CSDA e-News - January 6, 2015

The final article in the New Laws of 2015 series focuses on new legislation that makes it easier for municipalities and special districts to harness tax increment—the future incremental growth in property tax revenues —for financing infrastructure.

Senate Bills 614 and 628 strengthen Infrastructure Financing Districts (IFDs) by lowering the vote threshold for creating IFDs and broadening their applicability to different types of projects. IFDs can finance capital investments in public facilities by issuing bonds backed by tax increment.

Though IFDs have existed in California law since 1990 (traditional IFDs), very few traditional IFDs have been created because redevelopment agencies had broader powers to leverage tax increment financing until they were dissolved in 2011.

CSDA thanks Jake Vollebregt and Paul C. Marra for their assistance with this article. Jake Vollebregt is a public law attorney with Best Best & Krieger LLP and Paul C. Marra is a managing principal for Keyser Marston Associates, Inc.

IFDs for Disadvantaged Unincorporated Communities

SB 614 allows any local taxing entity (except school-related agencies) to form an IFD in an unincorporated area with LAFCO approval. The IFD can invest the sponsoring entity’s tax increment to fund improvements or upgrades to structures, roads, sewer or water facilities, or other infrastructure that serves a disadvantaged unincorporated community. A community qualifies as a “disadvantaged unincorporated community” if the annual median household income is less than 80 percent of the statewide annual median household income.

Enhanced Infrastructure Financing Districts

SB 628 creates a new mechanism called the Enhanced Infrastructure Financing District (EIFD). Special districts can partner with a sponsoring city or county to create an EIFD for capital infrastructure and economic development projects. Though a municipality must take the lead in forming an EIFD, any affected taxing agency (except school-related agencies) may choose to partner with the sponsoring municipality and allocate some or all of its share of the tax increment toward the infrastructure financing plan. Municipalities and other taxing entities can combine this revenue stream with investments from other capital providers to further public-private partnerships. Here is an outline of the key distinctions between EIFDs and traditional IFDs:

1. Reduced approval threshold by the electorate: Traditional IFDs require voter approval by two-thirds of the electorate to both form the IFD and issue bonds. A municipality may form an EIFD without a ballot approval, and the EIFD may issue tax increment bonds with the approval of 55 percent of the voters in the affected area because the debt service is backed solely by the tax increment. If the proposed EIFD boundaries include fewer than 12 registered voters, the vote is held among the landowners.

2. Extended Financing Period: Traditional IFDs limited the financing period for repaying the issued bonds to 30 years from the date when the IFD was formed. EIFDs allow the financing (and the capture of tax increment) to extend for 45 years after the date the bonds are authorized. This extends the tax increment financing period by more than 15 years, which significantly increases the amount of tax revenue available for financing. Both traditional IFDs and EIFDs can also enter into reimbursement agreements with master developers as an alternative to conventional or bond financing.

3. Broaden Applicability to many types of infrastructure: EIFD funding may be applied to projects of communitywide significance that provide significant benefits to the EIFD area or the surrounding community. This includes flood control, storm water quality management, sewage treatment, water reclamation, industrial facilities for private use, and environmental impact mitigation.

4. Polanco Act Powers: An EIFD may also utilize any powers under the Polanco Redevelopment Act, which allows the EIFD to clean up toxic or hazardous substances within the EIFD’s boundaries. This power was reserved to redevelopment agencies and disappeared when redevelopment agencies were dissolved.

5. Cross-boundary cooperation: Municipalities may form multiple EIFDs within their jurisdictions and partner with other municipalities to form larger EIFDs across city and county lines.

Before creating an EIFD, a municipality must have completed the process of winding down its affairs of its redevelopment agency and received a notice of completion from the Department of Finance.

Creating a Value Proposition

These changes in the law may make tax increment financing a viable option for a broader array of infrastructure projects. There are many factors to consider in determining whether an IFD can add value to a project, including bond market conditions. Financing with tax increment depends on a “before and after” analysis of many factors, including anticipated amount, timing and valuation of new development within the affected area. EIFDs may not work for all jurisdictions, since the portion of the 1 percent tax levy that is allocated to cities varies widely. For example, the City and County of San Francisco receives approximately 57 percent of the 1 percent property tax levy. Even for projects of the largest scale, however, tax increment financing from an EIFD will likely be just one of several revenue sources in a project’s capital financing portfolio.

*This article first appeared in the CSDA e-News on Jan. 6, 2015. Republished with permission.