Budgeting TIF Revenues and Expenses: How to do it right.
By: Rudman Winchell Attorney Erik M. Stumpfel
Recently, a number of Maine communities that have approved tax increment financing (TIF) districts for new development projects have discovered, after several years, that they have failed to properly account for the impact of the TIF on their municipal budgets and mil rates. Usually, this results in an accumulated shortfall in the municipal general fund, often necessitating a dramatic increase in the mil rate to make up the shortfall.
How does this happen? Aren’t TIFs supposed to be self-supporting, especially when the municipality “captures” 100% of the new taxable value in the TIF district for TIF development program purposes? Didn’t the developer and the town’s consultant assure us that the TIF district designation would “shelter” the new value from state funding formula impacts, and therefore would not affect the town’s mil rate? What’s going on here?
What’s going on in these cases is that, even though a 100% capture TIF should not affect the municipal mil rate, TIF district revenues must still be raised and money for TIF development program purposes must still be appropriated in the annual municipal budget. Too often however, town budget preparers treat a TIF as an “off-budget” category of revenues and expenses, and do not account for those items in setting the municipal mil rate. This can artificially reduce the municipality’s mil rate (rather than holding it stable), until the mistake gets noticed in the form of a general fund shortfall.
If the TIF is a small one, the error is likely to go unnoticed for several years, simply reducing the undesignated surplus at the end of each fiscal year. However, if the TIF district valuation is large in relation to the municipality’s total taxable value, the result, in just one or two years, can be a large deficit in the municipality’s general fund balance.
But how do you budget for annual TIF development program expenses, especially credit enhancement agreement payments to the project developer, when the amount of these expenses is tied to the municipal mil rate that has not yet been set? The solution involves establishing a “trial” mil rate, then using that mil rate to determine the amount to be raised in the annual budget for TIF development program expenses, and only then establishing the final budget and mil rate.
A typical TIF development program usually has two financial components (sometimes three). Often, part of the development program will consist of annual reimbursements of a portion of the property taxes paid on account of the new taxable value in the district, to the project developer. These are “credit enhancement agreement” payments. In addition, there is usually a municipal portion of the development program – new public infrastructure projects, for example – that are also paid for out of the annual TIF district revenues. And occasionally, a municipality will borrow money to fund all or part of its portion of the development program, resulting in annual sinking fund contributions and debt service payments. All of these expenses, and the TIF revenues that support them, must be properly accounted for in setting the municipal mil rate.
Here’s how to do it:
Step 1. Determine a “trial” mil rate by excluding the “captured” assessed value in the TIF district and all TIF district development program expenses from your annual budget calculations. All other anticipated expenses, revenues and taxable valuation should be included in determining the “trial” mil rate. This includes the “original assessed value” within the TIF district.
Step 2. Apply the “trial” mil rate to the “captured” assessed value figure for the TIF district. This calculation will tell you how much the district should generate in TIF revenues during the ensuing fiscal year. By statute, all TIF revenues from the “captured” assessed value are dedicated to funding TIF development program expenses (including credit enhancement agreement reimbursements and sinking fund contributions, if any), so this figure will also be the amount you must raise and appropriate in the annual municipal budget for TIF development program purposes.
Step 3. Reconcile your results. This is done by re-calculating the mil rate, this time including the “captured” assessed value in the TIF district and the TIF development program expenses calculated under Step 2. If you have done all three steps correctly, the “final” mil rate calculated in this manner should be the same as the “trial” mil rate calculated under Step 1. If the two rates are not the same, go back to Step 1 and start over.
It’s really pretty simple. But it is an extra step in your budget preparation that needs to be done every year that the TIF district is in existence, or you could face an unanticipated budget shortfall at some point during the life of the district.
In some TIF districts, less than 100% of the new taxable value is “captured” for TIF development program purposes. In other districts, the “capture” percentage starts at 100%, but is later reduced, often during the last several years of the district in order to phase in State funding formula impacts as the new district value goes from “sheltered” to non-sheltered status. In any year when the “capture” percentage is less than 100%, only the “captured” portion of the new taxable value in the TIF district should be used to calculate the annual TIF revenues and development program expenses under Step 2 above. The non-captured portion of the new taxable value in the district should be treated like all other taxable property in the municipality, and should be included in the valuation base that is used to calculate the “trial” mil rate under Step 1 above.
Likewise, the “original assessed value” in the TIF district (= existing taxable value in the tax year prior to TIF district approval) should be included in the valuation base that is used to calculate the “trial” mil rate under Step 1 above, and not in calculating the annual TIF revenues and development program expenses under Step 2 above.
As always, if you have questions relating to tax increment financing or municipal economic development, please feel free to call attorney Erik Stumpfel of Rudman Winchell at (207) 992-2568 or consultant Noreen Norton of Starboard Leadership Consulting, LLC at (207) 441-0609 (cell).