Tax-increment financing poses big risks in Pennsylvania
William O'Neill and his wife, Gretchen, watched earthmovers zigzag for months across a vacant 68-acre hillside a few steps from their North Versailles backyard.
A consultant visited the couple, seeking permission for developer David Lichtenstein to run drainpipe near their property and touting spillover economic benefits from what was to be 184 townhomes in phase one of Longvue at North Versailles.
Crews would build a model home by Christmas 2011, he said, marking the start of the Allegheny County township's first major multi-family construction project in more than two decades.
“At the time I thought it was going to be a good thing,” said O'Neill, 73. “But then they stopped working and nothing ever happened. It's a shame.”
Longvue remains a fallow field.
The apparent failure of Longvue and a residential development in Mt. Lebanon highlight risks inherent in projects backed by tax-increment financing plans, and they could cost state taxpayers at least $7.3 million.
Such plans can expose taxpayer dollars to unnecessary risk in financing housing developments when builders could use federal or nonprofit housing assistance programs, said Sabina Deitrick, associate professor at the University of Pittsburgh's Graduate School of Public and International Affairs.
“It's a financing tool, and it's appropriate for certain kinds of projects, but it's not the only financing tool for all projects,” she said.
Money backed by public subsidies can be lost if the developer pulls out — as in Longvue's case — or can fail to generate enough tax revenue to cover principal and interest on loans, as in the case of two TIF deals that built The Mall at Robinson.
Deitrick cited the financing tool's most high-profile failure in Pittsburgh — the use of a TIF to entice Lazarus to open a department store Downtown in 1998. Lazarus closed in 2004 because of poor sales.
School districts and municipal officials who must approve giving up a portion of property tax revenues for as long as 20 years have backed away from authorizing TIFs for retail developments.
Theresa Elliott, a spokeswoman for the Department of Community and Economic Development, blamed the broken deals partly on the economy. She said the state financing agency has made policy changes to prevent such failures.
“The program's intent was for the TIF guaranty to be the last source of repayment,” Elliott said in an emailed response to Tribune-Review questions. “In light of that fact, the department no longer allows the TIF proceeds to be used to acquire private property and no longer guarantees projects involving private property, without being secured.”
John F. Nugent III, executive director of Montgomery County's redevelopment authority, said TIF agreements with private developers should include payments in lieu of taxes and other guarantees that protect taxpayers.
“That's important to us because we, as the redevelopment authority, are borrowing the money to carry out the project,” he said.
In Robinson, officials are angry that development around the mall hasn't grown enough to generate tax money sufficient to eventually pay off $21.5 million in debt and interest. The township is contesting a property assessment reduction that further reduced the development's capacity to pay off the debt.
Officials established the TIF district for Longvue under the notion that giving up some initial tax money would serve a long-term goal of luring housing that would ease population losses to Murrysville, Irwin and North Huntingdon in Westmoreland County, where property tax rates are lower.
The Commonwealth Financing Authority, a seven-member board appointed by then-Gov. Ed Rendell, agreed and in 2007 guaranteed up to $5 million in bonds to grade the hillside and install sewer and utility lines.
An Oct. 2 warning notice attached to $3.67 million in bonds to pay for the project states that just $1.20 remains in a contingency fund that once contained nearly $410,000. The state Department of Community and Economic Development acknowledged taxpayers likely will pick up the tab.
The only evidence that a developer once planned work is a weathered sign proclaiming “Coming Soon!” on a steep section of Greensburg Pike near the Wal-Mart.
Lichtenstein, 84, of McKeesport declined to comment.
Vincent Falleroni, the consultant who visited the O'Neills, said Lichtenstein refused to renew his one-year contract last August and stopped paying contractors associated with the project, including Richard Lawson of Finleyville, whose backhoes and dump trucks scoured the hillside for five months.
“We got paid a couple payments and then they stiffed us on a couple payments,” Lawson said.
Falleroni said Lichtenstein, who is listed as president of One Hundred Ltd. and Nine Hundred Ltd. in bond documents, didn't explain why he soured on the project.
“It would have generated a tremendous profit and tax revenue,” Falleroni said.
The township is losing money while searching for another developer. Property taxes are unpaid for 2010, 2011 and 2012, online Allegheny County records show.
“The state calls it a loan, but it's not a loan. It's a grant,” Falleroni said of the TIF guarantee program. “I know the state got snookered on more than his TIF, and bigger TIFs than his.”
In fact, it's at least the second of three state-backed projects in Allegheny County to fail this year under the Commonwealth Financing Authority's Tax Increment Financing Guarantee Program. The other is a scrapped plan to build Washington Park, a $42.8 million, 72-unit luxury condominium and 14,000-square-foot retail space at the corner of Washington and Bower Hill roads in Mt. Lebanon. Developer Zamagias Properties of Downtown is nearly $2 million short of repaying the taxpayer-backed state loans made under a TIF.
TIF programs generally allow private companies and municipal agencies to borrow money to purchase land, build roads and prep for construction. A portion of the money from higher tax revenue that a development will generate repays the loans over 20 years. In this case, the state guaranteed to repay loans of up to $5 million in case of default.
Jeremy Boren is a staff writer for Trib Total Media. He can be reached at 412-320-7935 or [email protected].