Citizens For A Better Norwood

Monday, July 28, 2008

Norwood City Auditor Jim Stith’s comments re TIF’s

A few minutes ago, Jim Stith left the following comment under our 7/22/08 “Rookwood Exchange Update” blog below. We’re publishing his remarks here because we feel they are blog worthy and could spark a whole new discussion. Thank you, Jim, for taking the time to educate us about Tax Incremental Financing:

TIF’s are not “tax breaks” for the developer or the property owners in the area. A TIF takes property tax revenue which would go to the county and diverts it to the cities debt for improving the infrastructure. A percentage of this new revenue goes to the schools.

This example explains TIF’s in the simplest terms:

Imagine a field of farm land in a city. The county collects property tax for the city and schools at the “farm land tax rate” twice a year. A developer wants to turn into a subdivision. In order to do this the city has to develop an infrastructure of streets, utilities, water, and sewer lines. They must also develop a system of safety and service for this new community. By creating a TIF area the city can sell bonds (borrow money) to finance these improvements and build the infrastructure. The developer then builds the new houses which raises the property value and tax basis for the area contained in the TIF. We will call this the “new tax rate.”

The county collects the new higher taxes “new tax rate” as PILOT (Payment In Lieu of Taxes). The county keeps its portion of the taxes at the “farm land rate”, everything collected above that rate goes into a special fund run by the city. This fund is then used to pay the school district and the bond payments (money borrowed by the city for the infrastructure.

- The school district continues to get revenue from the county from property taxes collected at the “farm land rate”. This is paid by the developer, the value of the property does not go down and will always be at least the rate when the project started.

-The school district makes a percentage (usually 50% but is negotiated in the TIF agreement) of the PILOT revenue paid from the cities special fund. This way the schools continue to benefit from improvement even though it is a TIF area.

-Until the area generates enough PILOT income to pay the bond debt the DEVELOPER MAKES THE BOND PAYMENTS. This way the cities improvements in the TIF are financed only by the improvements and not out of its operating budget.

-TIF areas have geographical and time limits, they are not permanent. (The county and state want their part of the taxes after the debt is paid)

Clear as mud?

We currently have 2 TIF areas, Cornerstone and Linden Point. Cornerstone generates enough PILOT revenue to makes its own bond payments and payments to the school district. Linden point is still subsidized by the developer. The new Xavier expansion will be a TIF.

-Jim Stith
Norwood City Auditor