tax increment financing and infrastructure investment presentation to the northern border finance...

What is Tax Increment Financing?

• A financing mechanism that allows future increases in taxes to pay for development projects through– Increases in designated TIF District property valuations

– Additional tax revenues generated by the project

• Revenues are earmarked to pay for project costs– Additional tax revenues do not pay for additional services

• Popular financing method designed to:– Reduce urban blight by stimulating development

– Reduce voter aversion to tax increases

– Address dwindling federal grants

Fundamentals of TIF Revenues

Base EAV: The amount available to taxing bodies stays flat.

New EAV: Goes toward

creating $$ for the TIF (increment)

Total E

AV: O

nce the TIF ex

pires,

othe

r tax

ing bo

dies

collect ta

xes

on th

e fu

ll EA

V.

How a Successful TIF Generates Revenues Increased EAV from redevelopment = more tax revenues

Year TIF Established

Year TIF Expires

Taxes

Base EAV: The amount available to taxing bodies stays flat.

New EAV: Goes toward

creating $$ for the TIF (increment)

Total E

AV: O

nce the TIF ex

pires,

othe

r tax

ing bo

dies

collect ta

xes

on th

e fu

ll EA

V.

How a Successful TIF Generates Revenues Increased EAV from redevelopment = more tax revenues

Year TIF Established

Year TIF Expires

Taxes

Mechanics of TIF District Revenues

1. A TIF District is created with specific boundaries

2. A time period for the TIF District is established

3. Plans for specific improvements are developed

4. Public service expenditures within the boundaries are “frozen” once the TIF District is established

5. Improvement projects occur in the District and attract private development

6. Property values in the District increase

7. Property taxes rise due to the increase in valuations

8. The additional taxes help pay for the project costs

9. Once the TIF designation expires, all of the increased tax revenues are available to the community for other public purposes

Short History of TIF programs

• California passed first State law in 1952

• By 1970, only six States had authorized TIFs

• Today, all States except Arizona and including the District of Columbia have TIF legislation

• Each State determines their TIF criteria such as– Ability to issue bonds– The distribution and sharing of TIF revenues– The types of eligible development– The maximum time period and size (acreage) for the

TIF District

Advantages of TIF

• Increases in property valuations pay for the development (versus new or additional taxes )

• No voter approval is required for a TIF District or to issue bonds, reducing delays in project delivery

• TIF Districts permit more project flexibility• Communities have local control• TIF bonds are not counted against the municipality’s

general obligation debt ceiling or constitutional debt limits, and may obtain bond insurance

• The technique may be used in combination with other lending programs or economic development instruments, such as Transit Oriented Development

Challenges of TIF projects

• Incremental tax revenues do not materialize– Property may be acquired by a tax exempt entity

– District encounters unanticipated legal expenses

– Project delivery delays occur

– Changes in the tax code are enacted

• Citizens displaced by rising property valuations may oppose the project

• A regional project (e.g., a rail line) may benefit users that do not pay TIF based taxes

• Redistribution of economic development may result in an overall decline in city wide tax revenues

• Reliance on public services outside of TIF District– Fire or police protection, sewer or water services may be

needed by the TIF district

TIF: The Greater Chicago Experience

• Illinois TIF legislation first enacted in 1977• First TIF District created in 1984• Program is designed to address aging or obsolete

structures and land use policies• TIFs may be used to fund public transportation

infrastructure but not operating expenses• 373 TIF Districts in Cook County, 147 in Chicago• TIF Districts generated $686 million in property taxes

and an estimated $2.82 billion in private investment

Chicago TIF funded transit projects:

• The Randolph/Washington Station ($13.5 million in TIF funds)

• The Dearborn Subway-Lake/Wells ($1.2 million in TIF funds)

• Miscellaneous Central Loop transit projects ($24 million in TIF funds)

• The Block 37 Transit Center (aka 108 North State Street; $42.4 million in TIF funds).

Chicago TIF Program Problems

• April 2007 report by Cook County Commissioner Mike Quigley questions the use of TIFs , finding: http://www.commissionerquigley.com/library/taleoftwocities.pdf

• Development would have occurred without the TIF• Local governments may lose tax revenues to TIFs• TIF implementation problems exist, including poor

oversight, documentation and public participation• TIF tax revenues were not properly tracked• Property taxes were raised in TIF Districts• The TIF program needed to be reviewed

Other TIF transit projects include:

• A $30 million BART parking structure and a $75 million BART station in Fremont, California;

• A $7.5 million investment in the Central City Streetcar project in Portland, Oregon;

• The $350 million Interstate Avenue Light Rail, also in Portland, Oregon; and

• Elements of the $324 million Metro Rail Red Line in Houston, Texas.

TIF and other financing considerations

• TIF funds may be pledged to repay State Infrastructure Bank (SIB) or USDOT TIFIA loans

• TIF projects may fulfill obligations under revised Community Reinvestment Act provisions, thereby attracting private banking interest

• Bonds may be issued against future TIF revenues to enhance financing options

• TIF Districts often fund small scale projects due to the risks of collecting future TIF tax revenues

• Many transportation projects require sizable investments, necessitating other financial resources, such as a direct loan in addition to TIF revenue

PAY-GO v. Infrastructure LoansBorrowing Is Attractive When:• Low or attractive interest rate environments • Insufficient grant funds for project

– Appropriation risk for multiyear project• Delays may occur in budget schedule• Changes in project earmark status

• High inflation rate environment – construction materials

– right of way costs

• Time sensitive delivery – Must meet safety standard (air quality)

– Disaster recovery (restore service)

– External pressure to meet a deadline (reduce blight, etc.)

Existing USDOT Lending Programs

• Transportation Infrastructure Finance and Innovation Act (TIFIA, Public Law 105-78, 1998)– Supports Title 23 and 49 surface transportation projects

• Direct Loans

• Loan Guarantees

• Lines of Credit

• Railroad Rehabilitation and Improvement Financing – Direct Loans for passenger and freight rail infrastructure

• Maritime Guaranteed Loan Program– Loan Guarantees to support shipping industry

These programs could be used with a TIF project

Commercial Lending and the Community Reinvestment Act (CRA)The CRA regulates bank lending practices:• Public disclosure of commercial lending practices

and activity in low income, minority, distressed areas• Bank services must meet needs of local community• Bank examiners determine compliance• First established in 1977 (Public Law 95-128)• Four Federal agencies involved in compliance

– Federal Deposit Insurance Corporation

– Office of the Controller of the Currency

– Federal Reserve Board

– Office of Thrift Supervision

A TIF project could also attract a CRA lender

CRA Infrastructure Investment

Revised Guidance issued on March 10, 2006– Federal Regulations (70 FR 44256)

– FDIC RIN 3064-AC97

• Qualifying activities include infrastructure :– Disaster area:

“providing financing or other assistance for essential community-wide infrastructure”

– Underserved non metropolitan middle income area: “financing the construction, expansion, improvement, maintenance or operation of essential infrastructure…for public safety, public services”

TIF Bonds and Bond Insurance

• TIF bonds may be insured to reduce risks• Bond insurance lowers the cost of borrowing and

may simplify the TIF bond sale• TIF bond credit analysis is similar to a typical general

obligation issue• Bond insurers typically limit TIF insurance to mature

TIF districts or to refunding existing bank loans• TIF bonds must have high debt service coverage

ratios with a diverse property base and diverse (unconcentrated) ownership

• Major risk factors include project development default, declining real estate markets, and reduced asset valuation

Future Infrastructure Investment Needs

Surface Transportation 2004 Estimated Funding Gap:

Average annual cost to maintain current conditions (2005-2024)

Funding shortfall

Highways and Bridges$8.5 billion

Transit $3.2 billion

These estimated numbers are from the Conditions and Performance Report and do not include any funding for infrastructure improvements

Conclusion

• TIF programs have supported infrastructure investments and economic development BUT

• TIF revenues may not be sufficient to meet the funding requirements for large projects such as transportation infrastructure HOWEVER

• Additional programs exist at USDOT and with commercial lenders implementing CRA to assist with infrastructure investment.

• The need for infrastructure investment is great, but it must mesh with the needs of the community where it will be installed

Contact Information:

THANKS!

Robena Reid, Federal Transit Administration

(202) 366-1973

[email protected]

tax increment financing and infrastructure investment presentation to the northern border finance...

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