War is Peace

War is peace. Freedom is slavery. Ignorance is strength. Most of us have heard those slogans, and quite a few have read the novel 1984. The concept of “newspeak” is one that’s fairly easy to understand. We can recall Bill Clinton quibling over the definition of “is”. That kind of deliberate misrepresentation has become synonomous with politics, and breeds distrust between neighbors, within communities, and drives a wedge into the relationship a representative has with their constituents.

Someone recently asserted to me that bonds issued under the Georgia Redevelopment Powers Law (O.C.G.A. § 36-44) don’t count as debt. This sounded like a pretty bad example of the kind of misleading language that I really dislike. To be sure, I went straight to the source. Section 14 of the law states “it does not otherwise constitute an indebtedness or a charge against the general taxing power of the political subdivision or county or independent board of education”. OK, that sounds like confirmation, doesn’t it? However there is also language that restricts payments on the bonds to come solely from approved sources, which centers primarily around something called “Tax Increment Funding” (more on that later). So now all it seems to do is say “yea, it’s a bond, but only against a very specific source of revenue”, which tracks what its proponents claim.

The downside is that doesn’t sound like a very marketable bond, since it’s based entirely on hoped for (and not actual) revenues raised from redevelopment, which anyone in the business can tell you is not without risks. Still in Section 14, to explicitly address this, subsection (d) allows that a local legislative body may “[c]reate a lien for the benefit of the bondholders upon any public improvements or public works financed thereby or the revenues therefrom”. They may also “[m]ake covenants and do any and all acts not inconsistent with the Constitution or this chapter as may be necessary or convenient or desirable in order additionally to secure tax allocation bonds, notes, or other obligations or tend to make them more marketable according to the best judgment of the local legislative body.” Using the term “convenient” makes it sound a lot more permissive and watered down than I thought.

The kicker is §36-44-20, which says that general revenue derived from the area may be used as well upon “adoption of a resolution of the local legislative body finding that positive tax increments or lease or other contract payments in the district’s special fund will be insufficient to pay principal and interest on bonds to be issued to finance redevelopment costs for the redevelopment described in the redevelopment plan.”

So yes, these bonds do not count as debt against general revenues, while general revenue may be on the hook for paying these bonds after all.

How likely is that, though? The main funding source is the afore-mentioned “tax increment funding”. What is that? When a property is improved, its value rises and the taxes generated at the site increase. The difference between the taxes generated before and after the investment in the property is called the tax increment. Tax Increment Financing (TIF) uses the annual increment to finance a portion of the costs the improvements made. TIF was initiated in California in 1952, and was intended to provide a way of supporting redevelopment projects without increasing taxes, without requiring a popular vote, and, usually, without impacting a city’s debt limit or financial stability.

Today, every state except Arizona has approved some form or use of TIF. Georgia is unusual in that it gives citizens of the municipality a chance to decide whether they wish to give their local government the power to use TIF and the redevelopment powers it finances.

There are risks to this. Anticipated revenue can be insufficient from either too small a change in value or an increase in demand for public services, as well as the public sector bearing a disproportionate share of the cost burden and risk, leaving a windfall for the private developers involved.

California recently elminated redevelopment agencies funded by TIF. There had grown too great of an incentive to “discover blight”, utilize eminent domain, pour public money into private development, and keep the cycle going with money and power accumulating with these supposedly independent redevelopment agencies. When California finds and admits that their own idea and techniques for publicly funding private development projects are not so great after all, it’s got to be pretty bad.

The following resources were used in researching this article: