Denver City Assessment audit

Transcription

1 Urban Renewal in Denver Performance Audit August 2014 Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Leslie Mitchell Rudolfo Payan Robert Bishop Jeffrey Hart Timothy O Brien, Vice-Chair Audit Staff John Carlson, Deputy Director, JD, MBA, CIA, CRMA Nancy Howe, Lead Internal Auditor, MPA, CRMA Anthony Lewin, Senior Internal Auditor Ronald F. Keller, Senior Internal Auditor, CIA, CFE You can obtain copies of this report by contacting us at: 201 West Colfax Avenue, Department 705 Denver CO, (720) Fax (720) Or download and view an electronic copy by visiting our website at:

3 City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado FAX Dennis J. Gallagher Auditor August 15, 2014 Cary Kennedy, Deputy Mayor, Chief Financial Officer Mayor s Office City and County of Denver Dear Ms. Kennedy: Attached is our audit of the City and County of Denver s relationship with the Denver Urban Renewal Authority (DURA). The purpose of the audit was to assess whether any enhancements are needed in the City s relationship with DURA regarding the use of tax increment financing (TIF) and the monitoring of TIFs used for urban redevelopment. We found that various City agencies and the public are involved in the TIF designation process. However, after approving the use of TIFs, DURA s statutory status as a separate legal entity limits the City s authority to oversee redevelopment activities. Despite limits on its administrative authority, the City is connected to DURA through the Cooperation Agreements developed for TIF Areas. Further, TIFs generate a great deal of tax revenue, which the City collects and forwards to DURA. As a result, it makes sense that the City should help ensure visibility into the amount of forgone property, sales, and lodger s taxes it collects on behalf of DURA as well as the redevelopment projects these tax revenues fund. Visibility into TIFs and TIF-funded projects is critical to ensuring that the City is benefitting from these redevelopment projects and ensuring a positive public perception of DURA activities. We identified three types of information that would provide the City, the public, and other stakeholders additional detail on TIF Areas and TIF funding of redevelopment projects. Specifically, the City can create a consolidated repository of TIF Cooperation Agreements, publish a list of active Denver Urban Renewal Plans and TIF Areas, and periodically report urban renewal activity to the public. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, Dennis J. Gallagher Auditor DJG/nh To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

4 cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Janice Sinden, Chief of Staff Mr. David P. Edinger, Chief Performance Officer Ms. Beth Machann, Controller Mr. Scott Martinez, City Attorney Ms. Janna Young, City Council Executive Staff Director Mr. L. Michael Henry, Staff Director, Board of Ethics To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

5 City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado FAX AUDITOR S REPORT We have completed an audit examining the City and County of Denver s relationship with the Denver Urban Renewal Authority (DURA). The purpose of the audit was to assess whether any enhancements are needed in the City s relationship with DURA regarding the use of tax increment financing (TIF) and the monitoring of TIFs used for urban redevelopment purposes. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We examined the relationship between the City and DURA and found that although various City agencies and the public are involved in the TIF designation process, DURA s statutory status as a separate legal entity limits the City s authority to oversee redevelopment activities after such designation is approved. Despite limits on its administrative authority, it is important that the City ensure visibility into TIFs and TIF-funded projects, first because of its connection to DURA and second because of the large amount of tax revenue that is foregone to fund redevelopment using TIFs. We extend our appreciation to the Department of Finance and the personnel who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CRMA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

6 City and County of Denver Audit Services Division REPORT HIGHLIGHTS Urban Renewal in Denver August 2014 The objective of this audit was to determine if enhancements are needed in the City s relationship with DURA regarding the use and monitoring of tax increment financing for urban redevelopment..] Background The Colorado Urban Renewal Law was enacted in 1958, and the Denver Urban Renewal Authority (DURA) was created shortly thereafter. DURA was created to help eliminate slum housing conditions. Over time, DURA s focus has widened to address redevelopment. DURA originally pursued federal grants to fund its activities. Over time, these funds dwindled and the absence of urban infrastructure on redevelopment sites required major public investment to make redevelopment possible. In order to finance the needed infrastructure, urban renewal areas were created, which enables financing of the infrastructure necessary for redevelopment by utilizing the future taxes generated by the sites themselves. Purpose The purpose of the audit was to assess the City s relationship with the Denver Urban Renewal Authority (DURA), including the process for designating Tax Increment Finance (TIF) Areas and of the use of TIF funds generally. Highlights Our work indicated that several City agencies, as well as the public, are involved when Tax Increment Finance (TIF) Plans, Areas, and projects are established. Once established, the Denver Urban Renewal Authority (DURA) is responsible for ensuring that the blight identified is remediated by the redevelopment project. DURA s statutory status as a body corporate and politic makes it a separate legal entity and therefore limits the City s authority over DURA activities. Despite limited oversight authority, the City has a connection with DURA through the Cooperation Agreements developed for TIF Areas. As a result, the City is in a logical position to help ensure the propriety of the forgone property, sales, and lodger s taxes it collects on behalf of DURA and the redevelopment projects these tax revenues fund. Visibility into TIFs and TIF-funded projects is critical to help show City benefits from these redevelopment projects and to ensure a positive public perception of DURA activities. We identified three types of information the City could request from DURA that would provide it and other stakeholders with additional detail on TIF Areas and TIF funding of redevelopment projects. Specifically, the City can create a consolidated repository of TIF Cooperation Agreements, publish a list of active Urban Renewal Plans and TIF Areas, and regularly publish information about urban renewal activity. For a complete copy of this report, visit Or Contact the Auditor s Office at

7 TABLE OF CONTENTS INTRODUCTION & BACKGROUND 1 Urban Renewal History 1 Overview of the Colorado Urban Renewal Law 2 Denver Urban Renewal Authority 4 Urban Renewal Plan Process 5 Colorado Urban Renewal Law and Blighted Areas 6 How Do TIFs Work? 10 Process for Creating a TIF Area 12 Potential Issues with TIFs 14 SCOPE 15 OBJECTIVE 15 METHODOLOGY 15 FINDING 16 Additional Tax Increment Financing Information Can Be Made Available to Stakeholders 16 Substantive Stakeholder Involvement in the TIF Designation Process 16 No Centralized List for TIF Areas and Cooperation Agreements 16 Opportunities to Enhance Urban Renewal Public Reporting 18 TIF Reporting Best Practice 20 Colorado Municipal League URA Reporting 20 Transparent Denver 21 RECOMMENDATIONS 22 APPENDIX A 23 Cross Functional Process Map of Denver s TIF Process 23

8 TABLE OF CONTENTS (continued) APPENDIX B 24 Active TIF Areas in the City and County of Denver 24 APPENDIX C 25 Colorado Municipal League URA Annual Report Template 25 AGENCY RESPONSE 26

9 INTRODUCTION & BACKGROUND Urban Renewal History Congress enacted the federal urban redevelopment program in Title I of the Housing Act of 1949, and over the next twenty years, planners, mayors, journalists, and the public implemented plans to revitalize the nation s cities. Artists renderings of slick glass and steel skyscrapers set in sunny plazas appeared in metropolitan newspapers and city planning reports, and nurtured hopes of a golden future. With the aid of Uncle Sam, cities were supposedly to be cleansed of their ugly past and re-clothed in the latest modern attire. 1 By the 1960s, skeptics were questioning the merits of a federally subsidized urban renewal program, and 10 years later the program was losing favor. The federal urban renewal program would cease in Title I Projects - Early Title I projects focused on moderate-income housing. Philadelphia s first Title I project, the East Poplar scheme, provided housing for low and middle-income residents. 3 As a greater amount of federal dollars could be allocated to commercial redevelopment residential projects diminished. Unfortunately, affordable housing did not become the stimulus for the urban renaissance contemplated by proponents of the Title I federal program. 4 Community Development Block Grants - In 1974, Congress created the Community Development Block Grant (CDBG) program. The CDBG scheme sought to give localities more options when using federal funds. Recipient cities had broad discretion in how they used federal grants, but the chief beneficiaries were supposed to be low and moderateincome residents. 5 Like the previous urban renewal program, cities could allocate the money for mitigation of slum and blighted areas, but the grants could also fund a range of programs and facilities including neighborhood centers, nonprofit economic development schemes, building code enforcement, energy conservation, and varied public works projects and public services. 6 1 Urban Renewal and Its Aftermath, Jon C. Teaford, Housing Policy Debate, Volume 11, Issue 2, Fannie Mae Foundation 2000, page 443. In Denver, developer William Zeckendorf embarked during the mid-1950s on the development of the Mile High Center office building, followed by the Courthouse Square project, comprising a department store, hotel, and office annex. Local observers hailed this private renewal effort as the spark that reignited Denver s core (Abbott 1981; Adde 1969). Ibid. 2 Ibid. 3 Ibid. 4 Ibid. 5 Ibid. 6 Ibid. P a g e 1

10 Urban Renewal Authorities Responding to a desired need for a program to eradicate slums in urban areas, urban renewal authorities began to appear in the 1950s to address these issues. The goal of urban renewal efforts at the time was to revitalize decaying city areas. Urban renewal authorities (URAs) are created by municipalities to redevelop areas within their jurisdiction that are found to contain blight or slum conditions and require public participation to attract redevelopment. Typically, an urban renewal project is considered a public/private partnership. The majority of the funding comes from the private sector; public investment comes from tax increment financing (TIF). 7 A TIF is a financing tool where the increased amount of property tax or municipal sales tax revenue collected within the URA after the project begins is used to pay off the obligations that help finance project costs. This new revenue is generated by the increased property values that result from the project. 8 Overview of the Colorado Urban Renewal Law The Colorado Urban Renewal Law was enacted in 1958, when urban renewal and slum clearance were a nationwide priority. Following the 1949 Federal Housing Act, the Urban Renewal Statute was originally intended to enable Colorado to receive federal funds designated for slum clearance and housing construction. 9 Title I of the Federal Housing Act provided funds for slum clearance and urban redevelopment, primarily targeted at the provision of housing. Under the Federal Housing Act, the federal government would provide funds for up to two-thirds of the cost of slum clearance and urban redevelopment projects; local governments were to provide the remainder. 10 According to the Colorado Department of Local Affairs there are currently fifty-one urban renewal authorities located across the state Statute Provisions The provisions of the original Urban Renewal Law have not changed significantly since inception. Pursuant to the 1958 statute, a municipality could form an urban renewal 7 Urban Renewal and Its Aftermath, Jon C. Teaford. The negative image of urban renewal, together with growing budget deficits, dampened any enthusiasm for marked increases in federal funding to the central cities. Beginning in the late 1970s, the portion of city revenues derived from the federal government declined, especially during the Reagan administration. States and localities increasingly had to rely on their own ingenuity and resources to finance revitalization. One of the most widespread approaches was use of the TIF. Under a TIF, a portion of the additional property tax revenue generated by development in a renewal area was used to pay off the bonds issued to finance such project costs as site and infrastructure improvements. In other words, a city borrowed against its expected increase in income and used the enhanced tax revenues in a designated TIF district to reimburse the cost of the public investment in the renewal project. By the late 1990s, 44 states had authorized municipalities to establish TIF districts, with 780 such project areas in California. Ibid. California has since repealed the use of TIFs due to its fiscal crisis. Viewpoint: As California s TIF goes, so might Colorado s, Denver Business Journal, January 13, Colorado Municipal League, Urban Renewal Background, 9 See 63 Stat Enacted July 15, 1949, the Federal Housing Act established a national housing objective to provide Federal aid to assist slum-clearance, community development, and redevelopment programs. See also Government and Administrative Law News: A Brief Overview of Recent Changes in Colorado's Urban Renewal, Colorado Lawyer, Vol. 33, No. 9, September 2004, page A Brief Overview of Recent Changes in Colorado's Urban Renewal, Colorado Lawyer, Vol. 33, No Colorado Department of Local Affairs, City and County of Denver P a g e 2

11 authority if it found that one or more slums or blighted areas existed within the municipality and that the rehabilitation of such areas was necessary to preserve the public's health, safety, morals, or welfare. In such areas, the Authority could adopt an urban renewal plan and undertake an urban renewal project, including the acquisition of property by eminent domain. 12 The original statute used the terms slum area and blighted area, and defined each generally. The 1958 Urban Renewal Law also required a public hearing concerning the finding that an area was a slum or blighted area and the adoption of the urban renewal plan. 13 In 1958, the Denver City Council passed a resolution creating an urban renewal authority pursuant to the Urban Renewal Law Amendments The Urban Renewal Law was amended in In 1999, the General Assembly replaced the general definition of blighted area with a list of eleven factors. It added the requirement that four of those eleven factors must be present to justify a finding of blight. 15 The 1999 amendments contained a provision that, if the owners consented to the inclusion of their property in an urban renewal area, only one factor need be present for it to be considered a blighted area. A new requirement specified that the boundaries of an urban renewal area be drawn as narrowly as possible to accomplish the planning and development objectives of the urban renewal area Amendments Before 2004, the Urban Renewal Law defined blight as evidence that four out of eleven factors were present. The existence of blight was the prerequisite to the adoption of an urban renewal plan and the undertaking of an urban renewal project. After 2004, if a governing body is going to acquire property by eminent domain and transfer it to a private entity, the governing body must determine that the property is located in a blighted area or that the property itself is blighted. For purposes of this determination, and to be able to use the power of eminent domain, blighted now means that five out of the eleven factors must be present. There were also some slight changes made to the eleven blight factors listed in the Urban Renewal Law Eminent domain or condemnation is a governmental power that permits a government authority or, in limited circumstances, a private party to acquire or take property rights for certain specified purposes. The enabling authority of condemnation in Colorado comes from two provisions of the Colorado Constitution: Article II, 14 and A Brief Overview of Recent Changes in Colorado's Urban Renewal, Colorado Lawyer, Vol. 33, No. 9, September See CC Res. No A Brief Overview of Recent Changes in Colorado's Urban Renewal, Colorado Lawyer, Vol. 33, No. 9, September Ibid. See also C.R.S. Section (c)(1) which provides that the boundaries of an area that the governing body determines to be a blighted area shall be drawn as narrowly as the governing body determines feasible to accomplish the planning and development objectives of the proposed urban renewal area. The governing body shall not approve an urban renewal plan until a general plan for the municipality has been prepared. An authority shall not acquire real property for an urban renewal project unless the local governing body has approved the urban renewal plan. 17 A Brief Overview of Recent Changes in Colorado's Urban Renewal, Colorado Lawyer, Vol. 33, No. 9, September P a g e 3

12 Denver Urban Renewal Authority The Denver Urban Renewal Authority (DURA) was created in 1958 with an initial mission to help eliminate post World War II slum housing conditions. DURA was organized pursuant to the state Urban Renewal Law, and was statutorily defined as a "body corporate and politic" established to carry out urban renewal projects for a municipality. 18 Since that time, issues facing the City have changed with the times and DURA has partnered with the public and private sectors to help address redevelopment issues. After the Great Depression and Second World War, the United States in the late 1940s experienced a widespread housing crisis. Two decades of focusing financial resources on the war effort left the nation s urban housing inventory inadequate, including in Denver. 19 By 1950, the Rocky Mountain News reported that 24 percent of Denver s housing units were substandard and overcrowded, often lacking electricity or running water. Residents with the resources to escape these conditions headed to the suburbs, exacerbating the situation and leaving Denver with a declining tax base and a growing demand for social services, which consumed almost 50 percent of the City s annual budget. City leaders passed a series of measures that included an overhaul of Denver s zoning and building codes, among other initiatives. One of those measures was the creation of DURA. DURA is an independent agency with the power to acquire blighted property through condemnation proceedings, approved by City Council. 20 Leading up to DURA s creation in 1958, the City identified four neighborhoods where slum conditions were most serious and applied for federal grants and loans to assist in their eradication. Federal monies in hand, Denver s City Council approved a local contribution to be repaid when the acquired properties were sold for redevelopment. The first four projects undertaken by DURA were Avondale, Blake Street, Jerome Park, and Whittier. 21 A Focus on Downtown When DURA s initial work to eliminate central Denver s slums was underway, the City began to address another important issue the modernization of downtown. After suffering from many years of neglect and facing competition from more affordable suburban land, America s downtowns were in need of revitalization. 22 In Denver s case, there were two downtowns. The area above Champa Street was thriving with major department stores, restaurants and hotels, while the area below Champa Street was known as Denver s skid row See C.R.S. Section (1)(b). When the organizing certificate has been filed with the Colorado Department of Local Affairs, the commissioners and their successors are constituted an urban renewal authority, which shall be a body corporate and politic. The boundaries of such authority shall be coterminous with those of the municipality. Ibid. 19 Denver Urban Renewal Authority 50 Years of Revitalizing Denver, May 21, Ibid. 21 Ibid. 22 Ibid. 23 Ibid. City and County of Denver P a g e 4

13 By the 1950s, the area was a fiscal drain on the City as a whole. Civic leaders and area newspapers were calling for action. At the time, the federal government was aggressively supporting downtown revitalization through urban renewal grants, but in Denver use of these funds was the subject of much debate. It would take the flood of the century in 1965 to coalesce public support for the effort and, two years later, a referendum in support of the Skyline Project passed with more than 70 percent approval. 24 In 1966, voters approved a referred ordinance adopting a large scale urban renewal endeavor, known as the Skyline Project. In 1969, DURA presided over the first stages of the project, which demolished nearly thirty blocks of Denver's urban core. The Skyline project was accomplished quickly, and with little concern for the historic structures that it leveled. 25 From 1968 to 1984, DURA and Denver undertook urban renewal on a large scale, acquiring property, relocating existing residents and businesses, remediating contaminated areas, and selling the cleared sites to private developers to enable a wide variety of redevelopment efforts aimed at modernizing downtown Denver. The most significant projects of this era were the creation of the Auraria Higher Education Campus and the Skyline Project. Creating New Neighborhoods With the closures of the Lowry Air Force Base and Stapleton International Airport in the early 1990s, Denver faced large challenges. Working with citizens and civic leaders, the City developed a vision for reincorporating these massive sites back into the surrounding communities and then crafted plans for implementing those visions. While the private development community was set to undertake development, the absence of urban infrastructure on these sites required major public investment to make redevelopment possible. In order to finance the needed infrastructure, DURA worked with the City, Denver Public Schools, and the redevelopment entities to create urban renewal areas. The utilization of urban renewal allowed the City and DURA to finance the roads, sewers, schools, parks, fire stations, and police stations necessary for redevelopment by utilizing the future taxes generated by the sites themselves. As with the revitalization of downtown in prior years, the combination of planning and creative financing resulted in the communities we know today as Lowry and Stapleton. 26 Urban Renewal Plan Process The process of urban redevelopment starts with an idea followed by an Urban Renewal Plan. Many times the idea comes from a developer who approaches DURA for assistance with redeveloping a blighted property. The ideas can also come from the City community. With the idea in hand, DURA begins the processes of documenting an urban 24 Ibid. 25 The Skyline Project: Urban Renewal and the Demolition of Old Denver - Historical Perspectives, Colorado Lawyer, Vol. 34, No. 8, August Denver Urban Renewal Authority 50 Years of Revitalizing Denver, May 21, P a g e 5

14 renewal project. The steps involved in beginning an urban renewal project follow. These steps often happen concurrently. 1. Determine survey area boundaries 2. Verify presence and location of blighting factors 3. Prepare conditions survey 4. Present conditions survey findings to DURA and City Council for acceptance 5. Identify market opportunities within area and quantify timing 6. Together with stakeholders, define future role of area in community 7. Prepare Urban Renewal Plan 8. Complete financial analysis (Tax Increment Finance TIF) 9. Complete impact analysis and share with impacted taxing bodies 10. Present Urban Renewal Plan to DURA and City Council for adoption 11. Issue Request for Projects 12. Implement Urban Renewal Plan The first step in determining whether or not a proposed redevelopment project is eligible for assistance from DURA is assessing whether or not the area is blighted. Blight is a term defined in the Colorado Urban Renewal Law. Any planned redevelopment should eliminate the blighted conditions that have been identified. Moreover, the planned redevelopment must be consistent with the vision and goals laid out for the area by the City s Comprehensive Plan. As part of the process, DURA will hold at least one community meeting to review the proposed redevelopment plan and every redevelopment project undertaken by DURA is reviewed by the Denver Planning Board to determine whether it conforms to the City s Comprehensive Plan. 27 Once a redevelopment plan has the Planning Board s approval, it moves to City Council where it receives two hearings preliminary Council action and then a public hearing followed by final Council action. Colorado Urban Renewal Law and Blighted Areas In the Colorado Urban Renewal Law, the legislature has declared that an area of blight "constitute a serious and growing menace, injurious to the public health, safety, morals, and welfare of the residents of the state in general and of the municipalities thereof; that the existence of such areas contributes substantially to the spread of disease and crime, constitutes an economic and social liability Further, blight impairs the growth of municipalities, retards the provision of housing accommodations, aggravates traffic problems and impairs or arrests the elimination of traffic hazards and the improvement of traffic facilities 29 The prevention of blight is a matter of public policy and statewide 27 The Denver Planning Board advises the Mayor and Denver City Council on land use matters including planning and zoning. 28 See C.R.S et seq. 29 Ibid. City and County of Denver P a g e 6

15 concern in order to mitigate risk, and to save resources spent on extra services required for police, fire, accident, hospitalization, and public protection. Pursuant to the Urban Renewal Law, the term blighted area describes an area with an array of urban problems, including health and social deficiencies, and physical deterioration. 30 Before remedial action can be taken, however, the Urban Renewal Law requires a finding by the appropriate governing body that the study area constitutes a blighted area. 31 Conditions Study The blight finding is a legislative determination by the municipality's governing body that, as a result of the presence of factors enumerated in the definition of blighted area, the area is a detriment to the health and vitality of the community, requiring the use of the municipality's urban renewal powers to correct those conditions or prevent their spread. In some cases, the factors enumerated in the definition are symptoms of decay, and in some instances, these factors are the cause of the problems. The definition requires the governing body to examine the factors and determine whether these factors indicate a deterioration that threatens the community as a whole. This determination is facilitated by the Conditions Study. A Conditions Study is a necessary step if urban renewal, as defined and authorized by Colorado Urban Renewal Law, is to be used as a tool by DURA to remedy and prevent conditions of blight. The findings and conclusions presented in such a report are intended to assist the City Council in making a final determination as to whether the study area qualifies as blighted. The feasibility and appropriateness of using urban renewal as a reinvestment tool is also discussed in a Conditions Study. Based upon the conditions identified in the study area, the Conditions Study makes a recommendation as to whether the study area qualifies as a blighted area. In Denver, the ultimate determination of blight is the responsibility of the City Council. 30 See C.R.S (2). "Blighted area" means an area that, in its present condition and use and, by reason of the presence of at least four of the following factors, substantially impairs or arrests the sound growth of the municipality, retards the provision of housing accommodations, or constitutes an economic or social liability, and is a menace to the public health, safety, morals, or welfare: (a) Slum, deteriorated, or deteriorating structures; (b) Predominance of defective or inadequate street layout; (c) Faulty lot layout in relation to size, adequacy, accessibility, or usefulness; (d) Unsanitary or unsafe conditions; (e) Deterioration of site or other improvements; (f) Unusual topography or inadequate public improvements or utilities; (g) Defective or unusual conditions of title rendering the title nonmarketable; (h) The existence of conditions that endanger life or property by fire or other causes; (i) Buildings that are unsafe or unhealthy for persons to live or work in because of building code violations, dilapidation, deterioration, defective design, physical construction, or faulty or inadequate facilities; (j) Environmental contamination of buildings or property; (k) (Deleted by amendment, L. 2004, p. 1745, 3, effective June 4, 2004.) (k.5) The existence of health, safety, or welfare factors requiring high levels of municipal services or substantial physical underutilization or vacancy of sites, buildings, or other improvements. Ibid. 31 See C.R.S (1). P a g e 7

16 Blight Factors The Colorado Urban Renewal Law provides a list of eleven factors that, through their presence, may allow an area to be declared as blighted. Using these criteria, the statute requires, depending on the circumstances, that a minimum of either one, four, or five blight factors be present for an area to be considered a blighted area. Colorado courts have developed a guide toward the determination of whether an area constitutes a blighted area under the Urban Renewal Law. 32 First, the absence of widespread violation of building and health codes do not preclude a finding of blight. The courts have held, "the definition of blighted area is broad and encompasses not only those areas containing properties so dilapidated as to justify condemnation as nuisances, but also envisions the prevention of deterioration. 33 Courts have also reasoned that the presence of one well-maintained building does not defeat a determination that an area constitutes a blighted area. Normally, a determination of blight is based upon an area taken as a whole and not on a building-by-building, parcel-by-parcel, or block-by-block basis. 34 Four Factor Blight Test The definition of a blighted area is articulated in the Colorado Urban Renewal statute. This definition is used when a Conditions Study is performed. Blighted area means an area that, in its present condition and use and, by reason of the presence of at least four of the following factors, substantially impairs or arrests the sound growth of the municipality, retards the provision of housing accommodations, or constitutes an economic or social liability, and is a menace to the public health safety, morals, or welfare. 35 a. Slum, deteriorated, or deteriorating structures 36 b. Predominance of defective or inadequate street layout 37 c. Faulty lot layout in relation to size, adequacy, accessibility, or usefulness d. Unsanitary or unsafe conditions e. Deterioration of site or other improvements f. Unusual topography or inadequate public improvements or utilities 32 Urban blight is matter of both statewide and local concern. Denver Urban Renewal Auth. v. Byrne, 618 P.2d 1374 (Colo. 1980). Both the Colorado general assembly and local government can act to alleviate problem or urban blight provided the state and the local law do not conflict. Denver Urban Renewal Auth. v. Byrne, 618 P.2d 1374 (Colo. 1980). 33 Welton Corridor Conditions Study, City and County of Denver, March 2012, Matrix Design Group, page Ibid. 35 See C.R.S (2). 36 Examples of exterior elements observed for signs of deterioration include: Primary elements (exterior walls, visible foundation, roof), Secondary elements (fascia/soffits, gutters/downspouts, windows/doors, facade finishes, loading docks) Ancillary structures (detached garages, storage buildings). Welton Corridor Conditions Study, page Conditions may include: inadequate street or alley widths, cross-sections, or geometries; poor provisions or unsafe conditions for the flow of vehicular traffic; poor provisions or unsafe conditions for the flow of pedestrians; insufficient roadway capacity leading to unusual congestion of traffic; inadequate emergency vehicle access, poor vehicular/pedestrian access to buildings. Ibid. City and County of Denver P a g e 8

17 g. Defective or unusual conditions of title rendering the title non-marketable h. The existence of conditions that endanger life or property by fire or other causes i. Buildings that are unsafe or unhealthy for persons to live or work in because of building code violations, dilapidation, deterioration, defective design, physical construction, or faulty or inadequate facilities j. Environmental contamination of buildings or property k.5. The existence of health, safety, or welfare factors requiring high levels of municipal services or substantial physical underutilization or vacancy of sites, buildings, or other improvements One Factor Blight Test No Objections of Property Owners The Urban Renewal Law also provides that if there is no objection by any property owners or tenants to the inclusion of property within the urban renewal area, the area will meet the definition of blighted area if there is the presence of any one of the eleven factors. 38 Five Factor Blight Test Eminent Domain The statute also states a separate requirement for the number of blight factors that must be present if private property is to be acquired by eminent domain. Blighted area shall have the same meaning as set forth in section (2), C.R.S., except that blighted area means an area that, in its present condition and use and, by reason of the presence of at least five of the factors. 39 DURA has no eminent domain authority unless the City Council grants it to the Authority. City Council has complete control to determine if eminent domain is merited. 40 Tax Increment Financing in Colorado In Colorado, urban renewal projects may be financed in whole or in part by a URA pursuant to the TIF provisions of the Urban Renewal Law, or by any other available source of financing authorized to be undertaken by the Authority under C.R.S of the Urban Renewal Law. 41 The impetus to use TIF in the 1970s was related to the declining availability of federal funds for urban renewal projects. This situation coupled with a 38 See C.R.S (2). 39 C.R.S (5)(a) Acquisition of private property by eminent domain by authority for subsequent transfer to private party - restrictions - exceptions - right of civil action - damages definitions. Paragraph (5)(a) provides that a blighted area" shall have the same meaning as set forth in section (2); except that, for purposes of this section only, "blighted area" means an area that, in its present condition and use and, by reason of the presence of at least five of the factors specified in section (2) (a) to (2) (l), substantially impairs or arrests the sound growth of the municipality, retards the provision of housing accommodations, or constitutes an economic or social liability, and is a menace to the public health, safety, morals, or welfare. 40 David Broadwell, Esq. testimony provided during the Welton Corridor Redevelopment Plan, Public Hearing, September 10, See generally C.R.S Acquisition of private property by eminent domain by authority for subsequent transfer to private party - restrictions - exceptions - right of civil action - damages definitions and C.R.S Approval of urban renewal plans by local governing body. 41 Colorado Legislative Council Staff, Memorandum, Property Tax Accruing to Tax Increment Financing Districts, January 8, P a g e 9

18 national recession in 1974 and 1975 made the use of TIF more prevalent. TIF was used as a financing mechanism to offset the reduced level of federal funding and allow cities and other jurisdictions to work with the private sector to stimulate economic growth and employment through urban redevelopment projects. 42 Colorado enacted the TIF portion of its urban renewal law in The initial Colorado TIF was used by the Boulder Urban Renewal Authority for the development of the Crossroads Urban Renewal Project in In 1980, the Colorado legislature expanded the ability of TIF to municipal sales tax. 43 How Do TIFs Work? TIF is a mechanism for funding redevelopment projects. The concept of TIF has been around since the early 1940s. TIF was used as a financing mechanism to offset the reduced level of federal funding and allow cities to work with the private sector to stimulate economic growth through urban redevelopment projects. California was the first state to adopt a TIF law in TIF is a mechanism to capture the net new or incremental taxes that are created when a blighted property is redeveloped and use those incremental revenues to help finance the project. The Colorado Urban Renewal Law authorizes an urban redevelopment authority such as DURA to issue tax increment revenue bonds to fund redevelopment costs including eligible developer project expenses. Since tax increment revenues will be generated and collected over the life of the project, which could be up to twenty-five years, there generally are no revenues at the inception of a project when development costs are being incurred. Consequently money must be borrowed or invested up front and be repaid over time. DURA accomplishes this by agreeing to reimburse the developer or by issuing TIF bonds, or both. When DURA agrees to reimburse the developer, the developer must borrow or invest to pay the eligible project costs. If the developer borrows funds, TIF revenues can be used as collateral and a source of repayment for the banks or the investors. The developer s project costs can include capital costs for demolishing improvements, excavating, grading, landscaping, and constructing improvements within the areas covered by the Urban Renewal Plan. 42 Ibid. 43 Ibid. See also, C.R.S. Section (3)(a). City and County of Denver P a g e 10

19 Figure 1 illustrates how redevelopment results in tax revenue growth that can then be used to finance the redevelopment. Figure 1 Tax Increment Financing Source: Denver Urban Renewal Authority site, TIF Calculations To determine the increment amount of property tax revenue, the base valuation must first be determined. The base valuation is certified by the county and is equal to the total assessed valuation within the TIF Area prior to the approval of the redevelopment plan. TIF Areas are reassessed by the county as phases of redevelopment are completed and at least every two years. The TIF Area is the area where the revenue will be collected from. Over time, improvements add to the property tax base. The revenue that is attributed to the growing tax base becomes the incremental revenue that is used by the Authority to reimburse agreed upon costs or for debt service on the bonds used to finance the redevelopment project. Tax increment revenue may be generated from property, sales, or lodging taxes. Figure 2 illustrates a sample TIF calculation. The assessed value of a vacant site is $900,000 and generated about $50,000 for taxing entities. As a result, of the urban renewal redevelopment, the overall property value increases to $5,000,000 several years later. The property then generates more than $380,000 in property taxes. With Tax Increment Financing, the redevelopment is able to capture the new or incremental increase in P a g e 11

20 property tax revenue. The original tax entities continue to receive appreciation-adjusted revenue as if the site were still a vacant site. Figure 2 Sample TIF Calculation Source: Denver Urban Renewal Authority website, All property taxes attributable to the base valuation are paid to each taxing entity in the TIF Area. When DURA has repaid the TIF obligation it incurred to finance the project within the urban renewal area, the incremental revenues will be available to the original taxing entities from that point forward. Process for Creating a TIF Area The City and County of Denver has multiple touch points with a TIF project before it is created. Appendix A illustrates the process for creating a TIF project using a crossfunctional process map, which shows a step-by-step pictorial sequence of the process. This type of process map is a tool that highlights inputs, outputs, and cycle time. It also includes who is involved in the process and what the who is doing for the process. The urban redevelopment review and approval process includes the establishment of the Urban Redevelopment Area Plan; the Cooperation Agreement among the Area, DURA, and the City and County of Denver; and the TIF Area. All these are approved by City ordinance. Generally, City Council considers all three items at the same time. However, there may be occasions when the TIF Area is considered later. City and County of Denver P a g e 12

21 For a project to be approved by the City Council, it must first meet the following City criteria before a TIF Area can be created: Fit within City plan Meet blighted conditions Approve final viability study Once the City Council approves the Urban Renewal Plan and Urban Renewal Area, it enters into the Cooperation Agreement with DURA which establishes the TIF Area. Once all these steps are met, the base tax amount is set and the increment can go to DURA to reimburse the developer. The City s primary authority related to DURA resides with the Mayor and City Council in their authority to approve the appointment of Board members. In addition, several City agencies are involved in the process for creating a TIF Area. Specifically, the Department of Community Planning and Development and the City s Planning Board are involved to ensure that the Urban Redevelopment Plan aligns with various City plans such as its Comprehensive Plan, Blueprint Denver, and/or any relevant small area or corridor plans. The Assessor s Office establishes the base property tax amount and the Controller s Office establishes the base sales tax amount. In addition, the process for establishing a TIF Area involves public hearings, which enable the public to provide input. Figure 3 provides a high-level summary of the urban renewal process in Denver. See Appendix A for a more detailed cross-functional process map of the process for creating a TIF Area. Figure 3 The Urban Renewal Process Source: Denver Urban Renewal Authority website, P a g e 13

22 Potential Issues with TIFs TIFs may fail to bring new investment. In order to be a productive use of taxpayer resources, a city must judge that a development would not happen but for the issuance of a subsidy. In practice, this can be difficult to prove one way or the other. 44 TIFs may serve narrow interests without a broader public benefit. A TIF can be lucrative to private developers seeking locations in which to build. However, from the public s perspective, TIFs are meant to benefit broader public goals. A recent study suggests that there be a clear evaluation of a TIF project s benefits to the public; however, such an evaluation can often become lost in public officials rush to deliver new economic development. 45 TIFs may draw investment from areas that need it most. TIFs were originally designed to act as a catalyst for new investment in blighted neighborhoods that suffer from chronic underinvestment. These neighborhoods can suffer from vicious cycles of economic decline for many reasons. TIFs are an effective public policy tool when used as part of a development strategy that delivers public benefits and unlocks economic potential in areas of need. 46 TIF may impose local governments with additional costs if growth is less than anticipated. If a municipality issues bonds on future TIF revenue and the developments fail to generate sufficient additional growth, local government may be forced to use its general tax revenue on an expensive bailout. 47 The TIF process may lack transparency. TIF district spending is typically far harder for residents to follow and monitor than ordinary spending. Ordinary budget transparency requirements generally do not apply to TIF districts. TIF districts may be overseen by relatively obscure agencies with little public disclosure Tax-Increment Financing: The Need for Increased Transparency and Accountability in Local Economic Development Subsidies, U.S. PIRG Education Fund Fall Ibid. 46 Ibid. 47 Ibid. 48 Ibid. City and County of Denver P a g e 14

23 SCOPE Our audit assessed the City s relationship with the Denver Urban Renewal Authority (DURA), including the process for designating Tax Increment Financing (TIF) Areas and of the use of TIF funds generally. We focused on information and practices between the City and DURA. Our conclusions are based on our review of two areas. First, we reviewed the City Council process for authorizing an Urban Redevelopment Area (URA) and a TIF Area. Second, we reviewed the City s and DURA s progress reporting regarding DURA activity. OBJECTIVE The objective of our audit was to determine if any enhancements are needed in the City s relationship with DURA regarding the use of tax increment financing (TIF) and the monitoring of TIFs used for urban redevelopment purposes. METHODOLOGY We utilized the following methodologies to achieve our audit objective: Reviewing the Colorado Urban Renewal Law to determine the City s roles and responsibilities related to oversight of the designation of TIF Areas and the expenditure of TIF funds Assessing the process for establishing TIF Areas Interviewing personnel from the Denver Urban Renewal Authority, the Department of Finance, the Denver City Attorney s Office, and the Department of Community Planning and Development to understand roles and practices Locating the Cooperation Agreements between the City and DURA for TIF Areas Reviewing and assessing ten Cooperation Agreements between DURA and the City for audit and reporting requirements Reviewing City Council meetings and briefing documents for comment during the process for approving selected TIF Areas Conducting benchmarking work to assess reporting and other practices adopted by other Urban Renewal Authorities across the nation P a g e 15