Analysis – primer on C4C tax increment financing

City for Champions will require several financing tools, with tax increment financing a crucial element based on projected numbers.

City for Champions will require several financing tools, with tax increment financing a crucial element based on projected numbers.

“Colorado Springs is the heart of the United States Olympic movement,” former Colorado College President Dick Celeste told City Council this week. “But unlike Pikes Peak, [the Olympic Committee] can move.”

To forestall any such departure, Celeste suggested the city move vigorously forward with City for Champions, the four-project proposal to which the state Economic Development Commission recently allocated $120 million in state tax increment funding. The Olympic Museum, which Celeste is organizing and is considered the C4C keystone, is slated to receive $27.4 million in state funding as well as benefiting indirectly from an additional $51 million in state and local funding for infrastructure improvements in southwest downtown.

The four projects, including associated infrastructure, are projected to cost $250.6 million — $48.2 million coming from private sources, with most of the remaining cost provided from proceeds of multiple bond issues.

Only $29.5 million would come from a conventional revenue bond, to be issued by the Colorado Springs Parking Enterprise. Those funds would go to construct a parking garage serving both the Olympic Museum and the Colorado Sports and Events Center.

Beyond that, $10 million would come from some combination of “municipal bonds and new market tax credits,” with $15.3 million to be raised by UCCS from “clinic revenues, leases, and bonds,” according to the latest presentation.

That leaves $147.6 million, which would come from debt instruments secured by state, county and city sales tax increment funding.

For these financing plans to work, regional sales tax collections must increase sufficiently during the next three decades to provide the revenue necessary to service the bonds.

Selling the deal

The predictions of project proponents are rosy, to say the least. For example, here are two bullet points from a PowerPoint presentation delivered to Council by city economic specialist Bob Cope:

• $192 million in net new local tax revenue over 30 years AFTER TIF FINANCING.

• City for Champions does not reduce the general fund — it increases the general fund.

C4C proponents argue that highly conservative projections show that revenue streams will more than cover all of the proposed bond issues.

Often, such long-term economic projections aren’t much better than guesswork. In 1983, few would have predicted that the Soviet Union would collapse, that China would become the world’s chief economic driver and second largest economy, that both General Motors and Detroit would go bankrupt, and that Apple would become the world’s most valuable company.

Local revenue projections may be more accurate. As Celeste noted, there’s little danger of diminishing the region’s attractiveness. Other risks, such as possible contraction of the local military economy, another prolonged recession, accelerated climate change or shrinking tax base, can’t easily be quantified.

The past as a guide

One set of data may be useful and predictive: historical city sales tax collections.

Colorado Springs’ 1998 city budget pegged collections of the city’s 2.0 percent sales tax at $91.9 million. Fifteen years later, such collections (which do not include dedicated sales taxes for open space or public safety) had risen to $137.9 million.

That represents a 50 percent increase, which can also be expressed as a compounded 2.7 percent rate of increase.

Tax increment financing is calculated for every year’s tax receipts, based on the growth from the base year. So even if tax collections decline on a year-to-year basis, as long as they’re greater than those in the base year, there’s an increment.

Had the city issued TIF-supported bonds in 1998, budgets in the down years of 2009 and 2010 would have been affected.

Sales tax receipts were below those of 2007, but greater than 1998. Bondholders thus would have continued to tap a tax increment, further reducing city funds in those straitened times.

C4C tax estimates 2014-2043

Taking 2014 as a base, here’s an estimate after running the C4C numbers. Note that the increase in tax receipts is not pegged at the 2.7 percent level of 1998-2013, but rather at the “normal growth” rate of 1.5 percent plus approximately 0.2 percent that is attributed to the projects.

• 2014 estimated “RTA Zone” sales tax revenue: $100.2 million.

• 2043 sales tax revenue: $162.2 million.

• Compounded rate of increase: 1.7 percent.

Over the 30-year term of the C4C bonds, the zone’s total net state sales tax increment is estimated at $921 million, of which $166 million could be attributed to the projects.

Accepting the city’s estimates, the EDC authorized the city to issue bonds secured by 13.08 percent of the total tax increment, or $120 million. Such bonds, bearing an interest rate of 6 percent, might raise approximately $48.5 million.

Using similar figures, C4C advocates propose three additional bond issues secured by city and county tax increments in the aggregate amount of $96.8 million.

Council has questions

Skeptical councilors presented Cope, the financing proposal’s author, with a list of 36 questions, many concerning project financing. Stripped to their essence, most asked the same thing: How do you know there will be enough tax revenue to support all of these bond issues without putting the city at significant risk?

If the future resembles the past, revenues will be more than adequate. The 15 years between 1998 and 2013 saw the collapse of the city’s high-tech manufacturing sector, the end of the first Internet boom, 9/11 and then the Great Recession. Despite such travails, city sales tax revenues increased by 50 percent during the period.

But suppose that the city had issued TIF-backed securities in 2007, just before sales tax receipts declined sharply as a result of the recession? As Cope pointed out, purchasers of the bonds would have taken a temporary hit, but city finances would not have suffered.

While C4C advocates’ tax revenue projections may be reasonable, another set of estimates are equally crucial — projecting attendance at the two downtown venues.

Touting the facilities

Celeste dismissed the three existing Olympic “museums” (at Lake Placid, N.Y.; Salt Lake City; and Atlanta) as essentially “shops where you can get (Olympic) paraphernalia.” The Colorado Springs facility would be different, telling the Olympic “story of sustained excellence.”

“The best architects in the United States will compete to design this building,” said Celeste.

Proponents estimate the museum will attract 350,000 visitors annually, 82 percent from out of state. The Sports and Events Center is expected to enjoy similar success, attracting 781,000 annual attendees to various events it would host.

Those visitors presumably would use the $29.5 million parking garage, furnishing the revenue to pay off the bond issued to build the structure.

Are the numbers wildly inflated, or too conservative? There’s only one way to find out.

Proponents have done their research, run their numbers and persuaded the EDC to back them. Now, just like any new business, they’re looking for additional funding.

If they’re successful, they’ll pull the buildings out of the ground, open the doors and hope that the customers show up.

And if they don’t … well, they’ll have a problem and so will we.