Municipal Finance & Economic Development
State and local governments have taxing powers, special debt tools
and credit quality that can be used for a variety of economic
development purposes:
ƒ Raising capital for development finance programs
ƒ Financing infrastructure and public improvements on a fee
basis (turnpikes, water/sewer systems, airports, etc.)
ƒ Financing public improvements or services needed to
attract private development and investment
ƒ Fixed asset and equipment financing for manufacturers
ƒ Credit enhancements\guarantees to help private businesses
or development projects access credit markets
ƒ Financing facilities for non-profit organizations
ƒ Government leases and financing to support larger
developments
Primary municipal finance tools are:
ƒ Tax-exempt debt
ƒ Tax-increment financing
ƒ Assessment districts
Advantages of Municipal Finance Tools
ƒ Access to taxing power and credit strength of government
ƒ Federal tax-exemption lowers the cost of funds
ƒ Capture future benefits of a project to help finance it today
Municipal and Tax-exempt Debt
Major Types of Municipal Debt
ƒ General Obligation Bonds
ƒ Revenue Bonds (Industrial Development Bonds)
ƒ Tax Increment Financing
Allowable Uses of Tax Exempt Bonds Under IRS code.
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General state and local government facilities and uses
501(c)(3) use, i.e., non-profit organizations
IDBs for small manufacturers
Waste-water and solid waste treatment facilities and pollution
control facilities
ƒ Multi-family and single family housing bonds for low-income
households
ƒ Redevelopment bonds to eliminate slums and blight
ƒ Empowerment Zone Facility Bonds
Industrial Development Bonds
¾ Tax-exempt financing for manufacturing plant
¾ Provide a source of long-term fixed rate debt
¾ Firms limited to $10 million within 3 years (+ or -) of the
date of issue and $40 million over their lifetime
¾ Primarily used as a capital subsidy for firms that already
have access to capital since bonds require a letter or credit
or willing buyer
¾ Can be a tool to expand access to capital markets for small
firms through reducing transaction costs, financing smaller
size projects and enhancing credit for riskier firms
a. Some states (PA, AR )pool several small loans into one
bond
- Allows financing of smaller projects
- Risk pooling mechanism
- Reduces transaction costs per firm
b. Provide credit enhancement through reserve or
insurance fund
c. Private placement of bonds, standard legal documents,
and same financing team to reduce transaction costs and
make small transactions feasible. St. Louis County
mini-bond program for financing of $500,000 to $ 2
million
Tax Increment Financing
¾ Setting aside new "incremental" tax revenues to raise
financing for a project or public improvements. Financing
can be either “pay as you go” or debt financing
¾ Typical Tax increment financing Process
A.
B.
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G.
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I.
J.
Establish the applicable area: Tax Increment
Financing or Redevelopment District
Survey conditions to demonstrate blight or meet other
standards
Prepare redevelopment plan and strategy for district
and use of TIF within the plan
Setting up authority to oversee TIF District and
undertake projects financed with TIF
Identify specific projects, assess feasibility and
determine development entity
Approve projects and authorize bond sale
Prepare and complete bond sale
Complete public investments
Complete final development projects
Collect tax increment & repay bondholders
TIF Uses to Support Economic Development
¾ Address site and infrastructure development obstacles for
a project
1. Site assembly and preparation
2. Environmental contamination
3. Public infrastructure
¾ Addressing blighted conditions and infrastructure needs
that impair development and investment in a commercial
district or large area
¾ Target investment of tax revenues to an area suffering
from neglect and disinvestments
¾ Tax base sharing mechanism (e.g., Montgomery County
EDGE Program)
¾ Uncertainty about the level and timing of incremental tax
revenues is a obstacle to selling bonds and using TIF
¾ Options to address this problem include up-front private
commitments, expanding size of the TIF district, LOC or
bond insurance, deferred principal payments, and reserve
funds.
Advantages and Disadvantages of TIF
Advantages
1. Can be a powerful tool to help finance projects
2. Does not divert funds from existing budget and
thus may be easier to get political support
3. Can be used as a way to overcome significant site
problems or costs
4. If used correctly, serves to generate new investment,
employment and tax revenues
Disadvantages
1. Diverts tax revenue from other government uses and
services
2. May simply subsidize development rather than
overcome obstacles to make it happen: Would the
project occur in any event with the TIF contribution?
3. A complex, costly and time-consuming way to
finance public infrastructure
4. An incentive for higher density development to cover
financing costs
C. Principles for effective use of TIF
1. Target district to areas needing public investment to
address blight and generate new development
2. Integrate into comprehensive economic development and
redevelopment plans
3. Use only in "but for" situations
4. Establish clear objectives and thresholds for projects to
get approval for TIF
5. Broad community representation on TIF authority board