TIF What are they and How are they suppose to work

How's Your TIF Program working for you Lisbon? 

A TIF Policy
(from Maine Townsman, January 1997)
by Michael Starn, Editor

This Maine Municipal Association publication is presented for "Classroom Use Only."  Its intended use is to stimulate and aid in discussion and role playing within a classroom setting.

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Tax increment financing (TIF) is one tax incentive program for economic development that is available to all Maine local governments. TIF uses property tax dollars that are generated by new development and applies some or all of those dollars to the project.

Like any tax incentive program, a TIF when properly used can be a real catalyst to local economic development. Used improperly, or perhaps unwisely, a TIF can turn around and bite the hand that feeds it.

While Maine has not experienced any of the "tax break" nightmares that other states have encountered, any tax incentive program can be a double-edged sword. Consider the Michigan city that gave a hugh tax break to General Motors only to have GM move its plant to Texas after the tax benefits had been exhausted. Or, how about the deal that Alabama gave Mercedes Benz to locate a manufacturing plant in Tuscaloosa? Some economists have estimated that deal would cost the state about $40,000 for every job created.

A public frenzy often accompanies news about proposed economic development. People want and need jobs so news or even rumors about economic development attracts their attention. However, proposed economic development projects inevitably have a lot of "what ifs" connected to them. Unfortunately, key players in these projects sometimes overstate the benefits - jobs, improved retail activity, other businesses locating in the area, etc.

Given the high level of public interest in proposed economic development projects and considering the increased media attention given to these projects and any "tax breaks" associated with them, it is easy to see how the situation can quickly get out of control.

TIF policies provide a mechanism for municipal officials to keep these types of economic development projects under control. A TIF policy can help to provide clarity and understanding about how a TIF program works in a particular community. Businesses which are potential TIF applicants can get a preview of the the application process, get a better understanding of how their business needs match up to the program, and have a clearer picture of any parameters that the community may have set for the program. After a brief discussion of State law relating to tax increment financing, this article looks at the purpose, common elements, and the need for flexibility in a municipal TIF policy.

History of TIF In Maine
 
Tax increment financing has existed in Maine law since 1977 although municipalities showed little interest in the program until the mid-1980’s. The original intent of tax increment financing was to promote economic development through improvements to public infrastructure financed by the additional property tax revenues generated by the project. 

The mechanics of a TIF program have remained the same since its legislative adoption. Basically, a municipality designates a Municipal Development District (intended for blighted areas or sections of a community in need of redevelopment) where development will occur and tax increment financing will be used to assist that development. Property values within the "district" are frozen. When improvement are made within the district and value increases, the difference between the frozen value and the new value is called the "captured value". Property taxes generated by that captured value are used to support the development project.

Two major changes have occurred to the TIF program that have increased municipal interest in it. One change, in the mid-1980’s, excluded the "captured value" from state valuation, thereby sheltering the municipality from reduced state aid in programs such as General Purpose Aid to Education and State-Municipal Revenue Sharing. The second change was an amendment to the TIF statute in 1993 allowing credit enhancement agreements (CEAs).

Credit enhancement agreements permit the "captured" property tax dollars to be channeled directly to the business doing the development. The money must be used for the project but the business is given considerable latitude in its use of these funds, unless stipulated otherwise by the municipality.
CEAs have infused new life into the tax increment financing program. Since the CEA change, TIF activity has skyrocketed. Over the past two years, according to Alan Brigham at the Maine Department of Economic and Community Development, there have been 33 approved projects, most of them using credit enhancement agreements.

Businesses appear to like the flexibility that a CEA has in directly reducing their development costs. Communities without infrastructure needs are able to offer a tax incentive to potential developers. Municipalities also like CEAs because they carry less risk - they are performance based. Unlike infrastructure investments that involve long-term payments which continue whether or not the project is successful, CEAs are paid out each year based on what development has actually occurred .

State Guidelines for TIF
 
State law does provide minimum guidelines for all TIF programs. A few specific requirements are that the total area of a single development district may not exceed 2% of the total acreage of the municipality; that all development districts may not exceed 5% of the municipality’s total acreage; that the property value of the district may not exceed 5% of the municipality’s state valuation; and that the aggregate value of indebtedness of TIF districts within a county may not exceed $50 million.
A change was made this past legislative session to allow waiving of the 5% valuation limit if the multiple TIF districts are on one contiguous piece of property. This amendment was intended to primarily benefit paper mill towns.

Purpose of A Municipal Policy
 
A municipal policy or guidelines can provide structure and shape to the TIF program. A policy can help to take some of the uncertainty out of the program for potential applicants. A policy also provides valuable information about the program that lets applicants know beforehand what is required of them, how their application will be evaluated, who will review their application, and what criteria will be used to evaluate the application.

In Portland, TIF guidelines make it clear that the program is primarily for large scale economic development projects. The city council’s approved guidelines specify that projects must create significant new tax value equal to or greater than $2 million. A primary reason why TIF was targeted by the council for big projects was that the city already has a number of incentive programs available to smaller economic development projects.

Environmental projects are given priority for TIF funding in Westbrook. A few years ago the city recognized that it had a problem in some of its industrial zones where a few businesses had no means of utilizing their property without wetland mitigation. City Planner Jim Fisk did an inventory of 50 existing industrial lots in the city and found that 26 were non-expandable because of wetland issues. Several were receiving tax abatements due to their limitations, totaling about $30,000 a year, says Fisk.

The Westbrook City Council established a non-profit corporation called the Westbrook Environmental Improvement Corporation, composed of business and municipal representatives, to address these environmental issues. Tax increment financing was one of the tools given to the corporation which has responsibility for evaluating TIF applications before they go to the city council for approval. The WEIC also coordinates funding from other sources for environmental improvement activities in the city.

The Town of Unity decided it needed a TIF policy after Avian Farms, a large poultry breeding corporation, suggested that the town give them a 80% tax break for 10 years on five chicken barns the company was proposing to build there.

Recalling the Avian Farms proposal, Planning Board Member John Piotti says there was a lot of emotional response to it with "some people willing to give away the store." Piotti, the chief architect of the Unity TIF Policy, said, "It (the proposal) created a lot of confusion and a lot of questions among the townspeople."

Without any professional staff, town officials realized that if a number of these types of (TIF) proposals were to come before them, they would not be able to handle them. Town officials also wanted to be in a position to offer a more reasoned, less emotional response to TIF proposals.

The Unity TIF policy was adopted in January 1996. The town’s first, and to this point only,TIF was approved at last year’s annual town meeting in March. Ironically, the Avian Farms proposal never came together. The approved TIF was for a local business that was constructing an office building in the downtown area. The TIF revenues are being put into a downtown improvement fund that town officials are hoping will leverage other grant monies for infrastructure improvements.

Two objectives behind the policy, according to Piotti, were: (1) there can’t be any development that is inconsistent with local land use policies and ordinances; and (2) there has to be a shared benefit between the business and the town.

"With the TIF policy we wanted to let the business community know that the town was interested in economic development and that it was specifically interested in economic development that fit with the community," says Piotti.

Town officials in Sanford were interested in promoting economic development, but at the same time they didn’t want the expense of TIF developments, or even the applications, to be borne by the existing property taxpayers. The current policy, approved by the Board of Selectmen in September 1995, is being updated.

Sanford’s draft policy says that "to minimize the risk to the citizens of the Town of Sanford" TIF funding will be providing only through credit enhancement agreements. The policy further states that TIF agreements of five years or less are highly preferred.

Common Elements
 
Although the TIF policies reviewed for this article were quite different in their purpose and scope, some common elements could be gleaned so as to give guidance to other communities contemplating a TIF policy.

Review Process
 
All four policies had language that explained the review process for TIF applications. The reviewing authorities in each of the communities were different.

TIF applications are submitted to the City of Portland’s economic development department, then reviewed by the Community Development Committee before being submitted to the city council for approval.

In Sanford, TIF applications are considered by the Chamber of Commerce Economic Development Committee, and reviewed by the town treasurer, board of selectmen and warrant committee before being voted on by the (representative) town meeting.

In Unity, the budget committee and planning board screen applications before they are submitted to the town meeting.

Westbrook, as previously mentioned, has formed a non-profit corporation to coordinate environmental remediation activities in the city and oversee the creation of tax increment financing districts. The corporation members review TIF applications and forward them to the city council for approval.

Criteria for Judging Applications
 
Essential to any TIF policy is the criteria upon which applications will be judged.
Westbrook’s environmental priorities include land, water, air and solid waste improvements. Wetlands mitigation, elimination of straight pipe discharge into water bodies, mitigating sulfur emissions at the paper mill, and solid waste incineration (due to a landfill closing need) are listed as environmental improvements that would receive high priority.

The Town of Unity lists both company and community benefits as standards to be reviewed. Favorable ranking is given to applications that propose activities consistent with the town’s comprehensive plan; those that minimize traffic impacts and do not contribute to commercial sprawl; and non-agricultural activities that do not result in a net loss of productive farmland.

Portland’s policy contains guidelines that must be met and some that merely help to prioritize applications. An example of a mandatory guideline is that the applicant must demonstrate that the city’s participation is economically necessary and involvement by the city is needed in order for the project to be undertaken. Prioritizing guidelines include such criteria as level of employment created; if the project improves a blighted area; if public infrastructure improvements are made that have application beyond the particular project; and if the project supports other community projects or creates public benefits.

Limitations
 
Two policies - Sanford and Portland - limit participation in the TIF program to credit enhancement agreements only. 

Sanford and Unity, albeit with different language, forbid "double dipping". A basic provision of the Sanford policy states: "The applicant is obligated to apply for any State reimbursement programs for personal property and/or real estate taxes. The proceeds from this application will be returned to the Town and placed in the 'Public Improvement' Account."

Unity’s policy states, "In no instance may the direct benefit provided to a company be so high that - when combined with other governmental benefits for which it is eligible - the company is eligible to be refunded more than 100% of its tax burden in any given year."

The Portland policy sets a limit of 75% on the incremental taxes (from the captured value) that can be returned to the company in the form of a credit enhancement agreement.

Unity’s policy states that no more than 50% of the financial benefit from the "captured value" may go directly to the company.

Need for Flexibility
 
By their very nature, TIF policies restrict or contrain a community’s negotiating position. Policies need to be flexible. In most cases, they do not carry the same legal weight as an ordinance. The legal force of a policy depends on how it was adopted, by whom and for whom.

The TIF policy in Portland was adopted by the council for the council. It can be changed at any time by the council, which also must approve TIF applications. Sanford’s TIF policy was adopted by the board of selectmen for themselves and therefore can be changed by the board. In Unity, however, the town meeting adopted the TIF policy. Unless the town meeting changes that policy, those committees and boards reviewing TIF applications must abide by it.

All of those interviewed for this article say it is important to keep flexibility in TIF policies. Sanford Treasurer Elizabeth Thayer says that the board of selectmen were very sensitive to the wording in the policy "so as not to knock Sanford out of its competitive position for TIF projects." Thayer says the policy is a work in progress and continues to be refined.

Portland’s Economic Development Director Kathleen Brown says the city’s guidelines are so flexible that the city council and developer can negotiate any deal they wish. For example, a recent project in the city didn’t meet the mandatory $2 million taxable value guideline because part of the project included exempt property. The city council negotiated a separate PILOT (payment in lieu of taxes) for the exempt portion of the project.

Conclusion
 
While any policy ties your hands to some degree, municipal TIF policies can make dealing with TIF applications a lot simpler. A policy can help make it clearer to the prospective TIF customer how the proposed project fits into the municipal economic development scheme.

Because of the media publicity surrounding TIFs, a number of business people are approaching municipalities with preconceived ideas about what the community can do for them via a TIF. Some view the TIF program as a "tax break" entitlement. Business people who are interested in the bottom line want to be sure that they take advantage of any tax break available to them.

Some of the miscommunication is due to an information gap that exists between corporate finance officers and municipal officials, according to Roland Miller, Auburn’s CD Director and a key person in the development of Maine’s TIF program. "They are not familar with the way we operate and we aren’t that familar with how they operate," says Miller.

Having a better understanding of the position of each side entering the TIF application process will make the program work better. A municipal TIF policy should articulate the position of the community. "With a policy," says Miller, "you won’t be making things up as you go along in the process. [The process] won’t boil down to ‘let’s make a deal’."



http://www.freeportmaine.com/page.php?page_id=180


http://www.graymaine.org/Pages/GrayME_BComm/TIF

Town of Gray, Maine

24 Main Street, Gray, ME 04039 ph: 207-657-3339 begin_of_the_skype_highlighting              207-657-3339      end_of_the_skype_highlighting

Tax Increment Financing (TIF) Guidelines

http://www.maineco.org/Tax_Incentives.php	POLICY GUIDELINES ALL Tax Increment Financing [TIF] applications shall be reviewed by the Community Economic Development Committee [CEDC], the Town Treasurer and the Gray Town Council.  The CEDC shall have the responsibility to study, review and submit a recommendation to the Gray Town Council concerning the application.  The application must meet a majority of the following guidelines: Notwithstanding compliance with any or all of the guidelines, the creation of a TIF district is a policy choice to be made by the Gray Town Council and the citizens of Gray on a case-by-case basis.  A TIF district is not a right under Maine law and meeting these guidelines, in whole or part, does not create a right or entitlement in any applicant. BASIC PROVISIONS 1.      In order to minimize risk to Gray, Tax Increment Financing [TIF] will be provided via Credit Enhancement Agreements only.  The applicant must provide any and all other documentation that will protect the Town’s economic and financial position, and that confirm both the letter and spirit of the underlying agreement between the applicant and the Town. 2.      The Town shall not issue general obligation bonds to support development of any TIF project. 3.      The amount of funding available to the Town of Gray shall not decrease significantly due to the effect of any Tax Increment Financing [TIF] plan over the life of the TIF district [revenue neutral to the Town]. 4.      The maximum value of the captured assessment in a single TIF district shall be limited to 2% of the equalized value in the base year of each TIF district [1996 equalized value: $318 million x 2% = $6.3 million]. GUIDELINES THAT MUST BE MET In all instances, applicants requesting Tax Increment Financing [TIF] demonstrate: 1.      The Town’s participation is economically necessary and involvement by the Town is needed in order for the project to be undertaken.  Justification for economic need and Town Involvement must be demonstrated by: a.      A need to offset economic advantages available to the corporate entity if it should build or expand outside of the Town of Gray. b.      A need to offset infrastructure costs unique to the site. 2.      The project must be primarily industrial or commercial in nature and no uses which are principally consumer retail. 3.      The project creates significant, new, assessed tax value equal to or greater than $250,000. 4.      The project produces additional, permanent employment. 5.      Financial capability to undertake the project must be evidenced prior to review. 6.      Compliance with all statutory and regulatory guidelines of the State and the Town. TOWN OF GRAY TAX INCREMENT FINANCING [TIF] GUIDELINES GUIDELINES TO DETERMINE THE TOWN’S LEVEL OF PARTICIPATION Although an applicant need not meet each of the following criteria, these criteria will be used to determine the level of participation by the Town: 1.      The project assists an established business in the Town of Gray, thus retaining existing employment. 2.      The project creates significant, long-term employment. 3.      The project improves the general economy of the community 4.      The project improves and broadens the tax base. 5.      The project improves a blighted building or area in need of [re]development. 6.      The project creates public infrastructure / facilities which have application beyond the particular development such as traffic upgrades, public parking facilities, etc. 7.      The project will support community projects or create public benefits such as providing job training or supporting local contractors and supplies, etc. STANDING OPERATING PROCEDURES The Town Treasurer, in coordination with the Community Economic Development Committee [CEDC], acts as a liaison and coordinates all activity regarding Tax Increment Financing [TIF] proposals.  Working with potential applicants, the Town Treasurer and Committee will: 1.      Provide information on Tax Increment Financing [TIF] 2.      Discuss project proposals and accept Application Information Sheets from applicants. 3.      All applicants will be required a sign a Legal Fee Consent form agreeing to reimburse the Town for all legal costs and any out-of-pocket expenses incurred as a result of the Tax Increment Financing [TIF] proposal, whether or not the TIF is approved. 4.      Review the Application Information Sheet based on policy guidelines, in consultation with the Town Assessor and the Town Attorney. 5.      Assist applications to complete a final application suitable for presentation to the Town Council for formal review and recommendation. 6.      Following a review and evaluation of the application, the Community Economic Development Committee [CEDC] will present a written recommendation to the Town Council and the Town Manager will advise the applicant that application is ready for Town Council consideration by the Town Council and the citizens of Gray. 7.      Upon receipt of the final development plan and the Credit Enhancement Agreement, the applicant will present the plan to the Town Treasurer, accompanied by a nonrefundable $250.00 application fee. 8.      The Town Treasurer will notify the Chair of the Town Council that the review process is completed and the application is in accordance with policy and guidelines as stated herein. TOWN OF GRAY TAX INCREMENT FINANCING [TIF] GUIDELINES 9.      The Town Treasurer, in consultation with Town staff and officials, will: a.      Verify Tax Shift Formulas b.      Verify calculations in various exhibits which at a minimum, will show development cost, tax shifts and revenue return percentages over the duration of the Tax Increment Financing [TIF]. c.      Verify the revenue amounts to be returned to the applicant over the life of the Tax Increment Financing [TIF]. d.      Act as the liaison between the applicant, the Town Council and the Town Attorney. e.      Make financial recommendations to the Town Council as requested. 10.     Upon completion of the review by the Town Treasurer, the applicant will be required to: a.      Submit to the Town Treasurer a development program, which in turn will be introduced at a regular scheduled Town Council meeting. b.      Request the Town Council to schedule a Public Hearing with at least a ten [10] day Public Notice. c.      Attend the Public Hearing to answer any questions that may arise at the Public Hearing. d.      Attend any subsequent Town Council meeting to answer any questions that may arise at the Council meeting. 11.     The Town Manager will submit the application to the State, based upon the direction of the Town Council. 12.     Any out of pocket expenses incurred by the Town in connection with the Tax Increment Financing [TIF] proposal will be reimbursed by the applicant, whether or not the TIF is approved. 12.     The CEDC will monitor the progress of the project. 13.     If the applicant transfers ownership of property in the district, the applicant must notify the Town Manager, in writing prior to finalizing the transfer.  The new owner must agree, in writing, to accept the provisions of the agreement as presented to and approved by the Town Council, before the Town Treasurer will release any further TIF reimbursements. 14.     Application Information Sheets will be provided by: The Gray Town Office 6 Shaker Road Gray, Maine 04039 Note:  Underlined is added                               Crossed Out is deleted Electronic Version created 09-09-05 http://www.maineco.org/Tax_Incentives.php