TAX INCREMENT FINANCING: A Thumbnail Sketch

This memo provides a “thumbnail sketch” of municipal tax increment financing, as authorized in Title 30-A, MRSA sec. 5227.

Introduction

Tax Increment Financing (“TIF”) is a tool first adopted by the Maine Legislature in 1977, to encourage Maine’s municipalities to take a more active role in local economic and community development efforts.

As originally adopted, the statute sought to eliminate or reduce the penalty imposed by Maine’s school funding, general revenue sharing and County tax formulas on municipalities that succeed in attracting new economic development. Under the school funding and general revenue sharing formulas, a municipality that encourages economic development, thereby adding to its property tax base, suffers a reduction in State assistance and pays a larger portion of the annual County tax assessment, frequently wiping out most of the fiscal benefit of the new development to the municipality. Under the TIF statute, however, a municipality may “shelter” new taxable value added as a result of the municipality’s development efforts, so that the new taxable value does not affect the municipality’s overall level of State assistance or County tax payments.

How It Works

(1) Original Concept. As originally conceived and adopted, the TIF statute served primarily as a funding mechanism for municipal public infrastructure projects (roads, sewers, etc.) needed to attract or encourage development or redevelopment within “development districts” designated in accordance with 30-A MRSA sec. 5223. Upon designation of a development district, municipalities would approve a “development program”, typically consisting of new infrastructure construction, rehabilitation of existing buildings, or similar activities funded by the municipality. The municipality would concurrently approve a tax increment financing district, under which increased property tax revenues generated by new taxable value created or attracted to the district (the “tax increment”) would be “retained” in whole or part, to fund development program costs directly, or to defray the municipality’s annual debt service payments on sums borrowed to meet those costs. To the extent that the “tax increment” was “retained”, the underlying new taxable value would be excluded from consideration in calculating the municipality’s State assistance under the school funding, general revenue sharing and County tax formulas.

When used to fund municipal borrowing, TIF revenues typically are not pledged on a “revenue bond” basis. Most municipal borrowing involved in TIF public infrastructure projects consists of traditional general obligation financing. However, municipal development program documents will typically show retained tax increment revenues as an offset to anticipated debt service costs, thereby reducing the impact of project borrowing on municipal property tax rates and the availability of existing revenues to meet other municipal needs.

The TIF statute remains available to serve as a funding mechanism for municipal infrastructure projects. In recent years, however, the TIF statute has increasingly come to be used to provide direct financial incentives to private project owners, under the “credit enhancement agreement” concept.

(2) Credit Enhancement Agreements. Some creative lawyering in the early 1990s produced the first “credit enhancement agreements” under the TIF statute. Their use was subsequently approved in several decisions of the Maine Law Court.

Under the “credit enhancement agreement” approach, all or a portion of the “development program” for a TIF district may consist of financial incentives provided to the lender or project owner of a private development project within the district. In the earliest such agreements, tax increment revenues would be pledged as a secondary source for repayment of money to be borrowed by the project owner from a bank or other private lender to finance the development project. The project owner’s credit would be literally “enhanced” by a three-way agreement between the municipality, the project owner, and the private lender. More recently, credit enhancement agreements have come to be used to “give back” all or a portion of the retained tax increment attributable to a particular new private project directly to the project owner. Often used in combination with direct loans or other forms of State or local assistance, such “givebacks” encourage private development by lowering the owner’s total project costs.

Along with the increased use of credit enhancement agreements, many TIF districts now consist of a single property owned by a single owner, designated as a TIF district in response to a specific development proposal. This is a departure from the original concept of a TIF district, in which the municipality would designate and improve an entire area, more or less “on spec”, and then wait for new development to arrive.

Although there are ongoing philosophical debates about the appropriateness of direct reimbursement of tax dollars to private project owners, the credit enhancement approach has one substantial advantage over TIF programs consisting of municipally-funded infrastructure projects. Under a properly drafted credit enhancement agreement, if a private development project doesn’t take place, fails to add the anticipated new value, or fails for any reason to pay an increased property tax bill, the municipality has no liability to meet debt service payments on project borrowing. Put somewhat differently, with a pure credit enhancement agreement TIF, if the project doesn’t pay, neither does the town.

The development program for a TIF district may include both municipal infrastructure and financial incentive elements. In addition to funding public infrastructure and providing financial incentives to project owners, development programs can also fund such items as environmental site rehabilitation, new employee training, and marketing efforts intended to attract additional private development.

Legal Requirements

(1) Designation of the Development District. The first required legal step in setting up a TIF district is to designate a “development district” under 30-A MRSA sec. 5223. This is a local legislative act and, in most towns, must be approved by the Town Meeting. A public hearing is also required. Under the statute, municipalities have enhanced development powers within a development district, including the right to establish a TIF district and to acquire property for development purposes by eminent domain. It is not mandatory that the development district include a TIF, but it is mandatory that every TIF be within a designated development district.

The boundaries of a development district under sec. 5223 need not correspond to the boundaries of districts established by the municipality for other purposes. A development district, for example, may overlap all or portions of a local historic district or a local community development project area, or one of the new “Pine Tree Zone” sites. However, development districts must satisfy certain statutory requirements, as follows:

(a) At least 25% of the district area must be

- A “blighted” area;

- In need of rehabilitation, redevelopment or conservation work; or

- Suitable for commercial uses.

(b) No single district may exceed 2% of the municipality’s land area, and the total area of all districts may not exceed 5% of the municipality’s land area.

(c) At the time of adoption of the development district, the municipality’s legislative body must also adopt a development program in accordance with sec. 5224.

(2) Designation of the TIF District. The TIF district may be designated at the same time as the development district, or afterwards. It may include all or a portion of the development district. If the TIF district is approved after designation of the development district, the district’s development program must be amended accordingly. Approval of the TIF district is a legislative act, and is subject to the same procedural requirements (public hearing, Town Meeting vote, etc.) as designation of the development district. The following additional requirements also apply:

(a) Subject to a statutory exception for certain large projects ($10M+), the equalized assessed value in all TIF districts may not exceed 5% of the municipality’s equalized assessed value as of April 1st preceding the most recent proposed designation.

(b) The aggregate value of all municipal general obligation indebtedness financed by retained tax increment revenues may not exceed $50,000,000 County-wide (adjusted annually for inflation).

(c) Land acquisition and improvements financed through municipal bonded indebtedness must be completed within five years of the district designation. (This provision does not apply to privately financed projects under a “credit enhancement agreement” approach.)

(d) The final district designation must be made by the State of Maine, Commissioner of Economic and Community Development, following review for compliance with departmental regulations and statutory requirements. A detailed application, including the municipality’s development district program and a full analysis of “tax shifts”, must be submitted to the Department of Economic and Community Development (DECD) for this purpose.

TIF Variations

Four special variations are allowed on a basic TIF under current law. These are:

1. “Major Exception” TIF. Under section 5223(3)(B), a TIF district may be approved for certain projects that exceed the 5% cap on the valuation of “original assessed value” within all of the municipality’s TIF districts. This provision applies only where the project costs specified in the development program exceed $10 million; the TIF district concerned consists entirely of contiguous property owned by a single taxpayer; and the assessed value in the TIF district exceeds 10% of the total assessed value in the municipality. In addition, certain municipal program elements that are allowable as project costs under the general TIF statute are disallowed with respect to a “major exception” TIF.

   Although it is by no means limited to paper companies, the “major exception” TIF provision is sometimes referred to as the “paper company” TIF.

2. “Downtown” TIF. Under the TIF statute, a TIF district designated for the purpose of implementing a municipality’s approved downtown redevelopment plan is exempt from several requirements that apply to a basic TIF. First, a downtown TIF district need not satisfy the requirement that 25% of the area of the district be blighted, in need or rehabilitation, redevelopment or conservation work, or suitable for commercial uses. Second, the $50 million County-wide borrowing cap does not apply to a downtown TIF district.

   The statute also requires that the redevelopment plan for a downtown TIF district must be consistent with downtown criteria established pursuant to rules of the Department of Economic and Community Development (DECD).

   One distinct advantage of a “downtown” TIF is that tax increment revenues from other TIF districts in the municipality may be used to help fund the downtown district’s development program. For example, a town can apply tax increment revenues from the new Wal-Mart out by the Interstate to assist with redevelopment and marketing of the downtown TIF district’s commercial area. In order to use revenues from other TIF districts for this purpose, the municipality must first “capture” and apply 100% of the tax increment revenues from the downtown TIF district to funding the downtown district’s development program. TIF revenues from other TIF districts may then be used to make up any funding shortfall.

3. “Pine Tree Zone” TIF. By recent amendment to the TIF statute, TIF districts located in an approved Pine Tree Zone are also exempt from the 25% blighted area requirement and the $50 million County-wide borrowing cap.

4. “Affordable Housing” TIF. A new subchapter of the development district statute adopted by the Legislature in 2003 provides for creation of “Municipal Affordable Housing Development Districts”, which may include a tax increment financing district. Certain requirements for approval of a basic TIF, such as the 25% “blighted area” requirement, do not apply to affordable housing TIFs under this subchapter. There are also several differences in the required local legislative findings, approval process and authorized program costs. In addition, a separate $50 million County-wide cap (adjusted annually) applies to municipal borrowings for affordable housing TIF district purposes.

TIF Policies

Many municipalities, with or without existing TIF districts, have approved TIF “policies”. Adoption of such policies is not a legal requirement. However, adoption of a TIF policy in advance of an actual project may help to clarify the municipality’s goals and procedures, and to avoid inconsistent ad hoc approaches.

Because circumstances may arise in which literal application of the TIF policy would not be in the Town’s best interests, it is preferable that the document be approved as a general statement of policy, and not as a local ordinance. The policy should contain language indicating that specific TIF proposals must be negotiated by the Town and project owner and approved by the legislative body and the State of Maine to be effective.

In a town, the Selectmen or Town Meeting should approve the TIF Policy. A Town Meeting vote is preferable. A TIF Policy adopted by the Selectmen should clearly state that it is not binding on the Town Meeting, but that the Selectmen, in their advisory role, may recommend approval of a TIF proposal that complies with the approved policy.

A TIF Policy will typically address a number of areas, including:

- Types of TIFs the Town is willing to consider (infrastructure TIFs; credit enhancement agreements; affordable housing TIFs; etc.).

- Preferred locations for TIF district projects, including existing TIF districts and development districts.

- Factors to be considered by the Town in approving or rejecting a TIF proposal (e.g., job creation; tax base expansion; reuse/rehabilitation of existing structures; environmental remediation; other public benefits such as creation of necessary services or affordable housing; downtown redevelopment; extent of competition with existing businesses; economic diversification; etc.).

- Levels of assistance the Town will consider providing, e.g., the maximum percent of the tax increment the Town would consider returning to a project developer under a credit enhancement agreement.

TIF Glossary

Captured Assessed Value (“CAV”) – The portion of the “increased assessed value” (“IAV”) used to fund the development program. The portion (percentage) of IAV used for development program purposes can vary from year to year. In any year, it can be up to 100% of IAV. New property tax revenues on the CAV do not decrease the town’s share of school funding or State revenue sharing, or increase the town’s County tax.

Credit Enhancement Agreement - An agreement negotiated between a municipality and a private project owner under which the municipality agrees to provide direct or indirect financial support, out of the retained tax increment, for the owner’s development project within a TIF district.

DECD - The State of Maine’s Department of Economic and Community Development, which must review and give final approval to all TIF districts.

Development District - A district designated by the municipality under 30-A MRSA sec. 5223 for enhanced municipal development or redevelopment activity.

Development Program – The municipality’s written program of activities for a development district. If a TIF district is also created, the development program will include a detailed description of the TIF program.

Increased Assessed Value (“IAV”) - The new taxable property value created within a TIF district, as a result of the development program. “Increased assessed value” includes the increased value of both real and personal property within the TIF district. If taxable values in the district do not increase over the base year (OAV) amount, there is no increased assessed value.

Original Assessed Value (“OAV”) – The taxable assessed value of all real and personal property within the TIF district prior to approval of the TIF. OAV is determined as of March 31st of the tax year prior to the date on which the TIF receives final approval from DECD. This “look-back” feature corresponds to the normal timing for changes in valuation to affect school funding, revenue sharing, etc.

Retained Tax Increment - The portion of additional local property taxes used to fund the development program. (Note: the non-retained portion of the tax increment is general fund revenue to the Town.)

Sheltered Value - The portion of captured assessed value from which the retained tax increment is derived. “Sheltered value” is excluded from the Town’s property tax base in calculating the Town’s share of general aid to education, general revenue sharing, and other State assistance, and in calculating the Town's share of the County tax assessment.

Tax Increment - The additional local property taxes to be generated within a TIF district, based on the increased assessed value.

Tax Increment Financing (“TIF”) District - All or a portion of a development district, designated by the municipality for special treatment of increased property tax revenues, in accordance with 30-A MRSA sec. 5227.

Additional Questions

Please feel free to contact the writers of this information sheet, at the telephone numbers / e-mail addresses given below.