LAWSUITS CHALLENGE CALIFORNIA’S TERMINATION OF REDEVELOPMENT AGENCIES

October 22nd, 2012

Two lawsuits against the State of California allege that the adoption of AB1X26 in 2011 violates both the California and the United States Constitutions.  AB1X26 eliminated all of California’s approximately 400 redevelopment agencies and required successor agencies, typically the municipalities where the redevelopment agencies were located, to wind down redevelopment activities.  TIF fund balances not pledged to the repayment of outstanding obligations were to be transferred to the State for redistribution to other local taxing bodies.  Any pending projects or transactions that were not formally approved by June 29, 2011 were terminated and the validity of other recent obligations issued or entered into after January 1, 2011 was reviewed.   In passing this law, the legislature terminated the State’s TIF program and put the payment of outstanding obligations for both on-going and completed projects in jeopardy.

The two lawsuits, Syncora Guarantee Inc. v. State of California and City of Cerritos v. State of California, are both based on the theory that the United States Constitution and the California Constitution prohibit legislation that impairs existing contracts and that AB1X26 deprived bondholders of money owned to them under existing contracts.  AB1X26 requires payment of redevelopment bonds to be made out of general property tax coffers, with the same priority as all other claims against the property taxes.  However, the redevelopment bonds were issued based on assurances under the California Constitution that all property tax increment generated in a particular area would be used for redevelopment activities within that project area.

A finding by the Court that AB1X26 violates the contractual impairment clause of either the California or the United States Constitution may result in the entire act being struck.

The California Supreme Court previously upheld the constitutionality of AB1X26 in California Redevelopment Association v. Matosantos however the issue of impairment of existing contracts was not raised in the Matosantos case.

Chicago Will Again Use TIF Money to Help Close its Budget Deficit

October 15th, 2012

On October 10th, 2012, the City of Chicago released its 2013 proposed $8.3 billion budget. The City projected a $298 million deficit and proposed several measures to close the funding gap, including personnel savings, spending reform and long-term debt refinance.

The budget also proposed using TIF funds to reduce the 2013 deficit. Approximately $10 million in TIF funds will be distributed to the City, comprised of $6.7 million in released surplus from existing TIF districts and $3.3 million from expired and terminated TIF districts. In 2012, about $12 million in TIF surplus funds were distributed to the City to aid in reducing the City’s $635 million budget deficit and in 2011, approximately $38 million in TIF surplus funds were used to help fill a $655 million spending gap.

The City anticipates that TIF dollars to be collected in 2013 will decrease to approximately $332 million, which represents an approximately 27% reduction from the $454 million collected in 2012.

West Virginia May Allow a Third County to Use Sales Tax Increment Financing for Economic Development

October 9th, 2012

After approving the use of sales tax increment financing (STIF) in two economic opportunity development districts located in Ohio County and Harrison County, the 2013 West Virginia legislature may consider approving a third economic opportunity development district in Monongalia County.

Compared to traditional property tax increment financing, STIF is used less frequently in West Virginia. West Virginia collects a 6% State sales tax on retail sales throughout the State. Current West Virginia Statutes provide that counties and municipalities may create economic opportunity development districts with State legislature approval and use State sales tax increment for up to 30 years to finance certain development costs. In order for the State legislature to consider approving the establishment of an economic opportunity development district, the proposed project must include capital investment of at least $25 Million within two years after district designation unless environmental remediation activities are required, in which case developers have up to four years to meet the minimum capital investment requirement.

In 2003, Ohio County established West Virginia’s first economic opportunity development district and in 2006, $99 Million worth of STIF bonds were issued, supported by sales tax increment generated by approximately 60 businesses located in the approximately 300 acre district. The District includes a 1,100,000 square foot Cabela’s distribution center, a 175,000 square foot Cabela’s retail store, a movie theater and several other big box stores. In 2012, the State legislature approved the Charles Pointe Economic Opportunity Development District in Harrison County, only the second economic opportunity development district in West Virginia. With approximately 300,000 square feet of commercial/office space, 200 hotel rooms and a 15,000 square foot conference center already constructed, when completed, the Charles Pointe development is expected to generate sufficient tax increment to support up to $400 Million bonds with bond proceeds to be used for certain development costs.

Developers in Monongalia County intend to construct a multi-use development in a 1,400 acre area, including a new baseball stadium in the greater Morgantown area.  Both the County and the State approved the property tax increment financing in 2012.  The State legislature will debate approval of the STIF agreement during the 2013 legislative session. If approved, project proponents anticipate that approximately $15 Million in STIF bonds would be issued to pay for certain development costs.

Vermont Expands Use of State Education Property Tax for TIF Projects

October 4th, 2012

Vermont Governor Peter Shumlin is considering an expansion to the State’s TIF program by allowing seven municipalities to use state education property taxes to stimulate local economic development instead of six as is currently allowed under Vermont’s TIF law.

The Vermont legislature approved the use of TIF for economic development in 1985. Since then, TIF statutes in Vermont have undergone considerable changes, most notably when Vermont created a state education property tax in 1997, replacing local school district property taxes. After this change, the Vermont TIF statutes were amended to allow both municipal property tax increment and state education property tax increment to be pledged for TIF projects.

In order to be eligible for TIF assistance in Vermont, a project must be located in an existing industrial area, approved growth center, or economically distressed area. In addition, a project must meet at least three of the following criteria:

  • Requires significant public investment in amounts substantially greater than normal municipal expenditures;
  • Includes affordable housing;
  • Impacts the remediation and redevelopment of a brownfield;
  • Stimulates business creation and expansion; and
  • Improves public transportation

If a project is eligible for TIF assistance, a municipality can pledge up to 75% of both the municipal property tax increment and the state education property tax increment generated within that TIF district to the project. Both types of property tax increment must be pledged in equal percentages.

A 2008 amendment to the TIF statutes provides that between July 1, 2008 and June 30, 2013, only six TIF districts can use the state education property tax. Further, the 2008 amendment limits each municipality to the creation of only one TIF district during this period.

In order to establish a TIF district and use the state education property tax, a municipality must receive approval from the Vermont Economic Progress Council (VEPC). So far, the VEPC has approved the requests of five municipalities (Burlington, Colchester, Hartford, Milton and St. Albans). Because there is only one slot remaining but there are two applicants (Barre and South Burlington), the Governor is considering an expansion of the TIF program by making seven slots available. This proposal will be considered during the 2013 legislative session.

It is unclear whether a municipality has the authority to establish a TIF district and pledge only municipal property taxes, and therefore not be subject to the TIF cap. The VEPC has requested that the Vermont legislature clarify this issue during the 2013 legislative session.

New York School Districts Allowed to Pledge Taxes for TIF Projects

September 4th, 2012

On March 30th, 2012, New York Governor Andrew Cuomo signed Bill A9057D into law.  Although it mainly focuses on budget items for the 2012-2013 fiscal year, A9057D also amends certain provisions of New York’s Municipal Redevelopment Law (MRL) to broaden the State’s TIF program by allowing school districts to pledge their portion of property tax increment to TIF projects. This amendment may significantly increase the use of TIF as an economic development tool in New York.

In 1984, New York adopted the MRL, allowing municipalities to use TIF for economic development.  However, under the MRL, municipalities could only pledge their share of incremental property tax for TIF projects. Because a municipality is only one of many taxing bodies that levy property taxes and the municipal share only accounts for a relatively small portion of total property taxes levied and collected, New York’s TIF program was less able to generate and pledge incremental tax revenues for economic development. In addition, without the ability to pledge incremental taxes collected by other taxing bodies, TIF obligations were viewed as overly risky, driving away potential investors.

With the adoption of A9057, school districts in New York can now elect to participate in TIF and pledge their share of incremental property taxes to economic development projects. Under the amended MRL, the board of education of any school district must review a TIF District’s redevelopment plan and adopt a resolution approving the TIF plan before the school district’s property tax increment can be pledged. Because the school district share generally accounts for a major portion of property tax increment, it is anticipated that this change to the MRL will encourage more municipalities in New York to use TIF as an economic development tool.

Although a welcome development, with this change, the New York school districts will have control over whether to pledge their portion of property taxes. This is different from many other States. In Illinois, for example, school districts cannot unilaterally veto a TIF proposal by voting against it. They can only force the corporate authorities of a municipality to adopt a TIF plan by a super-majority vote rather than by a simple majority.

PORTLAND, MAINE CONSIDERS CHANGES TO TIF POLICY

August 29th, 2012

The Portland, Maine City Council is considering proposed changes to its TIF Policy because of concerns over the number and size of two recent TIF Agreements – a $31 Million incentive for a sports complex and a $2.9 Million incentive to renovate a cold storage building for use by a law firm.

Maine law provides that a maximum of 75% of property tax increment can be pledged to a Developer for up to 30 years for eligible redevelopment costs including land acquisition, demolition, site work, equipment acquisition, professional services, infrastructure improvements, public safety improvements and job training.  In addition to the State statutory requirements, current Portland TIF policy requires a TIF project to include a minimum $2 Million investment, to retain existing jobs, and to create long term employment opportunities in the long term.

The proposed changes to Portland’s TIF Policy include:

  • Reducing the percentage of real estate taxes pledged to TIF projects from 75% to 50% except for certain projects that provide extraordinary public benefits;
  • Shortening the term of TIF Agreements to 10-15 years from 30 years;
  • Prioritizing certain industries such as manufacturing, life sciences and information technology when determining incentives;
  • Prioritizing transit oriented development; and
  • Focusing on affordable housing projects where at least one-third (1/3) of the housing units in a residential project are affordable to residents at or below 120% of area median income.

Portland’s first TIF District was created in 1994.  Since then, the City has paid more than $18 Million in tax increment to various projects.  Portland currently has 13 active TIF Districts.  Based on current obligations set forth in existing TIF Agreements, the City anticipates that it will pay approximately $65 Million in additional tax increment to the projects in those TIF Districts.

The suggested TIF policy changes were introduced during a Portland City Council Meeting on August 22nd, 2012.  They will be debated over a series of City Council meetings before being put to a vote.

Virginia Tourism Development Financing Program Granted $600,000 STIF Assistance to its First Project

August 13th, 2012

In 2011, Virginia adopted a new sales tax incentive program to stimulate tourism development.  The Commonwealth of Virginia Tourism Development Financing Program provides tourism-related projects with assistance in amounts up to 20% of total project costs.  Pledged sales taxes are used to repay bank loans or retire bonds issued to bridge a project’s financing gap.

The tourism financing program can only be used for projects located in tourism zones, which can be established by any city, town or county.  Projects in tourism zones are eligible for public assistance, such as reductions in fees and pledges of gross receipt taxes, for up to 20 years.

The Virginia Tourism Development Financing program is unique in that it pledges portions of the State and local sales tax to tourism projects.  In order for a project to be eligible for this sales tax incentive program, a local government must:

  • Establish a tourism zone;
  • Adopt a tourism development plan;
  • Determine whether a proposed project has a funding deficiency; and
  • Enter into an agreement with the project developer to develop the tourism facility.

To qualify for this financing program, a developer must prove that at least 80% of a project’s funding is secured from equity and debt financing. Once a project is certified by the State Comptroller, the State may pledge its 1% State sales and use tax generated by the project only if the local government pledges its 1% local sales taxes. The project developer is also required to pay a program access fee to match the amount of State assistance paid to the project.  The pledged assistance plus the program access fees are used to pay principal and interest on the financing secured to close the funding gap.

This financing program is available for a wide range of tourism-related projects. In June 2012, a Hyatt Place Hotel with office and retail space in Fredericksburg became the first project to qualify. This hotel project, the second phase of a residential, retail and office development by the University of Mary Washington Foundation, has a $13 Million budget and is anticipated to contribute approximately $3.27 million in new taxes to the City over the next 10 years. It is anticipated that the Project will receive up to $620,000 in assistance from the State and the City under this program.

An Analysis of Five Chicago TIF Districts – TIF District EAV Growth vs. Township EAV Growth

August 8th, 2012

To further analyze EAV growth within the 5 terminated TIF Districts, we compared the EAV compound annual growth rates (CAGRs) for each of the Districts to the EAV CAGRs for each District’s Township.

To calculate Township EAV CAGRs, we compiled a list of all PINs in each of the Townships that met the following criteria:

  • PINs that were not a part of any TIF District or special service area; and
  • PINs that existed both in the TIF District creation year and the termination year (and, if amended, the amendment year).

We then calculated the CAGR for each Township based on the total EAV of all PINs in the beginning year and the final year of each analysis period.

Our methodology could not determine whether some Township PINs were excluded because of parcel division or consolidation. Because the EAV of these PINs may have grown significantly, we determined that excluding these PINs could result in an artificial reduction in Township EAV growth. To eliminate this potential bias, we included the total EAV of these PINs in the final year of each Township’s analysis period (we were unable to determine the initial EAV of these PINs, so we could not include such data in the total Township initial EAV calculation). Because our calculation is ultimately based on the total Township initial EAV and the total Township final EAV plus final EAV of certain excluded PINs, we derived a CAGR for each Township that is actually the upper limit of Township EAV growth.

The following is a summary of the CAGRs for each TIF District and Township (when more than one TIF District is located in a Township, the same Township may have different CAGRs because of different analysis periods):

TIF District

Analysis Period

TIF District CAGR

Township

Township CAGR Upper Limit

Central Loop

1984-1996

17.80%

Central

8.11%

1997-2007

8.72%

9.51%

Chatham Ridge

1986-2000

21.78%

Lake

6.94%

2001-2009

5.83%

10.17%

Chinatown Basin

1986-1999

39.13%

Central

7.49%

2000-2009

15.07%

13.18%

Ryan/Garfield

1986-2007

19.78%

Lake

8.32%

West Ridge-Peterson

1986-2009

8.82%

Lake View

10.80%

When we compared the TIF District EAV CAGR with the Township EAV CAGR for each analysis period, the average TIF District EAV growth was approximately 17% while the average township EAV growth was approximately 9% – and 5 out of 8 TIF District EAV growth rates exceeded the Township EAV growth rates.  The largest difference between TIF District EAV growth and Township EAV growth was between the Chinatown Basin TIF District and Central Township – between 1986 and 1999, TIF District EAV growth was 39.13% and Township EAV growth was 7.49%.

It is also notable that when a TIF District was amended, EAV growth before amendment was consistently higher than both EAV growth after amendment and corresponding Township EAV growth.  On the other hand, TIF District EAV growth after amendment was generally lower than or only slightly greater than Township EAV growth over the same period.

Our observations are based on our analysis of these 5 terminated TIF Districts only.  As more TIF Districts in the City terminate, additional TIF District data may be useful in assessing the ability of TIF Districts to stimulate economic growth.

An Analysis of Five Chicago TIF Districts – EAV Compound Growth Rates

August 6th, 2012

To examine the growth of the 5 TIF Districts included in our analysis, we calculated the compound annual growth rate (CAGR) for each TIF District’s EAV based on the total base EAV of each TIF District and the TIF District’s total EAV in the year before the termination year (the most recent annual EAV data available).

Because the Central Loop, Chatham Ridge and Chinatown Basin TIF Districts were amended during their terms to include additional parcels, two CAGRs were calculated for each of these districts to eliminate any artificial increase in EAV due to the new parcels.

The following chart shows the beginning EAV, final EAV and CAGR for each TIF District’s analysis period:

TIF District

Analysis Period

Beginning EAV

Final EAV

CAGR

Central Loop

1984-1996

$54,537,921

$389,437,601

17.80%

1997-2007

$1,379,439,511

$3,184,101,518

8.72%

Chatham Ridge

1986-2000

$1,369,425

$21,613,200

21.78%

2001-2009

$24,357,066

$38,315,922

5.83%

Chinatown Basin

1986-1999

$199,790

$14,626,407

39.13%

2000-2009

$19,243,111

$68,073,215

15.07%

Ryan/Garfield

1986-2007

$166,083

$7,353,511

19.78%

West Ridge-Peterson

1986-2009

$1,617,926

$11,299,347

8.82%

In addition to calculating the CAGR for each TIF District, we also derived each TIF District’s year-over-year EAV growth to look for growth patterns among the TIF Districts. Based on this year-over-year analysis, the Central Loop, Chatham Ridge and Chinatown Basin TIF Districts experienced steady growth during their terms.  The Ryan/Garfield TIF District experienced rapid growth in the first few years and the final few years of its term. Growth in the West Ridge-Peterson TIF District was concentrated in the final few years.

AN ANALYSIS OF FIVE CHICAGO TIF DISTRICTS – OVERVIEW OF TIF DISTRICTS INCLUDED IN ANALYSIS

August 1st, 2012

The following TIF Districts terminated at or close to the end of their statutorily imposed terms and were included in our analysis:

Central Loop TIF District

In 1984, Chicago designated the Central Loop TIF District, the first TIF District in the City.  When it was designated, it was intended to redevelop the northern part of Chicago’s Central Loop.  At the time of its designation, it encompassed declining commercial buildings in an area that was considered unattractive and unoccupied outside of normal business hours.  Retail sales were stagnant or declining and multiple entertainment venues were deteriorating.  In 1997, the District was expanded to encompass an additional 139 acres for redevelopment, including a much larger part of the Chicago Loop.  Central Loop TIF projects included the development and redevelopment of commercial buildings, cultural facilities, hotels, residential buildings, public resources and transit facilities.  This District terminated in 2008.

Chatham Ridge TIF District

The City originally designated the Chatham Ridge TIF District in the Chatham neighborhood in 1986 to encourage new commercial and residential opportunities.  The District terminated in 2010.  The original district, located approximately 12 miles south of the Chicago Loop, was expanded to include an additional 23 acres in 2001 to further improve commercial and educational opportunities in the area.  Major projects in the Chatham Ridge TIF District included rehabilitating and expanding a high school, constructing a commercial center and developing low and moderate income housing opportunities.

Chinatown Basin TIF District

The 30-acre Chinatown Basin TIF District was designated by the City in 1986 to encourage residential and commercial development on former railroad property in the City’s Chinatown area, approximately 2.5 miles south of the Chicago Loop.  The TIF District was expanded in 2002 to encourage additional residential, commercial and infrastructure development and redevelopment and expired in 2010.  Major projects include a two-story shopping mall containing restaurants, retail and other commercial businesses, and surrounding residential development, including both affordable and senior housing.

Ryan Garfield TIF District

The Ryan Garfield TIF District was established in 1986 and was terminated in 2009.  It was established to encourage the development of a shopping center in one of the City’s poorest neighborhoods.  Located approximately 8 miles south of the Chicago Loop, the property that comprised this TIF District had been vacant for more than 10 years.  The City hoped that the creation of a TIF District would encourage the development of a shopping center and improved infrastructure, which would also create job opportunities in the area, particularly for nearby residents.  A community shopping center was ultimately constructed, providing both shopping and employment opportunities to an under-served neighborhood.

West Ridge-Peterson TIF District

The 6-acre West Ridge-Peterson TIF District was designated in 1986 to incentivize commercial redevelopment of property located approximately 9 miles northwest of the Chicago Loop.  An existing vacant big-box store was demolished and a new Target store was constructed in the final years of the District’s term, which ended in 2010.