Opposing takes on Tax Increment Financing in Montpelier could affect South Burlington’s own TIF district in City Center, but it will be up to the Legislature to work out the issues next session.

“A fight has broken out between the (state) auditor of accounts and the Agency of Commerce,” City Manager Kevin Dorn told the city council at its Sept. 16 meeting. “There are things now that need to be resolved by legislation that put some TIF-related issues of great importance at some level of unknown right now.”

Indeed, South Burlington’s City Center TIF district has three projects in various stages of completion – City Center Park, Market Street reconstruction and the 180 Market Street city hall/library/senior center, which depend, in part, on TIF funding. 

The catalyst 

Tax increment Financing (TIF) is an economic tool used to fund public infrastructure that encourages development of an area known as the TIF district. For example, a city could use TIF to create infrastructure like new sidewalks, streets or stormwater management systems that make development attractive in a given area. As new businesses, buildings and homes crop up in that area, known as the TIF District, the value of the grand list increases.

While the debt for the infrastructure is being paid, the entire original taxable value for the district – before improvements – goes to the state educational fund. As for the increased value due to the improvements, or the increment, 70 percent goes to repaying the improvements while 30 percent goes to the state education fund. After 20 years, 100 percent of the taxable income – original and with increased value due to infrastructure and growth of the grand list – is paid to the state education fund in perpetuity.

But what if the TIF district revenue doesn’t grow as quickly as predicted; how can a town cover its debt? According to South Burlington City Manager Kevin Dorn, most projects do not incur enough increased TIF district revenue in early years to cover the debt service. Then in later years, they experience a surplus of revenue over the debt. Towns cover the shortage in early years with something like a reserve fund, then repay that fund with surplus from TIF revenue in later years, he said. 

That’s essentially what St. Albans did with one of its TIF projects, and that’s where the main issue in Montpelier lies. The St. Albans TIF district underwent a routine audit last winter, during which the State Auditor’s office asked for the Attorney General’s office to review the definition of “improvements” as allowed for financing under TIF. 

The attorney general’s office determined the definition and found that using bond proceeds to fund debt service was not allowable under the TIF program. 

“Our attorney in the Agency of Commerce ... agreed with that, but looking at broader provisions, Title 24 and Title 32 – both involved in TIF – that this becomes less than clear,” said Megan Sullivan, Executive Director of the Vermont Economic Progress Council. “Given that it is less than clear, we received legal guidance that it would be an allowable use, with the understanding that the legislature needs to provide clarification in the next legislative session.”

The Vermont Economic Progress Council administers and oversees the state’s TIF program.

According to State Auditor Douglas Hoffer, TIF statute does not permit a town to use TIF bond proceeds to cover debt service on those bonds. 

“The statute is very clear on what are allowed uses for bond proceeds,” Hoffer said. “The money can only be used for capital investments in ... wastewater treatment plants, or a garage or a street or whatever it may be … You can also use it for related costs if you have some legal costs or some engineering costs.”

He referenced 24 V.S.A. 1891(4), which defines improvements as “the installation, new construction or reconstruction of infrastructure that will serve a public purpose and fulfill the purpose of tax increment financing districts.” 

The listed examples of improvements that qualify for TIF financing are “utilities, transportation, public facilities and amenities, land and property acquisition and demolition and site preparation,” as stated in a memo from Assistant Attorney General Bill Griffith.

“But [the statute] does not say anything about the fact that they [VEPC] believe they can use it to pay debt,” Hoffer said. “Their view that, because towns are allowed to do that in other circumstances, they should be allowed to do it for TIF, is not supported by the very clear evidence that … [is] in Bill Griffith’s memo.”

It’s a false notion that using bond proceeds to pay the debt service on TIF bonds is the only way to make a TIF district work, Hoffer said.

“For those who say there’s no other way, that’s simply not true,” he said.

Preventative measures

Hoffer believes there are alternatives to cover the debt service if development does not occur as quickly as anticipated. First, he said, a town can negotiate the terms of the bond. Normally, they’d pay the interest and principal at the onset, but Hoffer suggested the municipality could negotiate paying just interest for the first two or three years to cover themselves in case TIF district growth and revenue are slower than anticipated. Alternatively, Hoffer said the city can plan and set money aside before incurring debt. The process from creating a TIF district to borrowing money for TIF projects takes anywhere from four to six years, he said. If a town knows it wants to pursue a TIF district, it can take that time to raise and set aside funds to cover bond debt in the first years of the district.

But Sullivan said that’s a conversation for the municipality and its lender.

“It’s important for the municipality, and for their lender, or the Vermont Municipal Bond Bank and their bond counsel, to have those conversations,” she said. “There’s an issue of risks and expenses that come up if you’re not making certain payments. If there are additional costs that come about because of adding risk, you end up using more increment.”

What could it mean for South Burlington?

In South Burlington, the City Center TIF district currently has three TIF projects: part of Market Street, City Center Park and the 180 Market Street city hall/library/senior center – which has yet to break ground.

Voters approved the construction of the 180 Market Street building in November 2018, authorizing it to be constructed using numerous financing methods including TIF in the form of a $5 million bond. That bond accounts for 23 percent of the total community center cost. 

“Debt issued under this authorization will not raise the tax rate,” the city’s website says of the community center financing. “Debt will be serviced by two main revenue sources: TIF District Financing and City Center Reserve Fund ... There is no additional tax increase needed.”

But asked if a change to TIF statute could change that, City Manager Kevin Dorn said, “it might,” and that the city would have to “wait and see.” 

The city’s original plan, should TIF revenue lag behind debt service in early years, was to use the City Center Reserve Fund to pay debt until the TIF increment kicked in. Then, it would use the surplus from the TIF revenue to repay the reserve.

“If the legislature’s going to change the rules, then we’re going to want the legislature to hold us harmless,” Dorn said. “The communities are innocent here, we’re kind of in the middle of a dispute between two governmental bodies.”

As for the building, Dorn said the voters called for it and it’s his job to deliver. He believes despite what happens with TIF statute, the building will be constructed. Residents needn’t panic about the funding though, Dorn said. 

“We’re so early into this,” he said. “[The] numbers aren’t huge right now for us … if the legislature or a court somehow said, ‘Yes, you can’t use bond proceeds to pay debt,’ our problem wouldn’t be very big because we haven’t had debt that long.”

If push came to shove the city could use other funds to cover the debt until the increment met it. Dorn said it could use money from the general fund or another revenue source such as property taxes, the local option tax or other means. 

But he’s hopeful that all communities with TIF districts will gain clarity soon. He believes the next step will be for the lawyer from the Attorney General’s office and that of the Agency of Commerce and Community Development to discuss differing opinions together.

“We’re pushing for the attorney general’s office, the general counsel and the agency get-together in the same room and figure out what the law says,” Dorn said.

The council’s take and request for clarity

Following the attorney general’s office determination, the Vermont Economic Progress Council is seeking clarification around TIF statute. 

The Agency of Commerce and Community Development’s counsel determined that two aspects of TIF statute, titles 24 and 32, are unclear.

“[The] attorney found that taken together, it’s less than clear and that it was a reasonable interpretation for [the Council] to find that this standard financing tool [using debt proceeds to cover debt service] could be utilized,” she said. 

Sullivan added that it is a “very common practice” in general obligation bonds. She added it’s especially fitting for a program like TIF, “where the revenues that are expected to pay for public improvements are coming in the form of increment after the private development is built.”

Seeking advice from counsel was not meant to “shop around” for a different legal opinion as Hoffer has alleged of the council’s actions.

“We didn’t seek out guidance to try and find a different answer ... our attorney was involved from the beginning,” Sullivan said. “We didn’t do it with any mal intent or disrespect to the attorney general’s office.”

As for Hoffer’s statement that the Vermont Economic Progress Council may be too close to the municipalities it oversees, Sullivan said the first step in overseeing the program is providing guidance and assistance to the communities. 

“We’re going to diligently oversee the program and we’re going to continue to treat communities in it with respect,” she said. “I don’t think it serves any Vermonters well if the idea is that we would only wait to catch them during that bond and not work with them to understand the complexities of the program.”

Sullivan noted that the members of the council spent a great deal of time and effort reviewing the audit and meeting with town managers.

“There is a great deal of expertise on this council and their review,” she said. “We represent every corner and part of Vermont, so I think that the ones that they’ve done have been significant and thorough.”

Sullivan noted that two of the council’s members are legislators who have been involved in the process from the onset and will continue to be involved during the legislative process in looking at the issue. 

What’s next

According to Sen. Ann Cummings (D-Montpelier), the legislature will examine the issue and work on clarifying matters. 

Cummings will craft legislation “basically as a placeholder” that will allow towns to use bond proceeds to pay bond debt until the increment comes in. 

“To me it’s a reasonable thing to do,” she said. “There’s a lag between when you start building [infrastructure improvements] to get developers and when revenue comes in. The legislation I’m putting in will say, ‘Yes, you can use the proceeds to pay the debt that limited time until the revenue comes in.’”

There are “bugs” in the statute, and they will be fine-tuning those, she added.

As for the auditor’s opinion that no, bond proceeds cannot be used to fund bond debt, Cummings said she had the legislative counsel look into it. Their counsel said that there are different possible interpretations of it. 

“We’re going to make it clearer,” she said. “I think this was an honest mistake on everyone’s part.”

As for other communities with TIFS, Cummings acknowledges it’s a complex situation. 

The statute is clear that taxpayers are on the hook if TIF revenue does not come in as planned, Cummings explained.  But in the first two or three years it doesn’t seem “in the spirit” of TIF districts to hold towns to paying debt service with means other than debt proceeds. 

“The towns that are out there are indeed in limbo,” Cummings said. “They can look at my bill and say, ‘we’ll be alright [to cover bond debt with bond proceeds],’” but she added until that bill is signed into law by Gov. Phil Scott, it’s not a done deal.

“There is an enhanced risk here that you’re going to pay more for the project,” she said.

However, the legislature will continue working on the issue, Cummings said.

“We’ve found the problems and we’re fixing them,” she said. 

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