Tax increment financing making a return to California

Tax increment financing is back in California. New state legislation expanding the use of property tax increment through infrastructure financing districts (IFDs) gives local governments a tool to invest in needed infrastructure and economic development projects, much as they formerly could through redevelopment agencies until their elimination in 2012. However, it's clear that the new IFDs won't fully replace redevelopment agencies and the billions of dollars of tax increment they once generated. The new IFDs are best thought of as "redevelopment lite," a helpful but less lucrative tool for specialized situations.

The comeback of tax increment is made possible through the passage of several bills which expand the use of the state's infrastructure financing district law in different ways. The central bill is Senate Bill 628, legislation authorizing the creation of a new form of IFD named the "Enhanced IFD." The Enhanced IFD concept began as an administration proposal contained in the 2014-15 state budget. While Gov. Jerry Brown has continued to veto legislative attempts to bring back revised forms of redevelopment (including this year's Assembly Bill 2280, which would have authorized "community revitalization and investment authorities" in low income areas), the governor has supported other efforts to make IFDs more flexible and useful for local government economic development efforts.

Under SB 628, Enhanced IFDs are empowered to provide financing for a broad range of infrastructure work, including traditional public works such as roads and highways, bridges, parking facilities, transit stations, sewage and water facilities, flood control and drainage projects, solid waste disposal, parks, libraries, and child care facilities. Enhanced IFDs may also finance a broader range of public uses, including brownfield restoration and environmental mitigation, military base reuse projects, affordable housing, private industrial buildings, transit oriented development projects, and projects carrying out sustainable communities strategies.

Like redevelopment projects, Enhanced IFDs are financed through tax increment generated from the growth in property taxes collected from the district. Unlike redevelopment agencies, however, Enhanced IFDs will only be able to collect tax increment from local government agencies that voluntarily agree to contribute those funds, and cannot collect tax increment from K-12 school districts, community college districts and county offices of education. This leaves cities, counties and special districts as the primary potential participants in Enhanced IFDs. This is a fundamentally different system than was used for the formation of redevelopment projects, where if a city or county established that an urbanized area of its jurisdiction was blighted, its redevelopment agency would be allocated all of the tax increment of each of the local government agencies with a share of property taxes from that area.

As a result, Enhanced IFDs are expected to generate much smaller amounts of tax increment than redevelopment once did. Nonetheless, the Enhanced IFD legislation is viewed as an improvement on the state's existing IFD law, which has been authorized since 1990 but rarely used because of its daunting two-thirds public vote requirements for formation and bond issuance. Moreover, until recently adopted legislation, the formation of IFDs was constrained by the former requirement that they could not be established in areas that were currently or formerly part of a redevelopment project area.

Unlike redevelopment projects, an Enhanced IFD can be established without finding that the area of the infrastructure district is blighted or urbanized. The law requires more public participation in the governance of an Enhanced IFD than a redevelopment agency, mandating that the board of the Enhanced IFD include at least two public members in addition to members of the legislative bodies of the public agencies that form the district. Under the new law, an infrastructure plan is adopted specifying what types of infrastructure projects will be financed, what public agencies will contribute tax increment to the Enhanced IFD, and what amounts will be contributed.

No voter approval is required to form an Enhanced IFD, but a 55 percent affirmative vote is required for the Enhanced IFD's issuance of bonds. This is less stringent than the vote requirement under the existing IFD law, with a two-thirds vote required for both formation and bond issuance. Opponents of the bill have questioned the constitutionality of the reduced threshold for voter approval. It remains to be seen whether the lessening of the public voting requirements will actually make it easier to create Enhanced IFDs than standard IFDs.

SB 628 allows Enhanced IFDs to overlap the boundaries of former redevelopment projects, but an Enhanced IFD cannot be formed until the state issues a finding of completion for the redevelopment project. No former redevelopment agency assets involved in litigation with the state may be used in the Enhanced IFD until the litigation is resolved - a condition that may further delay the formation of Enhanced IFDs in some jurisdictions that most heavily relied on redevelopment.

Many in the local government community have remained skeptical about how useful Enhanced IFDs will be. For instance, although the League of California Cities has supported SB 628, it has continued to lobby for the passage of other financing tools more closely resembling redevelopment that it believes would be more helpful. While the tax generation potential of Enhanced IFDs may be limited, there is virtually no limit to the creativity of the financial advisors, economic consultants and attorneys who formerly advised on redevelopment financing, who will now turn their attention to potential uses of the Enhanced IFD law. There are a number of types of development projects that might benefit from the use of Enhanced IFDs, such as:

Infill development projects with public works requirements that benefit more than one public agency, which may entice multiple taxing agencies to participate in the Enhanced IFD;

Master planned communities with less than 12 voters, where the developer owns the majority of the land in the development and can control the outcome of a public vote;

Large housing developments with local inclusionary housing requirements, where cities and counties may be willing to contribute their tax increment to the Enhanced IFD for loans or grants to make affordable housing projects feasible;

Transit-oriented development projects which are provided for in a community's sustainable communities plan, or meet the CEQA definition of a "transit priority project" (located within one-half mile of a transit station, with specified density and project amenities);

Projects where the developer and/or its investors can provide upfront funds for required infrastructure improvements, subject to reimbursement on a "pay-as-you-go" basis after completion of the project and infrastructure;

Projects where a Mello-Roos district or assessment district requires additional revenue from an Enhanced IFD to pay for a development project's public works requirements; and

Brownfield projects where cleanup would be facilitated through public agency use of the state's Polanco Act, which was formerly limited to use by redevelopment agencies.

The other 2014 bills that expanded the use of IFDs and tax increment are Senate Bill 614, which permits tax increment financing for infrastructure in connection with the annexation of disadvantaged communities; Assembly Bill 229, which permits the formation of "infrastructure and revitalization financing districts" in connection with military base reuse; and Assembly Bill 2292, which allows IFDs to finance community broadband projects.