The use of Tax Increment Financing (TIF) is something that is done throughout Minnesota and other states to spur economic development. TIF stands for Tax Increment Financing. TIF is a means of capturing taxes to offset costs associated with development. There are a number of types of TIF’s.
How this works is a developer generally starts out with a property that is undeveloped. The property is then developed and the city captures the difference in taxes between the vacant undeveloped property and the developed property. That’s the increment. This increment is then used to write down costs of the development.
To accomplish this, the city is obligated to write a plan which includes both a development district (physical area) and a development plan. The plan includes what is going to happen in terms of development and what were the expected revenues (taxes) that will be created as a result. A public hearing is held prior to the adoption and notice is given to the school district and county. The plan captures their taxes in addition to the city’s. Setting this all up generally involves the use of a public finance consultant and sometimes a bond attorney. Establishing these documents and going through the process generates some expenses.
When you consider financing options, two approaches exist. One involves the bonding for the improvements the city will participate in and doing the construction. Construction can occur through the developer or through city efforts. So in this approach, the city bonds for costs to be incurred and then collects the increment and uses it to pay off the bonds.
The second approach is a pay as you go. What this means is the developer pays all costs associated with the development, which he’ll get reimbursed from the TIF. The city pays the developer the increments received as we collect them on an annual basis.
In either approach a development agreement is needed which specifies what conditions each party will observe. In many communities a developer is required to pay for all out of pocket expenses the city experiences. Some communities rely on the increment to reimburse itself for prepaid expenses. This was the situation with the TIF district the city recently decertified. The district was then decertified as the developer did not live up to his obligations. The city was then left with prepaid expenses that were not reimbursed.
We wanted to satisfy our books by removing the fund that supports this district. We did this with a transfer from the general fund to the TIF Fund. The fund will no longer show a negative balance so it can be removed from our accounting. The unfortunate part of this is the city chose to reimburse itself with an increment rather than demand upfront payments of costs associated with the development. This was a decision that didn’t pan out as expected but we’ll know better if there is a next time.
