CINCINNATI - A lawsuit headed for trial in Hamilton County this week could be a budget wrecker for the city of Cincinnati.
The suit seeks a court order requiring immediate repayment of a $4 million internal loan that was used to balance the city’s budget in 2011.
Developer Hyde Park Circle LLC claims the loan violated state law because the money came from tax-increment financing, or TIF districts, in which property-tax proceeds are supposed to be spent in the neighborhoods where they were generated. City officials say payments to the school district are permissible under the 2001 statute that created the city’s TIF districts.
“The goal behind the payments is to reimburse the school district for lost revenue because of the creation of the districts,” said a May 19 court filing in which the city outlines the arguments it plans to make in a four-day trial scheduled to start Tuesday. “The funds were lawfully dispersed.”
The issue came to light this week after interim City Manager Scott Stiles reported in a memo to council that the city now considers its 2011 fund transfer to be an internal loan that is “not required to be repaid.”
Two members of council said during a budget hearing Monday the issue is one of several reasons the city's proposed $358.2 million is not "structurally balanced," as Cincinnati Mayor John Cranley has argued.
"I still have a lot of questions that have not been answered," said Councilmember Yvette Simpson, "I certainly have qualms about calling it structurally balanced. It's really not."
Simpson joined Kevin Flynn and Chris Seelbach in voting against an omnibus budget plan that appears headed for passage by city council Wednesday.
TIF districts allow local governments to siphon off property taxes from new construction and increases in real estate value. The city has 20 TIF districts that generated millions in tax revenue since 2002. That money built garages, made streetscape improvements and guaranteed loans that fueled the redevelopment of Over-the-Rhine.
But in 2011, a five-member majority of council voted to use $5 million in neighborhood TIF district revenue to make the city’s annual “stadium payment” to Cincinnati Public Schools.
That’s a payment the city has made since the mid-1990s to reimburse the school district for lost revenue from taxpayer-owned Paul Brown Stadium and Great American Ball Park.
Critics challenged the transfer in January 2011 , but city officials said they had an opinion from bond counsel on the legality of the transfer. They have refused to make the opinion public, citing attorney-client privilege.
Hamilton County Judge Ralph Winkler has the case scheduled for a four-day bench trial starting at 1 p.m. June 3.
Hyde Park Circle filed suit in 2011 claiming the city reneged on its agreement to use TIF proceeds for infrastructure improvements near its redevelopment of the old Oakley Drive-in. It later amended its complaint to include a broader taxpayer claim that the city’s use of TIF proceeds violated state law.
City attorney Terry Nestor said the lawsuit lacks merit and Hyde Park Circle lacks legal standing to make any claims on the propriety of city TIF proceeds. He added that the city and school board have a contract governing the distribution of TIF proceeds, further bolstering the legality of the 2011 transfers.
Stiles explained to city council May 27 that the city transferred $5 million from 12 neighborhood TIF districts in 2011 and repaid $1 million of that total in 2012. The city still owes $4 million to eight neighborhood districts, according to Stiles’ memo, as follows:
- Madisonville, $749,490
- Evanston, $669,043
- East Walnut Hills, $585,410
- Oakley, $485,785
- Queensgate, $426,515
- Walnut Hills, $409,790
- Avondale, $359,610
- Bond Hill, $299,357
State Sen. Bill Seitz, who helped write the state's TIF district legislation, said in 2011 that the city's use of TIF proceeds for stadium payments was illegal. But now he thinks the city's most recent explanation could pass muster.
He said local governments can reimburse school districts for lost revenue caused by TIF districts, but not for other obligations like stadium payments.
"If it was negotiated as part of the creation of the city’s area-wide TIF districts, then that is a whole different question," Seitz said. "That might fly, if that’s the truth."
But getting to the truth may be difficult, based on depositions of city officials by attorneys for Hyde Park Circle.
"We deposed Milton Dohoney," said attorney Matt Fellerhoff. "He said it was council's idea to do the loan and he didn't know anything about it."
Fellerhoff has been unable to force the city to reveal its legal opinions defending the TIF transfer.
Cincinnati Councilman Charlie Winburn, one of five who voted for the 2011 TIF district transfer, said during council's budget hearing Monday that his vote was mainly intended to avoid 189 police layoffs. When it voted to cover the stadium payment with TIF revenue, council freed up general fund money for
"We felt that if these neighborhood projects were not shovel ready that we would put and delay them until the appropriate time," he said. "My colleagues were also talking about a $20 trash tax and laying off police and fire and Charlie Winburn was not going to do that."
Even if it were to lose the Hyde Park Circle lawsuit, appeals could keep the city from having to pay back the $4 million in TIF transfers during the 2015 fiscal year, which starts July 1. In addition, Winburn revealed during Monday's budget hearing that the city is negotiating to sell what's left of the former Blue Ash Airport for up to $10 million.
"If we sell the airport, that first $4 million I would want to go toward paying back the TIF repayments," he said.