2012 State Budget Expands the Reach of Tax Increment Financing

By Christopher A. Andreucci and Patrick M. Malgieri

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.

2 Responses to “2012 State Budget Expands the Reach of Tax Increment Financing”

1. Kenneth S. Kamlet says:

   April 5, 2012 at 12:04 pm

   Messrs. Andreucci and Malgieri raise two concerns about the recent change in the law applicable to tax increment financing (TIF) that allows school districts to opt-in to redevelopment plans initiated by municipalities:

   1) The constitutional prohibition in Art. VIII, Section 2, which prohibits taxing jurisdictions from contracting indebtedness unless those jurisdictions pledge their faith and credit for the payment of the principal thereof and the interest thereon. This is said to be an “apparent conflict” with Section 970-o of the TIF law, which provides that, in issuing TIF bonds, the municipality “shall not pledge its faith and credit….”

   2) The fact that the property tax cap law makes no specific provision or exception for taxes allocated toward the payment of TIF indebtedness.

   The answer to the first concern is that the NYS Constitution was specifically amended in 1983 to authorize municipalities to issue bonds backed, not by full faith and credit, but by the payment “of that portion of taxes raised… on real estate [in the TIF district]… which, in any year, is attributed to the increase in value of taxable real estate resulting from such redevelopment.” Art. XVI, Section 6. This dispensation addresses only municipalities, leaving the status of school districts unclear. The new TIF legislation, however, goes to great lengths to make clear that, it is the municipality and not the school district that is issuing the TIF bonds and incurring the TIF indebtedness. A participating school district merely agrees to allocate a portion of its incremental tax revenues toward repayment of the TIF principal and interest. It is not directly contracting indebtedness.

   There are two answers to the second concern. First, in any given year TIF indebtedness will make up a small share of a municipality’s total spending. So, while it would have been preferable for the tax cap law to have explicitly excluded such indebtedness from the tax levy amount that serves as the baseline for the cap, its failure to do so, shouldn’t be a big burden in most cases. (Arguably, Art. 8, Sec. 12 of the state constitution precludes the Legislature from doing anything to restrict the power to levy taxes on real estate for the payment of interest or principal on previously contracted indebtedness. So, localities might have a valid basis for deducting such indebtedness from the tax cap baseline anyway.) The second answer, as alluded to in the original note, is that, even if the amount of the annual indebtedness can’t be deducted from the baseline, any resulting expansion in the tax base can be, through the use of the “tax base growth factor” carve-out.

   PILOT Increment Financing (PIF) is a useful tool and it has its advantages. But, it was initially developed as a work-around the limitations in the TIF provisions of the Municipal Redevelopment Law. Now that the major limitation in that law has been rectified, TIF has the potential to emerge in New York as the powerful economic development tool it is recognized to be in every other state but Arizona.

   Both TIF and PIF have their uses. The availability of one should not denigrate the opportunities provide by the other. New York municipalities need and deserve all the economic tools they can get.

   Reply
   • NYMuniBlog says:

     April 11, 2012 at 12:30 pm

     Ken, thank you for the comment. We apologize for the delayed response.

     Of course we are aware of the changes to NYS Constitution that allowed municipalities to issue bonds not backed by its full faith and credit, but instead backed by the increase in taxes generated as a result of municipal redevelopment projects. We believe, however, that Article XVI, Section 6 is a necessary, but not sufficient change to the Constitution relating to authorizing municipalities to issue TIF Bonds. It fails to address the rights of the holders of a municipality’s general obligation debt even though it expressly authorizes the municipality to issue TIF bonds. Our concerns are similar to those that were voiced by the New York State Comptroller in 1984 upon the enactment of the Municipal Redevelopment Law. Essentially, the issue is that Article VIII, Section 2 of the NYS Constitution requires that “[p]rovisions be made annually by appropriation by every county, city, town, village and school district for the payment” of principal and interest of the general obligation debt of such municipality. Upon the failure of a municipality to make such appropriation, “a sufficient sum shall be set apart from the first revenues thereafter received and shall be applied to such purposes.” Furthermore, bondholders are given express authority to commence legal action to ensure that such “first revenues thereafter received” be set aside for the payment of the municipalities general obligation debt. Thus, the Constitutional problem arises when one is asked to opine as to whether the incremental taxes are deemed to be among those “first revenues” or whether, in accordance with the general municipal law, they can be pledged as a first priority to the repayment of TIF bonds to the exclusion of the holders of general obligation indebtedness. Given that is a question likely to be answered by a court, it seems unlikely a TIF deal will be able to receive a “clean” bond counsel opinion, which is customary in the marketplace. Rather, bond counsel, if it is comfortable providing any opinion in connection with the issuance of TIF bonds, may resort to giving a “reasoned opinion” thereby weakening the attractiveness of the issuance to potential purchasers; at a minimum, this will increase the borrowing costs and could potentially prevent the TIF bonds from ever being issued. Further, one would have to question whether allocating taxes toward the payment of TIF debt service may constitute an impairment of the contractual rights of existing general obligation debt holders who purchased the bonds with the agreement that all taxes would be available for the payment of debt service.

     Another issue we see is whether a school district has the constitutional authority to divert its tax revenues for economic development purposes. Article XVI, Section 6, as you know directs any county, city, town or village contracting TIF indebtedness to pledge to its payment thereof that portion of the real property taxes raised by it which, in any year, is attributed to the increase in value of taxable real estate resulting from its redevelopment. School districts, however, are not mentioned at all. Concededly, school districts would not be issuing indebtedness under the new statutory amendments but absent constitutional authority, we at the very least question the ability of a school district to divert any of its tax revenues for the exclusive benefit of the holders of TIF debt in contravention of the provisions of Article VIII, Section 2 and perhaps even Article VIII, Section 1.

     With respect to your comment on the tax cap formula, we agree that at least in some instances the allocation of the increment may prove relatively incidental. In other instances, though, it may not. In that regard, the impact of a TIF allocation could be similar to that of a PILOT. Each situation must be reviewed and determined on its individual merits. You raise the prospect that Article VIII, Section 12 might serve as an obstacle to the imposition of the tax cap at least in so far as it may relate to the payment of indebtedness. This is at least to some an interesting argument that has been discussed by some bond counsel and will be a topic for discussion by C. Todd Miles and Patrick Malgieri of Harris Beach at their presentation to the annual meeting of the County Attorneys’ Association of New York in May.

     Finally, regarding the relative benefits of TIFS and PIFS, it was not the intention of the authors of the piece to denigrate either one. To the contrary, your point was the very point intended to be advanced by the piece. Each approach deserves thoughtful consideration and analysis in light of the facts and circumstances when being considered as a tool to advance economic development in any community.

     Reply