Strategic Economics Group
Michael Lipsman and Harvey Siegelman
West Des Moines, Iowa
April 3, 2013

The analysis presented by Jon Muller of how school funding works in Iowa is correct, but it misrepresents the analysis done by Strategic Economics Group (SEG) and addresses side issues that were not the subject of the SEG study and that serve as a distraction from the larger issue related to the use of tax increment financing (TIF) for casino incentives. 

School funding was not the focus of the property tax impact analysis done by SEG for the four Sioux City casino proposals. The SEG analysis focused on how future property tax revenues would be impacted by the different proposals assuming the existing property tax rates imposed by the various taxing authorities serving the area remain unchanged. The analysis was done in this way to allow apples-to-apples comparisons.

It is true that the Iowa School Foundation Formula does provide for equal funding on a per pupil basis (with some exceptions made for additional weighting allowed for students with special needs and with additional weighting to promote resource sharing). 

Under the foundation formula general school operating costs are covered by a combination of property tax and State aid. At the present time 87.5% of the foundation funding is split between property taxes raised by applying a uniform levy rate of $5.40 per $1,000 of non-TIF taxable valuation and with the remainder of 87.5% of the foundation level made up with State aid. Therefore, to the extent those property taxable valuations are reduced through the use of TIF the State aid portion of funding increases. This means areas that make extensive use of TIF require an increased subsidy from the remainder of the State.The remaining 12.5% of school foundation formula funding generally falls back on local property taxpayers, but also in the case of property poor districts some may also fall back on the State General Fund.

So, when the use of TIF reduces a school district’s property tax base the additional levy tax rate must be increased to maintain the required funding level. Furthermore, in property poor districts (such as Sioux City), which are made property poorer through the use of TIF, State funded property tax relief must be increased, which increases the subsidy from the State’s other taxpayers.

There are some additional elements of school budgets funded with property taxes that are not backfilled by the State. These include the management levy (which covers costs related to unemployment, early retirement, medical insurance, and property losses), the playground levy, and the debt levy. The increased use of TIF may either cause the levy rates for these purposes to increase or cause the amount of funds for these purposes to be constrained when levy limits are reached.

Finally, it appears that the attention paid to school funding has distracted attention away from what should be the focus of the comparison of the casino proposals. Schools represent only one of the types of taxing authorities that would surrender the potential growth of future property tax revenue due to the overuse of TIFs. 

For the two proposals that would require TIF financed incentive payments either tax rates would  have to be increased to meet the future needs of the other taxing authorities, or alternatively  property tax rates could not be reduced by as much as they otherwise could be in the absence of the  use of TIF financing. 

TIF has its place in helping to spur economic development, but when development would occur without having to use this form of incentive, not using TIF is the better course to follow. 

Download the full report here

Response to Muller Critique.pdf

What do you mean “taxpayers will lose out on millions of dollars”?

Both Hard Rock and Warrior Casino developers are requiring $22 and $25 million in taxpayer increment financing (also known as a TIF) in order to build their casinos. These requirements are outlined in development agreement letters between the City and each of the developers. The Hollywood Casino developers are not requesting or requiring such public dollars.

When a municipal government provides this kind of taxpayer financing for a developer, the growth in property taxes collected from that development go to paying off the TIF instead of to the various bodies that receive proceeds from property tax collections. This loan is paid off over the course of 20 years.

But Hard Rock and Warrior are providing the City with additional dollars – won’t that cover it?

The answer is yes and no. While the City itself will recoup most of the dollars from the “extras” the Hard Rock and Warrior developers have offered, the other recipients such as the schools, community college and county will not have access to those dollars. The study points out that the promised 1.75% of adjusted gross revenue offered by Hard Rock to the City as an “extra” is in fact not an “extra” but instead is “a payment intended to compensate the city for their lease payment on a surface parking lot that will be used by the casino.” This is according to a letter of correspondence between the Hard Rock developers and City of Sioux City.

The chart below shows what each of the other property tax recipients will forgo in new revenue as a result of the Hard Rock and Warrior casino projects over the course of 20 years:

But Hollywood Casino is also in the same TIF-­‐allowed districts in downtown Sioux City, what is the difference?

First, Hollywood Casino is not requiring any kind of taxpayer financing of their proposals. While their downtown location is located in a TIF district, it can be removed from that district. Regardless of this, Hollywood’s downtown proposal would generate both overall and to each of the property tax recipients the most dollars over the next 20 years. The chart below shows the estimated total property tax projections for each of the downtown casino proposals over the next 20 years:

 

Otherwise stated, the Hollywood Casino Downtown proposal will generate the most tax revenue for Sioux City.

 

Download the full report here

SEG Sioux City Casinos Impact Report.pdf

What is a TIF?

Tax increment financing is a method by which municipalities can fund urban renewal projects.  TIF legislation was enacted in 1957 in Iowa.  While it was first established to finance infrastructure improvements in blighted areas, today TIF is used as an economic development tax incentive to finance the cost of attracting new businesses to an area.

Who gets property tax revenue?

Property taxes collected in the City of Sioux City are distributed to the following tax districts:

  • City
  • Community College
  • County
  • Agricultural Extension
  • School
  • DistrictSpecial and Other
  • Assessor

Property taxes collected in Liberty Township are distributed to the following tax districts:

  • County Rural (Liberty Township)
  • Assessor (Woodbury)
  • County General (Woodbury County)
  • Community College (Western Iowa Tech)
  • School District (Westwood)
  • Agricultural Extension 

What the study says

  • Over 20 years the total Hard Rock related diversion of property tax from the Sioux City Community School District may be as much as $21.0 million.  However, through the State School Foundation Aid Formula the Iowa taxpayers would offset $6.6 million (31.4%) of the diversion, yielding a net diversion of $14.4 million.
  • Over 20 years the total Warrior diversion of property tax from the Sioux City Community School District may be as much as $30.0 million.  However, through the State School Foundation Aid Formula the Iowa taxpayers would offset $9.4 million (31.4%) of the diversion, yielding a net diversion of $20.6 million.
  • Hollywood Siouxland Casino and Hotel proposal requires no diversion of property taxes and would generate $34 million over 20 years to the Westwood School District.
  • Hollywood Sioux City proposal for downtown Sioux City requires no diversion of property taxes and would generate $41 million for Sioux City schools.

 

Download the full report here

SEG Sioux City Casinos Impact Report - School Funding Impact.pdf