Appellate Court Strikes Down Legal Challenges to TIF and Business Districts

By Ares G. Dalianis and Scott R. Metcalf

Two decisions by the Illinois Appellate Court this year resulted in set backs to taxpayer challenges to municipal economic development activities.  In Malec v. City of Bellevile, the Court upheld the municipality’s finding that the proposed TIF was located in a blighted area that would not be redeveloped but for the formation of the TIF.  In Barber v. City of Springfield, the Court ruled that taxpayers do not have standing to challenge the formation of a municipal Business District, even though they may challenge the formation of a TIF. 

To create a TIF district, a municipality must make a finding that an area is blighted and that no redevelopment of the area will occur without the creation of a TIF district.   In 2006 the City of Belleville created a TIF district to redevelop 150 acres of land containing two undeveloped parcels and a third parcel with dilapidated structures.  Mr. Malec filed suit challenging the formation of the TIF district arguing that two factors for “blight” under the TIF statute were not met, that the undeveloped land being used as a farm did not qualify as “vacant” land and that the existence of an abandoned mine under the property did not qualify as an “unused mine.”  Mr. Malec also argued that the property would have been developed in the absence of the TIF. 

Not only did the Court affirm that any challenge to the formation of a TIF district must meet a high burden of proof, it also found little merit in Mr. Malec’s contentions.  Initially, the Court rejected the claim that the burden of proof should be shifted to the City because of alleged misrepresentations made in the TIF eligibility study and other City documents.  The Court found that the City’s conduct did not rise to the level of intentional misrepresentation.  As a result, the taxpayer had to produce clear and convincing evidence to overcome the presumption that the City’s findings were valid.  The two parcels being used as farmland were found to be “vacant” within the meaning of the TIF statute because the parcels had been subdivided, which the Court found is all that is required for farmland to be found vacant.  As for the presence of an unused mine, the Court simply rejected the taxpayer’s argument that to qualify as a “blight” factor a mine had to be on the surface of a property.  The Court went on to find that the evidence in the record satisfied the requirement that redevelopment would not occur but for the creation of the TIF.

A few weeks later, the Appellate Court handed down its decision in Barber v. City of Springfield involving the formation of a Business District.  Interestingly, the Barber Court interpreted and reaffirmed a 2008 ruling in the Malec case that taxpayers can challenge the formation of TIF districts.  The Barber Court found, however, that Business Districts are sufficiently different from TIF districts to prevent similar taxpayer challenges.

Unlike TIF districts which apply existing property tax rates to the incremental value of property, Business Districts may impose special sales taxes in an area, with the additional sales tax collections being dedicated to funding redevelopment projects.  Although Mr. Barber alleged that the findings of blight by the municipality were fraudulent, the issue became whether Mr. Barber had any legal interest on which to base his lawsuit. 

The longstanding rule in Illinois is that taxpayers may bring lawsuits only if they may be personally liable to replenish public revenues depleted by an allegedly unlawful government action.  The 2008 ruling in Malec v. City of Belleville was that taxpayers could bring lawsuits challenging the formation of TIF districts because taxpayers are liable to replenish, through higher property taxes, the public revenues depleted by an unnecessary TIF district.  Mr. Barber argued that the same rule should be applied to Business Districts.  The Court, however, reasoned that taxpayers are not liable to replenish revenues depleted by an unnecessary Business District.  The higher sales taxes in a Business District are supplemental to the existing tax rate and are dedicated to specific projects from the beginning.  Therefore, unnecessary Business Districts do not deplete public revenues, and taxpayers do not have standing to bring a lawsuit challenging their formation.

These cases are a reminder of the importance of involvement by non-municipal taxing agencies in the early stages of municipal economic development programs.  For example, school district participation in TIF Joint Review Boards, and the resulting negotiations with municipal officials, may avoid the challenges and expense inherent in litigating against a TIF district after it is formed.