Building Wisconsin for the Future: Five Ways to Help Local Communities Fund Infrastructure for New Development

 Tom Larson  |    December 08, 2016

With state and local budgets experiencing significant constraints, many Wisconsin communities are finding it difficult to fund needed repairs to and expansions of infrastructure. The public support for increases in transportation funding through higher gas taxes and vehicle registration fees, tollways or other revenue sources is questionable, yet infrastructure costs continue to rise. The prioritization of more federal funding for transportation is possible, but this money will likely not address all the needs at the local level. 

In response, communities in the Badger State have been relying heavily on tax increment financing (TIF) to pay for expansion and upgrades to sewer and water, new roads and other infrastructure necessary to accommodate both redevelopment and new development opportunities.

However, TIF has its limitations and isn’t appropriate in all situations, even though it is currently one of the only economic development tools for local communities in this state. Moreover, TIF is often misunderstood by both the public and lawmakers, who mistakenly think, among other things, the new development within the TIF district is receiving a tax break or isn’t paying their fair share of taxes. As a result, political opposition is often present with the use of TIF.

While Wisconsin communities are not unique in their need for replacement, repair and expansion of infrastructure, other states allow for a broader range of financing tools at the local level. To remedy this problem, the WRA has made infrastructure financing one of its top legislative priorities for the upcoming 2017-18 legislative session and is working with the League of Wisconsin Municipalities and other stakeholders to provide Wisconsin communities with additional options to fund their infrastructure needs. The following are some of the options being considered:

Municipal lease financing: Allows municipalities to ‚Äúrent-to-own‚ÄĚ buildings and facilities ‚ÄĒ such as schools, courthouses, prisons and parking facilities ‚ÄĒ by paying renewable obligations on a given project until the debt is retired. When the debt is retired, the municipality owns the property. Municipal leases are structured as a series of one-year renewable obligations that are subject to the municipality‚Äôs ability to allocate the necessary funds to make the lease payments. The municipality can terminate the lease in any given year simply by not appropriating the necessary funding for the lease payments. In which case, the lessor or the designated trustee has the right to take possession of the leased asset. The interest portion of the lease payments is federally tax-exempt, and can be exempt from state taxes too if provided for under state law. Currently 33 states allow for this type of financing.¬†

Certificates of participation (COPs): COPs are funded by incoming municipal payments, which are subsequently sold as issues to raise revenue for financing infrastructure projects. Like other forms of lease financing, the lease payments are subject to annual appropriations and thus the municipality can cancel the lease on an annual basis. A COP is different than other forms of lease financing in that the lessor raises funds through the sale of COPs to investors, which provide the funding necessary to pay for the infrastructure project. Each investor receives a fractional interest in the lease agreement and the rental payments made by the municipality. COPs are currently allowed in more than 25 states, but they are not used by all municipalities in those states because they are generally more expensive to issue than bonds due to the higher rate of return required by investors to offset the higher risk.

Community development districts (CDDs): CDDs are quasi-governmental entities with distinct boundaries that provide financing for infrastructure projects by charging property owners within the district’s boundaries an annual tax surcharge. Property owners within the CDD are provided with new or upgraded infrastructure and, to pay for it, the developers are authorized to issue tax-exempt debt to fund the improvements. In essence, the developer-created CDD performs a quasi-governmental role in partnership with the local government within the district. While CDDs provide a way to provide infrastructure at a lower cost through a tax-exempt vehicle, they are often used in only larger developments because they are expensive to create. 

Grant Anticipation Revenue Vehicles (GARVEE bonds): GARVEE bonds provide a way for local communities to use federal highway aids as another potential revenue source. Under this system, communities issue long-term bonds and pay the debt service on the bonds with the future federal highway funding they are scheduled to receive. GARVEEs are attractive, particularly for large projects, where there is often a significant time delay to receive federal funding, and for projects that do not have access to a revenue stream, such as local taxes, tolls or state appropriations. The primary risk with such bonds is the uncertainty associated with the federal reauthorization of highway funding, which occurs typically every six years. Twenty-nine states currently authorize the use of GARVEEs by statute.

Sales tax TIF: TIF allows municipalities to utilize increased taxes, or the increment, attributable to the new development to pay off bonds issued to fund the new infrastructure. While Wisconsin law currently allows the municipality to use the increment only from increased property taxes, other states allow municipalities to capture increased sale tax revenue generated in the TIF district to help pay off the bonds. In some states, local communities are able to retain a portion of the revenue from the state sales tax plus, upon vote approval, revenue from an optional local sales tax. In Iowa, for example, local communities may impose up to 1 percent of additional local sales tax on retail sales within the TIF district. TIF is often viewed as an attractive financing tool because the costs and benefits of all the improvements are paid for by the property owners within the designated district. However, revenues are dependent upon the success of the TIF district and can decline when the economy slows. 

While lawmakers have not yet agreed upon a long-term solution to fund our transportation system at the state level, these new tools for local governments to fund necessary infrastructure will hopefully find broad bipartisan support in the state legislature next session.

Tom Larson is Senior Vice President of Legal and Public Affairs for the WRA.

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