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Chapter 9. How Do Special Assessments Work With Tax Increment Financing?

Tax increment financing (TIF) is a budgeting device used to fund infrastructure projects without going through the traditional budget expenditure process. A typical project must be justified and compete for funding with other capital projects until an elected body approves its funding via expenditures from the jurisdiction’s capital fund budget. Pursuant to a TIF, however, specified tax revenues in a geographic area are benchmarked. Any future increases in revenue above the benchmarked amount (or some indexed form of the benchmarked amount) are diverted from the general fund and deposited into an account dedicated to fund a capital project serving that area. Thus a jurisdiction diverts expected future revenue due to a project in lieu of spending capital funds. The key appeal of TIF is that no new taxes are required (taxpayers within the TIF district pay taxes as they otherwise would, even in the absence of a TIF) and the TIF-funded capital project does not compete with other spending priorities for existing tax revenues either.

TIFs were initially created to support infrastructure improvements in distressed areas where development was otherwise unlikely to occur. The underlying justification for this approach is that “but for” the proposed infrastructure project, specified tax revenues within a specified geographic area would remain constant. Because it is assumed that the proposed project will lead to increased revenues, those project-created revenues can be used to fund the project. In other words, the proposed infrastructure project appears to pay for itself. In practice, the “but for” nature of revenue growth is e often assumed rather than proven. This has consequences including, but not limited to, the following:

• If revenues would have grown anyway, then the jurisdiction’s general fund is being deprived of revenue and this will negatively impact the general fund’s ability to fund other projects and programs.
• If future revenues fail to grow above the benchmarked amount, TIF revenues may be insufficient to pay debt service on bonds, loan or other financing mechanisms used to finance the project.

The first issue is a question of concern for those who believe that all spending projects should compete with transparency for funding on a level playing field. The second issue is a risk to bond repayment. This may cause lenders or bond purchasers to refuse financing for the project or may cause them to impose higher interest rates to compensate for the increased risk.

If jurisdictions have the authority to implement both TIFs and SADs, jurisdictions might consider creating them in tandem to:

• Provide additional revenues to support an infrastructure project.
• Provide a backstop for insufficient TIF revenues. If TIF revenues fall below a specified threshold, this would trigger the implementation of an enacted but contingent special assessment. To the extent that SAD revenues are determined by a formula and not subject to future development activity, SAD revenues are more certain. Thus, even if the SAD is never invoked, its mere existence as a backstop reduces risk to bond holders or lenders and can lead to lower interest rates on TIF financing.

The Potomac Yard case study mentioned previously shows that in the past few years, Alexandria, Virginia, has created both a TIF district and a special assessment district to pay for this station that is now under construction. For details, see “Potomac Yard Metrorail Station Cost/Revenue Summary,” April 29, 2019, at https://www.alexandriava.gov/uploadedFiles/City2ndVDEQAddlInfoReqAttGPYMSCostRevSum20190429.pdf

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