By Jake Vollebregt.
It will be slightly easier for municipalities and special districts to harness the tax increment for financing infrastructure projects under Senate Bill 628. Infrastructure Financing Districts, which have existed in California law since 1990 (traditional IFDs), can finance capital investments in public facilities by issuing bonds backed by the future incremental growth in property tax revenues known as the “tax increment.” SB 628 creates “Enhanced Infrastructure Financing Districts” (EIFDs) with a streamlined formation process and applicability to a broader array of projects. Very few traditional IFDs have been created because redevelopment agencies had broader powers to leverage tax increment financing until they were dissolved in 2011.
A sponsoring city or county can create an EIFD for capital infrastructure and economic development projects. Before creating an EIFD, a municipality must have completed the process of winding down its affairs of its redevelopment agency and received a notice of completion from the Department of Finance. Though a municipality must take the lead in forming an EIFD, any affected taxing agency (except school-related agencies) may choose to partner with the sponsoring municipality and allocate some or all of its share of the tax increment toward the infrastructure financing plan. EIFDs have several distinguishing characteristics from traditional IFDs:
- Reduced approval threshold by the electorate: Traditional IFDs require voter approval by two-thirds of the electorate to both form the IFD and issue bonds. A municipality may form an EIFD without a ballot approval, and the EIFD may issue tax increment bonds with the approval of 55 percent of the voters in the affected area because the debt service is backed solely by the tax increment. If the proposed EIFD boundaries include fewer than 12 registered voters, the vote is held among the landowners.
- Extended Financing Period: Traditional IFDs limited the financing period for repaying the issued bonds to 30 years from the date when the IFD was formed. EIFDs allow the financing (and the capture of tax increment) to extend for 45 years after the date the bonds are authorized. This extends the tax increment financing period by more than 15 years, which significantly increases the amount of tax revenue available for financing. Both traditional IFDs and EIFDs can enter into reimbursement agreements with master developers as an alternative to conventional or bond financing.
- Broaden Applicability to many types of infrastructure: EIFD funding may be applied to projects of communitywide significance that benefit the EIFD area or the surrounding community.
- Polanco Act Powers: An EIFD may also utilize any powers under the Polanco Redevelopment Act, which allows the EIFD to clean up toxic or hazardous substances within the EIFD’s boundaries. This power was reserved to redevelopment agencies and disappeared when redevelopment agencies were dissolved.
- Cross-boundary cooperation: Municipalities may form multiple EIFDs within their jurisdictions and partner with other municipalities to form larger EIFDs across city and county lines.
SB 628 makes tax increment financing a viable option for a broader set of infrastructure projects. Many factors will determine whether an IFD makes economic sense for a particular project, including bond market conditions and the anticipated amount, timing and valuation of new development. Even for projects of the largest scale, tax increment financing from an EIFD will likely be just one of several revenue sources in a project’s capital financing portfolio.
Jake Vollebregt is a public law attorney with Best Best & Krieger LLP.