A common concern regarding the Rutland City TIF District is: what happens if the development doesn’t generate enough tax revenue to pay back the bond? This week’s article seeks to answer that question, as well as explain some of the safety nets that are in place to make sure the City remains financially secure.
By law, the municipality pledges its “full faith and credit” to back a TIF bond. That means the City’s general fund would step in to cover any shortfall if the TIF revenue isn’t enough. However, there are several important safeguards in place to protect taxpayers.
Development agreements help share the risk
With the Master TIF District in place, Rutland City can now begin with the next step: phase filing. This is the step in the process where the City will finalize plans for Phase One (the downtown hotel). A major piece in that planning process is for the City and the hotel developers to finalize the terms of a development agreement. This is the first safety net.
Frequently, a municipality enters into one or more contractual agreements with developer(s), known as a development agreement, which lays out two critical and mutual commitments: how the developer commits moving forward on the project, and how the City will finalize the construction of the needed public infrastructure investments to support it.
Development agreements also often include protections for the City, such as a minimum agreed assessed value for the project that ensures enough incremental tax revenue will cover the bond payments. A development agreement might also provide that the municipality will not commence its infrastructure improvements until the developer has closed on financing and entered into a binding construction contract for the project.
Planning is key
It’s normal for TIF districts—including those that are projected to be net positive—to face a revenue gap when increment is insufficient to pay debt service in any given year. This is what municipalities do. They manage cash flow with a variety of tools and options.
In Rutland, the possibility of a cash flow deficit won’t occur for several years. At that time, the City could make the choice to pay debt service with pooled cash that gets repaid with increment the following year, or it can use short-term financing and pay the interest from the General Fund. Both strategies are compliant and offer different advantages.
While the City may need to make those decisions at a later date, this highlights the importance of why good planning is key: give future administrations and administrators the flexibility and range of tools to respond to the evolving circumstances.
The Vermont TIF record
While there are no guarantees, Vermont’s experience has been overwhelmingly positive.
As of today, all eight active TIF districts are fully paying their costs, including debt service. In order to make sure that Rutland is among these success stories, the City has pledged to put the appropriate personnel with the right expertise in place to manage the TIF District and future projects.
For more information, visit the Rutland 360 website: rutlandvtbusiness.com/tax-increment-financing.
