WORKSHOP ITEM - Joe Huss, Finance Director
Title
DRAFT DISCUSSION - DEBT MANAGEMENT, TIF/ABATEMENT POLICIES
Background
In the latter part of 2017, staff identified initiatives that would not only solidify the City’s current AA+ credit rating (Standard & Poor’s), but also potentially lead to an enhanced AAA rating. Included in the initiatives was the updating and formal adoption of a debt management policy. To be effective, a policy should allow flexibility to achieve its intended purpose under most conditions or circumstances. At the same time, the policy should be written such that it provides clear direction and removes ambiguity in its intentions. With these in mind, staff has prepared a draft Debt Management Policy as well as a draft Tax Increment Financing (TIF) and Tax Abatement policy for Council’s review and discussion.
Debt Management Policy
Purpose & Objectives - The purpose of the debt policy is to establish guidelines and parameters regarding the administration of debt and other financing obligations issued by the City of Blaine and the Blaine EDA. The policy is intended to improve and direct decision-making, assist with the structure of debt issuance, identify policy goals, and demonstrate a commitment to long-term planning, including the City's Five-Year Financial Plan and its Capital Improvement Program. It is intended to ensure the City's debt is issued and managed prudently.
While flexibility is an important element in a well-structured policy, the policy must comply with all relevant State and Federal securities laws and regulations. Additionally, it is intended that the policy protects the City in its funding decisions and ensures that such decisions are not controlled by problems or emergencies. Other objectives include:
• To provide long-term cost effective funding mechanisms of essential public facilities and infrastructure.
• To maintain the City's sound financial position, protect the City’s credit-worthiness, enhance the City's credit rating and prevent default on any municipal debt obligations.
• To ensure the City has the flexibility to respond to possible changes in future service obligations, revenues, and operating expenses;
• To protect both current and future taxpayers, ratepayers and constituents of the City;
• To minimize debt service commitments through efficient planning and cash management.
Policy Elements - Key elements of the policy include:
• Except in instances where long-term financing would prove beneficial to the City, Blaine will strive to confine long-term borrowing to capital improvements, equipment, or projects that have a useful life of at least three years.
• The City will strive to keep maturity length of bonds below 20 years and to retire 65% of outstanding principal within 10 years.
• Every effort will be made to structure its debt repayments to match pledged revenue streams and tax levies.
• Total net general obligation debt (net of any utilities supported portion, any portion supported by other entities, and after deducting sinking funds and reserves) will not exceed the statutory limit of 3% of the estimated market value of taxable property in the City as required by Minnesota Statute, Section 475.53.
• Where possible, the City will use revenue (including G.O. backed revenue) or other self-supporting type bonds instead of general obligation bonds.
• The City will not use long-term debt for current operations (including repairs).
• The City will maintain frequent and regular communications with bond rating agencies and comply with Securities Exchange Commission (SEC) reporting requirements.
• Inter-fund borrowing is allowed in certain instances.
Standards - Recognizing that there are costs associated with debt issuance that are beyond the cost to obtain or construct capital assets, the City will consider debt issuance only in those cases where public policy, equity and economic efficiency favor debt financing over cash funding. Additionally, prior to the issuance of debt or other financing obligations, the City will carefully consider the overall long-term affordability of the proposed debt issuance by conducting an objective analysis of the City's ability to support additional debt service payments. The City will consider its long-term revenue and expenditure trends, the impact on operational flexibility and the overall debt burden on the taxpayers/ratepayers.
Finally, the City may issue debt to refund or refinance existing debt, but only in instances when the reissuance or refunding provides significant cost savings in terms of net present value of the reduced costs.
TIF & Abatement Policy
Differences - For Tax Increment Financing, other political subdivisions (the school district and the county) are required to contribute their portion of the increased taxes to the project. Conversely, for Tax Abatement, each political subdivision has the option of granting its portion of the increased taxes to the project. Subsequently, the dollars generated for the project with Tax Abatement are generally less than the dollars generated with TIF.
Purpose & Objectives - This policy is to establish the City's position regarding the use of Tax Increment Financing (TIF) or Tax Abatement (Abatement) for private development. The policy includes both the City of Blaine and the Blaine Economic Development Authority (EDA). This policy is also to be used as a guide in the processing and review of applications requesting TIF or Abatement assistance. Additional objectives include:
• To define the city's goals and objectives for the use of TIF and abatement financing including requirements, review criteria, eligible activities and funding approach;
• To guide staff in forming recommendations on the use of TIF and abatement financing and negotiating contract terms with developers;
• To provide a framework within which the City Council and EDA can evaluate and compare proposed uses of TIF and abatement financing;
• To inform the public of the City's position on the use of TIF and abatement financing and the process through which decisions regarding the use of the tools are made.
• To strengthen the city's property tax base and maintain a stable mix of residential, commercial, and industrial uses.
• To support the local economy to create opportunities for living-wage jobs, especially job opportunities for the unemployed and underemployed.
• To eliminate blight and substandard conditions that impede the development potential and economic health of the City.
• To clean contaminated land to provide sites for uses that achieve City redevelopment objectives.
• To provide an array of housing choices that meet the needs of current residents and attract new residents to the city, with an emphasis on providing affordable housing.
• To support neighborhood retail services, commercial corridors and employment hubs.
• To support redevelopment efforts that enhance and preserve unique urban features and amenities.
• To create a desirable and unique character through compatible land use and quality design in new and redeveloped buildings.
• To preserve historically significant structures to reuse in viable commercial, industrial or residential activities.
• To promote the development of certain areas and properties consistent with the City’s comprehensive plan.
• To retain and attract stable industries that provide significant employment and tax base.
Policy Elements - Key elements of the policy include:
• TIF or abatement will be used only when a clearly identified city development objective is served and only to the degree necessary to accomplish that development objective.
• TIF or abatement will only be used in cases where the City has the financial capacity to provide the needed public assistance, the Council deems it fiscally prudent to provide such assistance, and the developer can clearly demonstrate that the development will be able to meet its financial and public purpose commitments.
• The City will recapture the public subsidy to the maximum extent feasible after allowing the developer a reasonable return.
• TIF is to be paid solely from related tax increment revenue. Projects that employ "pay as you go" (PAYGO) financing and reimbursement of front-end public redevelopment costs with tax increment revenues, are preferable to bond financing and are to be considered and used when appropriate.
• If a TIF project is to be bond-financed, it is the City’s preference to structure the bond issue as a TIF Revenue Bond, with repayment of the debt solely from the increment generated from the project.
• Except in the case of financing necessary public infrastructure, use of General Obligation (G.O.) Tax Increment Bonds (those bonds guaranteed or backed by the full faith, credit, and taxing power of the City) are allowed under this policy only with an affirmative vote of at least five (5) Councilmembers. In addition, the following conditions must be met:
• Such G.O. backed financing will not, in the opinion of the Council, place an undue burden on tax rates and relative debt load (in terms of per capita debt, or percentage of debt to Assessor's Market Value);
• No other, better, financing alternative exists;
• There is a significant rate of return relative to the risk taken or it is found that there are overriding socioeconomic considerations which are significant to the City overall, as determined by the City Council.
• G.O. Tax Increment Bonds may also be used in instances where all net bond proceeds are used to directly pay public costs or refinance debt that was previously issued to pay for such costs.
• The City will analyze each potential new TIF district and recommend whether it should be included or excluded from the fiscal disparities contribution. The impact of the fiscal disparities election on the City's general tax base will be analyzed using the methodology prescribed by the Minnesota Department of Revenue and will be reported to the City Council in a manner understandable to the general public prior to approval of the proposed use of tax increment financing.
Economic Analysis and Risk Assessment Process
Proposed uses of TIF and will be subject to rigorous economic analysis and risk assessment. City Finance Department staff will be responsible for overseeing the analysis and assessment process. Consultants will be used to complete needed analysis and assessment as appropriate.
The analysis and assessment of all proposed uses of TIF will address the following questions as part of the standard format for reports to the City Council:
• What is the public purpose of the financial assistance to the project?
• Why is there a financial need for public investment and/or subsidy?
• What is the total cost of the project?
• What is the appropriate level of public participation?
• What are the risks associated with the project?
• What are the alternative plans for managing the risk?
• How does the proposed project finance plan compare with previously approved comparable projects?
• What is the project’s impact on other publicly financed projects?
The results of the economic analysis and risk assessment will be presented to the City Council at the time of the request for approval of the proposed use of TIF. The report will identify any elements of the proposed project that are not in conformance with this Tax Increment Policy.
Projects with an anticipated term of increment collection greater than 15 years or projects with tax increment principal in excess of $10 million will be subject to a more extensive analysis, including appropriate market analysis and review by City Finance Department staff.
The City will not approve any new tax increment district or abatement district if the resulting total projected tax capacity (net of estimated Fiscal Disparities Contribution) of all tax increment districts in the City (including the proposed district) exceeds 15 % of the total projected tax capacity of all taxable property (including the proposed district) in the City.
Evaluation Criteria
The following items will be taken into consideration in the evaluation of any development proposal requesting tax increment assistance.
• Need For Public Assistance. In all cases, it is required that the need for public assistance be demonstrated and documented by the developer to the satisfaction of the City Council. All such documentation, including development budgets, cash flow projections, market studies and other financial and market information, must be submitted by the developer along with an application for public financial assistance. If the request is based on financial gap considerations, the developer will demonstrate the profitability and feasibility of the project (i.e. gross profit, cash flow before taxes, cash-on-cash return, IRR, etc.), both with 
and without public assistance.
• Amount of Public Assistance versus Private Investment. All development proposals should seek to maximize the amount of private investment per dollar of public assistance. Public assistance as a percentage of total development costs will be determined for each project (or discrete portion of a project receiving a subsidy) and compared to other development projects or subprojects of similar scope and magnitude whenever possible.
• Term of Public Assistance. The term of the public assistance shall be kept to a minimum. The proposed term of any public assistance shall be fully documented and explained to the City Council.
• Development: Benefits and Costs. The direct and indirect benefits of the development proposal shall be determined and quantified to the degree possible. Benefits shall include, but are not limited to:
o Employment benefits (number of jobs retained or created; percentage of jobs held by City residents; wage and salary information, etc.);
o Tax base benefits (estimated market value of new development, new property taxes generated, etc.);
o Housing benefits (number of new rental or ownership units, number of affordable units, etc.); and
o Other benefits relating to transportation, parking, blight remediation, environmental cleanup and 
historic preservation.
Costs of the development proposal to the City shall also be identified to the degree possible. Such costs shall include, but are not limited to, additional required infrastructure, required local contributions by the City and the impact on the City's General Fund of the fiscal disparity contribution election if tax increment financing is used. The timeframe used for these cost estimates should equal the timeframe of the project finance plan and should separately identify any projected recapture of public subsidy.
Recapture of Public Subsidy. It is the City's goal to recapture all, or a portion, of the public subsidy provided to the extent practical. Methods of recapture shall include, but are not limited to, long-term ground leases, subordinated loans, sale and/or refinancing provisions, and equity participation.
Tax Abatement Financing
The City of Blaine may grant an abatement of taxes imposed by the City of Blaine on a parcel of property, or defer the payment of the taxes and abate the interest and penalty that would otherwise apply if:
• It expects the benefits to the City of Blaine of the proposed abatement agreement to at least equal the costs to the City of Blaine of the proposed agreement or intend the abatement to phase in a property tax increase; and
• It finds that doing so is in the public interest because it will:
o Increase or preserve tax base.
o Provide employment opportunities in the City of Blaine.
o Provide or help acquire or construct public facilities.
o Help develop or renew blighted areas; or
o Help provide access to services for residents of the City of Blaine; or
o Finance or improve public infrastructure; or
o Phase in a property tax increase on the parcel resulting from the increase of 50 percent or more in one year on the estimated market value of the parcel other than increase attributable to improvement of the parcel.
The total amount of property taxes abated by the City of Blaine may not exceed five percent (5%) of the current general levy.
The City of Blaine will consider all proposals eligible for abatement districts before adopting an abatement district for any project. The duration limit for an abatement district shall not exceed 20 years.
Recommendation
Staff is seeking Council’s review and comments on this first draft of the policies. Following this, staff will make necessary edits and present to Council for approval at a subsequent Council meeting.