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Home My WebLink About6. Tax Increment Financing CITY OF SHAKO PEE Memorandum CASE NO.: NA TO: Shakopee Economic Development Authority Mark McNeill, City Administrator/EDA Executive Director FROM: R. Michael Leek, Community Development Director SUBJECT: Discussion of Use of Tax Increment Financing MEETING DATE: May 19,2009 INTRODUCTION: Recently, the City received a request for business assistance from a manufacturing firm that proposes to occupy about 50,000 square feet in Valley Green Business Park. The business would bring about 100 jobs starting at about $15.00/hour to the City initially with the potential of 20-40 additional jobs in the next two years. , To date, City staff and the City's consultant, Shannon Sweeney, have discussed municipal tax abatement with the applicant, but the amount of abatement that would be generated is relatively small. Tax Increment Financing has not been used in recent years by the City of Shakopee, but can generate a substantially larger assistance benefit. For that reason, before bringing forward the specific request, staff thought it would be good to discuss with EDA the potential for use ofTIF generally. The attached letter from Mr. Sweeney provides specific background for the EDA for the discussion. ACTION REQUESTED: The EDA is asked to provide staff with direction regarding whether to consider the use of tax increment financing for business assistance purposes. ~ d::--/~~--L R. Michael Leek Community Development Director H: \CC\2009\05-19\ TIF discussion. doc 1 Waconia Office: 2078 Feather Circle DAVID Waconia, MN 55387 DROWN (952) 442-5821; fax (952) 442-8838 ASSOCIATES Email: Shannon@daviddrown.com May 14, 2009 City of Shakopee Attn: R. Michael Leek, Community Development Director 129 South Holmes Street Shakopee, MN 55379 Dear Mr. Leek: The purpose of this letter is to outline some of the benefits and pitfalls created by the use of tax increment financing (TIF) for industrial development projects. It will also serve to provide a general background on the use of tax increment financing versus tax abatement. Background: Through the use of tax increment financing, a local unit of government designates a parcel or parcels from which it will capture new property taxes that are generated as a result of new development. The local unit of government is able to capture not only its share of property taxes, but also those of other jurisdictions that levy property taxes with a few exceptions. The property tax levied by the State of Minnesota on commercial and industrial property cannot be captured as tax increment, and referendums that are levied based on market value are not captured as tax increment. State statute regulates the process, procedures, and term for implementing and administering a tax increment financing district. While Counties have some rights to capture tax increments generated by projects for administrative costs and road improvements required as a result of a new project located in a tax increment district, approvals by affected units of government are not required. To be clear on this point, when a City creates a tax increment district, notification is provided to the State, County, and School District, but their approval is not required. For those entities that are subject to fiscal disparities (redistribution of commercial/industrial tax base), the unit of government creating the TIF District has the option of reducing the tax increment by the amount captured by the fiscal disparities pool, or the unit of government can opt to have the fiscal disparities paid by properties located outside of the TIF District. With few exceptions, local units of government have opted to have fiscal disparities paid by the properties within the TIF District as the politics of having the other commercial and industrial properties within their jurisdiction contribute on behalf of the project are difficult to overcome. By opting to have fiscal disparities contributed by the tax increment district, the tax increment generated by a project is reduced by approximately 40%. Project Financing: Once a TIF District is created and a project is constructed, a revenue stream is created that can be used for a number of activities that are generally categorized as the construction of public improvement or subsidizing private development. The revenue stream is generally used to fund private or public project costs in one of three ways: A) Pay-as-you-go - For those entities that have determined the use of TIF is appropriate, a pay-as- you-go method of subsidy has become popular. As tax increments (new taxes) are collected by the unit of government that created the TIF District, a portion is reimbursed to a developer for the reimbursement of specific and quantified costs over a specified term. B) TIF Bonds - generally used for the financing of public improvements, TIF bonds borrow against the forec~sted revenue stream. Problems arise if the revenue stream is reduced or eliminated by government intervention or market forces. If General Obligation Bonds are issued, the taxpayers are ultimately responsible for making up any shortfalls in TIF revenue through tax levy. C) TIF Revenue Note - private developers will sometimes capitalize the revenue stream by requesting the issuance of TIF Revenue Bonds. While the pledge that the unit of government is making is similar to that provided in a pay-as-you-go deal, the developer is able to capitalize the revenue stream up front, rather than waiting for the repayments over time. In this scenario, the bank that issues the note is taking the risks associated with fluctuations in TIF revenue. Tax Increment Financing V5. Tax Abatement: Tax increment financing functions in a similar manner as tax abatement, both of which the City of Shakopee has used in the past. Primary differences include: 1) Tax Increment Financing captures nearly all local taxes, while approvals must be sought from each jurisdiction for tax abatement. 2) The State Auditor requires that annual reports be submitted for each tax increment district (not an insignificant task). 3) The costs associated with implementation and administration for Tax Increment Financing are higher. 4) Each jurisdiction must annually calculate and levy an abatement amount, while TIF collections are administered by the County. 5) Tax Abatement has far more flexibility (less regulation) regarding its use and how it can be applied to projects. 6) Tax Increment Financing provides leverage for debt issuance (can borrow 5 times the projected revenue stream). 7) Tax Increment Financing provides the local unit of government the ability to set a minimum market value for a project (assessment agreement). Precedent: Tax Increment Financing can be a useful tool for advancing good projects that would not occur without this form of assistance. Whether it is competitive forces or affordability that drives the need for subsidy, the issue of precedent is generally managed in the manner that the City of Shakopee has utilized in the past. That is, to develop a business subsidy policy that explains the economic development goals of the community and establishes thresholds (generally in wage rates for new jobs) under which a subsidy will be considered. Presently that threshold is 275% of federal minimum wage or $19.94 per hour after July 24, 2009. Recognizing that a tremendous amount of industrial development has previously occurred in Shakopee without public assistance, the focus likely needs to remain on high quality jobs that meet a minimum threshold in industries that will contribute to the long-term economic health of the community. While much debate can occur regarding the necessity of subsidy, it will not serve the community well to hold such a debate each time a project requests this form of assistance. Establishing clear goals that can be communicated by staff to the business community will serve all well by efficiently moving good projects through the process, and will result in less frustration for those projects that do not meet stated goals. Please feel free to contact me if you have any questions regarding the information provided. I am available to discuss this material in additional detail at your convenience. Sincerely, Shannon Sweeney, Associate David Drown Associates, Inc. SJS/ss