By Guest Author: Russell Powel, Economic and Planning Systems, Inc.
Tax increment financing has long been relied upon as one of a handful of economic development tools available to invest in public infrastructure projects. In the wake of the dissolution of redevelopment agencies (RDAs), new forms of tax increment financing have emerged. Some jurisdictions have begun to implement one or more of these new tools, with results that are too early to predict. The utility of these new tools for special districts following the enactment of AB 116 (Ting) is explored in this article.
Property Tax Increment Financing Background
In the latter half of the 20th century, tax increment financing for public infrastructure was a popular economic development tool for cities and counties in California. Under Redevelopment Law, cities and counties could divert property tax revenues from all affected taxing entities to invest in public infrastructure and affordable housing to encourage revitalization and redevelopment of blighted areas. Aside from a small portion of pass-through property tax revenues, former RDAs could unilaterally divert property tax increment from all overlapping special districts, schools, cities, and the county. This empowered RDAs to secure municipal bond issuances to fund land assembly, infrastructure improvements, affordable housing projects, and other developments with principal and interest repaid over a period of time from the diverted incremental property tax revenues.
One significant downside to redevelopment, from the perspective of special districts, was that cities and counties could take tax increment from these districts to fund redevelopment projects, while special districts had no recourse.
After the dissolution of RDAs in California in 2012, cities and counties looked to Infrastructure Financing Districts (IFDs) and Enhanced Infrastructure Financing Districts (EIFDs) to replace the former, more robust form of tax increment infrastructure funding. As an economic development tool, tax increment funding allowed investment of property tax dollars without increasing property taxes or adding land-secured charges to subject properties through Mello-Roos Community Facilities Districts (CFDs) or 1915 Act Assessment Districts (ADs).
Developers often sought to leverage three available public infrastructure financing tools for new and redevelopment projects:
- Tax increment funding (RDAs, IFDs, EIFDs)
- Development impact fees
- Land-secured funding (CFDs, ADs)
There has been keen interest on behalf of cities and counties, and certainly welcome interest from the development community, to consider the formation of EIFDs. But even with this interest, there have only been several new EIFDs formed throughout the state. The primary reason is the exclusion of the school or State share of local property taxes and the voluntary participation framework for other entities’ property tax shares, as established under EIFD Law. Specifically, participation in the EIFDs by special districts, cities, and the county is voluntary rather than compulsory, and schools are prohibited from participating.
The bottom line is that, while baseline funding for the infrastructure and services provided by local agencies is protected, the amount of property tax increment revenue that may be available in an EIFD could pale in comparison to what otherwise would have been available under the former RDA Law. That being said, another possible impediment to EIFD formations was the 55 percent voting threshold of qualified electors that was required to issue tax increment bonds. Effective January 1, 2020, this voting requirement has been removed by Assembly Bill (AB) 116.
Recent Amendments to EIFD Law (AB 116)
AB 116 amends several sections of the EIFD Law found in Government Code section 53398.50 et seq. and:
- Removes the 55 percent voting threshold previously required for an EIFD bond issuance.
- Introduces two additional public hearings and an additional meeting by the EIFD’s public financing authority as part of the formation process.
- Introduces an annual reporting and audit requirement.
The removal of the voting requirement means that an EIFD would be able to issue bonds soon after formation, presuming adequate revenues are available, as opposed to previously having to hold an election of the qualified electors before a bond sale could be authorized.
In place of the election, the new law requires additional public hearings to the EIFD formation process. During this public hearing process, if a majority protest exists, the formation process is halted. Alternatively, if between 25 percent and 50 percent of the combined number of landowners and residents who are at least 18 years of age within the boundaries of the proposed EIFD protest, an election would be called as part of the formation process. New reporting and audit obligations will then apply once the EIFD is operational and will result in an administrative cost that will need to be budgeted.
Tax increment financing remains a viable economic development tool for cities and counties and could be a viable tool for special districts, particularly those that receive property tax revenue. Special districts could benefit by partnering with cities or counties in sharing tax increment revenues to fund mitigation measures to accommodate new development or improve existing infrastructure.
EIFD Advantages
There are certain ways in which features of EIFDs may be a more useful tool than RDA Law. First, there is no need for a finding of blight to form an EIFD. As such, an EIFD could be applied to greenfield development as easily as to an infill or redevelopment project. Second, while there are housing related provisions under certain circumstances and for certain projects, an EIFD is not required to include a 20 percent set-aside for affordable housing. Finally, an EIFD has more flexibility in how tax increment revenue is used for projects.
When considering whether forming an EIFD is a viable option, the first test would be to evaluate the projected amount of tax increment revenue that would be available for a project area as it developed following EIFD formation. In some cases, it may take seven to 10 years before the increase in tax increment revenue is sufficient to adequately bond against that tax increment revenue stream. Because of this potential time lag in tax increment growth, other infrastructure funding tools may be used to bridge the funding gap. This is where a CFD could provide initial infrastructure funding. CFD funding is secured by a special tax that is levied against developing parcels in early years, while tax increment funding could be used in the long term to fund principal and interest payments for outstanding bonds. Development impact fee revenues could also be used to reimburse the developer for certain infrastructure improvements funded by the developer and may be integrated into the overall financing strategy.
Examples of How a Special District Could Benefit
EIFDs can be particularly effective tools for special districts where a larger infrastructure project has regional benefits. Perhaps the special district has a relatively small share of the property tax dollar, but combining it with other special districts, a city, and/or the county may provide an efficient funding share for such regional projects.
Our firm, Economic & Planning Systems, is part of a team that has evaluated programs to fund flood control projects that would allow growth in a city and unincorporated areas of the county. A reclamation district may pool all or a portion of their growth in tax increment to the flood control project along with city and county tax increment pledges. Under this scenario, the reclamation district might also seek to form a CFD or AD to fund flood control maintenance costs. In pledging a portion of the growth in tax increment, the reclamation district may need to backfill property tax revenues that are being used to fund improvements through the use of an assessment district in this example.
In another example, a wastewater treatment facility may need to be expanded to accommodate new growth. Development impact fees could be charged to fund expansion requirements attributable to new growth, but there may be enhancements required that benefit existing development. Tax increment financing could be used to fund wastewater treatment facility costs attributable to existing development.
In a related example, what if a water or sanitary district was looking for capital to build out purple pipes to deliver recycled water? The overlapping city or county may have a shared interest in such a project, as may neighboring water or wastewater districts. A city, county, or neighboring water agency may also be willing to entertain partnering on an EIFD for a conjunctive use project. Enhancing water reliability in a region could significantly improve its long-term economic stability.
One last example, recreation and park districts may observe a patchwork of disconnected parks, trails, and bike lanes throughout their region and look to EIFDs as a funding solution. The overlapping city or county, or even neighboring park districts or cities, may find value in partnering to connect the community’s parks with a system of trails, paths, and bike lanes that would enhance transportation and livability.
Not all special districts receive property tax revenues, and as such, would not typically be a participant in an EIFD formation. However, provisions within the law do allow for special districts and other local agencies to participate in an EIFD by contributing other types of revenue sources, such as enterprise revenues.
So, Where Do Special Districts Fit In?
While special districts may participate in EIFDs, only cities and counties are authorized to officially form them. As such, special districts will need “dance partners” when seeking to access tax increment financing through an EIFD. Special districts interested in using tax increment financing for their projects will need to demonstrate to a city and/or county how the partnership will fund projects that either solve regional infrastructure needs (flood control?) or lower the barriers for desirable development projects in the community.
In areas where special districts hold joint meetings with cities and counties to discuss regional issues, there may be greater opportunities to develop relationships that make it possible to form EIFDs under a joint powers authority that would include special districts.
A special district interested in pursuing the idea of forming an EIFD should first identify the critical infrastructure project that is required. Because we know tax increment revenues grow over time, the special district should also determine how the project might be funded initially.
The process of forming an EIFD is similar to that of a CFD. The professional team hired by the special district would be similar to that for a CFD formation. The special district would likely need special counsel and an economic advisor to initiate the formation. The economic advisor would do an initial feasibility analysis to show how tax increment revenues would likely occur over time and determine if they are sufficient resources to fund the identified project. The economic advisor would also evaluate the feasibility of including other taxing entities in the formation process.
In some areas of the state, the local special district serves as the de-facto “city hall” and may most logically serve as a lead in initiating a formation process. A county may have a larger tax increment share than the special district, but it would be the special district that becomes the primary service provider for residents of new development. While the county or a city would be required to ultimately “form” the EIFD under law, there is nothing in law that precludes a special district from initiating the effort and leading the charge.
This article was written by guest author Russell Powell of Economic & Planning Systems, Inc., as part of CSDA’s New Laws Series, where experts explain legislation passed in 2019 and how it will affect special districts moving forward. This article is provided for general information only and is not offered or intended as legal advice. Readers should seek the advice of an attorney when confronted with legal issues and attorneys should perform an independent evaluation of the issues raised in these materials.
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