05.01 - Presentation of Project Financing Options

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Pequot Lakes Memo - Financing of Street Improvements May 31, 2011 Page 2 `— of state and county road projects, street reconstruction does not include the portion of project cost allocable to widening a street or adding curbs and gutters where none previously existed. As further clarification our clients have been advised that certain activities such as cleaning out road cracks and filling them in, and seal- coating do not qualify as permitted activities to be financed by street reconstruction bonds. Adding an inch or so of overlay also would not qualify unless done in conjunction with removal of an inch of existing road. Street reconstruction projects funded under this statute must be included in an adopted five year street reconstruction plan that lists the reconstruction projects to be completed in the next five years and the cost of the improvements. Both the plan and the issuance of bonds must be unanimously approved following a public hearing on the plan. The issuance of the bonds is subject to a reverse referendum if a proper petition is filed within 30 days of the public hearing. Absent a petition being filed, this debt can be issued without election. The bonds will count against the general debt limit of the city. MS 469, Tax Increment Bonds Tax increment financing (TIF) uses the increased property taxes generated by new real estate development within a defined geographic area (the Tax Increment District) to pay for certain eligible costs associated with the new development. Eligible costs include such things as land acquisition, demolition, public and site improvements, and related consulting and administrative costs. `.. Although TIF can be used for public improvements, such as streets, the formation of a Tax Increment District is subject to stringent statutory requirements. In particular, a city must be able to demonstrate that without the TIF assistance, new development would not have occurred. A budget for the anticipated use of TIF must be established and as a general assumption, a majority of the tax increment revenue used must be spent within the Tax Increment District itself. A Tax Increment District can only be established after a public hearing is conducted and appropriate findings are made. There is frequently a considerable lag between when a district is established and when tax increment revenue starts becoming available. The complexities and restrictions on the general application of tax increment revenue offers only limited application for its use to finance street projects, particularly if the projects are outside of the context of the new development that is generating the tax increment revenue. In the event that it is available, it can be pledged to repay debt and provided that tax increment revenue provides for repayment of at least 20% of the bond issue, the city's general obligation can be pledged without an election. Debt issued under these provisions is not subject to the city's general debt limit. MSA 469, Tax Abatement Bonds Minnesota law provides that certain taxes paid can be collected and used for prescribed development purposes, which can include financing streets. The collected taxes are defined in statute as "tax abatements ". Tax abatement can be captured from existing properties as well as new improvements and is less restricted in its use than tax increment. The taxes abated can include city, county, and /or school district taxes, with each entity having the ability to decide if it participates or not.