5/1/2011
By CHRIS HUNTER Salina Journal

For many years, development had occurred all around the vacant lot along the west side of South Ninth Street.

To the immediate north was the Mid-State Plaza, which includes a couple of banks, Hobby Lobby, Sutherlands and restaurants. Just to the south was Office Max, a Goodwill store and more restaurants.

What scared developers away from the lot in the middle was the fact that the property had poor soil and was in a floodplain, and thus would be more expensive to develop.

The city's answer was a development tool called tax increment financing, or TIF. And the result of the city's first TIF district is the Kohl's department store, which opened in 2009.

"Plain and simple: If it hadn't been for tax increment financing, the Kohl's project would not have occurred," said Dennis Lauver, president and CEO of the Salina Area Chamber of Commerce.

"The proof of that is the Kohl's piece of land had development all around it," he said. "The free market said no one wanted to develop that land because of the expensive challenges of doing that. Something extraordinary had to happen."

Lauver said a TIF district is used to help a city keep money in the community and also bring in money that is going elsewhere.

"When people drive through the parking lot (at Kohl's), they see a lot of license plates that are not from Saline County," Lauver said. "Those are dollars that are coming here rather than Wichita or Topeka. The Kohl's TIF is accomplishing its goal. It is giving people another reason to shop in Salina."

Tax increment financing comes with a risk. If the development doesn't generate enough tax revenue, the city could be stuck with paying off the bonds. But, at this point, the Kohl's TIF appears to be a risk that is paying off.

Needed to spend millions

In 2008, the city of Salina authorized $3.525 million in general obligation bonds to developer One Kansas for the Kohl's site. Just bringing in the dirt to raise the property 6 inches to get it above the floodplain and building road infrastructure took $3 million, with the remaining $525,000 for expenses in issuing the bonds.

The developer paid for the building, valued at $5,411,544, and all other expenses.

The bonds, which are scheduled to be paid off in 2028, are retired with sales and property taxes.

How a TIF works

Here's how a TIF works. The city, school district and county collect property taxes on the land. When improvements are made to the land, any increase in the amount of money generated by property taxes as a result of the improvements is used to pay off the bonds.

For example, in 2008, when the land where Kohl's is located was a vacant lot, it generated $2,588 in property taxes. In 2010, the first full year the Kohl's store was open, that same property generated $132,974 in property taxes. That difference -- $130,386 in this case -- went to pay off the TIF bonds.

In addition, all city and county sales taxes -- or, 1.9 percent -- in the TIF district are put toward retiring the bonds.

So far, the property and sales taxes are generating more than is due each year on the bonds. For example, in 2009 the first payment due on the Kohl's bonds was $84,168.39, but the company sent $96,545 to the bank. In 2010, the payment due was $154,595, and Kohl's paid in $235,590. In 2011, the company's payment will be $264,595; $269,095 in 2012, and $273,275 in 2013.

City Manager Jason Gage said that extra money being sent to the bank builds interest to help pay the bonds off early.

While the city cannot disclose the amount of sales tax earned, Gage said only property and sales taxes are being used to pay off the TIF payments. In 2010, Kohl's made a payment of $235,590, and the property tax portion was $130,386. That would mean the sales tax portion was $105,204.

Gage notes that the tax revenue from the Kohl's development was being generated in poor economic times.

"I expect that (revenue) to pick up when the times get better," Gage said.

Not an easy process

TIF districts are prevalent in other cities and states. For instance, Manhattan uses TIF districts so much that it no longer considers it an incentive, Lauver said.

But, Franz said, no one had asked for it in Salina "because getting a TIF is a fairly cumbersome procedure."

"There are many criteria that a location has to meet, but not very many sites in the city that have been considered for development have qualified," Franz said.

Under Kansas law, a site must be considered a "blight area" because of deteriorated structures, poor infrastructure, unsafe conditions or other conditions. Gage said the Kohl's site automatically met the criteria because it was in a floodplain.

And, Lauver said, TIF districts can create other issues.

"It can become too much of a good thing," Lauver said. "For retail development, it isn't a problem. For bringing in a factory or business with 300 jobs, that is a different issue.

"There would be 300 employees, many of which have families with children," Lauver said. "Those children need an education. They are an expense, and you are robbing the school district of (property tax) money to pay those expenses (because of the bond payments)."

A 'slap in the face'

While city officials believe the TIF district is working, City Commissioner Aaron Householter does not believe the city will see much of a benefit.

"The (sales tax) numbers can be tricky," said Householter, who questioned the Kohl's TIF when he was a member of the Salina Planning Commission. "If someone thinks that $100,000 (in 2010) is all new dollars, they are crazy. It is not newly generated, but money that would have been spent elsewhere on clothes."

Householter said he would rather reinvest money into businesses in the community instead of just giving money to new businesses.

"There perception to other businesses that we are giving another retail business money to come to town," Householter said. "I don't like corporate welfare. It is a little slap in the face to other business owners."

Householter said he believes TIF districts should be used for areas of true blight, not just land that is in a floodplain. He also doesn't want the city to automatically set up TIF districts around the city.

"It may be legal, but I don't think that (use in flood plains) is what TIFs were set up to do," Householter said.

Lauver said the biggest program with tax increment financing is that people don't understand it.

"They think that their tax dollars are being used to help pay a developer's taxes or the developer of the property is paying less property taxes than they should," he said.

"Your property taxes and my property taxes have nothing to do with the Kohl's project," Lauver said. "The developer of the property pays 100 percent of their property taxes."

Maybe in north Salina

Because of the success of the Kohl's TIF district, Lauver said the city could consider using it for other sites with issues, including north Salina.

At a recent meeting with North Salina Community Development, Lauver told the group that a TIF would be one of the best routes for attracting business to north Salina.

"The free market has spoken and people don't want to develop in north Salina," Lauver said. "You have to give them incentive to go there."

While he disagreed with the TIF district, Householter hopes the store works out.

"People are shopping there," Householter said. "If nothing else, the property tax will eventually pay for the TIF."

Gage said any proposed TIF districts need to strengthen the local economy and bring something new to the city.

"We will look at all TIF proposals on their own merits," Gage said. "Right now, I don't think we have been able to fully test out this TIF because of the recession."

nReporter Chris Hunter can be reached at 822-1422 or by e-mail at chunter@salina.com.

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