Tax Increment Financing and Infrastructure Investment

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					What is Tax Increment Financing?
• A financing mechanism that allows future increases
  in taxes to pay for development projects through
   – Increases in designated TIF District property valuations
   – Additional tax revenues generated by the project

• Revenues are earmarked to pay for project costs
   – Additional tax revenues do not pay for additional services

• Popular financing method designed to:
   – Reduce urban blight by stimulating development
   – Reduce voter aversion to tax increases
   – Address dwindling federal grants

                                                                  Page 2
Fundamentals of TIF Revenues

   How a Successf ul TIF
   Gener at es Revenues
   Increased EAV from

                                           Total EAV: Once the TIF expires,
                                           other taxing bodies collect taxes
   redevelopment = more
   tax revenues

                                                   on the full EAV.

                             New EAV:
                          Goes toward
                     creating $$ for the
                        TIF (increment)
    Base EAV: The amount available
       to taxing bodies stays flat.

   Year TIF                       Year TIF
  Established                     Expires

                                                                                       Page 3
Mechanics of TIF District Revenues
1.   A TIF District is created with specific boundaries
2.   A time period for the TIF District is established
3.   Plans for specific improvements are developed
4.    Public service expenditures within the boundaries
     are “frozen” once the TIF District is established
5.   Improvement projects occur in the District and
     attract private development
6.    Property values in the District increase
7.   Property taxes rise due to the increase in valuations
8.   The additional taxes help pay for the project costs
9.   Once the TIF designation expires, all of the increased
     tax revenues are available to the community for other
     public purposes

                                                              Page 4
Short History of TIF programs

• California passed first State law in 1952

• By 1970, only six States had authorized TIFs

• Today, all States except Arizona and including the
  District of Columbia have TIF legislation

• Each State determines their TIF criteria such as
   – Ability to issue bonds
   – The distribution and sharing of TIF revenues
   – The types of eligible development
   – The maximum time period and size (acreage) for the
     TIF District

                                                          Page 5
Advantages of TIF
• Increases in property valuations pay for the
  development (versus new or additional taxes )
• No voter approval is required for a TIF District or to
  issue bonds, reducing delays in project delivery
• TIF Districts permit more project flexibility
• Communities have local control
• TIF bonds are not counted against the municipality’s
  general obligation debt ceiling or constitutional debt
  limits, and may obtain bond insurance
• The technique may be used in combination with
  other lending programs or economic development
  instruments, such as Transit Oriented Development

                                                           Page 6
Challenges of TIF projects
• Incremental tax revenues do not materialize
   –   Property may be acquired by a tax exempt entity
   –   District encounters unanticipated legal expenses
   –   Project delivery delays occur
   –   Changes in the tax code are enacted
• Citizens displaced by rising property valuations may
  oppose the project
• A regional project (e.g., a rail line) may benefit users
  that do not pay TIF based taxes
• Redistribution of economic development may result
  in an overall decline in city wide tax revenues
• Reliance on public services outside of TIF District
   – Fire or police protection, sewer or water services may be
     needed by the TIF district

                                                                 Page 7
TIF: The Greater Chicago Experience

• Illinois TIF legislation first enacted in 1977
• First TIF District created in 1984
• Program is designed to address aging or obsolete
  structures and land use policies
• TIFs may be used to fund public transportation
  infrastructure but not operating expenses
• 373 TIF Districts in Cook County, 147 in Chicago
• TIF Districts generated $686 million in property taxes
  and an estimated $2.82 billion in private investment

                                                           Page 8
Chicago TIF funded transit projects:
• The Randolph/Washington Station ($13.5
  million in TIF funds)
• The Dearborn Subway-Lake/Wells ($1.2
  million in TIF funds)
• Miscellaneous Central Loop transit projects
  ($24 million in TIF funds)
• The Block 37 Transit Center (aka 108 North
  State Street; $42.4 million in TIF funds).

                                                Page 9
Chicago TIF Program Problems
• April 2007 report by Cook County Commissioner
  Mike Quigley questions the use of TIFs , finding:
• Development would have occurred without the TIF
• Local governments may lose tax revenues to TIFs
• TIF implementation problems exist, including poor
  oversight, documentation and public participation
• TIF tax revenues were not properly tracked
• Property taxes were raised in TIF Districts
• The TIF program needed to be reviewed

                                                        Page 10
Other TIF transit projects include:
• A $30 million BART parking structure and a
  $75 million BART station in Fremont,
• A $7.5 million investment in the Central City
  Streetcar project in Portland, Oregon;
• The $350 million Interstate Avenue Light
  Rail, also in Portland, Oregon; and
• Elements of the $324 million Metro Rail Red
  Line in Houston, Texas.

                                                  Page 11
TIF and other financing considerations
• TIF funds may be pledged to repay State
  Infrastructure Bank (SIB) or USDOT TIFIA loans
• TIF projects may fulfill obligations under revised
  Community Reinvestment Act provisions, thereby
  attracting private banking interest
• Bonds may be issued against future TIF revenues to
  enhance financing options
• TIF Districts often fund small scale projects due to
  the risks of collecting future TIF tax revenues
• Many transportation projects require sizable
  investments, necessitating other financial resources,
  such as a direct loan in addition to TIF revenue

                                                          Page 12
PAY-GO v. Infrastructure Loans
Borrowing Is Attractive When:
• Low or attractive interest rate environments
• Insufficient grant funds for project
   – Appropriation risk for multiyear project
       • Delays may occur in budget schedule
       • Changes in project earmark status
• High inflation rate environment
   – construction materials
   – right of way costs
• Time sensitive delivery
   – Must meet safety standard (air quality)
   – Disaster recovery (restore service)
   – External pressure to meet a deadline (reduce blight, etc.)

                                                                  Page 13
Existing USDOT Lending Programs
• Transportation Infrastructure Finance and Innovation
  Act (TIFIA, Public Law 105-78, 1998)
   – Supports Title 23 and 49 surface transportation projects
      • Direct Loans
      • Loan Guarantees
      • Lines of Credit
• Railroad Rehabilitation and Improvement Financing
   – Direct Loans for passenger and freight rail infrastructure
• Maritime Guaranteed Loan Program
   – Loan Guarantees to support shipping industry

These programs could be used with a TIF project

                                                                  Page 14
Commercial Lending and the Community
Reinvestment Act (CRA)
The CRA regulates bank lending practices:
• Public disclosure of commercial lending practices
  and activity in low income, minority, distressed areas
• Bank services must meet needs of local community
• Bank examiners determine compliance
• First established in 1977 (Public Law 95-128)
• Four Federal agencies involved in compliance
   –   Federal Deposit Insurance Corporation
   –   Office of the Controller of the Currency
   –   Federal Reserve Board
   –   Office of Thrift Supervision

   A TIF project could also attract a CRA lender

                                                           Page 15
CRA Infrastructure Investment
Revised Guidance issued on March 10, 2006
   – Federal Regulations (70 FR 44256)
   – FDIC RIN 3064-AC97

• Qualifying activities include infrastructure :
   – Disaster area:
     “providing financing or other assistance for essential
     community-wide infrastructure”

   – Underserved non metropolitan middle income area:
     “financing the construction, expansion, improvement,
     maintenance or operation of essential infrastructure…for
     public safety, public services”

                                                                Page 16
TIF Bonds and Bond Insurance
• TIF bonds may be insured to reduce risks
• Bond insurance lowers the cost of borrowing and
  may simplify the TIF bond sale
• TIF bond credit analysis is similar to a typical general
  obligation issue
• Bond insurers typically limit TIF insurance to mature
  TIF districts or to refunding existing bank loans
• TIF bonds must have high debt service coverage
  ratios with a diverse property base and diverse
  (unconcentrated) ownership
• Major risk factors include project development
  default, declining real estate markets, and reduced
  asset valuation

                                                             Page 17
Future Infrastructure Investment Needs
Surface Transportation 2004 Estimated Funding Gap:
  Average annual cost to maintain current conditions
                             Funding shortfall
  Highways and Bridges       $8.5 billion
  Transit                    $3.2 billion

These estimated numbers are from the Conditions and
  Performance Report and do not include any funding
  for infrastructure improvements

                                                       Page 18
• TIF programs have supported infrastructure
  investments and economic development BUT
• TIF revenues may not be sufficient to meet the
  funding requirements for large projects such as
  transportation infrastructure HOWEVER
• Additional programs exist at USDOT and with
  commercial lenders implementing CRA to assist with
  infrastructure investment.
• The need for infrastructure investment is great, but it
  must mesh with the needs of the community where it
  will be installed

                                                            Page 19
      Contact Information:


Robena Reid, Federal Transit Administration
              (202) 366-1973

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