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July 16 2018

Changes Ahead for Tax Increment Entities Under New State Law

By: Mark E. Nettleton

While financing public infrastructure improvements through the use tax increment financing by downtown development authorities, local development finance authorities, and corridor improvement authorities is not new in Michigan, those entities will be established and will operate under a new statute as a result of legislation approved by the state legislature and signed by the Governor earlier this year.

In March, the Governor signed PA 57 of 2018 known as the “Recodified Tax Increment Finance Act.” Act 57 repeals nine existing statutes that authorized municipalities to establish tax increment entities, such as downtown development authorities, local development finance authorities, corridor improvement authorities, water resource improvement authorities, tax increment finance authorities, as well as four lesser known and utilized types of authorities, and places all of those authorities under Act 57. Act 57 does not repeal or make changes to the State’s Brownfield Redevelopment Financing Act.

Act 57 does not make substantive changes to the process by which a tax increment entity, such as a downtown development authority, is established or adopts its development plan and tax increment financing plan. There is no change in the ability of affected taxing jurisdictions to opt out of existing or newly established tax increment entities or tax increment financing plans, or require authorities and their plans to “sunset” after a certain period of time, which were features of previously introduced bills over the past several years. However, Act 57 does make substantive changes in the way a tax increment entity operates, most notably with respect to annual reporting, publication of certain required information, and failure to comply with the statute’s reporting requirement.

In order to provide “transparency” as to a tax increment entity’s operations, under the Recodified Tax Increment Finance Authority Act an authority is required to create a website or utilize a municipality’s existing website to regularly maintain all authority records and documents. The authority’s webpage must also include: authority board meeting minutes; annual budgets, including encumbered and unencumbered fund balances; annual audits; currently adopted development and tax increment financing plans; a current listing of authority staff with contact information; a current listing of contracts and other documents related to management of the authority with a description of the contracts and services provided to the authority; and an “updated synopsis” of activities of the authority.

The updated synopsis of the activities of the authority must include information regarding the authority’s accomplishments, including progress made on development plan and tax increment finance plan goals and objectives for the immediately preceding fiscal year; a list of authority projects and investments, including active and completed projects for the immediately preceding fiscal year; and a list of authority events and promotional campaigns for the immediately preceding fiscal year. Most importantly, the synopsis must disclose and provide information on the accumulation of tax increment revenues that are not expended within five years of receipt. Under the statute, an authority is required to detail the reasons for accumulating the funds, the proposed uses for the accumulated funds, and the time frame for the use of those funds. If any tax increment revenues have not been expended within 10 years of receipt, an authority must disclose the total amount of those funds and provide a written explanation of why those funds have not been expended.

The information, including the synopsis, must be provided within 180 days following the close of the authority’s fiscal year after January 1, 2019. So, for example, if an authority’s fiscal year ends June 30, the authority must comply with the reporting requirements by December 30, 2019.

The statute requires an authority to hold not less than two informational meetings each year on the authority’s activities (and provide notice of the meetings on the website and to affected taxing jurisdictions whose millage is subject to capture by the authority not less than 14 days prior to the informational meeting).

Further, an authority will be required to file certain information with the Michigan Department of Treasury on an annual basis, if the authority is capturing tax increment revenues. Information that must be filed with the Department of Treasury includes: amendments to existing development plans and tax increment financing plans; authority fund balances for encumbered and unencumbered accounts; tax increment revenues generated and affected taxing jurisdictions from which the revenues were generated; and the initial and current assessed values of the authority’s district by property tax classification and amounts on hand in authority accounts, the source of the revenues on hand, and any expenditures from authority funds. The report must be filed with the Michigan Department of Treasury at the same time the authority’s audit is done.

The statute establishes actual enforcement mechanisms for failure to comply with Act 57’s reporting requirements. For example, an authority that fails to report as required will be precluded from capturing any tax increment revenues that are in excess of amounts necessary to pay bonded indebtedness or “other obligations” for a period in which an authority is determined to be in noncompliance. Further, an authority could not amend or approve a tax increment financing plan during such period of noncompliance. If an authority is determined to be in noncompliance for a period of two consecutive years, the authority is prohibited from capturing tax increment revenues in excess of the amounts necessary to pay bonded indebtedness or other obligations without approval, in the form of a resolution, adopted by the governing body of the municipality establishing the authority and the governing bodies of all of the affected taxing jurisdictions. All other tax increment revenues not necessary for paying debt service or other obligations would need to be returned to the affected taxing jurisdictions as “surplus revenues” under the applicable part of the statute for that type of tax increment entity, unless the authority is expressly permitted to retain those revenues by affected taxing jurisdictions. The Michigan Department of Treasury is authorized to monitor and enforce the reporting requirements under the statute, as well as promulgate rules and regulations under the statute.

The provisions of Act 57 become effective January 1, 2019. Authorities are advised to begin gathering the necessary information and preparing a webpage to comply with the requirements of the statute. Moreover, authorities will need to schedule, as part of the annual meeting schedule, and plan for the required semi-annual public informational meetings.