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The New Orleans City Council is attempting to create a policy to govern an incentive program for developers in hopes of expanding it. But analysts say the way the city and state have created the program is inherently flawed.

But with few developers actually using the program, there is a question of whether there are enough benefits to make it worth the effort.

Council Vice President Arnie Fielkow said the city lacks a definite set of guidelines for tax increment financing. Its TIF program allows developers to use a portion of the sales tax revenues a project generates to pay off bond financing used to pay for the project.

Louisiana law allows TIFs to be based on either sales or property tax revenues, but with nearly all of the city’s property taxes already allocated, Fielkow said using sales taxes is the only practical option.

“They have been very, very rare here in the city, but we do believe that TIFs are an effective economic development vehicle,” Fielkow said. “They have to be used strategically and there has to be a formal policy as opposed to evaluating TIFs on an ad hoc basis.”

Only two New Orleans projects — River Garden on the former St. Thomas housing site and the Algiers Development District — have used TIFs so far. Both feature a Wal-Mart Supercenter as their sales tax-generating engine.

By drafting clear TIF application guidelines, Fielkow said the City Council hopes to steer developers to other areas of the city in need of an economic boost.

But Stacy Mitchell, a researcher at the Washington, D.C.-based Institute for Self-Reliance, said allowing sales taxes to be used prohibits local TIFs from ever being truly effective. Out of the 49 states using TIFs, Mitchell said all but Louisiana and Missouri base the incremental financing only on property taxes rather than less stable sales tax revenues.

“I think that’s a really bad policy to use sales taxes,” Mitchell said. “If you think about it, the amount of sales tax generated in the state of Louisiana is a function of how many people live there and what they have for disposable income.”

Fluctuations in population coupled with the teetering economy make any kind of incentive based on sales taxes a dubious prospect at best, Mitchell said. The concept also encourages economic development in one area while depleting resources from another, she said.

“It’s a retail merry-go-round where you’re robbing Peter to pay Paul,” she said. “You’ve got businesses opening up in one area that are draining sales tax revenues from another area. All you end up doing is shifting the market around.”

BGAV Urban Consulting vice president John Brancaglione, who has been helping the City Council develop TIF guidelines, said the state constitution would have to be amended to switch the incentive source exclusively to property taxes.

“In a perfect world, you would be able to capture both sales tax and property tax increment,” he said. “In Louisiana, most of the property taxes are … dedicated. The amount of increment that can be generated by property taxes is comparatively small.”

More than 90 percent of property taxes generated in Orleans Parish are dedicated, Brancaglione said, leaving only 16.1 mills out of an available 175.19 for other uses such as TIF projects.

HRI Properties used the TIF program to develop the River Garden from the former St. Thomas public housing site. Selim Burkol, HRI development team senior vice president of finance, said the $20 million TIF bond connected to the Wal-Mart Supercenter on Tchoupitoulas Street was used to help get the first phase of River Garden off the ground.

A second TIF bond issuance was planned once a certain level of revenue was reached, but that plan was scrapped when the Wal-Mart was heavily damaged in Hurricane Katrina, Burkol said.

If the TIF had been based on property taxes, Burkol said all of the money would have been available up front and Katrina would have proved to be less of a roadblock.

“You would get all the money and the debt service coverage ratios would be much lower if everything was based on property taxes,” he said. “Everybody knows that you are going to pay your property taxes. If you don’t, you lose your property. It’s the least risky cash flow stream for the financial markets to underwrite.”

Financing on projected increases in sales revenues is difficult to obtain, Burkol said, but state Rep. Jeff Arnold, D-New Orleans, said the program is still effective in its current form.

Arnold heads the Algiers Development District and said the TIF program allowed the district to land an important project.

“We wouldn’t have Federal City without it,” he said. “We just went before the City Council and extend our TIF from the original 10-year period to a period of 35 years.”

Federal City, where construction started in September, will transform the Algiers Naval Support Activity base into a campus of federal and private sector offices. HRI, in partnership with Environmental Chemical Corp. and the New Orleans Federal Alliance, is one of the master developers of Federal City.

Fielkow said he hopes to duplicate the success of the Algiers TIF into areas of eastern New Orleans in need of development.

The council’s proposed TIF changes won’t be released until the end of June, although an initial overview has already been completed, Fielkow said.

Ashton Ryan, president of First NBC Bank, is seeking a TIF district to rebuild the former Lake Forest Plaza site. A panel that includes Mayor C. Ray Nagin, two City Council members and two state legislators who represent the area must approve the district.•Few developers putting TIF incentives to work in city