Effective in October is new legislation in Connecticut that will make TIF the powerhouse economic development tool it was always meant to be. For those unfamiliar, tax increment financing (TIF) is a public financing method that is used to incentivize and catalyze development, infrastructure, and other projects. Essentially, it allocates the future property tax revenues from a project or project area - that are above and beyond what would have been generated without project – to costs associated with the project. In other words, the property tax benefits from the project are used to help finance the project. The new legislation, An Act Establishing Tax Increment Financing Districts, P.A. 15-57 now allows Connecticut communities to use TIF the way it should be.
Connecticut has technically had this option on the books, but it was so limited and burdensome that few projects ever used it. The complex procedural requirements were not only convoluted, but also opened up projects to rejection at various stages. The process of setting up a TIF also largely played out at the state-level including numerous players such as the Connecticut Innovations Board, the State Bond Commission, and Joint Standing Committees. The new legislation allows individual municipal legislative bodies to establish their own tax increment districts in accordance with the new requirements.
Another one of the critical problems with the previous TIF legislation was that it allowed only the incremental tax revenue from a specific project. The more effective approach, and what is allowed under the new legislation, is to permit municipalities to form TIF Districts that include both the project itself and other properties that will experience property value increases as a result of the project. The benefit, as indicated by a Yale study on the matter, is that “the existence of a TIF District can make the bonds more attractive to investors, since there is a wider source of potential revenue to be accumulated to help finance the bond.”
Other highlights of the legislation include allowing municipalities to issue general obligation bonds (versus revenue bonds). The new law also defines a broad set of uses of TIF revenues including (but not limited to) capital, financing, property assembly, professional services, maintenance and operations, and other costs. Funding can also be used to make improvements outside of the district if they are related to the project such as road and infrastructure projects.
The new legislation also authorizes municipalities to levy “benefit assessments” that are an additional assessment on properties within the district, which allows the municipality to finance construction, improvements, repairs, and rehabilitations within the district. Also of note is the provision in the legislation that allows funding to flow to economic development, environmental improvements, and employment training associated with the district. This means that TIF revenues can be used to fund things including economic development programs, economic development revolving loan funds, investment funds, services and equipment necessary for employment training, and specific uses associated with the district. One benefit of this, for example, is that a workforce development program could be created and funded to train workers needed by new businesses at a major development project.
While the overall process has been drastically streamlined, there are still some hurdles to be aware of. TIF districts must include property that is either (1) blighted; (2) in need of rehabilitation or conservation; or (3) suitable for certain types of development, including downtown or transit-oriented development. The legislation also requires the municipal legislative body to adopt a master plan for the TIF district that includes a financial plan detailing the schedule of incremental tax revenues and the anticipated costs of improvements and developments among other financial aspects. Other requirements include approval by the municipality’s planning commission, a public hearing, and a determination that the district will improve the economy or well-being of the community.
Public-private partnerships are the model for economic development in today’s economy. The new TIF legislation enables communities to better engage the private sector to implement projects by offering an effective “new” funding mechanism. Local officials and economic developers can now use TIF the way it has been used successfully in other places around the country.