Slow speed crash

The current Mayor and Metro Council are creating a budget challenge for the future. I’ve mentioned the issue several times during Council Budget & Finance Committee meetings. So far, I’ve failed to get the administration or my colleagues to see the issue or act on it. As a sense check for myself, I’ve pulled the details together here. I think I’m right, but you can decide for yourself.

The issue is about spending property tax revenue years in advance.

The Council is currently considering BL2022-1170, which would authorize the Health & Education Facilities Board to provide property tax reductions up to $3M per year for certain affordable housing projects. This will have effect of removing up to $3M per year from the annual operating budget process. After five years, there could be as much as $15M in annual property tax revenue “missing” from the annual budget process under this program.

With this bill along with other recent and expected legislation, the Mayor and Council are in the midst of dramatically increasing the amount of property tax revenue that is automatically spoken for and spent outside of the city’s annual operating budget. This matters because committing future property tax collections years in advance can tie the hands of future city leaders, especially in tight times. The worst part is that this is being done without any policy or goals or targets in place.

There are two main ways that property tax revenue gets spent years in advance without any chance for future mayors and councils to make annual spending decisions. With tax increment financing, or TIF, property taxes are collected but automatically diverted to pay development loans. These tax increment funds are never a part of the annual budget spending process. The other tool is “payment in lieu of taxes”, or PILOT. This is when a property tax bill is reduced, or abated, for many years for economic development or other purposes.

Think about property tax revenue as sap coming out of a tree to fuel the city government. TIF loans and PILOTs are extra taps higher in the tree pulling out sap before it gets to the annual budget process to run the city. For many years, there were two property tax “taps” in the tree above the operating budget — MDHA TIF loans and Industrial Development Board (IDB) PILOTs for economic development. In 2016, a third tap was created — MDHA PILOTs for certain affordable housing projects. With no policy in place for guidance, the current Mayor and Council are busy pounding multiple new taps in the tree to spend substantial future property tax revenue outside of the normal annual operating budget process.

Let’s back up to the Dean administration.

In FY2008, there was $9.4M of property tax revenue collected that was immediately redirected toward TIF loans. The Dean administration doubled this while they were in office. In FY2016, it was $18.3M. This data was collected as part of the TIF Study and Formulating Committee that I led in 2018-2019.

As for PILOTs, in the FY2008 audit, tax abatements were not identified. By the FY2016 audit, at page B-119, Metro reported $5.2M in tax abatements — $4.8M of these were created during the Dean years, and the other $400K was from the Dell incentives granted in 1999.

We can see that during Dean’s eight years in office, the amount of property tax revenue that either abated before being billed or redirected immediately after collection to pay development loans increased from about $9.8M per year to $23.5M per year.

This large increase was not the result of a public policy or process. It is clear that they never made any active decisions about how much property tax revenue should be committed like this outside the annual appropriations process, or what the priorities were for that money. To the extent there was any informal policy or a set of priorities, it was entirely inside the Mayor’s Office and not something the public could see or know.

Also, these numbers only reflected projects that had been built by the time Dean left office. His last few years of deals didn’t have a financial impact until after he left office. After only two more years, in FY2018, the amount of property tax revenue sidetracked into TIF loans had exploded up to $27.9M per year. In the FY2018 audit, at page B-111, the PILOTs had increased to $6.6M per year.

To recap, from 2008 to 2018, the amount of property tax revenue either abated or redirected before ever getting into the annual budget process increased from $9.8M to $34.5M. And there was no apparent end in sight on the acceleration of the annual TIF spending. And remember, there was no policy then (or now) about how much outside-the-annual-budget spending Nashville was aiming for. There was no known policy then (or now) about what the city was trying to incentivize with this kind of spending.

The absence of a policy is a bad practice.

The Government Finance Officers Association (GFOA) has a Best Practices statement about Establishing an Economic Development Incentive Policy. The GFOA warns that “incentives often carry substantial risk.” Because of this, the “GFOA recommends that jurisdictions create a policy on the appropriate parameters for use of economic development incentives.” They explain that “[g]oals and measurable objectives create a context and accountability for the use of economic development incentives.” The GFOA also recommends that the policy “define the types of incentives the jurisdiction is permitted to use and any limitations on their use (e.g., maximum dollar amounts, time limits, type of project that is eligible).”

The GFOA also has a Best Practices statement about TIF: Creation, Implementation, and Evaluation of Tax Increment Financing. I won’t belabor it here, but Metro does not adhere to these best practices.

Predictably, the rapid increase of spending outside the annual operating budget had an impact on Metro. In the 2019 TIF Study Committee final report, we noted that “Metro Finance has identified that as the amount of tax increment being used to pay TIF loans has increased in recent years, it has been more difficult for Metro Finance to accurately plan the city's operating budget.” By 2019, there was an impact on schools too. The final report described that “due to the recent unpredictability of estimates, Metro Nashville Public Schools (MNPS) has experienced…significant variances from budget estimates provided by Metro, which have impacted its overall budget status.”

Mayoral candidate John Cooper was aware of this problem. His campaign Policy Book quoted the TIF Study Committee final report about the lack of strategy and policy related to TIF. At page 31 of the Policy Book, he promised, “As mayor, I will define a strategy.”

Where I was on this around the 2019 elections.

In the 2015-2019 Council term, my colleagues and I passed significant TIF reform legislation. We successfully slowed down new TIF deals. We shined light on how the process works. We tried to change Metro’s long-time habit of using TIF and PILOTs to incentivize development downtown.

However, by the time of the 2019 elections, I knew there were going to be new fronts on this battle. Because my efforts to slow down the explosion of off-budget TIF spending were largely directed at TIF loans made by MDHA, the development community began to look for other avenues for economic development spending. At the time, people were beginning to talk about trying to move more economic development spending to the IDB.

I was clear with candidate Cooper that as the city moved forward we needed a policy about how much spending the city is willing to have outside of the budget process on a five to ten year horizon, along with a policy decision about what we want to incentivize and where. When he was in the Council, he was a co-sponsor on all of my TIF reform legislation and he agreed about the need for a policy.

What’s happened since 2019?

Since the current Council term began, I have consistently reminded the city’s highest leadership about the need for a policy for this spending. Often it has been in conversations. Although in a July 30, 2020, email about the IDB to Mike Jameson in the Mayor’s Office , I put it this way:

I know that John and I discussed at length last term, and he put in his policy manual, that incentives should be done pursuant to policy and not based on whomever walks in the door of the Mayor's office. He and I often talked about getting clarity around having community consensus about how much to invest, where, and for what purpose...and then also agree in advance about how to measure success. I suspect that we probably have at least 6-9 months before the economy turns back on in earnest. And I know these policy issues are on the Mayor's agenda. Do you think it would be helpful…for a follow-up conversation about these topics sometime in the next month or so?

Unfortunately, there still is no policy and the city now is in the midst of rapidly expanding the amount of spending that happens outside of the annual budgeting process. The current expansion goes way beyond the scope of anything done during the Dean years.

The city is expanding the number of ways that property tax revenue is abated or redirected out of the annual budget process — both in small ways and large. On the small end, the Council recently created a new property tax abatement program for historic preservation properties. This may amount to no more than $100K per year in property tax revenue that doesn’t make it into the annual appropriations process. Also, at the Council’s next meeting, it likely will pass BL2022-1170 (with me voting ‘no’) authorizing the Health & Education Facilities Board PILOTs. I’m a big supporter of affordable housing initiatives — but after 5 years of these deals, this new tap in the tree will be side-tracking another $15M of revenue away from the annual budget process ($3M per year of new property tax reductions for 5 years).

At the large end of the spectrum, the Council approved a $175M TIF for Oracle last year. That will be paid over 20 years and will divert at least an average of $8.8M per year from the annual budget process. And, if rumors are correct, the non-stadium infrastructure improvements for the East Bank will include a TIF arrangement of at least $500M. I believe that would be over 30 years and would pull at least an average of $16.7M of property tax revenue out before the annual budget process.

I put together this chart to show the growth of spending and missed revenue outside of the annual budget over time. The chart shows the amount of property tax revenue automatically pulled out before the annual budget process will grow to a projected $87.1M by FY2026. Honestly, I think this number might be too low. But I’d be happy to have anyone who is employed full-time by Metro share their projection.

This post has a lot of numbers. But, stop and soak this in — by FY2026, I expect the city to have almost $90M per year of property tax revenue fully abated (so it never gets collected) or fully committed (through TIF loans) without ever being included in the annual budget process.

I am strongly opposed to creating more ways to lock up future property tax collections outside the budget process without first having an appropriate policy in place. It is simply too dangerous to future budgets to continue expanding this non-budget spending without a good policy in place.

Next steps

I have a mixed track record about long-term fiscal issues. I tend to be correct about them, but I also struggle with how to explain them in a way that resonates.

As an example, I talked about Metro being in a financial crisis 16 months before the State Comptroller raised a louder alarm. I talked for almost two years about Nashville being the lowest overall tax environment among peer cities before the Chamber of Commerce had a paid consultant conclude the same thing. So while I am spotting important issues, it is taking a while for my perspective to become the prevailing perspective. With this issue, I plan to keep trying to find a better way to explain my concerns.

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Here are some additional thoughts that didn’t make the cut to be included in the main post:

• People will say — “Well, Bob, how much should we be spending in this way…affordable housing is important…economic incentives are important…what should the number be?” To that, I would say there’s more than one right answer. The starting place is for the city to establish that amount in a transparent way, set goals for how it wants to spend that money, and establish ways to measure success. Otherwise, the city will always just be chasing the next deal instead of comparing deals to a set of agreed upon goals.

• The city has for many years been the lowest overall taxes among peer cities, likes to keep low fund balances, has been increasing its long term debt, redirects large amounts of local sales tax revenue to pay for stadiums, and has no policy about any of this in place. In this context, people should be nervous about the rapid growth of the amount of future property taxes being committed outside the annual budget process. Together, these factors erode the ability to withstand a future fiscal crisis.

• You may notice differences in TIF numbers from MDHA and from Metro Finance. MDHA is on a September 30 fiscal year and Metro is on a June 30 fiscal year. Their numbers don’t match perfectly because of this.

• You may notice that the MDHA TIF numbers are lower now than in FY2018. That’s because former Finance Director Kevin Crumbo very aggressively refinanced nearly all of Metro’s debt during COVID when rates were historically low. All of his refinancing deals lowered interest rates and therefore payment amounts without extending any of the due dates. That’s why payments are lower today than a few years ago.