Loading...
Memo- TIF and Bond Basics 101• CITY OF HOPKINS FINANCE DEPARTMENT MEMORANDUM Date: January 3, 2012 To: Mayor & City Council From: Christine Harkess, Finance Director Subject: TIF and Bond Basics 101 Stacie Kvilvang, Financial Advisor with Ehlers will be at the January 3rd Council meeting to give the following presentation on Tax Increment Financing (TIF) and Bond Basics 101. This will provide basic information on this topic before we have a discussion in February on the TIF Management Plan that Ehlers is currently working on for Hopkins. The presentation will allow for questions during the power point so jot down any questions you may have as you look through the attached slides. C] 9 TIF & Bonds 101 City of Hopkins January 3, 2012 Stacie Kvilvang — Ehlers ID EHLERS HABEAS IN CUBi IL RNMN;[ • H FA Property Tax Overview Tax Increment Review 11 Introduction to Abatement Fj Briefing on Bonds 0 • The ability to capture and use most of the increased local property tax revenues from new development within a defined geographic area. n Each local jurisdiction may decide to use its portion of the existing or new property tax revenues from any development within a defined geographic area. 0 • Complexity of TIF and Abatement Complexity of property tax system ✓ Tax capacity ✓ State property taxes ✓ Market value taxes ✓ Fiscal disparities ■ Different rules for ✓ Each type of district ✓ When the district was created ■ Policy issues fairly simple • 0 ■ Market Value ✓ Assessor assigns value on January 2nd of any given year, used for the following year's taxes ■ Tax Capacity ✓ Based upon class rates or "capacity to pay" ✓ Commercial/Industrial ■ Anything over $150,000 at 2% Owner Occupied Housing • 15t $500,000 at 1 % • Anything over $500,000 at 1.25% Rental Housing (more than 1 unit) • 1.25% ■ "Tax Capacity" has been diluted 0 t� ■ State Property Taxes ✓ Tax paid by commercial users to support education (cabin owners pay as well) ✓ Not included in local tax capacity rate, therefore it is not applied to captured value for TIF districts or abatement ■ Market Value Taxes ✓ School operating referendums and other school taxes ✓ Based upon market value of property rather than tax capacity of property ✓ Not included in local tax capacity rate, therefore it is not applied to captured value for TIF districts or abatement • ■ Fiscal Disparities Taxes ✓ State Law requires commercial/industrial (C/1) properties in 7 -County metro area to contribute 40% of new C/I valuation to an area -wide pool for redistribution to all local taxing jurisdictions ■ Policy choice for Council ✓ Fiscal disparities paid outside of TIF district ■ Increase available TIF on an annual basis ■ Impacts existing tax payers ✓ Current practice has been to have fiscal disparities paid inside the TIF district ■ Last 2 TIF Districts ■ No impact to existing tax payers ■ Less TIF available on an annual basis 0 • E • Where Commercial Tax Dollars Go: $1 OM Value = $412,000 Annual Property Tax (4.12% of Value) Fiscal Dispa. "-. 24% School NIV 4% County 1 So/ School TC 9% I Y-/0 26% Other 3% Where Residential Tax Dollars Go: $250,000 Value = $4,133 Annual Property Tax (1.65% of Value) City 36% Other 7% School D7V 10'% mty �o ITC 11 n U ■ Encourage certain types of development or redevelopment that would not normally occur without assistance ("but for" test). ✓ Create or retain jobs ✓ Redevelop blighted areas ✓ Remediate polluted sites ✓ Construct affordable housing 0 TIF District "captures" value from new development Abatement can "capture" part or the entire value from the parcel 1 Development 1 occurs I 1 Original Tax Capacity 0 Project Area 0 -TIF districts must be located in a Project Area ■Established by various statutory authorities Sets boundary for TIF expenditures Project Area TIF District Redevelopment Rousing Rede°clopmenl 1� u ■ -Defines parcels for capture of value ■Some increment can be spent outside the TIF District, but in the Project Area ("Pooling") -Project Area can contain multiple TIF Districts ■ Eligible uses ✓ Land acquisition and relocation ✓ Demolition and clearance ✓ Site improvements and parking ✓ Public utilities ✓ Administration ✓ Interest on financing ■ Ineligible uses ✓ Recreation (parks, trails, ice arenas, etc.) ✓ City buildings ✓ Certain enhanced public improvements 0 • ■ 5 TIF Districts ✓ 4 Redevelopment districts • Entertainment, Oaks of Main, Super Value and Market Place and Main ✓ 1 Housing district ■ Hopkins Barrier Free Housing ■ Differing terms and qualifications ■ 26 year maximum term ■ Qualifications More than 50% buildings substandard ✓ 70% of parcels are "occupied" ■ Any future use allowed U ■ Affordability required Rental housing ✓ At least 20% of units affordable ■ Owner -occupied ✓ 95% of housing affordable ✓ Homebuyer's income is limited, not price 26 year maximum term 0 Should have evidence that project meets statutory requirements for need Developer "pro forma" or projections Comparable costs of land a' Risk Future development potential for site Consider look -back provision Developer detail actual costs after complete • ■ Each project has a development agreement/contract ■ Who up -fronts TIF costs? ✓ Developer • Pay-as-you-go • No risk to City but higher rate ✓ city • G.O. Bond or Interfund loan • MI ■ Actually a rebate rather than a forgiveness of taxes for up to 20 years ■ Each jurisdiction has to authorize use of its share of property taxes • No rules on what type of project may receive benefit Can be used for public improvements rather than direct subsidy Outside of levy limits • ■ Governed by Minnesota State Law v Mayor can not legally sign a standard bank note Different rules for cities, counties, and school districts Any authorized corporate purpose, except current expenses ■ Minnesota Statutes, Chapter 475 ■ All debt issuing authority begins here ■ Basic parameters for debt Authority for "revenue" bonds ■ Authority for refinancing 3 -year max temporary financing 0 CJ ■ 3% of the market value of taxable property in city ■ Rarely an important constraint Generally applies solely to 100% tax supported debt Most municipal debt specifically excluded from debt limit ■ Debt limit more important in other states so ■ Minnesota Statutes, Chapter 475 ■ Many common uses do not require voter approval Referendum required to issue G.O. bonds for some buildings and parks ■ Simple majority 0 • L15 ■ Minnesota Statutes, Chapter 429 Vehicle to finance wide range of public improvements, including streets, water, sanitary sewer, storm sewer, parks, parking ■ Minimum of 20% of project costs assessed to benefited property to issue G.O. bonds without a referendum ■ Minnesota Statutes, Chapter 444 ■ Ability to issue G.O. bonds supported by net revenues of municipal utilities ■ Water, sanitary sewer, storm sewer ■ No referendum ■ Property taxes only as backup 0 • • Minnesota Statutes, Chapter 412 Any form of capital equipment Must be repaid within ten years Amount limited to .25% of TMV w/o publication V Subject to reverse referendum if over .25% a Most 100% property tax supported 40 Minnesota Statutes, Chapter 475 New for 2002 No election required Subject to net debt limit Street reconstruction ONLY Need a 5 -Year Plan/Public hearing Subject to reverse referendum Need unanimous vote of council membership present 0 • • W • Minnesota Statutes, Chapter 475 • New for 2003 • No election required Subject to net debt limit for populations over 2,500 City/Town hall, public safety, public works, or library facility Annual d/s limited to .16% of TMV Need 5 -Year Plan/Public hearing Subject to reverse referendum Need 3/5ths vote of council membership ■ Not a general obligation ✓ Subject to annual appropriation of lease payments Future city council could walk away from debt payment on facility ✓ City would lose control of facility and would have bond rating lowered Slightly higher interest rates .60% to .85% $105k versus $130k payment per year on 25 year bond for $2,500,000 Still subject to debt limits • ■ General Obligation (G.O.) ✓ Full faith and credit of the City's tax base ✓ Can be "double barrel" G.O. • Revenues used first to pay debt but City "co-signs" ✓ Unlimited pledge: Bondholders can force property taxes to be raised to pay debt ■ Revenue Bonds ✓ Limits City's liability ✓ Pledge may be revenues or a lease • M ■ City's overall outstanding G.O. debt: $25,680,000 ✓ G.O. debt supported by taxes: $10,190,000 ✓ G.O. debt supported by taxes & assessments: $4,385,000 ✓ G.O. debt supported by tax increment: $3,790,000 ✓ G.O. HIA debt: $3,510,000 ✓ G.O. utility debt (water, sanitary sewer and storm sewer): $3,805,000 0 • 0 ■ 2012 — Two Issues ✓ 2012A • Improvement Bonds for 2011 and 2012 street projects 2012B ■ Equipment Certificates Refinancing in 2012 2003A Public Facility Lease Revenue Bonds • Refinance as GO • Reduce bond principle and reduce term by one year by utilizing existing debt service reserve • Less annual costs due to interest savings (reduced bond size and lower rates) Roles Bond Attorney: legal opinion that project meets state and federal laws Rating Agency: Summary of city's debt, socio-economic, tax base and management capacity to make timely payments Financial Advisor: Structure debt and create competitive process Underwriter/Bank: Purchases bonds and resells to retail and institutional buyers • ■ Your needs make the foundation of a bond issue Consider all costs ✓ Land ✓ Construction ✓ Design ✓ Legal/administration U Financial advisor ■ Bond counsel ■ Rating agency ■ Paying agent and/or trustee Discount or underwriters fees 0 • • ■ Funds to pay interest until other revenue available ■ Potential buffer to fiscal impacts ■ Reduced by income from investment of bond proceeds ■ Can structure payments to meet cash flow Allowed up to 3 years for capitalized interest ,/ Can have uneven payments G.O. Bonds limited to 30 years a' Shorter duration encouraged for rating purposes H Debt outside of levy limits u 0