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New “TIF” Authority Provides Powerful Economic-Development Tool

By Kenneth S. Kamlet

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Local governments in New York State recently received a long sought after shot-in-the-arm from the state legislature in the final round of budget-bill approvals. For the first time since “Tax Increment Financing” (TIF) was recognized by the New York Constitution in 1983 and made part of the Municipal Redevelopment Law in 1984, this powerful economic-development tool, which is used successfully by municipalities in every state but Arizona, can now be used effectively in New York. 

The key missing ingredient, just added by the New York Legislature, was giving school districts the right to opt-in to TIF-funded redevelopment plans. Without school district participation, TIF bonds were viewed as too risky by prospective investors. That defect has now been corrected.

The law gives “municipalities” the authority to issue TIF bonds to raise capital to promote economic development through investments in “blighted” areas for public-works infrastructure improvements and other allowable “objects and purposes.” 

But this authority can be used only where such redevelopment “cannot be accomplished by private enterprise alone without public participation and assistance,” and such assistance is limited to acquisition of land, planning, and financing of land assembly, the work of clearance, and making necessary improvements in furtherance of municipally approved redevelopment plans.

Unlike the typical municipal bonds that are backed by the municipality’s “full faith and credit” and are known as “general obligation bonds,” TIF instruments are “revenue bonds” that are repaid by the captured increased value of underutilized land, the redevelopment of which is enabled by the infusion of TIF funds. 

Advantages to the municipality include the following: TIF bonds are not subject to the constitutional debt limit (that’s a good thing for hard-pressed municipalities like Rochester and Binghamton, for example); the bonds are repaid by growing the tax base — not by depleting the local treasury; and, by growing the tax base, the bonds provide some relief from the 2 percent tax cap (thanks to the “growth factor” carve-out from the baseline tax-levy amount on which the cap is based). 

School districts, that can now opt-in to participate, share similar benefits, along with bringing in much-needed revenues and promoting new enrollments. Taxpayers benefit from new jobs and economic stimulus, along with stable or expanding municipal and school services, with no increase in taxes.

Since school districts account for the lion’s share of property taxes in most areas of the state, allowing these districts to participate (and to pledge their incremental tax revenues) greatly increases the security and effectiveness of TIF bonds to investors. Although increased property-tax revenues resulting from new economic activity in previously blighted areas must be diverted during the term of the TIF bond to repay the principal and interest, the diverted revenues are revenues that would not have existed but for the infusion of TIF funds. So, there is no actual loss of revenues even during the term of the TIF bond. After the bond matures, all of the new revenues go in their entirety to the taxing jurisdictions. 

New York City, as one of the “Big Five” municipalities in the state (along with Buffalo, Rochester, Yonkers, and Syracuse), has a “dependent” school district which is nominally under the city’s control. So, it and the other “Big Four” arguably have no need for the new opt-in authority. However, the state-mandated “Maintenance of Effort” (MOE) locks in place the “Big Five’s” level of support for their school districts — and within that MOE, the school districts still have some control over their spending priorities. 

In addition, without the new legislation, there was doubt that school-district allocations in support of TIF financing would pass muster under education-law restrictions of school-district spending for only legitimate education-related purposes. The legislation now explicitly finds that “sound development and redevelopment of blighted areas increases public school enrollment by providing affordable housing and employment opportunities and the need for expanded public education facilities and services.” 

As of 2004-05, TIF was the most widely used economic-development tool utilized by U.S. municipalities of 10,000 or more residents and counties of 50,000 or more residents, second only to general-fund revenues. 

Enactment of a functioning TIF law comes not a moment too soon. New York municipalities need all the help they can get to build their economies, broaden their tax bases, and keep residential and business taxpayers from abandoning ship.

Kudos to the governor and the Legislature for giving us a TIF law that works. It is now up to municipalities to use it.       

 

Kenneth S. Kamlet is an environmental and land-use attorney with the law firm of Hinman, Howard & Kattell, LLP, which is based in Binghamton and also has Central New York offices in Syracuse and Oswego. Contact Kamlet at kkamlet@hhk.com. This article first appeared in the May 1 issue of The Legislative Gazette weekly newspaper, covering state government.

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