ACTION REQUESTED:
Title
Communication from the City Manager with a Request for a POLICY SESSION to Discuss ECONOMIC DEVELOPMENT POLICY: Specifically to Discuss SALES TAX SPECIAL SERVICE AREAS, TAX INCREMENT FINANCING DISTRICTS, and ECONOMIC DEVELOPMENT INCENTIVES
Body
BACKGROUND:
1. Sales Tax Special Service Areas
Basics of Special Service Areas
A Special Service Area (SSA) is mechanism provided for in Illinois state law, 35 ILCS 200/27, that creates a financing vehicle for development activities within a defined geographic area. SSAs allow a City to levy additional taxes in a targeted manner rather than increasing taxes on the entire municipality. While SSAs have traditionally been built upon additional property tax levies, their use has expanded to other forms of taxation such as sales and hotel taxes. The use of funds generated by SSAs is broad and can cover municipal services such as additional street sweeping or landscaping, private services such as branding and marketing, and infrastructure development.
The process to create an SSA is relatively simple. There are a few key steps:
1. A request is made of the City to create an SSA.
2. The City Council is asked to adopt an ordinance proposing the SSA and setting a date for a public hearing.
3. No sooner than 60 days from the date of that initial ordinance, a public hearing is held.
4. After the public hearing, there is a 60 day “objection period” during which opponents can stop the implementation of an SSA by obtaining and delivering a petition bearing the signatures of at least 51% of the property owners AND 51% of the registered voters within the proposed area. This provision can be waived if the entity requesting the SSA can certify that there are no registered voters or disagreeing property owners in the area. This usually happens in commercial areas where all property owners (often just one owner alone) is behind the request.
A successful opposition petition forces defeat of the proposed SSA and it cannot be reintroduced for two years. However, the City Council is not obligated to approve an SSA in the absence of an opposition petition. The final ordinance requires a simple majority vote of the Council. An SSA ordinance must define the maximum length (usually in years), maximum rate of taxation and permitted use of funds. SSAs are established with a simple majority vote.
SSAs in Peoria
In the City of Peoria, SSAs have been developed for a variety of reasons:
• East Bluff - A property tax SSA has been levied to fund East Bluff Neighborhood Housing Services.
• Weaver Ridge - A property tax SSA is levied to repay the costs of road infrastructure. ( Final debt service payment, February 1, 2017)
• Westlake - First, a property tax SSA was levied to make certain improvements to the parking lot. In 2014, the property tax SSA was essentially replaced with a 0.75% sales tax that allowed for improvements in the rest of the complex.
• Junction City - A property tax SSA is levied to finance the construction of the new intersection on Knoxville.
• Louisville Slugger - A variety of SSAs (property tax, sales tax, hotel tax) were created to help finance construction of the complex.
• Holiday Inn - A variety of SSAs (property tax, sales tax, hotel tax) were created to help finance construction of the complex
• Portillo’s - A property and sales tax SSA was levied for the initial development, repair, and replacement costs of improvements to the site.
The City does not have a current policy regarding the establishment of SSAs regardless of whether the SSA looks to impose additional property tax or other taxes such as sales tax. To date, the City has relied on state law to determine if an SSA meets the legal threshold for creation and then allow the City Council to decide. Upon approval of the Westlake sales tax SSA in 2014, Council suggested that staff create a policy to govern future such SSA proposals as they relate specifically to shopping centers. A proposed policy was discussed briefly at the August 12, 2014 Council meeting (Item 14-343) and then more fully on September 9, 2014 (Item 14-368). Staff proposed a new policy that would limit the use of sales tax oriented SSAs based on a set of criteria. Of note, staff recommended that sales tax SSAs only be created after the creation of a real estate tax SSA which would need to be in place for at least three years before switching to sales tax.
While Council discussed the proposed parameters, no consensus was reached. One key argument was made that the City needed to remain flexible in its use of this development tool as it did not have many other financial options for encouraging development. The staff report was “received and filed” with no direction to formalize these ideas into a policy. Since that discussion in 2014, there has not been any further discussion of setting a policy. While the 2014 discussion was more narrowly confined to shopping centers and the use of sales tax SSAs, in 2015 the City Council adopted SSAs levying an additional sales tax (and hotel taxes) on properties associated with the Louisville Slugger Sports Complex. Unlike in the wake of Westlake, there was no discussion on the need for a guiding policy in this area. Following the establishment of the Portillo’s SSA, Council requested a policy session pertaining to the use of Sales Taxes with Special Service Areas.
Policy Questions
The state law that governs the use of Special Service Areas is very broad and gives a great deal of discretion to municipalities. According to SB Friedman, there are over 600 SSAs in Illinois. Most are of the traditional variety of property owners and businesses working together to provide an additional level of service to their area. The Downtown Development Corporation (DDC) has discussed an SSA for downtown and the Warehouse District to provide a variety of services including wayfinding, landscaping and marketing.
As indicated above, cities do not have many tools to encourage retail development. The Enterprise Zone provides some modest benefits in construction costs for new construction and renovation. Tax Increment Financing is a powerful tool but very complicated and limited to specific parts of town. Business Development Districts, which operate to some degree like SSAs, are similarly limited to qualified areas suffering from “blighting” factors. Many communities, such as the Town of Normal, have utilized their own local share of sales taxes to attract retail development. Staff in Peoria has consistently rejected requests for such sales tax rebates based on the impact to Peoria’s own revenue sources.
Going forward, staff is seeking guidance in addressing requests for SSAs based on additional sales tax. Establishing a policy, even a broad one, helps define opportunities for potential developments and allows staff to incorporate the tool into its work with projects. A policy would provide a methodological and transparent approach to this tool. Below are a number of questions to consider in formulating a policy:
1. Is the City Council comfortable with utilizing sales tax SSAs as a tool to generate investment? Outside of the Hospitality Improvement Zone, the City has never imposed a sales tax SSA on an area. Rather, these have been requested by the private sector. Just as SSAs are voluntary for businesses, they are also voluntary for customers: Individuals who are opposed to paying the additional sales tax can avoid those businesses.
2. Should a development need to first establish a property tax SSA before proposing a switch to sales taxes?
3. Should sales tax SSAs be limited to a common property owner or can a commercial corridor with multiple owners apply for the program?
4. While SSA ordinances need to propose time and taxation limits, there are no maximums required by state law. Does Council want to communicate upfront its own limits, i.e. 20 or 30 year maximum term or 0.5%, 0.75% or 1.0% tax increase?
5. Are there particular circumstances in which a sales tax SSA is warranted? For example, the use of this tool could be limited to any or all of the following:
a. Major exterior renovations of existing shopping centers or areas.
b. The development of unique shopping opportunities that would be a regional draw.
c. Serving to close the financing gap on complicated deals or below market rate transactions.
2. Tax Increment Financing Districts
Tax Increment Financing (TIF) is a tool for economic development under Illinois law, 65 ILCS 5/11-74 that may be implemented by local municipalities. The purpose of TIF is to induce development in an area that has been declining or has been deficient in growth and development. Once the area is defined, a redevelopment plan is adopted to address the conditions that have led to a lack of development. The Council must conclude that development would not happen but for the use of TIF as an incentive to the developer. TIF activity is managed by the City of Peoria’s Economic Development Department, Finance Department and other taxing bodies have input through the Joint Review Board.
The following explanation of Tax Increment Financing comes from the Illinois Tax Increment Association:
Tax Increment Financing is simple in concept. TIF calls for local taxing bodies to make a joint investment in the development or redevelopment of an area, with the intent that any short term gains be reinvested and leveraged so that all the taxing bodies will receive larger financial gains in the future. The funds for this investment do not come from current revenues, but from future tax revenues, not otherwise expected to occur. These new revenues are generated by increased public and private investment in identified, underperforming areas.
When a TIF redevelopment project area (often called a TIF district) is created, the value of the property in the area is established as the “base” amount. The property taxes paid on this base amount continue to go to the various taxing bodies as they always had, with the amount of this revenue declining only if the base declines (something that the TIF is expected to keep from happening) or the tax rate goes down. It is the growth of the value of the property over the base that generates the tax increment. This increment is collected into a special fund (the Special Tax Increment Allocation Fund) for use by the municipality to make additional investments in the TIF project area. This reinvestment generates additional growth in property value, which results in even more revenue growth for reinvestment.
In this way the TIF redevelopment project creates a vital cycle, increasing development and redevelopment in the area, such that when the TIF project ends - and Illinois law allows a TIF project to exist for a period of up to 23 years - all of the taxing bodies benefit from the new growth.
TIF revenues can be used for a variety of purposes outlined in the statutes: rehabilitation and renovation costs (not new construction); relocation of businesses; job training for businesses and citizens within the district; property acquisition; demolition and site preparation; studies surveys and plans for the district; marketing expenses; financing costs; construction of public works; and administrative expenses.
Currently, the City has 11 Tax Increment Financing Districts. The projected fund balance in 2019 is $2.6 million. At their inception, the TIF District budgets were established in a total amount of $1.2 billion: $513 million for redevelopment (43%); $400 million for infrastructure and public works (33%); $164 million for financing costs (14%); $89 million for other taxing district capital costs, porting to other TIF districts, and PILOTS (7%); and $39 million for studies, marketing and administration costs. Since their inception, $59.6 million in property and sales taxes have been collected, $43.9 million of bonds have been issued, and $100.6 million of expenditures have been made.
The current expiration dates, base EAV, most recent EAV, incremental EAV and property tax increment of all Peoria TIFs is as follows:
|
TIF DISTRICT |
Expiration |
Base Eav |
2017 EAV |
EAV Increment |
Tax Increment |
|
Central Business District |
2021 |
2,672,940 |
19,684,710 |
18,310,520 |
1,705,412 |
|
Northside Business Park |
2022 |
2,681,110 |
4,161,900 |
1,950,430 |
183,080 |
|
Midtown Plaza |
2022 |
750,370 |
1,511,700 |
761,330 |
1,525,886 |
|
Downtown Stadium |
2023 |
404,330 |
3,676,880 |
3,272,550 |
315,486 |
|
Warehouse District |
2030 |
16,141,140 |
23,800,050 |
9,115,000 |
867,559 |
|
Eagleview |
2030 |
4,201,080 |
5,166,620 |
1,309,440 |
125,425 |
|
Hospitality Improvement Zone |
2031 |
12,168,960 |
23,275,320 |
12,813,890 |
1,225,628 |
|
East Village Growth Cell |
2034 |
42,385,367 |
37,645,066 |
4,091,087 |
349,457 |
|
South Village |
2036 |
16,574,170 |
15,207,030 |
1,130,060 |
100,174 |
|
Downtown Conservation |
2036 |
42,926,328 |
40,479,480 |
1,285,790 |
120,420 |
|
River Trail |
2036 |
0 |
0 |
0 |
0 |
|
TOTAL |
|
$140,905,795 |
$174,608,756 |
$54,040,097 |
$6,518,527 |
Policy Questions
TIF is a powerful economic development tool that allows the City to grow the tax base. Within targeted geographic areas, it allows the City to facilitate investment and job creation, improve infrastructure, and meet specific redevelopment goals that the City Council may want to achieve.
Specifically, during the 2019 budget discussion, Council wanted to have a policy question to discuss the following policy questions:
1. When should the City create a TIF District? What factors should be present in a specific geographic area that would lead to the City creating a TIF District. According to the law, the City needs to show that various blighting factors must be present in an area to establish a TIF district.
2. How should the City implement the proposed budget within the TIF Districts? In general, the City has established a TIF District and allowed developers to drive redevelopment projects, and then follow with infrastructure improvements as a secondary benefit of the district. Should the City be more assertive about improving infrastructure within the district in conjunction with private development?
3. How should the City staff report activity within the TIF Districts? Does Council desire a more comprehensive report on public and private activities over the budget and audit reports that Council currently receives?
4. How should the City close TIF Districts? Should remaining funds be used to complete items originally budgeted, such as public infrastructure? Should unprogrammed funds be distributed back to other taxing bodies? Should unprogrammed funds be ported to other TIF Districts?
5. When should the City seek a legislative extension of a TIF? Currently, as TIFs mature, the opportunity to foster private redevelopment diminishes. Does the Council want to define specific criteria for approving a legislative extension of a TIF District, or does the Council want to act on a case-by-case basis?
3. Economic Development Incentives
In 2018 the Economic Development Department worked with Councilwoman Beth Jensen and members of the public to develop the attached Economic Incentives Policy document. More a compendium of incentives, the document catalogues the types of incentives and when the Council may use these incentives. Staff will walk through the public input provided into the document and outline the respective programs and incentives that the Council may utilize.
Staff would like to walk through the document and gather feedback from the Council.
FINANCIAL IMPACT: Economic development incentives have a varying impact upon the City. Larger projects with large incentives may be riskier for the City. Balancing the risk of loss with the proposed development and the return on the investment being made by the City is important.
NEIGHBORHOOD CONCERNS: Concerns and compliments have been raised about economic development incentives have been made by residents and business owners alike.
IMPACT IF APPROVED: NA
IMPACT IF DENIED: NA
ALTERNATIVES: NA
EEO CERTIFICATION NUMBER: NA
WHICH OF THE GOALS IDENTIFIED IN THE COUNCIL’S 2017 - 2032 STRATEGIC PLAN DOES THIS RECOMMENDATION ADVANCE?
1. Financially Sound City
2. Grow Peoria
3. Beautiful Peoria
WHICH CRITICAL SUCCESS FACTOR(S) FROM THE COMPREHENSIVE PLAN DOES THIS RECOMMENDATION IMPLEMENT?
1. Keep taxes and fees competitive.
2. Reinvest in neighborhoods.
3. Grow employers and jobs.
4. Invest in our infrastructure and transportation.
DEPARTMENT: City Manager's Office