Declaring Tax Incremental Districts As Distressed: Not A Panacea

October 19, 2010

On May 12, 2010, 2009 Wisconsin Act 310 became effective. The Act:

  • Authorizes the designation of a tax incremental district as distressed, or severely distressed
  • Expands the use of donor tax incremental districts
  • Extends the term of the district.

This legislation was enacted in response to a number of municipalities having tax incremental districts (TIDs), which were encountering financial difficulties as a result of general economic conditions. Several municipalities have gone through the process of declaring their respective TIDs to be “severely distressed.” Undoubtedly, there are other municipalities located throughout the state which are experiencing similar problems with respect their TIDs and will be moving in the direction of making the foregoing declaration.

The Act did the following: 

  1. Establishes a procedure by which a municipality can amend the district’s project plan to reflect the district’s distressed status. The legislation is not available to every TID. Rather, the TID in question must satisfy certain legislative requirements. For example, the TID must be in existence for at least seven years before the municipality adopts the resolution declaring its distressed status; the project plan has to be amended to reflect the district’s distressed status; and other than the amendment for declaring the district as distressed, there can be no other amendments to the project plan made thereafter.
  2. One of the most important requirements to be eligible to implement provisions of the new law is that the “value increment in any year must have declined at least 25 percent from the district’s highest value increment…” as determined by the Wisconsin Department of Revenue over the course of the district’s life. The sum of 25 percent is a significant decline. However, a number of municipalities in Wisconsin have experienced that magnitude of decline.
  3. Before a municipality goes through the process of declaring the district as being financially distressed, there has to be a public hearing, a plan amendment, approval by the joint review board and a filing with the Wisconsin Department of Revenue. Once all of this occurs, then the term of existence of the TID can be extended. If the TID is simply distressed, the law allows the Department of Revenue to allocate a positive tax increment for up to ten years after a TID would otherwise be required to terminate. If the TID is designated as severely distressed, the term can be extended up to 40 years after the district is created.
  4. The law also allows a municipality to make other TIDs which are generating revenues, “donor tax incremental districts,” for the purpose of sharing revenues with a distressed or severely distressed TID. This assistance can continue for ten years after the donor district would otherwise expire if the TID in question has been declared as distressed and up to 40 years if the TID in question has been declared to be severely distressed.

The Act is an important piece of legislation, but it does not solve the financial problems of a financially distressed TID. It simply gives to the municipality wherein a distressed TID is located, two tools which can provide some financial relief. For those communities that have multiple TIDs, some of which are generating positive cash flows, those cash flows can now be devoted to the distressed TID. This is definitely a positive factor. The second tool is that the time within which to pay off TID obligations has now been statutorily extended up to 40 years, in the case of a severely distressed TID.

These two features will not, in and of themselves, solve a municipality’s financial problems when confronting a distressed TID. Rather, those problems have to be examined by a review of all liabilities, of not only the TID, but the municipality as well. In practice, many municipalities established TIDs with the expectation that they would generate excess revenues that could be used by the municipality for additional projects.

For example, it is not uncommon for a municipality to incur a general obligation liability or a mortgage revenue liability; and anticipate that a portion of that liability will be paid off from revenues generated by the TID. If suddenly the TID has a decline in equalized values, resulting in a decline in revenues, that stream of income may no longer be available for debt service on the municipal GOL obligation or the revenue obligation. In this circumstance, the municipality clearly has a financial problem which is not necessarily going to be addressed by a stretch out of the TID or even by application of revenues from a donor TID.

Municipalities have to look at sources of revenue other than the anticipated cash flow from the TIDs in question. This can present many challenges and can affect municipal budgets, as well as municipal borrowings. Therefore, a municipality in the foregoing circumstance must look at alternatives such as the creation of utility districts and specific levies therein, special assessments for public improvements, connection fees, rate increases, etc. It is only through examination of all aspects of a their obligations that a municipality can make an informed judgment as to what benefits, if any, can be realized by the new legislation.

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For more information about "Declaring Tax Incremental Districts As Distressed: Not A Panacea," contact Timothy D. Fenner at tfenner@axley.com or 608.283.6733.