DEDA: helping business developers, low-income housing, large employers, and urban sprawl?

By Zachary Hammer

The Duluth Economic Development Authority (DEDA) has been in the news lately as it faces what to do with the historic Norshor Theater.

DEDA is also in talks with a business group, Pier B, about purchasing the city-owned area surrounding the LaFarge property next to Bayfront Festival Park. The group wants to create a commercial waterfront property there with restaurants, entertainment, and hotels.

DEDA has recently teamed up with the Environmental Protection Agency (EPA) and the Minnesota Department of Employment and Economic Development (DEED) to develop the long-abandoned Universal Atlas Cement Site that was purchased by the city in 2003. Once the site is cleaned up, DEDA hopes to create an industrial park out of the blighted area, thus fostering economic growth.

But just what is DEDA? What is it meant to do, and what tools does it have to accomplish those goals?

DEDA as matchmaker

One of DEDA’s main tasks is searching for properties that have potential economic benefits for the community, purchasing them, and then attempting to match an owner to the property, with the intent of creating more jobs for Duluthians.

John Heino, DEDA Commissioner and CEO of Como Oil and Propane, says DEDA “contributes to getting projects together” that may not have been organized otherwise.
Heino, along with Don Monaco, Christine Townsend, and Nancy Aronson Norr, are citizen representatives from local industry that have been appointed by the mayor and approved by the city council. Heino “didn’t exactly set out to serve,” he said, but when approached by Mayor Ness, he agreed.

Heino said. “One thing we need is good jobs, so I’ll do what I can.”
One of the tools at their disposal is Tax Increment Financing. TIF gives businesses or land developers the benefit of having their property tax rate frozen at the pre-development rate. Ideally, the property value increases, and the amount of new property tax revenue generated because of this development “goes to pay off any new water, sewer, streets…associated with the new development,” said Todd Fedora, one of three city councilors who also serves on the board. When the TIF is decertified, the property will be taxed at a higher rate, creating more revenue for the city.

A company may well see an area as more attractive than another if offered a TIF.
The idea of TIF was conceived over 50 years ago as a tool for developing areas considered to be “blighted,” and to spur economic development in those areas where it may not have occurred otherwise. In its inception stage, it was thought of as a “last resort” type of financing.
Now, though, Arizona is the only state without some kind of TIF-related law.
DEDA and Jobs

A TIF area created for United Health Group on Rice Lake Road in Duluth led to a multitude of jobs that otherwise might have gone elsewhere – “an example of how TIFs are supposed to work,” according to Fedora.

The Duluth News Tribune reported in 2000 that a tax relief package valued at $4.55 million over 25 years was assembled as an incentive for the company to stay and grow in Duluth. “Without the package, United indicated it would leave the community altogether, taking away 660 jobs.”
“United had a lot of people working from home” before they built their new facility, says DEDA Executive Director Brian Hanson. They were looking for a central location to do business.
Hanson says he is “not wild about saying that the TIF district ‘saved’” these people’s jobs, but it definitely did “help keep” them.

“The UHC building had an estimated value of $15 million when it was built,” said Hanson. “The city agreed to return tax increment of $1.5 million to UHC over time as the taxes were paid. In addition, the city agreed to invest $150,000 in site work related to a trout stream impacted by the project.”

“There was, essentially, no utilities or infrastructure up there to handle a building of that size,” said Fedora. The TIF revenue went owards creating “higher capacity water, sewer, [and] electrical utilities to handle their operation.”
DEDA and urban sprawl?

While elected officials are quick to paint Tax Increment Financing in a positive light because it is a potential alternative to raising revenue without raising taxes, there is a possible dark underside.
Four of DEDA’s members are not directly elected, but chosen from local industry by councilors and the mayor. This means that economic leaders are charged with the power to create economic policy, possibly leaving room for abuse.

One check on this misuse is the “but-for” test. This holds that TIFs can only be awarded if the “anticipated growth in property value at the effected site would not would not happen but for the availability of TIF capital,” as James Krohe, Jr. explains in At The Tipping Point.

A problem with this stipulation is that is difficult for city officials to predict such a thing, and in many cases the growth may have occurred without using a TIF. A study performed by Chicago’s Neighborhood Capital Budget Group found that the city gave $1.6 billion in TIF tax incentives, but they projected that $1.3 billion worth of development would have occurred without TIF. As Daniel McGraw states in Giving Away A Store to Get A Store, Chicago “invested $1.6 billion for $300 million in revenue growth” – hardly a bargain to the taxpayer.

Krohe compares TIFs to a “reverse Robin Hood: they rob from the average taxpayer to give to multi-million dollar development projects in thriving areas of the city.”

Another legal constraint is the “blight test.” However, the definition of “blighted” has been so expanded that in Baraboo, WI, a cornfield was found to be blighted in order to create a TIF district for an incoming Wal-Mart SuperCenter.

This example is also consistent with what studies have found nationwide regarding another problem: the law is more likely to be flexible to large businesses than small to receive the benefits of Tax Increment Financing. “In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens,” McGraw writes.

Tax Increment Financing was originally intended to revitalize urban cores, but has been found to subsidize sprawl in many cases — the opposite of sustainable development. A report by 1000 Friends of Wisconsin found that 45 percent of TIFs in the state were used on undeveloped land.
The United Health Group development on Rice Lake Road is an example of this — “an absolutely accurate example,” Hanson said.

Another example of this sprawl can be seen on Miller Hill, where a TIF district was used to pay off “some infrastructure needs” for the Mall area, according to Fedora.

A TIF can be used responsibly, and by DEDA it mostly is. Hanson says that the “vast majority of our projects are redeveloping” in the urban center; only one or two can be described as not.
Zachary Hammer is a third year journalism student at UMD. He completed a case study regarding DEDA for a state and local government course.