Champlain Housing Trust apartments on Garden Street in South Burlington's City Center. CHT photo.
by Timothy McQuiston, Vermont Business Magazine Auditor of Accounts Doug Hoffer today released his office’s report on South Burlington’s city managed TIF District. These reports are required by the Legislature. South Burlington has begun an extensive growth program through its City Center development projects. The auditor found that the city has been meeting its TIF obligations. Below is a largely verbatim transcript of the report.
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, in a municipality with a TIF district, a portion of state education property tax revenue is kept by the municipality to pay for infrastructure and debt. Normally these funds would be sent to the State’s Education Fund to pay for public education.
The City of South Burlington City Center TIF District was approved by the Vermont Economic Progress Council (VEPC) on July 25, 2013, subject to the submission of a TIF Financing Plan. The City’s Financing Plan was approved by VEPC in 2015. In total, VEPC has authorized $29.7 million of public improvements and related costs to be funded with tax increment financing.
As of the end of fiscal year (FY) 2022, South Burlington had issued $10,429,962 of bonds to be repaid with tax increment and voters had authorized an additional $4,002,550 of borrowing.1 Subsequently, the voters authorized another $15,086,430.
The City is authorized to issue debt until March 31, 2024 and to keep 75 percent of education tax increment through FY2037 for debt repayment and other allowed uses.
We performed this first audit of the City Center TIF District as required by the Legislature. The audit’s objectives were to determine:
1. For the period from 2012 to 2022, whether the City of South Burlington obtained required authorizations to issue debt for the City Center TIF district and used such debt to finance eligible improvement projects and related costs; and
2. For the period from 2017 to 2022:
a) whether the City retained the appropriate amount of education and municipal tax increment in the City Center TIF District Fund and remitted the required amount to the State’s Education Fund, and
b) whether the City used tax increment for allowable purposes.2
"We found that South Burlington received the required approvals to issue debt and used the debt to finance eligible improvement costs and related expenses. We also found that the City retained the correct amounts of municipal and education tax increment and used the increment for allowed purposes."
Background
The purpose of a TIF district is to fund public infrastructure and stimulate economic development. A municipality designates a geographical area where it wants to encourage private sector development, and where the municipality thinks public infrastructure improvements are needed for that development. The municipality incurs debt to finance the needed 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 property tax revenue. The expected growth in property tax revenues (i.e., incremental property tax revenue) in the designated area is used to pay debt incurred to finance the cost of improvements. The incremental property tax revenue is retained by the municipality for the period authorized by the municipal legislative body or until all financing and related costs are retired, beginning the year in which the first debt obligation is incurred. Taxing authorities, like the municipality and the State (i.e., the Education Fund), continue to receive property tax revenue on the original taxable value (OTV) of all the properties located within the TIF district throughout the 20-year period.
Exhibit 1 below shows the basic TIF model, including the anticipated tax increment.
a Based on the figure presented in “An Examination of the State of Vermont Tax Increment Financing Program” January 24, 2018, Vermont Legislative Joint Fiscal Office
The Legislature’s non-partisan Joint Fiscal Office (JFO) is required by law to periodically assess the fiscal impact of TIF, if any, on the Education Fund.
JFO’s 2022 report indicated that the fiscal impact of TIF hinges upon the strength of the “but-for” condition which is assessed when a municipality applies for a TIF district. According to JFO, all Vermont TIF district applications rely on the premise that the baseline property value growth of the parcels in the district would be flat for 20 years if not for the use of TIF (e.g., the “but-for”). JFO noted that if the “but-for” condition is correct, then TIF would never be a fiscal cost to the State or the municipality.
To understand the potential fiscal impacts of TIF, JFO modeled a hypothetical construct. The model shows the cost of TIF if the parcels in the district simply grew at their historical average, rather than assuming they would not grow for 20 years after creation, as is the construct when calculating tax increment under TIF.
"[O]ne significant result of this exercise was the discovery that no TIF district experienced zero or negative growth in their pre-TIF eras. In some districts, the growth prior to TIF creation was 5% per year or more (Hartford, Burlington Downtown)… If data shows the parcels in a TIF district were growing in the years prior to TIF, it seems unreasonable to assume they would suddenly stop growing… JFO concludes that the theoretical assumptions upon which tax increment calculations are based in current TIF districts are flawed…”
Having challenged the no-growth assumption underlying the “but-for” analysis, JFO estimated that if the existing 10 TIF districts were to grow at their historical average, they will cost the Education Fund between $5.5 and $7.5 million annually over the next five years and will cost municipalities $3 to $5 million each year.
TIF District Authorization and Oversight
The Legislature designated VEPC as the State body responsible for approving or disapproving a TIF district when a municipality applies for one.
Since 2006, to use incremental education property tax to finance TIF district improvements, municipalities are required to seek VEPC’s authorization of a TIF district plan and a district finance plan.3
VEPC’s approval is also required before the municipality seeks a public vote to pledge the credit of the municipality (i.e., issue debt).
According to statute and the TIF Rule 1100, VEPC conducts oversight and non-compliance enforcement of all districts.
TIF District Debt and Tax Increment
Upon VEPC’s authorization and municipal 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. The first debt is to be issued before the fifth anniversary of the district creation date. For the purposes of this report, the phrase “TIF district debt” refers exclusively to debt that will be repaid with tax increment.
Tax increment may be used to pay TIF district debt and to directly pay for improvements and related costs. The term “improvements” is defined in statute as 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. 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.4
Exhibit 2 illustrates the calculation of incremental property tax revenue.
TIF Districts and Statewide Education Funding
Municipalities, acting as agents of the State, collect state education property taxes and pay local schools the education property tax liability determined by the Agency of Education (AOE). As a result, payments from municipalities to local schools are in effect payments to the Education Fund.
Municipalities are statutorily required to provide the Vermont Department of Taxes (VDT) with grand list data. The grand list data forms the basis for the collection of property taxes for all the municipalities in Vermont and includes the owner’s name and assessed value for all real estate parcels, all taxable personal estates, and tax-exempt properties. VDT uses this data to determine the taxable education property value (EPV), which for municipalities with TIF districts, excludes 75 percent of the incremental education property value of the TIF district, as allowed. Conversely, 25 percent of the education tax increment is included in the amount of education property taxes owed to a local school district or to the Education Fund, per the AOE calculation.
New England Municipal Resource Center (NEMRC®), the grand list software program, used by municipalities, includes a TIF Module, which is used to account for TIF district properties and to perform the tax increment calculation.
Accuracy of the automated tax increment calculation directly or indirectly depends on the completeness and accuracy of the numerous information components, including:
• Property assessment values, listed on the grand list of the municipality,
• Certified TIF OTV,
• State Education Property Tax Rates,
• Municipal Property Tax Rate, including local agreement components.
These information elements originate at the municipal level and are reflected in various NEMRC® reports.
South Burlington City Center TIF District
Improvements authorized by VEPC include City Center Park, Market Street, and construction of a municipal building to house a public library, city hall, and a senior center. The use of tax increment for each of the projects is set by VEPC proportionally to the portion of the improvement costs that will serve the TIF district.
Some of the City Center TIF district improvements are TIF debt financed at 100 percent, while others are limited to a proportion of costs. For example, the City may use TIF debt financing to cover 30 percent of the library improvement costs, and 10 percent of the city hall improvement costs.
According to City records, City Center TIF district improvement projects will also be funded with federal and state grants, impact fees and a Capital Improvement Plan (CIP) Reserve Fund. See Appendix III for descriptions of the VEPC-approved improvements and costs anticipated to be financed with TIF district debt.
The City Center TIF District Fund is used to account for the financial resources used for City Center projects. The Fund is used to record all expenditures for costs of improvements (financed with TIF and non-TIF resources), debt proceeds, debt service (principal and interest), related costs, and tax increment revenues. All debt issued for City Center TIF District improvement projects is recorded in the fund, including debt that will be repaid with non-TIF resources such as the CIP Reserve Fund.
Objective 1: $10.4 Million of Authorized Debt Issued and of $6.8 Million Examined, 100 Percent was Used for Eligible Improvements
As of June 30, 2022, the City of South Burlington had issued $10.4 million of general obligation (GO) bonds for TIF district improvements out of $14.4 million of tax increment financing that has been authorized by VEPC and approved by municipal voters in three separate public votes. We examined 67 percent of the $10.2 million of TIF improvement project costs financed with the GO bonds and concluded the costs were eligible to be financed with TIF district debt, as they were: 1) authorized by VEPC and municipal voters as required by statute and 2) for improvements such as a municipal building, roadways, and streetscape which meet the definition of infrastructure improvements established in statute and the TIF Rules.
GO Bond Issuances Authorized by VEPC and Municipal Voters
VEPC approved the City of South Burlington’s TIF district plan on July 25, 2013 and the financing plan in 2015. The list of TIF district improvement projects authorized by VEPC was amended in substantial change requests of 2018 and 2021.5 As of the most recent 2021 substantial change request, total improvements and related costs authorized by VEPC for tax increment financing were $29,123,995 and $603,100, respectively.
As of the end of FY2022, the City had held three municipal votes to obtain municipal voter authorization for tax increment financing for $14.4 million for TIF improvements and related costs. Debt authorized in the 2016 and 2018 votes has been issued and is detailed in Exhibit 3.
In March 2021, municipal voters authorized another $4,002,550 of TIF District debt, but no debt has been issued under this authorization. The City has until March 31, 2024, to issue additional TIF district debt to finance remaining planned improvements.
South Burlington’s public votes held in 2016, 2018, and 2021 were in accordance with 24 V.S.A. §1894(h) and TIF Rule Sections 1003.1 and 1003.2.2. Prior to every instance of obtaining voter approval for TIF tax increment financed debt, South Burlington held public meetings and properly disclosed information that is required to be provided to the City's voters in advance of the public vote, such as the type of debt to be issued, term of the debt, improvements, and related costs that will be financed with the debt and expected private development.
In advance of issuing its first TIF bond in August 2017, the City obtained an interfund loan in February 2017 to provide temporary project financing. GO bond proceeds were used to pay off the interfund loan. The City appropriately disclosed the potential for the use of an interfund indebtedness to the municipal voters prior to the public vote on TIF debt issuance held in November 2016, in accordance with TIF Rule 801 and 1003.2.2 disclosure requirements pertaining to interim financing. The interfund loan was issued interest free.
On March 7, 2023, City voters approved another $15,086,430 of tax increment financed debt. Since this occurred after the period covered by the audit, we did not assess compliance with statutory and TIF Rule requirements.
City Financed Eligible Public Improvement Costs from FY2017 - FY2022
We examined $6,872,568 of infrastructure improvements financed with TIF district debt from FY2017 to FY2022 (67 percent of $10.2 million TIF financed costs) and concluded the costs were eligible TIF district infrastructure improvements. Specifically, the costs align with the descriptions and total costs estimated for improvements described in the 2015 TIF district plan and the City’s subsequent substantial change requests approved by VEPC. The costs are also consistent with those disclosed in public notices provided to municipal voters in advance of public votes authorizing the City of South Burlington to incur TIF district debt. Further, the costs were for construction of a municipal building, roadways, streetscape, stormwater, and activities such as engineering that fit within the statutory and TIF Rules definitions of improvements and related costs. An additional $227,528 of the debt issued had not yet been used for improvement projects.
Exhibit 4 lists improvement costs for the City Center TIF district from FY2017 to FY2022 and the amounts we tested.
According to the City’s records, the total cost for the combined City Hall, Library, and Senior Center project was about $21.7 million. The City’s use of TIF district debt for the construction of the City Hall (10 percent), Library (30 percent) and the Senior Center (30 percent) was appropriately limited to the proportion of total costs authorized by VEPC for tax increment financing.
All tested costs were reviewed, approved, and authorized by the City’s program development and finance officials. The goods and services included in the testing were provided by vendors competitively selected in accordance with the City Procurement Policy and authorized by the City Council. The City tracked and accurately documented all TIF improvement project expenditures by project and source of financing.
South Burlington’s compliance with TIF requirements for debt authorization and improvement cost eligibility was due to multiple factors such as the following:
• Close communication and cooperation between program management and finance management teams.
• Knowledge of and strict adherence to TIF statutes and regulations.
• Communication of changes to VEPC.
• Consistent project oversight practices.
• Institutional knowledge of the City Community Development Director, who has overseen the TIF district since its creation.
Objective 2: 75 Percent of Tax Increment Kept and Used for Debt Repayment as Allowed; 25 Percent Paid to Education Fund as Required
Beginning in FY2018 through FY2022, the City kept a total of $999,239 of education and municipal tax increment, equivalent to 75 percent of tax increment as permitted by 24 V.S.A. §1894(b) and (c). An additional $253,299 (25 percent) of education tax increment was remitted to the State Education Fund as required and $79,781 of municipal tax increment was directed to the City’s General Fund.
In this same period, consistent with 24 V.S.A. §1894(b) and (c), the City used education and municipal tax increment to pay $944,019 of interest on the three bonds issued to finance TIF district improvements. As of June 30, 2022, the cumulative balance of tax increment available for future use is $55,220.
City Kept About $1 Million of Tax Increment and Paid Approximately $250,000 to Education Fund as Required
Through five fiscal years (FY2018 to FY2022), the City kept $759,897 of education tax increment and $239,342 of municipal tax increment in the City Center TIF District Fund (equivalent to 75 percent of total tax increment). We recalculated education and municipal tax increment for FY2020 to FY2022 and concluded that the City’s calculation and the amount kept in these years was appropriate.
The City remitted $253,299, representing 25 percent of education tax increment, to the State’s Education Fund from FY2018-FY2022 as required by 24 V.S.A. §1896 and 24 V.S.A. 1894(f). In this same period, according to the City’s records, $79,781, representing 25 percent of the municipal tax increment, was directed to the City’s General Fund.
Exhibit 5 shows these amounts across the five-year period.
The City described its procedures for ensuring the grand list is complete and the tax increment calculation and amount retained is accurate.
For example, the City explained that changes to the grand list were input by the City’s Assessor and reviewed by a second individual. In addition, the Finance Officer uses Excel to verify the amount of tax increment the City was authorized to keep per reports from the NEMRC® TIF module.
Per 24 V.S.A. §1894(b) and TIF Rule 712, the City has twenty years to retain education tax increment based on the date of the first debt issued for improvements. The City first issued debt February 21, 2017, so the City’s education tax increment retention period began in FY2018 and concludes in FY2037. Therefore, the City has 15 years remaining to retain education tax increment. According to TIF Rule 300 and 802, municipal tax increment may be retained for the period authorized by the municipal legislative body or until debt and related costs are repaid. The City Council authorized retention of municipal tax increment for the legal life of the TIF district which ends when all TIF district debt and related costs are retired per TIF Rule 719. Thus, municipal tax increment may be retained for a period greater than 20 years if debt repayment extends beyond FY2037.
Tax Increment Used Exclusively for Debt Repayment as Permitted
Statute limits the use of any education tax increment held in the designated District Fund to pay district debt financing and related costs.
The City utilized $944,019 of tax increment for interest payments on three general obligation bonds out of the total $999,239 tax increment accumulated from FY2018 through FY2022. According to the City’s records, principal repayment commences in FY2024. As of the end of FY2022, the City reported an available balance of $55,220 remaining in the City Center TIF District Fund.
Statute and the TIF Rule 705 also allow tax increment to be used to pay for the cost of implementing and administering the TIF District (i.e., related costs). From FY2012 through FY2022, the City has incurred $111,789 of related costs such as VEPC filings/TIF application, legal, and audit but has not used tax increment to pay for these costs. In the future, if tax increment is greater than the amount needed for debt principal and interest, the City will also use tax increment for related costs.
Education and municipal tax increments are recorded annually in separate general ledger accounts. The City uses an Excel spreadsheet to track the use of tax increment. The spreadsheet details the annual TIF debt service, tax increment retained to pay for TIF debt service, and the projected interest and principal payments to be paid with tax increment through fiscal year 2038.
Conclusions
As of the end of FY2022, South Burlington had issued $10.4 million of general obligation bonds for TIF district improvements out of $14.4 million of tax increment financing authorized by VEPC and approved by municipal voters in issue additional debt to finance remaining planned improvements.
As of FY2022 South Burlington completed five improvement projects, authorized by VEPC, using $10.2 million of TIF district debt proceeds for these improvement projects. About $228,000 remains available for use on authorized improvement projects.
The City Center TIF District is approximately one quarter of the way through the 20-year period that education tax increment may be retained, and the City had a balance of $55,220 remaining in the City Center TIF District Fund as of June 30, 2022. Since issuance of the first debt on February 21, 2017, South Burlington has retained $999,239 of tax increment and used it to make interest payments of $944,019 for three bonds.
1 South Burlington’s fiscal year is July 1 to June 30.
2 Appendix I details the scope and methodology of the audit. Appendix II contains a list of abbreviations used in this report.
3: 32 Vermont Statutes Annotated (V.S.A.) §5404a(f)
4 In accordance with changes enacted by 24 V.S.A. §1894(b) and (c), TIF districts, approved by VEPC in FY2018 forward, may retain 70 percent of the education tax increment and are required to allocate 85 percent of the municipal tax increment to repay TIF district debt. A municipality may retain more than 85 percent of the municipal tax increment in the TIF district.
5 24 V.S.A. §1901(2)(B) requires any proposed substantial changes to the approved TIF district plan and approved TIF financing plan be submitted to VEPC for review.
Source: 5.25.2023. Office of the Vermont State Auditor. Montpelier. auditor.vermont.gov