ACTION REQUESTED:
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Communication from the City Manager with a Request for a POLICY SESSION on the Creation of a City Policy on the Use of SALES TAX INCENTIVES in SPECIAL SERVICE AREAS.
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BACKGROUND:
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 is 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
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.
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. Currently, the Downtown Development Corporation (DDC) is working to propose an SSA for downtown and the Warehouse District to provide a variety of services including wayfinding, landscaping and marketing. While the DDC was originally investigating a 0.25% sales tax increase within the SSA they have since removed that concept from their plan. Two other sales tax SSAs have been proposed: an increase from 0.75% to 1.0% in the Westlake Shopping Center and a new 1.0% sales tax for a proposed Portillo’s restaurant.
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. 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? 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 sale tax SSAs be limited to the redevelopment of existing property (such as Westlake) or also be allowed for new constructions (such as Louisville Slugger or the proposed Portillo’s)?
3. 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?
4. Should a development need to first establish a property tax SSA before proposing a switch to sales taxes?
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.
6. Should sales tax SSAs be limited to a common property owner or can a commercial corridor with multiple owners apply for the program?
FINANCIAL IMPACT: SSAs are a method of incentivizing development that does not impact City revenues.
NEIGHBORHOOD CONCERNS: Not applicable. SSAs provide a mechanism for gathering public feedback to proposals.
IMPACT IF APPROVED: Nothing to approve - Staff is seeking direction regarding this area.
IMPACT IF DENIED: Nothing to deny - Staff is seeking direction regarding this area.
ALTERNATIVES: Not applicable.
EEO CERTIFICATION NUMBER: Not applicable.
WHICH OF THE GOALS IDENTIFIED IN THE COUNCIL’S 2014 - 2029 STRATEGIC PLAN DOES THIS RECOMMENDATION ADVANCE?
1. Financially Sound City Government, Effective City Organization
2. Grow Peoria: Businesses, Jobs, and Population
WHICH CRITICAL SUCCESS FACTOR(S) FROM THE COMPREHENSIVE PLAN DOES THIS RECOMMENDATION IMPLEMENT?
1. Grow employers and jobs.
DEPARTMENT: City Manager's Office