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Challenges to the Use of Value Capture Revenues

With the economy improving, municipalities across the US are again able to consider value capture structures to support local transit agency efforts to fund and/or accelerate transit projects. Greg Kelly’s article in this EFR (What If? Integrated Transport Development: Investing in Our Future) summarized a series of important projects where value capture has been employed. He also set out some policy recommendations for consideration. In addition to the examples in his article, municipalities in North Carolina, Tennessee, Arizona, Utah, Virginia, and a few other states are allocating tax increment and assessment district revenues to support capital and/or operating expenses of transit projects.

There remain challenges to the use of value capture. Recall that all value capture revenues depend on private development—either new private development that is generating incremental property taxes, or landowners who agree to annual assessments which are allocated to public infrastructure projects.

The private sector gets it! They recognize the value to their properties and developments of being located at or near a transit station. They understand that it makes sense to invest at transit oriented development (TOD) sites, and build higher density, mixed-use properties to attract residents who want the conveniences that TOD provides. A growing portion of DINKs (dual income, no kids) and empty nesters want to live at TODs—particularly those in city centers where there is access to performing arts centers, museums, and entertainment as well as transit.

So by recognizing the public’s desire for connectivity, the private sector’s investments are beginning to generate the new tax revenues needed for value capture structures. However, both market and governance challenges exist today and must be addressed somewhat differently for each project, as municipalities have varying degrees of flexibility in their laws.

California

Local transit agencies in California lost tax increment fi nancing (TIF) as a funding source with the dissolution of redevelopment agencies. But the need to support transit persists. Transit agencies need to provide the local matching funds required when federal funding is sought, and in some cases, the value capture revenues are needed to provide that match. To solve this problem, several cities and transit agencies are considering creating Joint Powers Authorities (JPAs) where the city and county voluntarily allocate a portion of incremental property taxes to a JPA to support either an individual TOD or a transit corridor. The transit agency’s part of the JPA would be to administer the funds that are collected and allocated to support the transit activities.

The participating members of the JPA may assign to a JPA any powers that they hold or revenues that they collect. In creating a JPA the members clearly defi ne its purpose, how it will function, and the period of time it will exist. The JPAs being considered would have no independent taxing powers, but would have the authority to construct, manage, maintain, and operate the facilities needed for successful TOD projects and transit corridors. This application of the JPA governance structure may help to mitigate the loss of tax increment in California.

Florida

In Florida there are many community redevelopment agencies (CRAs), each of which has tax increment powers. However, the enabling legislation in Florida does not allow the use of the tax increment funding for transit projects. Therefore, utilizing the redevelopment statute does not help cities that want to integrate transit into their redevelopment project areas.

One of the transit authorities in south Florida is implementing a new commuter line and is considering asking local jurisdictions to pay a share of the annual operations and maintenance (O&M) costs for the proposed new service. There is a need for a perpetual funding source, as the O&M will be ongoing and the cost will increase over time. There is a fi xed “life span” for each of the existing TIF districts, so even if the redevelopment agencies could commit TIF revenues, the commitment would not be perpetual, as their use of tax increment revenues end with the termination of the TIF district. 

In addition to the limitations of the use of TIF funds, there is a broader issue to address. The cities along the proposed corridor vary tremendously from wealthy cities to cities with lowerincome and minority populations that are not flush with revenues. The challenge is to devise a structure where value capture revenues can be used to help “level the playing field.” Under an interlocal agreement structure (which is Florida’s version of a JPA), the counties and the cities participate by allocating incremental property taxes from designated parcels along the transit corridor to support the annual O&M costs of the commuter rail project. And while the tax increment from individual cities would be maintained in “their accounts”—meaning fully allocated to the pro rata costs for their stations—the counties’ portion of the tax increment would be applied across the county. The use of the counties’ tax increment would focus on supporting those cities where, through no fault of their own, it is unlikely that there will be enough new development in the foreseeable future to generate the necessary tax increment to meet their pro rata O&M costs.

Interlocal agreements can and often do operate in perpetuity, satisfying the need for ongoing revenues, rather than revenues limited by the life of a district. Many transit authorities across the country already operate as a JPA or under an interlocal agreement. Therefore, the revenues allocated by the cities and counties to the JPA could be used to fund ongoing annual O&M costs or any other expenditure.

Conclusion

These are two examples where there are challenges to using value capture revenues to support transit. Many more exist across the country. There is no “cookie cutter” approach when addressing the needs of a transit authority looking to value capture revenues as a potential way for local government to contribute to funding transit services. Both the private sector and the local jurisdictions understand the need and want to participate in support of new transit service.

Case studies demonstrate how a new transit line can dramatically influence new development. The studies show that property values are higher, rents for commercial properties are higher, and the TODs often create a “sense of place” previously lacking in the communities.

 

Image Header Source: Eric Fredericks (Creative Commons)