Over the course of 4 blog posts, we will describe research that we conducted on the growth in Equalized Assessed Value (EAV) in 5 of the City of Chicago’s Tax Increment Finance (TIF) Districts that terminated at or close to the end of their statutory lives of 23 years.  EAV is equal to the assessed value of a property multiplied by the State certified equalization factor.  In Illinois, TIF Districts are created to encourage development in areas where development would not otherwise occur.

A TIF District’s base EAV is determined when the District is created.  Taxes generated by the base EAV are paid to the overlapping taxing bodies during the life of the TIF District as if the TIF District did not exist.  Taxes generated by the EAV growth above the base – the tax increment generated by new development in the District – are paid into a special TIF District fund to finance certain improvements related to development within that District.

We compiled annual total EAV data for each of the 5 following TIF Districts:

1. Central Loop
2. Chatham Ridge
3. Chinatown Basin
4. Ryan/Garfield
5. West Ridge-Peterson

In addition to comparing these TIF Districts to each other, we wanted to compare EAV growth within these TIF Districts to EAV growth outside of them.  To do that, we calculated EAV growth for various townships in Chicago, all of which contained at least one of the TIF Districts that we examined.  Townships are local governments that are sub-units of the County.  Within Cook County, townships are essentially geographic designations. We included the following townships in our analysis:

1. Central (includes Central Loop and Chinatown Basin TIF Districts)
2. Lake (includes Chatham Ridge and Ryan/Garfield TIF Districts)
3. Lake View (includes West Ridge-Peterson TIF District)

Our township dataset consisted of more than 200,000 parcels.  Because our goal was to determine the natural EAV growth within the townships only, we limited our township dataset to parcels that were outside of any special taxing districts throughout the analysis period.  Ultimately, because of research limitations related to the ability to track township parcels on an annual basis, we were only able to derive the upper limit of the EAV growth rates for each township.

When comparing EAV growth within the TIF Districts, we found that 3 of the 5 TIF Districts experienced steady EAV growth over their terms and 2 of the TIF Districts experienced concentrated growth over shorter periods.  When comparing EAV growth to township growth, we determined that, in general, TIF District EAV grew faster than corresponding township EAV.  Average TIF District EAV growth was equal to approximately 17% while average township EAV growth was equal to approximately 9%.

Our research is limited to public information available on the Internet, from the City of Chicago Department of Housing and Economic Development and from the Cook County Clerk’s Department of Real Estate and Tax Services.  We did not confirm the accuracy of any of this data with any other source.

On March 21^st, 2012, Tennessee Governor Bill Haslam signed Senate Bill 2175, the Uniformity in Tax Increment Financing Act of 2012, into law.  The law is intended to make TIF easier for local governments to use as an economic development tool.

TIF is not a new concept in Tennessee. Before SB 2175, TIF was used in different ways.  Under Tennessee Code Annotated (TCA) Title 7, Chapter 53, an industrial development corporation is authorized to use TIF for industrial parks or other projects owned by the corporation. TCA Title 13, Chapter 20, allows a housing authority to adopt a redevelopment plan or urban renewal plan which includes incremental property taxes as a financing source. In addition, the Community Redevelopment Act of 1998 allows municipalities and counties to create community redevelopment agencies, adopt community redevelopment plans and issue redevelopment revenue bonds based on property tax increment.

Because the rules to create and use TIF in each of these three ways are different, the Tennessee legislature adopted SB 2175 to provide municipalities and counties with a more uniform tool for economic development. Generally, SB 2175 provides the following:

• TIF Districts established by housing authorities, municipalities and counties are limited to 30 years. TIF Districts established by industrial development corporations are limited to 20 years.
• The term of a TIF district can be extended with agreement from both the Commissioner of Economic and Community Development and the Comptroller of the Treasury if they decide such an extension is in the State’s best interest.
• Industrial projects may use TIF dollars to pay for privately owned land, improvements and equipment in addition to public infrastructure, site acquisition and site improvements if both the Commissioner of Economic and Community Development and the Comptroller of the Treasury decide such use is in the State’s best interest.

Elected and government officials have welcomed the adoption of SB 2175 because it will make it easier for communities to use TIF to encourage job growth.

Our previous post discussed the Chicago Inspector General’s Report “Recommendations for Improving the SSA Establishment Process” dated June 4, 2012 (the “IG Report”).  The IG Report focused on SSA #46, a south side SSA that overlapped three TIF Districts.  As a result of the overlap, the SSA tax rate levy on properties within the SSA was approximately 30% higher than anticipated, angering SSA taxpayers.  Ultimately, the City Council terminated SSA #46.

The IG Report offered suggestions to streamline the SSA process and improve coordination with the City’s Department of Housing and Economic Development for greater transparency and more accurate projections of the impact of the SSA tax.  Another possibility, however, is the ability of the SSA sponsor agency to coordinate with the City so that money attributable to the SSA tax that would otherwise be deposited in the TIF District Special Tax Allocation Fund (STAF) be paid to the SSA for SSA funded improvements.  Section 65 ILCS 5/11-74.4-3(q) of the Illinois TIF Statute allows a municipality to either retain tax increment generated by an SSA tax and use that increment for SSA projects or transfer that increment to the TIF District’s STAF.

This is not the first time that the Inspector General’s Office has examined the relationship between TIF and SSA.  Earlier in 2012, the Inspector General’s Office published “Analysis of Special Service Area Taxes and Tax Increment Financing Funds.”  In this Report, the Inspector General’s Office concluded that TIF Districts receive an unintended benefit when an SSA overlaps a TIF.  If an SSA tax is levied on property within a TIF District, it is not only extended on the Base Equalized Assessed Value (EAV) of property within the TIF District to meet the SSA tax levy, but it is also levied on the incremental EAV of the property within the TIF District.  SSA taxes generated on the base EAV are paid to the SSA.  Normally, SSA taxes generated on the incremental EAV are paid into the TIF District’s STAF.  However, the City has the authority to pay SSA tax generated on the incremental EAV to the SSA instead.

Encouraging coordination between the City and the SSA sponsor agencies by making them aware of this provision of Illinois TIF law is another way to improve the City’s SSA process.

A report released on June 4, 2012 by the Chicago Inspector General’s Office (the “IGO Report”) examines the City’s Special Service Area (SSA) taxing district establishment process. The report, entitled “Recommendation for Improving the SSA Establishment Process”, analyzes SSA #46 and explains how a TIF District impacts an SSA tax levy if an SSA taxing district overlaps an existing TIF District.

The following steps are required to establish an SSA in Chicago:

• A sponsor agency must complete a feasibility report (which includes a PIN analysis) and an SSA application.

• The City’s Department of Housing and Economic Development (DHED) must approve the SSA application.

• The sponsor agency holds local  stakeholder  meetings  and establishes public support levels with collaboration from the local alderman and DHED.

• The City Council’s Finance Committee holds a public hearing.

• The City Council votes on the establishment of the SSA.

According to the IGO Report, SSA #46 was established in December 2009. The first SSA tax levy was included in the second installment of the 2009 property taxes (collected in the fall of 2010). Because the 2009 property tax increase resulting from the SSA was significantly higher than the SSA taxpayers expected, the City Council elected to terminate SSA #46 in February 2011.

The IGO Report concluded that several factors, including inaccurate PIN analysis, miscommunication with SSA #46 taxpayers and failure by the HED to review the SSA establishment process led to higher than anticipated SSA taxes. For example, the IGO Report found that the PIN analysis for SSA #46 was inaccurate because the SSA sponsor agency failed to consider the effect of the three overlapping TIF Districts on the SSA tax levy.

To levy an SSA tax, the sponsor taxing agency must establish a budget (the dollar amount of the proposed SSA tax) and then derive an SSA tax rate by dividing the budget by the combined equalized assessed value (EAV) of all properties in the proposed SSA taxing district (SSA Tax Rate = Budget / Combined Property EAV).  The SSA tax levy for each taxpayer is then calculated by multiplying the EAV of each taxpayer’s property by the SSA tax rate (SSA Tax = Property EAV x SSA Tax Rate).

If the SSA taxing district overlaps an existing TIF District, the combined EAV used to derive the SSA tax rate must be adjusted. When a TIF district is created, its then current EAV is defined as base EAV.  Any EAV increase over the base is defined as incremental EAV. Property taxes generated by incremental EAV are deposited in the TIF fund. Only property taxes generated by the base EAV can be distributed to overlapping taxing agencies. Therefore, in order to calculate the SSA tax rate, only the base EAV (instead of the total EAV) for properties located both in an SSA taxing district and a TIF District (the “Overlapping SSA and TIF Area”) should be added to the total EAV for properties in the non-overlapping area (SSA Tax Rate = Budget / (Base Property EAV in Overlapping SSA and TIF Area + Property EAV in Non-overlapping Area)).

The EAV used to determine the tax rate for SSA #46 did not reflect the presence of the overlapping TIF Districts. As a result, while the sponsor agency estimated that the SSA tax rate would equal 1.5%, the actual SSA tax rate shown on the tax bills was 1.982%, approximately 30% higher. Although the total property tax collected for the 1.982% SSA tax levy is more than the budget amount, only the portion of the taxes attributable to the base EAV of properties located in the Overlapping SSA and TIF Area and the total EAV of properties located in the non-overlapping area can be distributed to the SSA tax sponsor taxing agency. The SSA taxes collected on the incremental EAV of properties located within the Overlapping SSA and TIF Area are deposited in the TIF District Special Tax Allocation Fund.

The IGO Report is available on the Chicago Inspector General’s Office website at: http://chicagoinspectorgeneral.org/wp-content/uploads/2012/06/IGO-Recommendations-for-Improving-the-SSA-Establishment-Process_final.pdf

Michigan uses redevelopment agencies, known as Authorities, to administer and implement TIF. A municipality can form an Authority to supervise development plans within a designated district. Once established, the Authority reviews development plans and allocates public funds to supplement a project. These special purpose authorities are structured to target specific types of redevelopment.

In particular, Michigan encourages developers to reuse brownfield properties through extensive financing incentives. Michigan broadened the traditional definition of a brownfield to include badly damaged or functionally obsolete properties. To oversee the distribution of public funds used for brownfield redevelopment, municipalities create Brownfield Redevelopment Authorities (BRAs). According to the Michigan website, 287 BRAs currently exist throughout the State. The goal of a BRA is to make developing brownfields more competitive with greenfield development. To offset the additional costs associated with brownfield redevelopment, BRAs can provide developers with TIF assistance, loans and grants.

TIF eligible costs include pollution abatement activities, environmental insurance, demolition or redevelopment of existing structures, and Baseline Environmental Assessments (BEAs). Normally, any owner in a property’s chain of title may be held liable for environmental contamination. A BEA is designed to determine the amount of existing contamination on a property to protect future purchasers from environmental liability for past contamination. To repay TIF bonds and notes issued for eligible costs, BRAs can capture all incremental property taxes generated by a specific project on eligible property for up to 30 years. BRAs may delay the commencement date to capture incremental property taxes for up to 5 years, potentially providing developers with extra time to remediate their properties prior to development.

Funding for brownfield redevelopment began in the late 1980s when Michigan passed several bond measures including the Environmental Protection Bond Fund (1988) and the Clean Michigan Initiative (1998). These two bond initiatives provide funds for the Brownfield Redevelopment Loan Program, the Brownfield Redevelopment Grant Program as well as the Waterfront Redevelopment Grant Program. In 1996, Michigan also passed the Revitalization Revolving Loan Fund which offers developers low interest loans for brownfield redevelopment costs. As of 2008, funding from these programs was more than $155 million of the approximately $1.4 billion the State had spent for brownfield redevelopment. For BRAs, in particular, from 1998 to 2007 the State provided $120.7 million in assistance to almost 300 brownfield projects.

Apple, Inc. has entered into a 15-year property tax exemption agreement with the City of Prineville and Crook County for its newly planned data center in Central Oregon.

In the agreement, Apple committed to a minimum investment of $250 Million on the 160 acres of land it purchased in February for $5.6 Million.  It also committed to a minimum of 35 jobs with wages at least 150% of the county average.  The data center will be constructed in one of Crook County’s enterprise zones.

In return for the property tax exemption, Apple has agreed to pay local governments a $150,000 per year project fee, which will be split between the City of Prineville and Crook County.

The exact amount of the benefit to Apple is uncertain, and depends on the amount Apple actually invests in the project.  Google received a similar tax break on a $1.3 Billion data center and the tax break is valued at more than $24 Million annually.

In addition to Google and Apple, Central Oregon has attracted other data centers for companies such as Facebook, Microsoft, Amazon and Yahoo.  To encourage additional internet-based companies to locate in Oregon, lawmakers adopted legislation in 2012 to exempt large data centers from certain property taxes, such as taxes on the company’s intangible property.  According to Rep. Tobias Read (D-Beaverton), this legislation will encourage even more internet-based companies to locate their data centers in Oregon.  While data centers are not typically large employers, they have become an integral part of Central Oregon’s economic development strategy.  Crook County, where the new Apple data center will be located, has an unemployment rate of approximately 15%, the highest in Oregon. City and County officials believe that these data centers will spur other development in the surrounding region.

We are starting a new series of blog posts to explore the role of TIF across the United States. The series, entitled “50 States in 50 Weeks,” will include an exploration of TIF policy, legislation and innovative projects throughout the country. Our first post will look at the country’s largest TIF supported project:  New Mexico’s Mesa del Sol Development.

Mesa del Sol is a master-planned, mixed-use development which encompasses a twenty square mile tract of greenfield space south of Albuquerque.  Over the last few years, infrastructure has been constructed at the Project and, according to the Mesa del Sol website, the first houses will be available for occupancy this spring. Approximately 27% of the Project’s 12,900 acres is expected to include 38,000 units of mixed-income housing.  Mesa del Sol will also include a nature preserve, community centers and recreational facilities. Along with these residential amenities, the remaining development will contain retail, corporate and industrial sectors, such as Albuquerque Studios, one of the nation’s largest media production companies, and Advent Solar, a solar technology company. The developer expects to create approximately 60,000 jobs as part of the project.

New legislation was passed in New Mexico in 2006 broadening the availability of tax increment financing. To assist the Project, the City of Albuquerque and the State of New Mexico have pledged tax increment for public infrastructure costs (TIF is known as Tax Increment Development or TID in New Mexico and Tax Increment Development Districts are known as TIDDs). As part of TID, the state, counties and municipalities can pledge up to 75 % of future gross receipt tax (GRT) and ad valorem property tax increment for a maximum period of twenty-five years to repay bonds used to finance development projects.

Currently there are five TIDDs designated in Mesa del Sol with a total pledge of $500 million available to the project from both New Mexico and Albuquerque. The five distinct TIDDs will receive money in separate phases corresponding to the construction timeline, which is anticipated to be 50 years. Based on information from the New Mexico Taxation and Revenue Department, TIDDs in Mesa del Sol will receive approximately 60% of the 6.75% GRT generated by the Project, comprised of 67% of both the municipal dedicated GRT and the City’s share of State GRT and 75% of the State GRT. Mesa del Sol began receiving GRT distributions in January 2008. In FY 2011, it received approximately $890,000 in GRT increment; however, much of the retail planned for the Project must still be constructed.

As part of its obligations, Mesa del Sol must pass an annual test to guarantee the Project is cost neutral for the City. The development must also maintain its plans for a sustainable water supply, pedestrian-friendly environment and offer affordable housing.  TID funds will be used to construct roads, water systems, schools and libraries, among other components of the Project.

On February 29^th, 2012, the City of Chicago announced the first draft of a plan to stimulate economic growth and create jobs. The plan delineates 10 long-term strategies ranging from strengthening the City’s manufacturing capacity to investing in next generation infrastructure. One strategy specifically focuses on enhancing innovation and entrepreneurship in mature and emerging sectors because current R&D spending and technology commercialization in Chicago is lower than the national level.

To promote innovation, spur R&D activities and create high-tech job opportunities, Chicago already has an established Laboratory Facilities Fund (LFF) program that was created by former Mayor Daley. The program aims to use TIF money to help develop laboratory space for new high-tech companies within certain TIF districts throughout the City. With maximum assistance of approximately $1.4 million per project and assistance distributed in a lump-sum amount upon project completion, the LFF program is designed to help new companies that develop products and processes in nanotechnology, biotechnology, pharmaceuticals, medical devices and services, food technology, and environmental technology. Large and publicly traded companies are not eligible to apply for this assistance.

In order to be eligible for assistance under the LFF program, new high-tech companies need to meet the following major requirements:

• Demonstrate evidence that they have advanced beyond incubator or early stage development and that they require larger and more advanced lab facilities;

• Present a lease or proposed lease for at least 5 years;

• Plan to occupy lab spaces ranging from 5,000 to 25,000 square feet in existing buildings within certain TIF districts; and

• Create or retain permanent jobs in Chicago.

Eligible expenses include the construction and rehabilitation of basic lab space improvements, environmental remediation, professional fees, and up to 30% of construction loan interest.

The LFF program application form is available on the City of Chicago’s website at: http://www.cityofchicago.org/content/city/en/depts/dcd/supp_info/laboratory_facilitiesfund.html

The Illinois Legislature is currently considering a bill that would give greater authority to TIF district joint review boards.

A joint review board is comprised of a representative from each community college district, school district, park district, library district, fire protection district, township and county that would have the authority to directly levy taxes on the property to be included in a proposed redevelopment project area as well as a municipal representative and a public member.

A joint review board offers recommendations to a municipality regarding the establishment or amendment of redevelopment plans and redevelopment project areas.  Current Illinois law provides that these recommendations are advisory only.  Any recommendation by the joint review board must be adopted by a majority of the board’s members, however a joint review board’s failure to act is considered to be an approval.

HB4694 would amend the TIF Act and give additional authority to a joint review board.  Most notably, the proposed legislation would delete the following language from the TIF Act: “A [joint review] board’s recommendation shall be an advisory, non-binding recommendation.”  Under HB4694, any recommendation would need to be adopted by a three-fifths majority, rather than a simple majority.  If three-fifths of the joint review board members reject a proposed amendment to a TIF plan, a municipality would be prohibited from proceeding with the amendment.  Additionally, it would be presumed that a joint review board’s failure to act on a timely basis means that the joint review board rejects the proposed redevelopment plan or project area because it fails to meet certain eligibility criteria.

HB4694 was assigned to the House Revenue and Finance Committee for review on February 7, 2012.  To read it in its entirety, visit http://www.ilga.gov/.

Since the California Supreme Court upheld legislation to abolish approximately 400 Redevelopment Agencies in that State, members of the State Legislature have attempted to keep certain TIF dollars for affordable housing (SB 654) and to slow down the dissolution process (SB 659). However, neither of these bills was approved prior to the deadline for dissolution.

Current law requires any TIF fund balances not pledged to the repayment of outstanding obligations to be distributed to taxing entities. SB 654 proposed to retain approximately $1.3 billion in existing housing funds to pay for affordable housing projects. On January 31^st, the California Senate passed this bill; however, as of February 1^st, 2012, it had not passed the General Assembly.

SB 659 proposed to delay the Redevelopment Agency dissolution deadline to April 15^th, 2012, in order to provide the Redevelopment Agencies with sufficient time to resolve issues related to the dissolution. This bill never gained any traction in the legislature.

Since no new legislation regarding the dissolution of the Redevelopment Agencies was passed prior to the dissolution deadline, the Redevelopment Agencies were dissolved as of February 1^st, 2012. Current law requires a successor agency to handle the wind down of redevelopment activities. According to news reports, many cities in California have acted as successor agencies and are in control of former redevelopment agency assets. However, some cities, such as Los Angeles, have refused this role. In the case of Los Angeles, Governor Jerry Brown appointed a three-person panel to oversee the dissolution of the Los Angeles Redevelopment Agency.