Tax Increment Financing (TIF) and Iowa K-12 Public School Finance Larry Sigel, Partner Iowa School Finance Information Services (ISFIS) 1

Overview Tax Increment Financing (TIF) is used by cities and counties for financing physical improvements or rebating property taxes. Understanding the interactions between TIF and school districts allows a better discussion between schools and city and county leaders about the impacts of TIF. Now, let’s understand a bit about Iowa school funding… 2

Iowa School Finance Overview Iowa (just like other states) has a state school finance formula. Revenues can only be raised in certain ways and to certain levels Expenditures are allowed only from certain funds. There are very few options to raise funding beyond the amount set by the state and there are limitation on how much districts can spend. 3

General Fund Basic Principles: ▫Student driven, amount per student set by legislature. ▫Schools are budget limited, not rate limited. Doubling property value = property tax rate falls – not more $’s to spend. ▫Tax rate driven by formula more than district actions. ▫District can only spend funds on allowable purposes. 4

General Fund Very important concept: Spending Authority State controls maximum amount of district spending Why? Equity – basic principle is that every child should receive the same amount of funding – no matter where they live 5

General Fund Restriction of Spending Authority only applies to the General Fund – all other funds allow spending if you have the cash to spend District must account for two things in their General Fund: ▫Fund Balance (cash) ▫Spending Authority (credit card limit) 6

General Fund Where does Spending Authority come from? ▫Basic formula: # of children x a cost per child = total current year Spending Authority.  Cost per child is set by the Iowa Legislature (allowable growth)  Spending Authority is then funded by a combination of State Aid and Property Taxes Limit on spending is the amount of Spending Authority a district has not the amount of cash or fund balance 7

General Fund So how do we pay for the Spending Authority in the General Fund? Three sources: ▫Uniform Levy - $5.40 property tax levy (first layer) ▫State Foundation Aid – backfills up to 87.5% of the cost per pupil (credit card limit) ▫Additional Levy – property tax levy that funds the last 12.5% of the cost per pupil (no rate limit – adjusts automatically to fund as much as needed) 8

General Fund Funding a school district’s Spending Authority 9 Property RichestAverage ValuationProperty Poorest Uniform Levy  State Aid  Additional Levy 

Valuation Characteristics… 10

…Impact Tax Rates 11

TIF and School Funding Interactions As schools gain property value, the General Fund rate falls because of the operation of the school foundation formula. Schools don’t get more money to spend when their valuations increase. Cities and counties are tax rate limited. So they are sensitive to valuation changes. As values rise (if keep rate the same) then revenues rise. As values fall, revenues fall. 12

TIF and School Funding Interactions School budgets grow when they have more kids. City/county budgets grow when they have more value. So, it should be natural for cities/counties to desire to grow valuation base. One way they attempt to do that is through TIF. 13

How does TIF work for Cities/Counties? Theory: Have a geographic area that needs improvements. By making improvements to the area, over the long run it will generate more economic development than if we hadn’t made the improvements. How do they make improvements without a revenue stream? That’s where TIF comes in. 14

How does TIF work for Cities/Counties? TIF caps the property value at a given level – this is now called the “Base”. Any growth in property value is attributed to the project. This is called the “Increment”. Property tax dollars that are generated by the Increment are then used to finance the project. 15

How does TIF work for Cities/Counties? 16

Types of TIF Projects Physical infrastructure improvements – sewer, water, roads. Specific infrastructure – hotels, parking ramps, city/county buildings. Tax Rebate Agreements – rebating (forgiving) all or a portion of a specific property taxpayer’s bill. 17

TIF and School Funding Interactions So how does all this impact schools? Depends on the funding source – we’ll deal with each in turn. Biggest fund in districts is the General Fund. That’s where we pay staff, curriculum and transportation costs from. Also impacts Public Education and Recreation Levy and Management Levy. 18

TIF and School Funding Interactions – General Fund So, TIF does not impact the amount of Spending Authority for a district because it doesn’t impact the number of kids or the cost per child (two drivers of school budgets) TIF does impact the General Fund tax rate by masking growth that the school finance formula would otherwise “see”. 19

TIF and School Funding Interactions – General Fund As valuation grows the Uniform Levy raises more funds 2. State Foundation aid falls 3. But total funding per pupil is the same

TIF and School Funding Interactions – General Fund 21 When the Additional Levy “sees” more valuation – total funds to the district doesn’t change, but the property tax rate to generate those same funds falls.

TIF and School Funding Interactions – General Fund Impact of TIF on school district General Fund: ▫School district property tax rates are higher because the Additional Property Tax levy has to work “harder” (higher rate) to generate the same amount of funds. ▫State Foundation Aid costs more because the finance formula doesn’t “see” the TIF valuation. Costs the State an additional $46.8 million per year for State Foundation Aid (FY12). 22

TIF and School Funding Interactions – General Fund Cash Reserve Levy impact: ▫Cash Reserve Levy is a levy for the General Fund of the school district for cash flow purposes. ▫If the property is in a TIF it does not generate additional funds for the district – so rates have to increase to compensate for the valuation that is not “seen”. 23

Non General Fund Levies Management Levy – rates will increase to provide funds produced by the foregone valuation. Public Education and Recreation Levy (PERL) – since the levy is capped at $0.135 per thousand any foregone valuation will reduce the funds available to the school district. 24

Levies Not Impacted by TIF Instructional Support Levy (ISL) ▫Effective July 1, 2013 valuation for the Instructional Support is exempted from TIF use going forward. Means property tax rate for ISL will fall if there is TIF valuation. ▫However, if a TIF area has an existing debt obligation that it would be unable to pay without the ISL revenue, it can request the school district send the revenue to the city. ▫Here’s the rub: due to the way the language was drafted school districts lose spending authority equal to the amount of the revenue to the city. 25

Levies Not Impacted by TIF ▫TIF debt must be older than April 24, ▫City must certify prior to July 1 to the County Auditor that they need the revenue. ▫The County Auditor is required to verify that the city needs the revenue. ▫If school and city don’t agree on the amount, school can ask the State Appeal Board to determine the right amount. The act places the burden of proof on the city to demonstrate that then need the revenue. 26

Levies Not Impacted by TIF Physical Plant and Equipment Levy (PPEL) – no impact – valuation base for PPEL includes regular valuation and TIF valuation. Debt Service Levy (bond issue) – no impact– valuation base for PPEL includes regular valuation and TIF valuation. 27

Summary Recap Listed below is a short table that summarizes the impacts of TIF by fund. 28

Questions? Do not hesitate to contact me if you have any questions or comments! Larry Sigel, Partner Iowa School Finance Information Services (ISFIS) (cell) © ISFIS