Janesville Councilwoman Carol Tidwell is watching out for taxpayers’ interests by examining a little-known mechanism used when tax dollars collide with private development.
Only an experienced, knowledgeable official could recognize the difference in the application of a guarantee versus a letter of credit on city-financed projects. Tidwell thinks a letter of credit would offer more taxpayer protection against default on projects proposed for tax increment financing, or TIF, districts.
She has asked the entire council to scrutinize this issue, and her probing led Economic Development Director Gale Price to issue a five-page memo justifying the city’s current policy.
In the memo, Price explained why he believes the city is better off requiring a developer’s guarantee instead of a letter of credit.
The world of finance can be complex, but Price’s logic in opposing a letter of credit requirement is straightforward: It would diminish the benefits of TIF districts by forcing developers to spend more on projects. A letter of credit acts as a promise to the lender, but it comes at a price to the developer, which must pay a financial institution to get the letter.
The city’s role in TIF districts is to finance the “gap” between what a bank and developer is willing to pay and the total cost of a project. This gap represents a small portion of a project’s total cost. In his memo, Price used a fictional example of a $1.3 million project with the city financing $340,000 of that amount.
The problem with a letter of credit requirement is that it could defeat the purpose of the city’s role and potentially cause developers to go someplace else with fewer restrictions.
One can debate whether the city should be involved at all in private development, but offering incentives is the new normal for governments everywhere. Once considered a novel tool to rehabilitate a city’s most blighted areas, TIF districts are now commonplace.
Price’s point is that the city can still protect itself with a developer’s guarantee because it would allow the city to go after a developer’s assets should the developer default. Letters of credit are more liquid, but Price prefers the guarantee because it doesn’t tie up a developer’s cash.
As the footprint of TIF districts expands, how the city protects itself against bad deals becomes more important, which is why Tidwell’s concerns cannot be dismissed.
But let’s not be worrywarts. Janesville is on the upswing: The unemployment rate has fallen to 3.9 percent, a 16-year low, and the housing market was booming this summer.
In his memo, Price explained the city exercises “due diligence” in evaluating each project before deciding whether to finance it. He notes the city “has not endured failures in developments paying back what was provided to them in assistance for the project.”
The city should plan for worst-case scenarios but shouldn’t necessarily build economic development policy around them. While Tidwell’s concerns are worth debating, they are somewhat overblown. In this era of widespread government incentives, cities must take some risks with tax dollars to remain competitive. -GazetteXtra