The 2012 New York State budget recently passed by the Legislature includes a small, but potentially significant, change in the law applicable to tax increment financing (“TIFs”) that may result in a growth in the use of this tool for the financing of private sector economic development projects. Embedded in the state budget is a change to Article 18-C of the General Municipal Law of New York (commonly referred to as the “Municipal Redevelopment Law”) that would allow school district taxes to be allocated toward the payment of debt service on redevelopment projects. The Municipal Redevelopment Law has been on the books for many years but, until now, only the taxes raised by or for the benefit of cities, towns, villages and counties (other than the five boroughs of the City of New York) could be allocated for this purpose. The ability, under the recently enacted amendment, for school districts to opt into the allocation of its taxes towards these projects makes the use of TIFs a potentially more useful tool in the economic development toolbox, particularly given the fact that school taxes typically account for a significant portion of the overall real property tax burden in a locality.
The expansion of the TIF statutes to school district taxes is not, however, without its potential legal and practical issues. For example, one of the long-standing questions raised by the Municipal Redevelopment Law virtually from its inception is whether its provisions may conflict with the state constitution. Section 297-o of the General Municipal Law authorizes the issuance by a municipality of tax increment bonds “payable and secured by real property taxes, in whole or in part, allocated to and paid” pursuant to the provisions of Section 297-p. Section 297-o goes on to provide that the pledge of the real property taxes allocated “shall constitute a first lien on the revenues derived therefrom and tax increment bonds or…bond anticipation notes shall not be subordinate to any other indebtedness of the municipality with respect to the pledge of such revenues.” Finally, Section 297-o provides that in contracting TIF indebtedness, “a municipality shall not pledge its faith and credit…to the payment of principal thereof and the interest thereon.” Yet, in direct contrast to that provision of the statute, Article VIII, Section 2 of the state constitution provides that “[N]o indebtedness shall be contracted by any county, city, town, village or school district unless such county, city, town, village or school district shall have pledged its faith and credit for the payment of the principal thereof and the interest thereon.” [emphasis added]. Reconciling the apparent conflict between the state constitutional directive and the provisions of Section 297-o will undoubtedly prove a challenge to municipal officials and their bond counsel as they consider the possibility of utilizing TIF financing for local development projects.
The taxes allocated to the payment of TIF notes and bonds will also likely be subject to the provisions of New York’s real property tax cap law. That law, which effectively imposes a limitation (subject to certain exceptions, exemptions and overrides) on the amount of tax revenues that may be levied from one year to the next, makes no specific provision or exception for taxes allocated toward the payment of TIF indebtedness. For purposes of calculating the real property tax cap, TIF-allocated taxes are apparently to be treated as all other taxes and, thus be subject to the levy limit, despite the fact that the TIF-allocated taxes will not generally be available for use by municipalities and/or school districts for their general public purposes. Potentially mitigating this impact, however, would be the continued availability of the tax base growth factor since the properties subject to the TIF financing would remain on the taxable rolls.
Finally, municipalities and project proponents considering the use of TIF financing might also consider the relative benefits of utilizing increment financing based on the use of payments-in-lieu of taxes (“PILOTs”). PILOT increment financing (“PIFs”) do not suffer from the same “full faith and credit” issues raised with their TIF counterparts. Further, if PILOT agreements are crafted to provide fixed dollar amounts, PIFs may provide greater certainty to the marketplace as to the availability of revenues to pay for project debt service since TIFs will in many instances be dependent upon growth in tax revenues tied to future (and potentially speculative) increases in the assessed value of the underlying project. PILOTs are, of course, also subject to the real property tax cap formula calculation and will, therefore, have an impact on a municipality’s and school district’s ability to increase its levy from one year to the next.
The NY MuniBlog will continue to monitor developments in the area of TIF financing in the wake of this recent amendment and will explore in greater detail in future postings the issues raised in this piece.