Reprinted from

January 30, 2008
Smaller cities look to TIFs
by Charley Shaw Staff Writer

Minnesota sees a rise in the number of tax increment financing districts

A few years ago, officials for the southern Minnesota city of Courtland were looking for ways to make housing affordable for people who wanted to own a home in the city of about 580 residents.

So Courtland created a development authority and established a $100,000 tax increment financing (TIF) district that helped the city build sewer and water services for about 12 lots on the outskirts of town. A second phase of the TIF, valued at $66,000, allowed Courtland to provide services to 11 more lots, according to city manager Mike Boulton.

“The reason why (the TIF district) was created was we had numerous lots in town that were out of the price range of people making less than $60,000,” Boulton said.

In TIF districts, cities or counties usually issue bonds to pay for the upfront costs of development. Developments like housing or commercial projects are supposed to produce increased taxes, also called the increment, which pays the financing costs. State law limits TIF districts to projects that wouldn’t happen “but for” the use of TIF.

TIFs can backfire, leaving communities in a financial hole. But their popularity continues.

On Tuesday, Minnesota State Auditor Rebecca Otto’s office released a new report that shows in recent years small communities in the state like Courtland have been busier than larger cities when it comes to creating development authorities in which TIF districts are located.

Of the 25 new authorities created since 2002, the average population of the community was about 1,911.

If West St. Paul, which established a development authority in 2003, is omitted, the average population size drops to 1,205, according to the Auditor’s annual legislative report on TIFs.

The report covers TIF districts through Dec. 31, 2006.

A development authority must be in place before a TIF district can be created. In 2006, there were 447 development authorities in Minnesota. Of those, 338 districts were in greater Minnesota and 109 districts in the seven-county Twin Cities metropolitan area.

Courtland is located eight miles west of New Ulm in Nicollet County. The city benefits from additional housing because that means residents can drive to work in New Ulm but live in Courtland, Boulton said.

“It serves the city in the sense that it is a public good. ... This is a way to subsidize people to build houses,” said Boulton, who is also city manager in the cities of Nicollet and Lafayette.

In the case of Courtland’s TIF district, the city had funding available to build utilities without issuing debt. In Nicollet, which recently established a new TIF district for residential development, the city issued bonds to do a residential development near the city’s high school, Boulton said.

TIF districts have helped communities like Courtland and Nicollet expand. Courtland’s 580 population has increased from 538 residents in the 2000 census.

Still, Boulton said TIF districts carry risks.

If TIF districts don’t see increased taxes from development, a city might have to pay for the debt service on the bonds it issued from its general fund.

“There are definite risks for a community to do this. Councils take it very seriously about when and how they do tax increment financing,” Boulton said.

State lawmakers passed the TIF Act in 1979. The legislation created five types of TIF districts: redevelopment, renovation and renewal, soils condition, housing and economic development.

In 2006, 95 percent of TIF districts, or 977 TIF districts, were used for redevelopment, the Auditor’s report said.

TIF districts for economic development, which had declined between 2003 and 2005, registered a 4 percent increase from 2005 to 2006, according to the report.

Economic development districts make up 30 percent of TIF districts in greater Minnesota and 15 percent of TIFs in the Twin Cities area.

Eighty-eight TIF districts were certified in 2006 and 102 districts were decertified.

Cities and counties can establish TIF districts without legislative approval if they meet the letter of the existing TIF law. In recent legislative sessions, communities such as Burnsville have sought legislative approval for complex TIF districts that have components that aren’t allowed in the current law.

The 2007 omnibus tax bill, which was vetoed by Gov. Tim Pawlenty due to controversy about a provision unrelated to TIF districts, allowed a couple TIF proposals to proceed.

House Taxes Chairwoman Ann Lenczewski, DFL-Bloomington, a frequent critic of TIF districts, said she and other legislators have discussed assembling a tax bill that contains only non-controversial items. TIF district proposals that won support from legislators in 2007 could be a part of the new tax bill when the Legislature reconvenes Feb. 12. She said she also expects more TIF proposals from cities in 2008.

“There will be a lot more proposals. We’ll hear some more (in committee),” Lenczewski said.

Lenczewski said she sympathizes with aging communities that want to use TIF districts as an affordable way to handle redevelopment. But she said the Legislature’s role is to scrutinize TIF proposals to determine if they are really essential to the development.

“I think they are feeling really strapped and really frustrated and I don’t blame them. On the other hand, we can’t have these rolling subsidies that don’t end,” Lenczewski said.

Otto, whose office audits TIF districts for compliance with state law, said violations have gone down. She said better financial record keeping by municipalities and education about TIF districts are factors in the decline in violations.

Other findings from the Auditor’s report showed the same number of TIF districts were certified in the metro area in 2006 as were decertified. That was a significant change from 2005 when twice as many TIF districts in the metro area were certified as were decertified.

New redevelopment TIF districts declined by 23 percent from 2005 to 2006, according to the report.

The Auditor’s office did not analyze the report’s findings. But Otto said future reports will indicate if trends persist, like the decline in TIF districts for redevelopment.

“We’ll watch and see over time if that continues,” Otto said.