NY State Expands Tax Increment Financing Use

As a result of our recent post on New York State’s recent changes to the statute authorizing Tax Increment Financing in the state, Chris Andreucci and Pat Malgieri were contacted by the Community Development Digest to explain the changes, and the Constitutional problems that remain notwithstanding the legislature’s actions.  The Community Development Digest story appears below. While there is a small, but vocal, minority of practitioners touting TIFs, we think additional changes are necessary before this tool is more widely used in New York.  In the meantime, PILOT Increment Financing is still a legally viable option for certain transactions and should be explored as an alternative to TIFs. – The Editorial Team

NY State Expands Tax Increment Financing Use

By Thomas Harman
Community Development Digest

New York municipalities and developers will have more leeway to use Tax Increment Financing (TIF) for development, but the new provisions passed in the state budget could present problems. TIFs have been available since 1984 to finance development projects by using increases in municipal, town, village or township property tax revenue. The legislature’s new budget law allows school districts to participate, because they tend to generate considerably more property tax revenue than the other eligible entities.

Christopher Andreucci and Patrick Malgieri, law partners at Harris Beach in Rochester, tell Community Development Digest that constitutional issues with existing law and the lack of revenue generated by eligible entities have kept TIF use in New York at a minimum.  While making school districts TIF-eligible may solve some of the financial problems, Malgieri says the authority conflicts with the state constitution, which explicitly allows only municipalities to reallocate tax revenue for TIF projects.

Another legal issue arises over the outcome when a municipality cannot make the bond payments. Andreucci says. Those holding General Obligation bonds have the right to sue for future revenue, but the new law allows TIF bondholders to have first lien on incremental revenues generated from increased property values. Andreucci says this creates confusion about whether to attempt TIFs.

Andreucci and Malgieri say Payment In Lieu of Taxes (PILOT) Increment Financing (PIF) can serve as a potential alternative to avoid TIF legal issues and provide more security in financial markets because payments are at fixed levels.

2 Responses to “NY State Expands Tax Increment Financing Use”

1. Kenneth S. Kamlet says:

   June 4, 2012 at 3:41 pm

   While it may seem difficult to reconcile the Constitutional provision that entitles GO bondholders to the “first revenues” thereafter received, with the provision of the Municipal Redevelopment Law that makes the pledge of incremental property tax revenues resulting from a TIF-funded redevelopment project “a first lien on the revenues derived therefrom,” the two are not really logically inconsistent.

   The key, or so it seems to me, is that the incremental property tax revenues that result from new economic activity funded by TIF bonds would not have otherwise existed. If it were possible to divert TIF-pledged funds to repay unrelated GO bonds, that would undermine the whole premise of TIF–a premise that is recognized and supported by the Constitution. Indeed, the logic of treating TIF-generated revenues as separate and distinct from general revenues (“first” or otherwise) is identical to the logic of Art. XVI Section 6, in not counting TIF debt toward a municipality’s debt limit. Just as TIF debt is not a drain on a municipality’s general revenues, it is wholly inappropriate to tap TIF income set aside to repay TIF debt, as a source of general income that can be used to repay wholly unrelated GO debt.

   That’s my “legal opinion,” anyway.

   Ken Kamlet

   Reply
   • NYMuniBlog says:

     June 6, 2012 at 2:11 pm

     Thanks again for reiterating your position; we here believe an open debate on these types of topics serve the community well. For those readers that do not know, Mr. Kamlet, along with a representative from the New York State Governor’s office and a private developer, is presenting a webinar on TIFs on June 13 at 2:00 p.m. EDT sponsored by the International Council of Shopping Centers. Those of you wishing to hear more about the Municipal Redevelopment Law are encouraged to attend.

     That said, we believe that what Mr. Kamlet presents above is akin to a more casual interpretation of the legislature’s intent behind the adoption of the Municipal Redevelopment Law and one he (and/or others) may make in a court of law in support of a TIF Bondholder’s claim to the incremental tax revenues over that of a GO Bondholder’s constitutional claim to the “first revenues thereafter received” by a municipality (See Article VII, Section 2 of the New York State Constitution). What is lacking, however, is any solid, irrefutable legal authority settling the competing claims of GO and TIF Bondholders. Accordingly, unless and until the legislature addresses that question, either by pursuing a constitutional amendment removing incremental revenues from being characterized as being among the “first revenues thereafter received” by a municipality (which, admittedly, could take several years to accomplish) or removing the statutory requirement that a TIF Bondholder receive a first priority lien on the incremental tax revenues (which, admittedly, will raise marketability issues), there remains an open question and one which will chill the use of tax increment financing as a municipal redevelopment tool.

     Additionally, we are not yet convinced that a school district does not need express constitutional authority to pledge its taxes in support of TIF bonds, like that granted to counties, cities, towns and villages in Article XVI of the Constitution. The issue, among others, is what school district purpose would be served in allowing for a diversion of taxes levied and collected as part of the annual school tax levy.

     In the end, PILOT Increment Financing remains an attractive alternative to TIFs until these issues can be worked out.

     Reply