The CRL

22 Nov

“Enter into discussions with the Katz Group of Companies and Northlands on a framework for the financing, not including an increase in current property taxes, and operations of a potential downtown arena and entertainment project.”

Motion passed by Edmonton City Council on July 21, 1010

“Council’s direction expressly provided that the funding model must not increase current property taxes.”

Background handout for CoE’s downtown arena public consultations

“I’ve said it a hundred times and I’ll say it another hundred times, we’re not going to raise taxes to pay for this.”

Mayor Stephen Mandel, March 26, 2008

All bolds mine.

Is the CRL a tax?

Yes. CRL stands for “Community Revitalization Levy.” In the United States, a similar procedure is known as a TIF (Tax Increment Financing). In both cases, a government collects (levies) property taxes in a designated area and uses them to pay off the debt incurred on a new development or project. In this case, the CRL would be used to pay off a taxpayer-funded downtown arena for the Edmonton Oilers.

Is the CRL a property tax?

Yes. Municipalities in Canada collect the majority of their revenues through property taxes. With property tax revenues, the City of Edmonton finances services such as road maintenance, parks, swimming pools and recreation centres, public libraries, garbage collection and police services.

Is the CRL a new tax?

Yes and no. When the CRL is created, the City draws a line around an area and labels it as a Community Revitalization Levy Zone. In this instance, that zone will be around the downtown arena and the projected downtown arena district. The City then determines what it currently collects in property taxes in that area, and guesses what it will collect from the new development that is supposed to occur alongside the arena. The difference between these two amounts is what the City will then use to pay off the debt it incurred in financing the downtown arena.

But as both Councillor Don Iveson and Scott Hennig of the Canadian Taxpayers Federation have pointed out, the taxes collected in the CRL zone are not new taxes. It is not bonus money. It is merely redirected money. Consumers do not spend extra money with the addition of new businesses in a city. They merely shift their spending habits from one business to another. Instead of going for a beer and a burger at Coliseum Steak and Pizza on game night, for example, or for Mac-N-Cheese at Blue Plate Diner, they will go for wings and pizza at the new Boston Pizza near the new arena. Spending that occurs around the downtown arena doesn’t occur in addition to spending in the rest of the city, therefore. It occurs instead of spending in the rest of the city. The same goes for development. If, for example, a new hotel goes up downtown, it means that a new hotel doesn’t go up in the west end. It also means that another hotel, say a hotel around the current Rexall Place, loses business, which means they shut down, which means the City no longer collects those property taxes. In the end, the CRL is zero-sum. The gain of new taxes in the CRL Zone will be offset by the loss of taxes outside of the CRL Zone.

Will the CRL lead to an increase in property taxes?

Assuredly. The taxes collected with a CRL aren’t just redirected taxes. They are also taxes that are now locked into paying for only one thing: the debt on the downtown arena. The City still has to pay for things like potholes, police, snow removal, community hockey rinks and libraries. Except it now has less tax revenue to draw from, as taxes have been redirected and locked into paying off the arena debt. This means that shortfalls in revenue from the creation of the CRL have to come from another place. Since the City can only tax property, it really only has one choice: property tax increases.

Are there other issues with the CRL?

Yes. They include:

  • The line the City draws in creating the Community Revitalization Levy Zone is completely arbitrary. It can be as small or as large as the City wishes it to be. The danger here is that the City can make the CRL Zone larger, likely as a result of insufficient tax revenue from around the arena district itself, and cut even further into tax revenue available for the City’s core services. The City has already admitted as much, in fact, noting that the size of the CRL Zone will in part be determined by “the funding requirements for the arena.”
  • If the City borrows the money to pay for the downtown arena, and there is a shortfall in CRL revenues from a lack of development and “revitalizing,” it is on the hook for that shortfall. That means the taxpayer is on the hook for that shortfall. During the July 21st meeting between City Council and the Katz Group, several Councillors asked the Katz Group what guarantees they could make about development in the arena district, and what role they would play in covering any shortfall in tax revenue in the CRL Zone. The Katz Group would not guarantee anything other than the $100 million that Mr. Katz has pledged to put towards the development of the district, and would not agree to cover any shortfall in tax revenues in the CRL Zone. Ultimately, even if the Katz Group guarantees development the CRL is still just a tax shift, but there is an added risk of even more debt for the City, and therefore taxpayers, without it.
  • Establishing another CRL could put a strain on the City of Edmonton’s ability to offer core services. The Province recently approved the establishment of a Community Revitalization Levy for the Quarters District in the east part of downtown. Yet it has the same issues as the arena CRL: it’s a tax that’s going to be redirected and locked into one single development project. Without property tax increases, that’s yet another drain on the City’s ability to offer core services. It is a dangerous game for cities to get into the habit of utilizing CRLs. It is not free money, without consequence. One only has to look at the City of Chicago to see tax-increment financing gone wild.
  • In allowing the City of Edmonton to institute the arena CRL, the Province of Alberta will be letting the incremental increase in education property taxes in the CRL Zone go to the City to help pay off the arena debt. Unless the Province subsequently raises its own taxes, that means less money is going into the Alberta School Foundation Fund (ASFF), less money is going to school boards, and less money is being used educate students.

Conclusion

The City of Edmonton’s proposed Community Revitalization Levy is money that is coming out of the public purse. It is a tax. It is also a tax that will lead to property tax increases for the citizens of Edmonton. To deny this is to deny economic theory so thoroughly established that one might as well be denying that the world is round. If Council decides to pursue this option in financing an arena for the 721st richest man in the world, it should at least be honest with Edmontonians about what it is in fact doing. It is taxing them to pay off the debt incurred in the building of a downtown arena for Daryl Katz and the Edmonton Oilers. Mr. Katz will receive all of the revenues from the arena, as well as the increased value of the team that will come with this sweetheart of a deal. In addition to being taxed, residents will take on the further risk that comes with downtown development and “revitalization” being nothing other than an optimistic guess.

These are the realities of the Community Revitalization Levy. Council is on the record saying that a funding model for a new downtown arena must not include an increase in current property taxes. Since the word “current” could be used to justify property tax increases a day after an arena CRL is approved, let’s hope that Council isn’t being cute with their language. The majority of Edmontonians do not want their tax dollars being used to fund a downtown arena, either now or in the future. The Mayor has been all over the map when it comes to the use of taxpayer dollars to finance a downtown arena. Hopefully his colleagues on City Council will take the more honest, straightforward approach.

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14 Responses to “The CRL”

  1. codetechnology December 18, 2010 at 6:11 am #

    There is a distinct lack of strategic thinking in this post and in the comments. Both the Quarters and the arena district have the potential to transform Edmonton into a more desirable place to work and live.

    Could we attract a head office or two? Could we discourage urban sprawl? Can new Edmontonians be attracted to downtown to work, live and play — or do we limit our city to a collection of isolated soul-less ‘burbs?

    Edmonton needs bold developments to become a better place — a more attractive place — for people to live. People will not come here if we remain a blighted prairie town, and good people will leave. (And I’m not talking about Katz and hockey players! Artists, technologists, researchers — we all want to live in great cities.)

    What are the generational, long-term benefits of these developments? Can they transform Edmonton?

    Count me as one local business and property owner who can accept the risk of rising taxes to attempt something big.

    Mike

  2. Jas December 11, 2010 at 2:26 pm #

    Hey, Andy, thanks for the RT on this post – I missed it first time. I understand your summary from an economic point of view (no new net spending, just relocated) and on a tax point of view (a tax bump in one area is at the expense of another area because the total property tax levy is only dependent on the total budget need), and therefore also your conclusion about new taxes (new civic budget item – supporting CRL – means budget shift or increased budget), but I didn’t get the point on Education tax: “the Province of Alberta will be letting the incremental increase in education property taxes in the CRL Zone go to the City to help pay off the arena debt.”
    Could you elaborate, because the Province just sends the city a bill for education tax and the city distributes it across all property owners based on MVA (rate for commercial and rate for residential).
    Thanks, Jas

    • Scott Hennig December 13, 2010 at 11:49 am #

      If I can jump in here Andy…

      It’s a bit more complicated than that. According the Alberta Education (http://education.alberta.ca/admin/funding/tax.aspx) the way it works is that the Alberta government sets a province wide mill rate (2.93 mills in 2010) and then uses municipality-by-municipality assessment to levy the bill to the municipality.

      Since it’s a province-wide mill rate, high property value communities pay a higher amount (proportionally) than lower-assessed communities (hence why people in Banff are not happy about it).

      The money is remitted to the province that puts it into the Alberta School Foundation Fund (ASFF). Then the money is distributed to all public school boards based on a per-student basis. This is, of course, topped up by general revenues.

      Separate school boards, on the other hand, directly bill the municipality for their share. It’s the same mill rate though. And even if nobody has declared their allegiance to the separate school board, the province then just adjusts the amount they provide the school board to get all school boards in the province the exact same amount of per-student funding.

      Section 191 of the School Act (http://www.qp.alberta.ca/574.cfm?page=s03.cfm&leg_type=Acts&isbncln=9780779752997) provides for a school board to put forward during a municipal election, a referendum on whether to increase the local education property tax take by up to 3% of their overall budget for three years. Now, most of them haven’t ever even asked in the past 16 years (http://taxpayer.com/alberta/most-school-boards-too-gutless-tax), but the point is that they have the legal ability to ask and voters have the ability to grant it.

      So, this is a long way of saying that if assessment in a CRL zone is essentially frozen for the Alberta government for 20 years (they can only tax at the old assessed value, not the new, higher value) the province’s portion of those re-located funds get used for the CRL project (in this case the arena), and if the province wants to collect, say $1.4 billion in education property taxes, they will have to either raise the mill rate, or not lower it (if assessment goes up) to collect those funds elsewhere. Or, they can just take less money from the education property tax and then top up the ASFF and separate boards from general revenues. Or, they can give public school boards across the province less money (and because they collect it themselves, Edmonton Catholic less money). I’d venture to guess the former two rather than the latter.

  3. The Other John December 2, 2010 at 11:23 pm #

    Andrew

    Sorry to burst your bubble and to rain reality on your parade but you get that the Alberta Capital Finance Authority is tied to the real world. Like the real financial world. Alberta has no more ability to ” make made in Alberta interest rates”than Pierre Trudeau could make made in Canada oil prices.

    How did that work out for Trudeau? Really, the real price of oil was the Canadian price Who knew?

    You get that the long bond rate in Portugal went from 5.3 % to 7.3% in ONE DAY and in Spain it went from 3.6 to 5.7% in, again in ONE DAY. THIS WEEK. Pest, that is a major factor that goes into setting a “prime” interest rate.

    So before you beek off off about interest rates and interest rate protection plans from the Alberta government please grasp the rudimentary concept that 2% less than prime ain’t worth dick if prime is 14%. Or,using your very rudimentary understanding of finance,the Alberta government can subsidize the City of Edmonton to borrow money to give to a private businessman to run his private business for his own private profit.

    Damn, you have just identified a double subsidy which is ABSOLUTELY irrelevant if interest rates hit 10 or 12%.

    Andrew: likely a good idea to understand rudimentary financial concepts before lecturing someone else on interest rate subsidies.

    If you cannot address basic concepts like who will build the proposed commercial development for profit and how will the City of Edmonton recoup it’s MASSIVE subsidy, please quit referring to my arguments as hysteria

    P.S. I get interest rates. Do you get bad business deals?:>

  4. Andrew December 2, 2010 at 5:01 pm #

    The “calamity” over interest rates is a red herring.

    Alberta municipalities borrow money from the Alberta Government’s “Capital Finance Authority” at well below market rates and the principal is guaranteed by the Alberta Government.

    http://www.acfa.gov.ab.ca/

    Likely be a good idea to research some of these things before embarking on any further campaigns of hysteria.

  5. The Other John December 2, 2010 at 4:15 pm #

    Andy I loved the article and appreciate your comments Scott.

    I have been waiting for someone in the print media to ask the hard questions about this proposed commercial project. Initially I thought it would be Scott McKeen but suspect now that Dave Staples at the Journal will be doing it. He is a big fan of hockey and the Oilers. He is a fan of the downtown redevelopment but I think he is a much bigger fan of balance and fair play.

    It has been pointed out that I unfairly suggested he is a blind supporter of this project. I expect that characterization is likely true.

    The Oilers say that this is a win-win. If that were clearly the case there would have been full & confidential disclosure of their finances, a method of testing their confidential disclosure and we would also have an opportunity to test the “probable” commercial development.

    Clearly I do not believe there is a case for the development that is being suggested but through investigative journalism the veracity of those assertions could be tested. Because, leaving aside the comments by Andy and Scott about a CRL just moving the source of taxes from one area to another, if the CRL does not cover the cost of borrowing the City of Edmonton will be faced with a real shortfall in revenue.
    Which leads to increased taxes or slashed programs.

    Today we are living in a world accustomed to historically low interest rates. There is nothing that assures low rates will continue into the future and if the City has to pay of $350 million dollars worth of debt at 7 or 8 percent that will truly a calamity!!!

    I and many Edmontonians eagerly await “the other side of the Arena story” by the media

  6. chartleys December 2, 2010 at 2:25 pm #

    My big issue is in their entire pitch. With-holding the books because they are basically lying about one of the major premise their arguement is based on, this cat and mouse veiled relocation threats, no real indication of exactly how or what their part would be in surrounding arena redevelopment, and so on.

    When all you see is trash, distractions and bs coming from one corner, the red flags should be collectively going up. They are not laying out anything resembling a prudent and logical case, fiscal or otherwise for the city to buy in. Why? Because they don’t give a shit about anything more than figuring out how to milk the city’s tax dollars for personal gain.

    I wouldn’t be as stand-offish as I find myself becoming if it weren’t for the complete dishonest means they have chosen to push this thing forward. Basically, if it were legal for them to shove a gun in our mouths they would and any intelligent person should resent that fact and rightfully question it all.

    I also have spent a lot of time reading and looking at downtown developments and I honestly do not think that an arena is the biggest factor by a long shot. We have some extremely key things coming up and if we are too quick to act in a piecemeal fashion without an integrated planning team in place, the dream that is a fully revitalized northern edge of Edmonton’s downtown will be over before all the buildings are even completed.

    Andy,

    Lorne Billingsley-Smith

    I mentioned it awhile ago but I honestly believe you would appreciate sitting down with this guy and having a chat about downtown redevelopment and such. He is pretty wired into how the system works and is extremely passionate about the subject.

  7. Scott Hennig November 22, 2010 at 6:27 pm #

    I think it’s disingenuous to suggest that people will spend more money in the city because of a new arena. Unless incomes go up or tourism goes up, where is the new money coming from?

    Entertainment budgets are fixed. People who live in Winnipeg spend less money on NHL games than people in Edmonton, but would, for example, spend more on concerts, plays, AHL hockey, etc. During the NHL lockout year, did you squirrel away all your money that you would have spent on NHL, or did you spend it on concerts, Eskimos games, poker tournaments, etc?

    And not to speak for Andy, but his point using Coliseum Pizza was not just to suggest that it’s a direct shift of business from the current arena district to the new one, but from other locations in the city to the new arena district.

    But if we stay with that example for a minute, the CRL assumes that all development is new development and as such is new tax dollars. If Coliseum Pizza moves from it’s current location to a new one, the CRL assumes that the new money is the difference between what was on that plot of land before and what is on it after. So, if it was a vacant lot and the property taxes paid were, say $800 per year and now is a restaurant and now they pay $15,000 per year, $14,200 is assumed by the CRL to be “new money” and can be used to pay back the loan on the arena.

    What it forgets is that currently they may be paying, say $12,000 in property taxes, and that the the difference is really $3,000 not $14,200. Moreover, even that assumes that there will not be a leveling of property values across the city to compensate.

    What I mean by that is that if I come in as a land developer and build 100 new $1,000,000 condo apartments in downtown Edmonton that are in a very desirable location, and I get 100 upper-income families to move from other locations in the city to these condos, because there is a standard distribution of incomes across the population, their current homes will have to be sold for less than before, because now the supply of million dollar homes is larger than the demand for them. So, their million dollar homes become worth $900,000, and now there is a glut of supply of $900,000 homes, meaning the people who move into them will have to sell their homes for $800,000, and so on down the line…

    If there is very valuable property on the commercial side in downtown Edmonton, unless there is an increase in incomes of the residents or inflow of cash from the outside (tourism), the rest of the market will have to settle out, because they just became a fraction less desirable.

    So, even that extra $3,000 isn’t “new” it will be lost across the rest of the market in $1 increments (give or take).

    As for the school tax side, if the province signs off on the CRL, they also give up their portion of the taxes to pay off the loan. The provincial property taxes are split between the separate and public school boards, based on the number of people who declare their affiliation. The province would either allow this shift, leaving less for schools, or would fund the school shortfall through other means, or would raise the education property tax mill rate to collect more money.

    So, this would have the perverse effect of having Calgary Flames fans help pay for a new arena for the Edmonton Oilers through higher education taxes.

  8. lesoteric November 22, 2010 at 7:54 am #

    While I agree that additional property taxes are absolutely the wrong way to go, it is disingenuous to claim that CRL is a zero sum proposition. A CRL collects taxes from a targeted area, in this case what will likely be a heavy commercial area, one which would benefit from additional revenues which aren’t currently available to the area (42 nights a year of 18,000 potential customers). This is not to say that each person who visits a new arena will spend anything outside of the arena, but it is unlikely that every single person visiting the arena will behave exactly the same as they do when visiting Rexall Place today. A rational person acts differently when environmental or situational factors change, such as when an arena district presents options other than Coliseum Pizza and, um, the LRT.

    The problem with your reasoning is that (as in your example) Coliseum Pizza will no longer pay taxes, and they will shift exactly the same amount of taxes to another similar business in the new CRL zone. The difference is that the new business will pay the additional tax with the expectation of increased revenues due to arena proximity. Your unstated assumption that each current customer of Coliseum Pizza will equate to exactly one, and only one, customer using the comparable service in the new CRL Zone is also incorrect. The location of Rexall place currently restricts businesses (due to geography) from opening up in the area and benefiting from arena proximity, whereas a less restrictive geography (such as Downtown) would allow more businesses to try and exploit their location to draw additional business from arena proximity. Additionally these businesses will have the opportunity to draw customers at non-event times, also due to geography (business customers during the day).

    As for the School Tax, I’m curious as to how you concluded that ASSF will be affected? Unless adding an arena severely degrades the value of surrounding property (very unlikely in Downtown) or the city drops the local education tax rate (I don’t believe they can) because I read from your link that “Your share is based on the assessment value of your property and the local education property tax rate”.

Trackbacks/Pingbacks

  1. Downtown Development Can and Should Happen, With or Without a CRL « Alex Abboud - August 28, 2011

    […] new tax money. Copper and Blue does a good job of debunking that. Still not convinced, here’s another thorough explanation of a CRL. On a related note, the idea that a CRL is needed to spur investment in downtown bothers […]

  2. understanding the katz arena district debate: community revitalization levy, opportunity costs, and the arena poll. | daveberta.ca - January 18, 2011

    […] is a good explanation of CRL on the WhyDowntown? blog. Mack Male has also written a helpful three part series explaining some of […]

  3. Alberta’s Community Revitalization Levy: Proposed Downtown Edmonton Arena District at MasterMaq's Blog - December 17, 2010

    […] write about a CRL in relation to the proposed arena. Last month, Andy Grabia of Why Downtown? wrote a popular post on the proposed CRL. The use of a CRL has been a frequently cited potential source of funding since at least August […]

  4. Alberta’s Community Revitalization Levy: Introduction at MasterMaq's Blog - December 14, 2010

    […] As others have pointed out, a CRL is not a risk-free proposition. There are a number of issues to consider. […]

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