Tax increment financing is back in California. Tax increment makes its comeback through the passage of Senate Bill 628 (Beall), legislation authorizing the creation of Enhanced Infrastructure Financing Districts (EIFDs), which was signed into law by Governor Brown on September 29. The new legislation provides local governments an intriguing new tool to assist in the economic development of their communities, although it is not expected to generate close to the level of tax increment revenues that redevelopment did during its heyday.
EIFDs are empowered to provide financing for a broad range of infrastructure work, including traditional public works such as roads and highways, bridges, parking facilities, transit stations, sewage and water facilities, flood control and drainage projects, solid waste disposal, parks, libraries, and child care facilities. EIFDs may also finance other items including brownfield restoration and environmental mitigation, military base reuse projects, affordable housing, private industrial buildings, transit oriented development projects, and projects carrying out sustainable communities strategies.
Like the state’s recently terminated redevelopment program, EIFDs are financed through tax increment generated from the growth in property taxes collected from the affected territory. Unlike redevelopment agencies, however, EIFDs will only be able to collect tax increment from local government agencies which voluntarily agree to contribute those funds, and cannot collect tax increment from K-12 school districts, community college districts and county offices of education. Because education districts are not permitted to participate in an EIFD, the primary participants in EIFDs will be cities, counties and special districts. As a result, EIFDs are expected to generate much smaller amounts of tax increment than redevelopment did. Nonetheless, the EIFD legislation is seen as an improvement on the state’s existing Infrastructure Financing District law, which has been authorized since 1990 but rarely used because of its daunting two-thirds vote requirements for formation and bond issuance. Moreover, until the passage earlier this year of Assembly Bill 471 (Atkins), the formation of infrastructure financing districts was constrained by the former requirement that they could not be established in areas that were currently or formerly part of a redevelopment project area.
Unlike redevelopment projects, an EIFD can be established without finding that the area of the infrastructure district is blighted or urbanized. The board of the EIFD must include members of the legislative bodies of the public agencies that form the district, plus at least two public members. Under the new law, an infrastructure plan is adopted specifying what types of infrastructure projects will be financed, what public agencies will contribute tax increment to the EIFD, and what amounts will be contributed. This is a fundamentally different system than was used for the formation of redevelopment projects, where if a city or county established that an urbanized area of their jurisdiction was blighted, the redevelopment agency would be allocated all of the tax increment of each of the local government agencies with a share of property taxes from that area.
No voter approval is required to form an EIFD, but a 55% affirmative vote is required for the EIFD’s issuance of bonds. This is less stringent than the vote requirement under the existing Infrastructure Financing District law, with a two-thirds vote required for both formation and bond issuance. Opponents of the bill have questioned the constitutionality of the reduced threshold for voter approval. It remains to be seen whether the lessening of the public voting requirements will actually make it easier to create EIFDs than infrastructure financing districts.
The EIFD legislation allows EIFDs to overlap the boundaries of former redevelopment projects, but an EIFD cannot be formed until the state issues a finding of completion for the redevelopment project. No former redevelopment agency assets involved in litigation with the state may be used in the EIFD until the litigation is resolved – a condition that may further delay the formation of EIFDs in some jurisdictions that most heavily relied on redevelopment.
There are a number of types of development projects that might benefit from the use of EIFDs, such as:
- Infill development projects with public works requirements that benefit more than one public agency, such as a project which is required to build city roads, a county fire station or library, a water or sewer line for a water district, etc. More potential tax increment will be available for an EIFD financing when multiple taxing agencies want to participate in the EIFD.
- Master planned communities with less than 12 voters, where the developer owns at least half of the land in the development. Much like the vote requirement for a Mello-Roos district, the vote for such a district would take place among the landowners, with votes allocated on the basis of acreage.
- Large housing developments with inclusionary housing requirements, where governmental assistance is needed to make affordable housing projects feasible. Cities and/or counties may be willing to contribute their tax increment to the EIFD for a loan or grant to an affordable housing project, making it possible for the developer to obtain other financing necessary to construct the project.
- Transit oriented development projects which are provided for in a community’s sustainable communities plan, or meet the CEQA definition of a “transit priority project” (located within one-half mile of a transit station, with specified density and project amenities).
- Projects where the developer and/or its investors can provide upfront funds for required infrastructure improvements, subject to reimbursement over time after completion of the project and infrastructure.
- Projects where a Mello-Roos district or assessment district requires additional revenue to pay for a development project’s public works requirements. District bonds could be structured to be repaid through a combination of EIFD tax increment and special taxes or assessments levied on the land in the district.
- Brownfield projects where cleanup would be facilitated through public agency use of the state’s Polanco Act, which was formerly limited to use by redevelopment agencies.
A small amount (up to 10%) of tax increment generated in the first two years of the EIFD may be used for planning and public education activities. The local agency forming the EIFD may loan funds to the district and reimburse itself from future tax increment. It is possible that developers will also be obligated by the infrastructure financing plan to pay for planning and administrative costs of the EIFD.
Kronick Moskovitz Tiedemann & Girard is one of the only law firms in the state to successfully form an Infrastructure Financing District under the current law, for its long-term client the City of West Sacramento. Located within that City’s new Bridge District area, the Infrastructure Financing District was established to finance a variety of facilities of communitywide significance. Kronick will rely on that experience and its considerable expertise in public works and economic development law to assist municipalities and developers seeking to form EIFDs.
Questions
If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Jeffrey A. Mitchell, Jonathan P. Cristy or Constantine C. Baranoff | 916.321.4500