The Great Recession’s Impact on Credible Commitment

• Published date: 01 December 2014
• Author: Robert L. Bland,Michael Overton
• Date: 01 December 2014
• DOI: 10.1177/0160323X14559713
• Subject Matter: Articles

Article

The Great Recession’s

Impact on Credible

Commitment: An Analysis

of Private Investment in Tax

Increment Financing Districts

Michael Overton

1

and Robert L. Bland

1

Abstract

This study explores the Great Recession’s effect on the commitment by the city of Dallas, Texas,

to its private partners in seventeen tax incrementfinancing(TIF)districts.Whateffectdidthe

recession have on private investment in public–private partnerships? Did the recession cause a

loss of credibility in the city’s commitment, resulting in lower levels of private investment? Was

there a lasting structural change in the determinants of private participation stemming from the

recession? Results from a random effects Tobit model show that the city’s proposed budget for

each TIF district was a significant determinant of the level of private investment. However, during

the recession, the actual amount of investment by the city was essential to reassuring private

investors of the city’s commitment.

Keywords

tax increment financing, credible commitment, Great Recession, economic development

Introduction

The Great Recession of 2007–2009 has had far

reaching consequences on the perceived finan-

cial capacity of local governments. The overall

weakening of the economy in combination with

the increasingly vitriolic bureaucrat bashing

has undermined the public’s faith in the fiscal

solvency of public institutions. Public–private

partnerships are particularly vulnerable to the

disruptive effects of recessions because those

relationships are built on trust, reciprocity, and

the credibility of collaborators to meet their

financial commitments (Ostrom 1998; Bovaird

2004). This article examines the Great Reces-

sion’s effect on the perceived commitment by

the city of Dallas, Texas, to m eet its financial

obligations and the effect that perception has

on participation by private developers in the

city’s tax increment financing (TIF) districts.

Using data from seventeen of the city’s TIF

districts drawn from a twenty-year period

(1992–2011), we assess the Grea t Recession’s

effect on the investment by private developers

in these targeted areas of redevelopment. What

1

Department of Public Administration, University of North

Texas, Denton, TX, USA

Corresponding Author:

Robert L. Bland, Department of Public Administration,

University of North Texas, 1155 Union Circle, #310617,

Denton, TX 76203, USA.

Email: bbland@unt.edu

State and Local GovernmentReview

2014, Vol. 46(4) 282-297

ªThe Author(s) 2014

Reprints and permission:

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DOI: 10.1177/0160323X14559713

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factors affect private participation in these

partnerships? Is there evidence that the city’s

credible commitment affects participation by

private developers? Did the recession cause

structural changes in private participation that

lingered into the postrecession period? TIF pro-

vides a fitting venue to answer these questions

because a TIF district’s success depends on the

fidelity of the host city to the prior commit-

ments it has made to the collaborative venture.

While public–private collaboration has

been studied extensively, little is known of the

determinants of private sector participation in

these collaborative ventures with the public

sector. Private sector participants have differ-

ent motives than the public sector that drive

their participation. This article contends that

the perceived credible commitment of the

public partner is a key determinant of private

sector participation. Recessions put that com-

mitment to its greatest test. The Great Reces-

sion provides a fitting venue to test whether

a city’s credibility suffers during fiscally

stressful times and whether that stress

adversely affects the city’s capacity to sustain

its partnerships with other organizations.

This article begins with a discussion of

public–private partnerships and the determi-

nants of private sector participation followed

by a brief discussion of the basics of TIF. That

is followed by a theoretical discussion regard-

ing the effects of credible commitment and of

recessions on private sector participation in

TIF districts. Next, we present a description

of our methods and the data used in the analy-

sis. This article ends with a discussion of the

findings and their implications for public man-

agers as they engage in partnerships with non-

profit and private firms.

Public–private Partnerships and

TIF Districts

Public–private partnerships have gained con-

siderable popularity over the past two decades,

especially with cities as they have sought more

cost-effective ways to deliver services. Now it

is quite common for state and local govern-

ments, private businesses, and nonprofits to

form partnerships that blend their distinctive

strengths to finance and deliver public, and

not-so-public, services. But we lack empirical

evidence of the determinants of private sector

participation in public–private partnerships.

Using TIF, this study assesses the importance,

if any, that a city’s perceived credible commit-

ment has to the success of its partnerships with

private businesses.

The motivation for public–private partner-

ships is the creation of what Klijn and Teisman

(2005) call surplus value—outputs that exceed

what would have been achieved in the absence

of collaboration by the partners. In the case of

TIF, the surplus value is increased economic

activity in the targeted area that would not

have occurred without the TIF—for example,

growth in property values, in retail sales, and

in employment. The cooperative arrangement

is a form of coproduction in which the partici-

pants achieve greater returns working together

than had they worked independently. All

partners are necessary to the success of the

venture, but none is sufficient on its own.

A key to a successful partnership is the

credibility brought by, what Bryson, Crosby,

and Stone (2006) call, the sponsor. A sponsor,

such as the city of Dallas, brings ‘‘prestige,

authority, and access to resources’’ to thepart-

nership. Champions, on the other hand, such as

private firms, provide the day-to-day business

activity that ‘‘help the collaboration accom-

plish its goals’’ (Bryson, Crosby, and Stone

2006, 47).

Public–private partnerships also risk failure

particularly in collaborative initiatives such as

TIF where financial riskissharedbypartici-

pants. Failure of the joint venture reverberates

not only to the immediate partnership but also

to future attempts at collaboration. As such,

we define a public–private partnership as a

formal or informal arrangement between a city

and one or more private firms where partici-

pants share in the financial risk, and the bene-

fits that accrue to each partner are dependent

on the success of the other partners.

Although no prior study directly examines

the determinants of private sector participation

in public–private partnerships, insights can be

Overton and Bland 283