16 - Tax Increment Financing DiscussionItem No. 16
TO: Mayor & City Council
FROM: John Godwin, City Manager
SUBJECT: 'FAX INCREMENT FINANCING
DATE. April 1"), 2018
BACKGROUND: Tax increment financing is a commonly used methodology tor setting aside
funds to redevelop areas within cities, especially downtowns. Essentially it sets aside any
incremental tax amounts due to improvements within the area, and then allows those tax
increments to be spent only for a public purpose within that district. For example., if we were to
create a district, called a tax increment reinvestment zone (TIRZ), for downtown Paris, when
new construction causes ad valorem values to increase, the increased revenue will be placed into
a separate TIRZ fund instead of the city's general fund,
STATUS OF JSSU[: It can take a long time to reserve enough funds to make a notable
difference, but the sooner we begin to accumulate funds, the quicker we will have amounts
sufficient to start to make a difference. By knowing increased tax payments will stay in their
"neighborhood," property owners will often be encouraged to invest more readily, too. Finally,
with a TIRZ in place, should a significant project or need carne along, TIRZ funds can be
pledged against the sale of bonds. The attached briefing provides a more detailed description. A
TIRZ neither creates an abatement nor increases tax rates.
BUDGET: NA
RECOMMENDATION: Discussion and provide direction to staff.
CHAPTER 3ltTAX INCREMENT FINANCING ACT ofthe TAX CODE
Tax Increment Reinvestment Zones (TI'RZ) are special districts created to help attract new investment to
an area. They have historically been used to finance the omst ofredevelopment and encourage new
development in areas that uvom|d otherwise not attract sufficient market development in a timely
manner. Taxes attributable to new improvements (tax increments) are set aside in a special fund to
finance public improvements within the boundaries of the zone. These funds are most commonly used
to fund street, water and sewer improvements but are also be used for street lighting, parking
structures, sidewalks, park amenities, and yandscapimg. Each of these elements contributes to the
viability o[the neighborhood and promotes quality development.
A number of Texas cities have one or more T1RZ districts with the common goal of stimulating or
accommodating new private investment and thereby increasing real' estate values aind improving quality
oflife. When aspecific geographic area isdesignated asaTiRZ,the property values mmthat date become
the "benchmark" or the base values. Only the additional tax revenue generated from new development,
nedeve|o0ment,orincneasud*a1uesonesistimgdeve|opmmentareaUocatedtutheT]RZ. Therefore, the
district does not increase the tax rate but only reallocates all or a portion of the revenue from the
inc/eased tax base back to the area for . If debt is incurred, the TKRZ must remain in
p|aceatleast until all such debt ioretired.
To be designated a reinvestment zone, an area must substantially arrest or impair the sound growth of
the municipality, retard the provision of housing, or constitute on economic or social liability and be a
menace to the public health, safety, or welfare because of the presence of one or more of the following
conditions: a) substandard or deteriorating structures, inadequate sidewalks or streets, faulty lot
layouts, unsanitary or unsafe conditions, defective or unusual conditions of title, , the deterioration of
site or other improvements or conditions that endanger life or property; gr b) an area that is
predominately upum and because of obsolete platting, orother factors, substantially impairs the growth
of the area. As an alternative, a TJRZ may be initiated by property owners who ovvm a minimum of 501%
ofthe appraised value inthe proposed zone,
The process for establishing aTTRZisgenerally esfollows:
• City prepares preliminary reinvestment zone financing plan;
~ Plan is provided to each governmental entity that levies taxes on real property within the zone;
m City meets with other taxing entities to discuss the boundary of the district and amount of the
tax increment to be contributed;
• City conducts public hearing(s) and approves boundary of district by ordinance;
• City appoints TIRZ Board consisting of 5-15 members (including one api�olintee each from PISD,
[9(, and county, plus state senator and state representative); and
m T|RZ board prepares a "project plan" and a "financing plan" and submits to council for adoption.
Cities are authorized to:
a Cause, project plans to be prepared, approve and implement the plans, and otherwise achieve
the purposes of the plan;
u Acquire real property by purchase, condemnation, or other means to implement project plans
and sell that property on the terms and conditions and in the, mainner it considers advisable;
° Enter into agreements, including agreements with bondholders, determined bythe governing
body of the municipality to be necessary �r convenient to, imiplement project plans and achieve
their purposes;
w Acquire, construct, reconstruct, or install' public works, facilities, orsites orother public
improvements, including utilities, streets, street lights, water and sewer facilities, pedestrian
malls and walkways, parks, flood and drainage facilities, 0rparking facilities, but not including
educational facilities.
Three funding mechanisms may be utilized by a TIRZ:
1. Pay-as-you-go uses the funds as they become available to finance projects. This involves the
least amount oJrisk but may not beable to finance larger scale projects.
2. lssuebonds and finance projecNs)with debt. The expectation is that the, sooner the public
portion is completed, the sooner private investment begins and the debt obligations are met.
I Reimbursement to developers. The public project is funded and constructed by the private
sector; the developer is then reimbursed asthe incremental tax revenues are collected. This
process ban incentive to the developer to work for a successful project which will grow in value.
The most significant advaotageisthstaDRZdoeamo1requirenewtaxesmrasseysmentsin#rdertmfund
improvements. The development pays the costs through increased captured revenue. Depending upon
how a project is financed, the risks to the local'govern,ment can be minimized by placing the burden on
the private developers to generate the added value. There is no federal oversight and state review is
limited toannual reports.