Freeport Area Economic Development Foundation

City of Freeport, Illinois

Tax Increment Financing Fact Sheet

The City of Freeport, in cooperation with the Freeport Area Economic Development Foundation conducted an analysis of nine different potential development areas within and adjacent to the city limits in 2001. The firm of Kane McKenna and Associates, the municipal consulting firm specializing in business incentive development and municipal finance, was retained to conduct this analysis that resulted in a formal report entitled "City of Freeport, Illinois Preliminary Finance Alternatives Report for Proposed Study Areas No. 1 through No. 9". That report addressed among other different incentives and inducement programs the use of Tax Increment Financing (TIF) Districts. Some of the study areas - specifically No.3, 4, 6 and 8 are specifically geared towards industrial development. Study areas #1, 2, 7 and 9 were specifically identified for commercial development. And finally, study area #5 was specifically studied for residential development.

The following are a list of frequently asked questions and the corresponding answers about TIF Districts in general. I have also inserted some additional information that is specific to the City of Freeport in these "frequently asked questions". These should be helpful in trying to understand the TIF process.

1. What is a Tax Increment Financing District?

A Tax Increment Financing (TIF) is a method of facilitating development or redevelopment of a certain area by utilizing future property tax revenues - realized from taxes generated only from the TIF District - to pay for necessary public improvements. The area designated for development or redevelopment is called a "TIF District". Creation of the TIF District does not in and of itself mean that development or redevelopment will occur; market factors will also be the principal motivation for development or redevelopment. A municipality may create a TIF District as a marketing tool in hopes of attracting new businesses to a target area. However, in Illinois the most common reason for the development of a TIF District is in response to a perceived market need in a municipality that triggers the request for the creation of a TIF District. Such is the case in the City of Freeport in response to the desire to develop a commercial shopping area (i.e.-the Glimcher/McGuire project), expand an existing industrial project (i.e.-the Seaga Manufacturing project), and possibly create a new residential area.

2. Does the creation of a TIF District result in increased tax rates?

The TIF process captures "incremental increases" in tax revenues without any required change in tax rate. As property values increase as a result of development, TIF enables the municipality to capture increased revenue and utilizes it to pay for public improvements. Such public improvements as defined in the TIF law take into consideration a wider range of expenses than a classic definition of "public improvements" might include. Eligible expenditure of TIF funds include the following categories:

Land acquisition, land assembly and demolition.
Site preparation including earthwork and environmental remediation.
Installation or upgrading of utilities, streets and other public facilities and improvements (such as, electric, natural gas and telecommunication lines; storm and sanitary sewers, potable water lines, sanitary sewer processing facilities, and potable water wells and processing plants)
Existing building rehabilitation - both public and private.
Planning, legal, architectural, engineering, administrative and other professional service costs.
Interest costs incurred by developers for the financing of projects going into the TIF District.
Job training.

3. Does anyone pay additional taxes because of TIF?

As property values rise, property owners in any redevelopment area including a TIF District will likely pay increased property taxes with or without TIF. A TIF merely permits any increase property taxes to be specifically directed to public improvements. This year, for the first time since its creation, the downtown Freeport TIF District actually saw a general appreciation in overall property value for all properties located within that District. This was not directly related to the creation of the TIF District, but from an improvement in the marketplace on the value of real estate located within the central business district.

4. Does TIF require the issuance of debt?

The establishment of a TIF District does not mean any debt will be incurred. If the municipality decides to incur debt to provide for public improvements, then funds for debt repayment will generally come from property taxes generated in the TIF District and not from any municipality-wide property taxes. The municipality has the option of utilizing other revenues and issuing other forms of debt should it deem the particular development justifies such utilization of funds and/or taxing powers. By this I mean other taxes "of general applicability" that the municipality might collect within the TIF District could be redirected back towards TIF eligible expenses. These include the municipal portion of any utility tax, sales tax, hotel/motel tax, etc.

5. Do all TIF districts have to meet the "But for" test to help in the development of projects?

Yes. The concept of the development of TIF districts is that "but for" the use of the revenues generated by the TIF District, the projects in question would not be taking place. Consequently, the law is very clear that the municipality must approve of any use of TIF funds for a particular privately developed project prior to the initiation of that projects development. The development of the assisted living care facility in Pecatonica is a good example of this "but for" test. Although the project has been discussed and planned for over two years now, it has not gone forward because the TIF District is necessary to make the financial constraints of the project more manageable. Said another way, without the TIF District's assistance, building the assisted living care facility does not make financial sense to the developer or to his bankers.

6. When discussing public improvements, can incremental revenues from the TIF District be used for corresponding public improvements that are not directly located within the TIF District itself?

Yes. In particular, if the development of a project within a defined TIF District causes excess stress on the wastewater treatment plant, or freshwater production plant for the City of Freeport, TIF generated revenues can be used to correct or upsize those facilities even though such improvements are not physically located within the TIF District. Similarly, if a public improvement has to be dislocated in order to accommodate a private project within the TIF District (e.g.-relocation of elementary school or a fire department building) then the cost of relocating such facility to a new site outside of the TIF District is an eligible expense. In this manner, development of the TIF District, while necessary to make financial challenges in the construction of a new commercial or industrial project more palatable, actually can help relieve the financial burden of all of the citizens in the City by helping to offset the cost of upgrading or reconstructing basic infrastructure projects. Otherwise, the entire cost of such an activity would be directly borne by all users within the City directly.

7. Can other developments within the proposed TIF District benefit from its creation?

Yes. Oftentimes the creation of a TIF District for one specific project stimulates other developments that might not have occurred "but for" the availability of the TIF District to help offset the cost of direct development.

8. Is it true that no other taxing bodies besides the City government will receive any money from this TIF District area for 23 years?

Not necessarily. While the law does allow the TIF to be in place for 23 years, and the City government does have control on those funds realized from the development of the TIF, most commonly once any TIF eligible expenses are paid for, the host municipality either dissolves the TIF District, or declares any excess revenues "surplus". The City of Freeport has gone on record as promoting a 25% pass-through of all new incremental revenues from future TIF districts to other taxing bodies affected by the TIF. An ordinance addressing such policy is currently being considered by the City Council. Such funds are then distributed to the other taxing bodies in direct proportion that they would have received through the normal property taxing process. In this manner, funds can be passed through to other taxing bodies long before any TIF related debts are paid off and well before the 23 year limit is reached.

Revenues for the school district are a different item. While although the school district can enjoy the receipt of revenues via the 25% pass-through policy, under such a proposal, the school district actually can realize more property tax dollars/state aid tax dollars through the development of a TIF District than if natural growth would have developed by itself. Even without a pass-through policy by the local municipality, state law has provided for any school district "to be made whole" in the case that any of its jurisdiction is included in a TIF District. Said more succinctly, under the current state law no school districts are financially hurt by the creation of a properly created TIF District.

9. If the City borrows money for this project, how does that affect its ability to borrow money in the future for other projects?

If properly structured, any borrowing done by the City on behalf of the TIF District should not affect its financial capabilities to borrow money for other municipal purposes. Adequate safeguards can be placed in the redevelopment agreement between the developer and the City that would affect the ability of the City to borrow funds in the future.

10. Why create a TIF District to begin with?

Generally, a TIF District will create the incentive to develop tax base and jobs in the municipality that might not normally have developed otherwise. Aside from the property taxes, the City realizes the other benefits of the increased population, job creation and its corresponding wealth in the community, and the increased public improvements that might not have occurred otherwise. In the case of a TIF District helping to defray the cost of general infrastructure upgrades the City has the ability to offset the cost of rehabilitating the basic infrastructure with funds generated by a project that will not significantly add to the burden of public services. Consequently, besides the jobs created by a new commercial or industrial project, all the citizens of the City could potentially benefit by not having to pay significantly increased property taxes to pay for basic infrastructure upgrades.

11. What can the City expect to provide to the developer of a new commercial or industrial project?

While there is no exact science as to specifically what a TIF District can do to assist a developer of a new commercial or industrial project, each project has to be assessed on its own merits in what benefits it brings to the community in the area of job creation, increased tax base, spin-off businesses and sales tax, increased population, general services and public benefits.

For instance, the creation of more shopping opportunities of a nature not currently found in Freeport will not only create new tax base, new jobs, and increased sales tax for the municipality, but also, relieve the burden of local citizens having to drive a significant distance to another municipality to obtain such retail products. The City of Freeport is in the process of putting in place a formal application procedure not unlike the City of Chicago that requires a developer to "open their books" to show the rationale and benefits to be expected from a TIF District for their project. TIF districts require each project be assessed on its own merits, whereas, Enterprise Zone benefits are very objectively distributed. That is, each TIF deal is negotiated with the municipality, whereas, enterprise zone benefits are an automatic benefit to any business that can legally build on a site located within the Enterprise Zone.