Loading...
26 - TAX INCREMENT FINANCINGItem No. 26 memorandum TO: Mayor & City Council FROM: John Godwin, City Manager SUBJECT: TAX INCREMENT FINANCING DATE: February 10, 2016 BACKGROUND: Tax increment financing is a commonly used methodology for 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 ISSUE: 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 come 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 311. TAX INCREMENT FINANCING ACT of the TAX CODE Tax Increment Reinvestment Zones (TIRZ) are special districts created to help attract new investment to an area. They have historically been used to finance the cost of redevelopment and encourage new development in areas that would 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 landscaping. Each of these elements contributes to the viability of the neighborhood and promotes quality development. A number of Texas cities have one or more TIRZ districts with the common goal of stimulating or accommodating new private investment and thereby increasing real estate values and improving quality of life. When a specific geographic area is designated as a TIRZ, the property values on that date become the "benchmark" or the base values. Only the additional tax revenue generated from new development, redevelopment, or increased values on existing development are allocated to the TIRZ. Therefore, the district does not increase the tax rate but only reallocates all or a portion of the revenue from the increased tax base back to the area for a said period of time. If debt is incurred, the TIRZ must remain in place at least until all such debt is retired. 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 an 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; or b) an area that is predominately open and because of obsolete platting, or other factors, substantially impairs the growth of the area. As an alternative, a TIRZ may be initiated by property owners who own a minimum of 50% of the appraised value in the proposed zone. The process for establishing a TIRZ is generally as follows: • City prepares a preliminary reinvestment zone financing plan; • Plan is provided to each governmental entity that levies taxes on real property within the zone; • 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 appointee each from PISD, PJC, and county, plus state senator and state representative); and • TIRZ board prepares a "project plan" and a "financing plan" and submits to council for adoption. Cities are authorized to: • Cause project plans to be prepared, approve and implement the plans, and otherwise achieve the purposes of the plan; • 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 manner it considers advisable; • Enter into agreements, including agreements with bondholders, determined by the governing body of the municipality to be necessary or convenient to implement project plans and achieve their purposes; • Acquire, construct, reconstruct, or install public works, facilities, or sites or other public improvements, including utilities, streets, street lights, water and sewer facilities, pedestrian malls and walkways, parks, flood and drainage facilities, or parking 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 of risk but may not be able to finance larger scale projects. 2. Issue bonds and finance project(s) with debt. The expectation is that the sooner the public portion is completed, the sooner private investment begins and the debt obligations are met. 3. Reimbursement to developers. The public project is funded and constructed by the private sector; the developer is then reimbursed as the incremental tax revenues are collected. This process is an incentive to the developer to work for a successful project which will grow in value. The most significant advantage is that a TIRZ does not require new taxes or assessments in order to fund improvements. The development pays the costs through increased captured revenue. Depending upon how a project is financed, the risks to the local government 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 to annual reports.