by Timothy McQuiston, Vermont Business Magazine The Vermont Auditor of Accounts Doug Hoffer released a report on the progress of the Town of Hartford’s TIF progress, as required by statute, December 30, 2020. While the auditor has taken issue with TIF district’s in the past over whether they are truly beneficial to the local economy and/or too onerous to the state education fund – notably the one in St Albans City – the auditor writes in this report that he found only a small and unintended error in the Hartford TIF.
The comments below are selected from the report itself. The full report is available on the state auditor’s website, http://auditor.vermont.gov/.
Municipalities with a tax increment financing (TIF) district incur debt to finance infrastructure improvements and earmark a portion of incremental education and municipal property tax revenues from the district to repay the debt.
The Vermont Economic Progress Council (VEPC) approved the Town of Hartford’s White River Junction TIF district on December 8, 2011.
Hartford is authorized to issue TIF district debt through March 31, 2024 and to retain tax increment through fiscal year (FY) 2034.
This is the first audit of Hartford’s TIF district as required by statute. The audit objectives were to determine:
1) how tax increment was utilized in fiscal years 2018 and 2019 and whether it was used to repay TIF district debt that a) was authorized by VEPC and municipal voters and b) financed eligible improvement project costs or related costs; and,
2) whether Hartford retained the appropriate amount of education and municipal tax increment in the TIF district fund and paid the balance to the taxing authorities for fiscal years 2018 and 2019.
In FY2018 and FY2019, the Town used tax increment to repay TIF district debt that had been authorized by VEPC and Hartford’s municipal voters.
From FY2016 to FY2019, Hartford used about $915,000 of TIF district debt to finance eligible TIF district improvements such as stormwater systems, water systems, roadways, streetscape, and parking.
Hartford retained slightly too much education and municipal tax increment in its TIF district fund in FY2018 and FY2019 and, as a result, underpaid the State Education Fund by a total of $2,175.
These errors occurred because eight parcels were inadvertently excluded when Hartford determined which parcels were within the TIF district boundaries at the time the district was created in 2011.
The auditor made recommendations to resolve this matter, including amending the list of parcels that comprise the original taxable value for the TIF.
Hartford White River Junction TIF District
VEPC conditionally approved the Town of Hartford’s White River Junction TIF District on December 8, 2011, authorizing the Hartford TIF District to use incremental property taxes to finance infrastructure improvements and requiring Hartford to submit filings for development project phases to VEPC for review and approval.
Pursuant to VEPC’s approval of the TIF district, the maximum dollar amount of debt obligations to be paid with incremental property tax revenues, including the cost of financing, is approximately $18 million.
Hartford submitted and received VEPC approval of four phased project filings through FY2019.
These phases included improvements such as stormwater and wastewater lines, new road construction, and parking lot reconstruction and resurfacing.
Tax increment financing (TIF) is a tool that municipalities can use to finance public infrastructure, such as streets, sidewalks, and storm water management systems.
In Vermont, establishing a TIF district allows a municipality to designate an area for improvement, incur debt to finance public infrastructure, and retain a portion of growth in property tax revenues, called incremental property tax revenue.
Incremental property tax revenues are used to repay the debt, and they include municipal property taxes (municipal tax increment) and statewide education property taxes (education tax increment).
Thus, a portion of state education property tax revenue is retained by the municipality for authorized purposes rather than remitted to the State’s Education Fund.
Through fiscal year (FY) 2019, Hartford issued $3,026,000 of bonds for public improvements. Hartford is authorized to issue debt until March 31, 2024 and to retain 75 percent of education tax increment through FY2034. Hartford is required to allocate 75 percent of municipal tax increment for repayment of TIF district debt for the same period.
The purpose of a TIF district is to fund public infrastructure and stimulate economic development. A municipality designates a geographic area where it wants to encourage private sector development and where municipal officials think public infrastructure improvements are needed for that development.
The municipality incurs debt to finance the public infrastructure improvements in the TIF district, which in theory, stimulates private investment that would not otherwise have occurred in the designated TIF area.
The combination of both public and private investment is expected to increase property values, generating incremental property tax revenue. The expected growth in property tax revenues (i.e., incremental property tax revenue or tax increment) in the designated area is used to pay debt incurred to finance the cost of improvements.
A portion of tax increment, comprised of education and municipal increment, is retained by the municipality for a maximum period of 20 years beginning the year when the first debt obligation is incurred.
Taxing authorities, like the municipality and the State, continue to receive property tax revenue on the original taxable value (OTV) of the properties during this time and also receive a portion of incremental property tax revenue.
Figure 1 below shows the basic TIF model, including the anticipated tax increment.
Source: An Examination of the State of Vermont Tax Increment Financing Program, January 24, 2018, Vermont Legislative Joint Fiscal Office.
The Vermont Legislature designated VEPC as the State body responsible for approving a TIF district. VEPC must authorize a municipality to use incremental education property tax to finance TIF district improvements.
Since 2006, a municipality desiring to use incremental education property tax to finance TIF district improvements must file an application with VEPC.
The application must contain both a district plan that has received prior approval from the municipal legislative body and a district finance plan.
The district finance plan, which includes plans for debt financing, must be approved by VEPC before the municipality seeks a public vote to pledge the credit of the municipality (i.e., issue debt).
Prior to seeking VEPC approval, a municipality must have held public hearings and established a tax increment financing district.
According to statute and the Adopted TIF Rule, VEPC is charged with oversight and non-compliance enforcement of all districts.
On May 6, 2015, VEPC adopted rules as required by statute to address issues related to creating, implementing, administering, and operating TIF districts.
The TIF District Adopted Rules (TIF Rules) address VEPC’s oversight and monitoring of the TIF districts’ compliance with rule and statute, and enforcement of any aspects of non-compliance and resolution.
TIF District Debt and Tax Increment
After VEPC approves the use of incremental education property tax to finance TIF district improvements, the municipality must seek voter approval to incur debt to build public infrastructure improvements and pay for related costs. A municipality may issue debt for up to ten years from the creation date of the district if the first debt is issued before the fifth anniversary of the district creation date. Specifically, if a municipality issues debt within the first five years following district creation, they may issue debt for a total of 10 years following the creation date.
The term “improvements” means the installation, new construction, or reconstruction of infrastructure that will serve a public purpose and fulfill the purpose of the district. According to TIF Rule 704, improvements may include, but are not limited to: transportation (e.g., public roads, parking lots, garages, streetscapes, and sidewalks), land and property acquisition, property demolition, site preparation, and utilities, such as wastewater, storm water, water dispersal and collection systems.
Related costs are defined as expenses incurred and paid by the municipality, exclusive of the actual cost of constructing and financing improvements, that are directly related to the creation and implementation of the TIF district. Per TIF Rule 705, examples of related costs include:
1) professional services incurred during preparation of a district plan, district finance plan, district application, or substantial change request;
2) costs of providing public notification about, and obtaining public approval for, a district plan, district finance plan, application or filing with VEPC; and
3) consulting, design, architects, engineering and other similar professional services costs directly related to the implementation and construction of eligible TIF district improvements.
Tax increment may be used to pay TIF district debt and to directly pay for improvements and related costs.
Municipalities with TIF districts approved by VEPC are authorized to retain 75 percent of the state education tax increment and are required to allocate at least the same proportion of municipal tax increment for repayment of TIF district financing.
For those municipalities with TIF districts, EPV includes the portion of incremental education property value that corresponds to 25 percent of the education tax increment, which is required to be paid to the Education Fund.
Figure 2 illustrates the calculation of incremental property tax revenue.