Here's how much Nashville tax revenue goes to developers instead of schools

Mike Reicher | The Tennessean

As Nashville prepares to raid its reserves to pay for unexpected school costs, some of the shortfall can be traced to tax breaks awarded to developers.

The city diverted $9.3 million of property taxes from schools to pay off redevelopment loans — for downtown hotels, luxury condos and other projects.

Such diversions have occurred for decades, but in the past two years they've grown quickly. This fiscal year's amount was about $1 million more than expected.

Metro Nashville Public Schools may cut 30 central office positions and pause new programs to make up for a $17 million hole in its budget next fiscal year. The city's financial woes have drawn new scrutiny to economic development subsidies, and caused many to ask fundamental questions about Nashville's perceived prosperity.

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How, they wonder, can a city with gleaming hotel towers, record-low unemployment, and years of real estate market growth, not afford to pay for its children's education? Who, exactly, has benefited from the development boom?

The scrutiny was heightened this week after Director of Schools Shawn Joseph made an unusual supplemental request seeking $3.5 million to plug budget holes related to health insurance, enrollment and redevelopment. About $1 million of that represented the difference between the budgeted and actual tax dollars diverted to pay off the economic development incentives.

“It makes no sense for the City of Nashville to rob the reserves of the schools to do redevelopment,” said Erick Huth, president of the Metropolitan Nashville Education Association​, the local teachers union.

So far this fiscal year Metro has redirected $29.8 million of property taxes to the redevelopment loans. Just like a homeowner's taxes, a portion of the collections would have gone to Nashville schools. In fiscal 2017, Metro sent $24.8 million to MDHA.

Nashville's redevelopment program uses "tax-increment financing" as its primary tool. The Metropolitan Development Housing Authority backs loans to developers for land acquisition, demolition, and off-site infrastructure such as utilities and sidewalks. Any future increases in property taxes at those sites are directed to repay the loans. Once the loans are repaid, the full property tax bill is available for schools and city services.

These sorts of subsidies were originally designed to spur development in "blighted" parts of cities. They were used to lure companies to the Gulch, for example, in the early 2000s, when parts of the downtown district were industrial and barren. Today, the area is teeming with luxury shops, restaurants, tourists and condos.

The Westin hotel, for instance, was awarded $15 million in economic development subsidies in 2014. The city collected nearly $200,000 in property tax on the property in the year ending September 30, 2017, but that was redirected to pay off a redevelopment loan.

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Critics argue Nashville no longer needs to offer these incentives because developers are already eager to build here. Also, the city has not kept records needed to evaluate the effectiveness of its redevelopment financing, according to a city audit released in March.

“It’s impossible to track the benefits to the community from the loans," At-large Councilman John Cooper said. “We don’t even have the records to show where it went and what we got for it.”

Each year, the Metro Finance Department estimates the amount of redevelopment collections, but for the past two fiscal years at least, it has under-forecast the amounts. Metro forecast that $8.3 million of tax funds meant for schools would be diverted in fiscal year 2018. It ended up at $9.3 million. The school district built its budget using the smaller amount, thus the $1 million supplemental request.

Deputy Finance Director Kim McDoniel said more tax revenue was collected from the redevelopment parcels because their values climbed during the 2017 reappraisal, and some of the parcels were developed during the fiscal year.

"The growth was greater than we expected,” McDoniel said. “The difficulty is we’re putting a budget together before the prior’s years numbers are finalized.”

Supplemental funding was approved by the Metro Nashville Council on Tuesday.

Reach Mike Reicher at 615-259-8228 and on Twitter @mreicher.