Editor’s note: This article has been updated to add comments from Omaha Mayor Jean Stothert.

OMAHA — More than a half-billion dollars in property tax collections were directed during the past five years to fund urban redevelopment across Nebraska — marking a “remarkable increase” in tax-increment financing use that has sparked a warning from State Auditor Mike Foley.

In a 26-page advisory letter Tuesday to Nebraska lawmakers, Foley said that growing use of the economic development incentive called TIF risks further upward pressure on “skyrocketing” local property taxes.

“Count me a skeptic if anyone tries to claim that the rapid escalation in TIF-funded projects has nothing to do with the ever-higher property tax obligations in our state,” the auditor said in a related media release.

Omaha streetcar project highlighted

Foley offered examples of how sometimes “loose and inconsistent” interpretations of governing statutes allowed cities “not only to accumulate significant amounts of unwarranted TIF proceeds” — but also to engage in activities he said pose legal concerns.

In particular, he took aim at the City of Omaha.

Among flags raised by Foley was use of TIF for Omaha’s streetcar project. 

Foley said his purpose was not to “pass judgment on this half-billion dollar undertaking, which uses TIF on over 1,100 parcels of prime real estate.”

He said he hoped to shed light on the potential impact of financing techniques being employed on the project, which is poised to be up and running in 2027.

“In the final analysis, construction of the ‘streetcar project’ will be anything but free,” Foley said.

Many Omaha government and business officials have touted the downtown-to-midtown streetcar route as a way to retain and attract a workforce and to accelerate development in the city.

Mayor Jean Stothert has said repeatedly that anticipated development and higher property values sparked by the streetcar should produce enough TIF revenue to pay off bonds without requiring a tax increase.

At a June news media conference to update elevated costs, she said: “Taxpayers will not pay for the streetcar, there will not be a tax increase, and the streetcar will not put the city in debt.”

Foley called the streetcar project the “largest diversion of property tax dollars for an economic development project in Nebraska history.”

He said, “The resulting impact upon the budgets of those governmental agencies reliant upon property tax revenues remains to be seen.”

The total cost to prepare the corridor and build the streetcar venture is expected to be $459 million. City officials have said that TIF will pay off $389 million in bond revenue.

The remainder is to be covered by sources including public utilities.

Review sparked by concerns

While debate over TIF has been long-running, Foley told lawmakers that the statewide review of related spending and statutes was spurred by “several concerns” that had been relayed to his office.

Created decades ago by the Legislature, the financing mechanism is praised by many as key to rooting out urban blight. 

Foley noted that others go as far as to describe TIF as “an off-budget scheme creating an illusion of cost-free financing with no impact on property taxes or municipal revenues.” 

Any project financed by TIF must first be approved by the local government and deemed to be in a blighted area.

The way it works typically: For up to 20 years, the property taxes generated by new improvements on TIF sites go to help private developers pay costs of transforming the area.

That means the increased tax increment during that time does not go to the usual recipients of property tax, such as schools and local municipalities.

Meanwhile, the pre-redevelopment value of a site (which existed prior to TIF approval) is “frozen” during the 15- to 20-year TIF loan period, and the fixed property tax revenue generated from it continues to be collected from the owner and distributed as usual. (The longer 20 years is allowed for “extremely blighted” areas.)

After the developer’s TIF loan is paid off, all property taxes flow to traditional tax recipients.

“The positive impact of TIF financing on economic development is evident,” Foley said. “When overused or misused, however, this popular financing tool risks undermining the interests of local property taxpayers.”

The core concern, he said, is ensuring the tool is applied in a manner that properly balances economic development needs and reasonable property tax burdens on citizens.

During the past decade, Foley’s letter said, the number of TIF projects in Nebraska has nearly doubled to more than 1,350 separate ventures totaling more than $6 billion in increased property valuations.

In 2023 alone, he said, $121.6 million in property tax collections went to pay for TIF projects approved by municipal authorities — more than double the annual amount a decade earlier.

“Arguably, much of those resources could have gone to fund public education and local government obligations,” Foley told lawmakers.

He said non-TIF property owners may be required to “make up the difference” needed to finance governmental functions.

Foley said his intention is to inform policymakers of the implications and status of TIF use, without advocating for specific legislative action.

But he did point out that the Community Development Law governing TIF allows cities an “inordinate degree of flexibility.” 

Foley said that may be seen by some “as an open invitation to push the boundaries of TIF beyond what is either ethical or beneficial to the citizens.”

Stothert pushed back on Foley’s assertions. She said the City of Omaha has been properly using TIF both for redevelopment projects and the streetcar.

She called “misleading” Foley’s statement regarding the $121.6 million in TIF proceeds that he said could have been used for some other public purpose instead of paying costs of a local redevelopment project.

Said Stothert: “This number does not reflect a basic principle of TIF financing, the ‘but for’ test. Without the TIF financing, the project would not occur and there would not be the additional property tax revenue. Also, TIF projects do involve a public purpose.”

Probe went statewide

The state auditor in the past few years examined and disclosed concerns about TIF projects in the cities of Benkelman and Auburn. The latest review looked closely at 44 additional Nebraska TIF projects, in Omaha, Lincoln, Valley, Sidney, Ralston, Waterloo, Beatrice, Broken Bow, Cambridge, Friend, Gothenburg, Holdrege and Lexington.

In the media release, Foley pointed to an Aksarben Village apartment project as “emblematic” of various Omaha redevelopments for which he said TIF proceeds were collected after a statutory deadline had passed. 

He alleged that, as a result, $1.2 million related to the Aksarben apartments was “withheld wrongly from other units of local government that could have used that money to pay for important citizen services.”

The City of Omaha denied wrongdoing in a response that was included in the Foley letter to state senators. Omaha officials said that while the financing structure of alleged TIF-expired projects might cause “confusion” in calculating dates, their process was within the law.

Statewide, Foley said, it appears that tens of millions of dollars were improperly collected on up to 17 of the 44 TIF projects reviewed. That revenue, said Foley, “might have proven helpful in lowering property taxes in the affected communities.”

The auditor team highlighted details of the Omaha streetcar, saying its financing plan directly impacts a swath of about 50 city blocks that stretches more than three miles.

Foley said that some areas within that TIF financing area are as much as six city blocks away from the proposed streetcar route and do not appear deteriorated enough to fit a “blighted” area designation.

“Nevertheless, those properties are also having a portion of their tax obligations diverted to provide TIF funding for the project,” he said.

The City of Omaha, in its response to lawmakers, cited a statute that allows TIF to be used in a project site if more than 50% has been declared blighted. The city said amendments were passed to update existing redevelopment project plans within the streetcar TIF area to conform to the law.