
Deschane said his group’s member municipalities aren’t too worried yet — either because they’re hoping the legal challenge to a TIF-killing referendum requirement will succeed or because the idea is so sabotaging that the public will reject it.
Kooyenga, however, frets that social media makes it easier to organize a populist veto to data centers that will become a wider opposition to growth. That, to him, is the lesson of the Port Washington vote.
“They’re doing harm to all economic development because of their disdain for data centers,” he said.
Patrick McIlheran is the executive editor at the Badger Institute.
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