Tax Increment Financing for Transit Projects (2020)

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TCRP LRD 55 3 TAX INCREMENT FINANCING FOR TRANSIT PROJECTS Gian Claudia Sciara, Lisa Loftus-Otway, and Timothy McCarthy, The University of Texas at Austin, TX SUMMARY The costs of operating public transit are significant, account- ing for the overwhelming majority of transit expenditures in the United States. Overall, about 70% of all transit agency spending is associated with expenditures for vehicle operations and main- tenance, non-vehicle maintenance, general administration, and purchased transportation services from private providers or other agencies. Embedded in these expenditures are expenses for labor, material, supplies, utilities, and insurance. (Capital expenditures—including costs for the purchase of new or re- habilitation of existing buses, the overhaul of rail rolling stock, preventive maintenance, and leased equipment or facilities— account for the remaining 30%.1) Meanwhile, the revenues that transit providers collect from the farebox are typically far from adequate to cover their operat- ing costs. The median farebox recovery ratio is approximately 0.35 for major transit systems, meaning that fare revenues cover only 35% of operating costs and that the remining 65% must come from elsewhere.2 This leaves most public transportation agencies reliant on other support for the routine costs of operat- ing and maintaining transit systems. This report examines the potential for transit agencies to use a value capture tool called Tax Increment Financing (TIF) to support transit operations. To do so, it studies the institutional framework for TIF as delineated in state enabling legislation and case law. Typically deployed to support economic develop- ment, TIF allows local governments to make physical or other improvements within a defined geographic area, and to capture the incremental gains in property or sales taxes that material- ize within that area after the improvements have been made. In every state except Arizona, state enabling laws allow cities to de- fine a TIF district and to steer increments of increased tax reve- nues generated within the district to fund public improvements and other district-based economic development initiatives. While TIF is well known among local governments, it is also attracting growing interest from U.S. transit agencies. Public transportation providers looking for new funding mechanisms to support transit view value capture strategies like TIF as prom- ising. Value capture approaches allow agencies to raise funds for specific transit facilities or services by leveraging the value cre- ated by those facilities or services. The use of TIF to fund transit 1 John Neff & Matthew Dickens, Public Transportation Investment Background Data (11th ed. 2015). 2 Xavier J. Harmony, Fare Policy and Vertical Equity: The Trade-off between Affordability and Cost Recovery. 21 J Public Trans,  2, (2018). projects, though not widespread, is expanding.3 However, it has typically supported capital transit system improvements and supportive infrastructure in transit-oriented redevelopment areas, not system operations or maintenance costs. Some ex- amples of TIF funded capital projects include San Francisco’s Embarcadero Station, Denver’s Union Station, and the light rail stations for Dallas Area Rapid Transit. For public transportation agencies that would use TIF particularly for non-capital expen- ditures, considerable uncertainty surrounds whether and how they might do so. This work explores whether and how TIF can be used for transit operations. To do so, it necessarily studies the state-by- state laws that enable local governments and other sub-state agencies or units to use TIFs. In each state, such enabling statutes and their provisions define what entities are authorized to use Tax Increment Financing and what kinds of revenues can be “captured” in this way. State enabling legislation also typi- cally specifies what activities or cost items are allowable expen- ditures for TIF revenue. In sum, state TIF enabling laws set the key parameters for how TIFs operate in a given state. A state- by-state summary of the key statutory provisions governing TIF applications is included in Table 1 of this report. Overall, this work shows that state enabling statutes present a number of challenges for transit operators that would support operational costs using TIF structures. These challenges include: • State  enabling statutes typically authorize only local gov- ernment entities—chiefly cities and counties—to undertake TIFs. Seven states authorize the state or another political subdivision to create as TIF. Thus, it may be easier for a transit operator to pursue TIF if it is an arm of city, county, or state government rather that an independent authority. The case study highlighting Metrorail’s TIF experience in Miami Dade County (Appendix A.I.) underscores this observation. • Many state enabling laws also require the designation of a specific entity to manage the TIF, and this review finds the laws seldom explicitly authorize transit agencies to serve as such. • A fundamental obstacle for transit entities seeking opera- tional support is that many state frameworks for TIF re- strict spending to traditional infrastructure, such as roads, parking, sewers, and sidewalks. Some statutes allow ex- 3 Shishir Mathur, Using Tax Increment Financing to Fund Public Transportation: Enabling Environment and Equity Impacts. 22 Public Works Manag. Policy, 3 (2017).