Town, Pusd At Odds Over Main Street Funding

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When Dick Wolfe strolls down Main Street, where mom and pop businesses struggle to survive in the shadow of overgrown lots and stark industrial buildings, he envisions a thriving cultural neighborhood with gift shops, restaurants, movie theaters, historic buildings and greenbelts.

But when Payson School Superintendent Russ Kinzer thinks about how Wolfe and other town leaders plan to pay for that vision, he just sees red.

Town officials have drafted a complex funding plan to revitalize Payson's faltering Main Street area, but school financial experts are convinced the plan will drain tax dollars out of local schools and raise property taxes without a vote.

Wolfe, the president of the town's Green Valley Redevelopment Committee, and town officials want to use town funds, grant money and increment financing to stimulate housing and business development in the Main Street area.

It is this last funding method that has local school officials crying foul, and they're protesting all the way to the State Legislature, where they're supporting a bill that would make increment financing illegal.

The state's increment financing law allows towns to raise money to help redevelop blighted areas by creating special districts that affect sales taxes or property taxes.

Town officials want to do both, but it is the property-tax proposal that worries school officials.

"This is a bad law and it needs to be taken off the books," Kinzer said. "No matter how you manipulate the numbers, it will do two things: It will increase district property taxes and it will raise taxes without representation or a public vote. This statute is one that can easily be abused."

The bill, HB2026, passed the Senate Government and Environmental Stewardship Committee by a vote of 6-2 last week and is now scheduled for a vote by the Senate.

Meanwhile, town and school officials are preparing to argue the pros and cons of increment-tax funding before the public and the Payson School Board during a special meeting of the Payson Town Council. The meeting will be held at 4 p.m. Tuesday at Town Hall.

Town officials are considering enacting the redevelopment district for 20 years, Kinzer said, and property taxes would likely go up every year during that time.

Here's how increment financing for property taxes work:

  • The town creates a redevelopment district.

Payson's redevelopment committee would like to create a triangular-shaped district roughly extending from Frontier Street on the north, Oak Street and South McLane on the west and the Beeline Highway on the south and east.

  • When the district is formed, town officials determine the total property value of the district. Currently it is $3.995 million for the proposed district.
  • All property taxes collected on that $3.995-million base are divided normally between the town, county and school district.
  • All property taxes collected on the assessed value of the district beyond that base are diverted to the redevelopment district for low-interest business loans, affordable-housing grants, street and parking improvements and other programs that will stimulate revitalization.

That means that as growth and development drive property values within the district up, the additional property-tax revenue that's created will be diverted from the school district and the county and churned back into district redevelopment projects.

School district budgets are set by the State Legislature and school officials depend on state aid and a local property-value formula to meet them.

The redevelopment district would affect the county's budget differently and would not necessarily raise county taxes.

Sales tax increment financing works much like property tax increment financing, but won't affect local schools. Here's how that works:

  • The town creates a redevelopment district.
  • Town officials figure how much town sales-tax revenues are being generated within the redevelopment district and establish that number as a benchmark.
  • Any town sales taxes collected above that benchmark are captured and diverted back to the redevelopment district. This plan does not affect state sales tax.

Both methods depend on the success of the town's redevelopment efforts: Development fueled by the town's revitalization program drives property values and retail sales up, and higher property values and retail sales drive tax collections up.

On that much, town and school officials agree.

What they don't agree on is this:
School officials say the plan will punch a hole in the school district's budget and force property taxes up; town officials say, not necessarily.

School officials say one government entity should not be allowed to rob another government entity of public money. Town officials say it's legal and it's worked in other Arizona communities such as Apache Junction and Casa Grande.

Valley communities are currently considering sales tax increment-financing proposals to fund a branch of the Smithsonian Museum and a commercial and residential complex that includes a football stadium for the Cardinals. Neither project would be affected by HB2026 if it's passed by the Legislature later this month.

If the Legislature passes the proposal as it stands today, however, it will snuff out both of the town's increment financing proposals.

Nevertheless, the town and the school district have each prepared financial models, based on property tax predictions and other assumptions, that support their respective arguments.

The school district's model, which was based on figures supplied by the town and verified by the Windsor Management Group of Phoenix and the Arizona Research Tax Association, indicates the plan will cause a $200,000 school district spending-limit shortfall in the first year.

School officials base that figure on an anticipated rise in property value on Main Street when the Sawmill Crossing commercial complex opens later this year or early next year. The state will use this added valuation to determine how much PUSD will be allowed to spend in its budget. However, the district would not actually collect extra property taxes from that added valuation, which would create a spending-limit shortfall.

By law, residents have to pay for any shortfalls in the school district's budget through higher property taxes.

"School districts don't control their spending levels, the State Legislature does," Arizona Tax Research Association President Kevin McCarthy said. "State law says school districts can spend their total budgets regardless of revenue, and the expectation is that they will spend their limits.

"The way school finance works, schools lose local funding (through increment financing) that the state won't offset. That leaves a hole in the district's budget that has to be made up through property taxes.

"If you play games locally, the only result will be a school district shortfall and taxpayers will have to make it up. The only way taxes will not go up is if the school district agrees to spend less."

But PUSD Business Manager Bobette Sylvester said she doesn't think local schools should be subsidizing town redevelopment projects.

"One government authority should not be allowed to raise the taxes of another," she said. "How can we be fiscally responsible with tax dollars if taxes can be raised without our consent or the consent of the people (through a vote)? This will divert revenue from our school children to redevelopment for the town."

The town's perspective
But Town Manager Rich Underkofler said he thinks the increment financing plan gives the school district an opportunity to team up with the town to build a better community.

"After the tax increment is done, this will be a windfall to the school district," he said. "I think they should consider this a small investment in their community, not a loss of money.

"If we don't do anything down there, we won't have any growth in sales or property taxes. We've only issued two new business permits down there in the past five years."

Glenn Smith, Payson's chief financial officer, who developed the town's increment-financing model, said the school district may not lose as much money as school officials have anticipated.

Both models are based on so many projections and assumptions that it's impossible to predict precisely how the school district will be affected, he said.

But the school's model didn't take into account the increased property taxes the school will collect as Chaparral Pines develops, he said. A development like that will bring lots of new money to the district, without burdening it with lots of new students.

"That will help cushion the district's shortfall," he said, "and if the town offers other assistance, the school board might not have to raise taxes for a few years."

Underkofler said he plans to sweeten the deal for the school board by offering to buy out the homeowners on the west side of Oak Street and deed the property to the school district to give Julia Randall Elementary School room to expand.

"I'm offering this as a potential compromise to solicit the school board's support for this proposal," he said. "Although we'd be intercepting their tax-increment revenue, direct benefit would be provided for the expansion of the elementary school."

Additionally, Smith disagrees with the amount of money the school district stands to lose. He estimates the redevelopment district would collect $50,000 the first year. By the fifth year, the school district could be losing more than $200,000 a year.

To make up for that loss in revenue, the owner of a $100,000 home would pay $1.91 more in property taxes to the school district the first year, he said, and $4.72 more the fifth year.

The school district's model indicates, however, that the owner of a $100,000 home would pay $21 more in property taxes to the school district in the first year, PUSD Superintendent Kinzer said.

"You are taking funds away," Smith said, "but the issue is how much and how long, and can they adjust for a few years?"

Both increment financing proposals would include sunset clauses, he said, and the money would be earmarked for specific projects.

"Main Street used to be our identity, but we don't have that any more," Payson Community Development Director Bob Gould said. "Now, to put it kindly, it's an unattractive area."

Town planners want to develop design-review regulations that are in line with the historic character of the area, he said, and use increment financing and other funding to widen streets, add sidewalks, create central parking and develop open areas to reinvent the neighborhood and create a cultural gathering place.

"That area down there is very depressed and very high-crime," Wolfe said. "We're trying to create a new Main Street. We need to provide a place for our local citizens to transact business, to enjoy themselves, to be entertained.

"You can already see a good deal of that at Green Valley Park. People are always walking and playing and enjoying themselves down there. We want to extend that ambiance down Main Street."

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