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TIF Pooling

What is TIF "pooling"?

The term "pooling" refers to the use of tax increments for activities located outside of the boundaries of the district from which they were collected. Unlike most states' TIF laws, Minnesota law permits increments to be "pooled" or spent outside of the district on other activities. The amount that may be pooled is, however, subject to percentage limits.

What are the relevant geographic areas in which tax increments may be spent?

Minnesota TIF law divides the area in which increments may be spent into two separate areas:

  1. District. The "district" is the area whose tax value the county authority certified and from which increment is collected. In all cases, increment may be spent on qualifying activities within the district. For housing districts, the larger project area is treated the same as the district. Similarly, for a district located in a biotechnology and health science industry zone, the zone is treated the same as the district. Thus, these two types of districts have unlimited pooling within these areas.
  2. Project area. The "project area" is a separate area in which increments from the district may be spent. The project area includes the district. It can be the same as the district or it may be larger. If the project area is larger and increments are spent on improvements or other activities outside of the district, these increments are "pooled."

What are the permitted pooling percentages?

The percent of increments permitted to be pooled varies by type of district. For redevelopment districts, 25 percent of increments may be spent on activities outside of district. Minn. Stat. § 469.1763, subd. 2. All other districts are limited to 20 percent. (The 25 percent limit also applies to nonredevelopment districts, if the request for certification was made before July 1, 1995.)

Can these pooling percentages be increased?

The statute permits the authority to increase the pooling percentages by up to 10 percentage points. This additional increment must be used for qualifying housing purposes–generally, to assist rental housing that would qualify for the federal low-income housing tax credit. Minn. Stat. § 469.1763, subd. 2(d). The increments may be used to acquire the site, construct the housing, or make public improvements directly related to the housing. In addition, increments may be spent for purposes that otherwise would not be a permitted use of the district's increments (e.g., increments from a soils condition district may not be used for housing, but could be under this provision).

How are administrative expenses treated under the pooling rules?

Administrative expenses (which have no clear physical location generally) are treated as being made outside of the district. Minn. Stat. § 469.1763, subd. 2(c). This, in effect, reduces the amount of the increment available for financing "hard costs" outside of the district under the pooling rules. For example, if the authority's administrative expenses are 5 percent in a redevelopment district, the "real" pooling limit would be 20 percent (25 percent pooling limit, less the 5 percent administrative expense). In other words, the authority could use up to 20 percent of the district's increments for property acquisition or improvements outside of the district but in the project area. Administrative expenses are, however, treated as in-district expenses, if the only pooling use is for qualifying housing purposes as described under the previous question. This allows, in effect, up to 10 percent more increments to be pooled for these housing purposes.

Are any districts exempt from the percentage pooling limits?

Housing districts are, in effect, exempt from the percentage limits on pooling. The law provides for housing districts that amounts spent on a housing "project" are treated as being spent within the TIF district. Minn. Stat. § 469.1763, subd. 3(b). To qualify the spending must be for defined low and moderate housing under a federal, state, or municipal law.

Do other special pooling rules apply?

Yes, the 2001 Legislature authorized TIF authorities to pool increments beyond the percentage limits to eliminate shortfalls in increments caused by the 1997-2001 property tax changes, if those shortfalls resulted in the authority's inability to pay "pre-existing obligations." This special authority is only applicable to districts if the request for certification was made before August 1, 2001. Pre-existing obligations are defined as bonds or binding contracts that were entered before August 1, 2001, or bonds that were issued to refund them.

Do all TIF districts have pooling authority?

No, the authority to pool increments varies, depending upon when the TIF district was created and the type of TIF district. It is useful to distinguish pooling authority based are four separate "eras" when different TIF pooling laws were in effect:

  1. Pre-1979 districts: pooling authority unclear. Before enactment of the 1979 TIF act, Minnesota had several separate laws authorizing TIF. None of these laws explicitly allowed "pooling." The statutory terminology generally treated the areas in which the increment was to be collected and spent interchangeably. However, some cities and their advisors concluded (especially in light of later explicit allowance by Minnesota law of TIF pooling) that pooling was permitted and acted accordingly. Pre-1979 districts have now (as of 2011) all been decertified.
  2. 1979-1982 districts: no pooling. The 1979 act's language did not allow pooling. The TIF plan was required to provide for improvement of the "district" (i.e., the area certified by the county auditor for the collection of increment). Increments were required to be spent in accordance with the TIF plan. A few lawyers disputed this view and advised cities that they could pool increments. As a result, a few cities pooled increments from districts created during this period. 1999 legislation ratified these decisions, but prohibited future pooling or financing of new activities in these districts. Minn. Stat. § 469.1764. These rules are discussed below.
  3. 1982-1990 districts: unlimited pooling. The 1982 Legislature explicitly authorized TIF pooling. This legislation established the distinction between the TIF "district" and the "project area." 1982 Minn. Laws 888-91, ch. 523, art. 38 §§ 3, 6. The law imposed no limit on the amount or percentage of increments that could be pooled.
  4. Post-1990: limited pooling. The 1990 Legislature imposed percentage limits on the amount of increment that may be pooled.

What are the special rules that apply to 1979-82 districts that engaged in pooling?

The 1979 TIF act did not grant pooling authority to these districts. However, a few development authorities, nevertheless, pooled increments from these districts. The State Auditor began uncovering these violations in the middle and late 1990s. The legislature responded by ratifying the spending made through December 31, 1999, and permitted outstanding obligations (including those for activities outside of the district) to be paid off. However, these authorities were not allowed to undertake new activities for the districts and were required to decertify the district as soon as all of the outstanding obligations were paid. In essence, these authorities were "penalized" for the violations with a prohibition on new spending on in-district activities.

October 2012