HB 521-MUNICIPAL IMPROVEMENT AREAS CO-CHAIR MEYER announced that the next order of business would be HOUSE BILL NO. 521, "An Act relating to municipal improvement areas." Number 2592 REPRESENTATIVE MURKOWSKI, Alaska State Legislature, testified as chair of the House Labor and Commerce Standing Committee, the sponsor of HB 521. She stated that HB 521 is essentially a follow up of legislation from last year dealing with the use of tax increment financing. Essentially, HB 521 clarifies that tax increment financing (TIF) can be used with either general obligation (GO) bonds or revenue bonds, or a combination of both. Currently, the statute is silent in regard to what can be used for TIF. This legislation also allows TIF to be used for private and public projects in order to provide greater flexibility to the municipalities that want to utilize these improvement areas. Furthermore, the definition of improvement area has been broadened to go just beyond the definition of blighted area. For example, Anchorage is discussing the development of town centers throughout the community. The current definition of improvement area would pose some restrictions. Representative Murkowski concluded by saying that HB 521 uses TIF in order to enhance urban renewal and encourage property improvement. REPRESENTATIVE SCALZI inquired as to the difference between this and the current structure for local improvement districts (LID). Number 2792 STEVE VAN SANT, State Assessor, Division of Community and Business Development, Department of Community & Economic Development, explained that LIDs are under special assessments in the statutes. That is, LIDs are improvements to private property that is paid for by the local municipality and subsequently rolled into the tax bill of each individual, and therefore those are paid back. However, the TIF is entirely different in that it's of a public nature. He informed the committee that Anchorage has had a TIF, the Fifth Avenue parking garage. REPRESENTATIVE SCALZI related his understanding that LIDs are capable of enhancing roads and public rights-of-way. He remarked that [the TIF] seems to meet the same criteria. MR. VAN SANT agreed with Representative Scalzi in that these are improvements that are made in the municipality. The statutes recognize special assessments, which are improvements made to private property and paid for with private funds. However, [the TIF] refers to the difference between the old tax base and the new tax base after the project begins. That difference is pledged to pay for improvements that benefit the public at large. REPRESENTATIVE SCALZI asked if a city-owned road and right-of- way would be a public utility. Thus if an LID fit the criteria, would the revenue from the property owners adjacent to that road be incorporated, he asked. Still, the road is a city road that everyone uses. MR. VAN SANT explained that currently LIDs are typically liens against certain properties, while [TIF] projects would pledge the entire faith and credit of the municipality for a project rather than a specific area. Number 2957 REPRESENTATIVE HALCRO surmised then that the revenue stream to pay for the bonds comes from the increase in the property tax assessment that's accomplished by the improvements. MR. VAN SANT pointed out that there are two different methodologies with HB 521. One methodology is a GO bond that pledges the faith and credit of all the property in the jurisdiction. However, the TIF takes the difference in the tax that ... TAPE 02-24, SIDE B MR. VAN SANT turned to the construction of the Fifth Avenue parking garage in Anchorage. He estimated that the property value in the area was worth $5 million before the construction of the parking garage. After the garage's construction, the value of the [property] increased to say $7 million. The taxes on the difference in value, $2 million, was pledged to pay for the financing on the garage. Number 2948 REPRESENTATIVE HALCRO remarked that it seems fairly speculative. He questioned what would happen if property values decrease and the revenue stream to pay off the indebtedness doesn't come to fruition. MR. VAN SANT pointed out that such was the case in Anchorage during the recession in the late 1980s when [property] values dropped approximately 50 percent. During such a time, the minimum [payment] has to be made. Again, the full faith and credit of the municipality has been pledged and thus the municipality has to make the payment. The difference is that the [payment] would come out of the general fund rather than the TIF. REPRESENTATIVE HALCRO surmised then that the community could be put at a substantial risk, depending upon the size of the project. MR. VAN SANT highlighted that HB 521 includes the following two different methodologies: revenue bonds and GO bonds. The choice is up to the municipality. Revenue bonds refer to the revenue generated by the project, which is pledged. The GO bonds actually pledge the full faith and credit of the municipality. He explained that the TIF specifies that those taxes above and beyond what was there prior to development will be pledged to pay [for the bond]. In the case of decreasing values, the municipality would be left to take it out of the GF. REPRESENTATIVE HALCRO reiterated that such could expose a community to a tax risk. CO-CHAIR MEYER pointed out that this is a local option and thus the mayor and the local assembly would have to approve such by ordinance. He recalled [Anchorage] taking a similar risk when it purchased a one-third share of the Beluga gas field, which was done through a revenue bond. Number 2832 GEORGE CANELAS, Director, Real Estate Services, Heritage Land Bank, Municipality of Anchorage, testified via teleconference. Mr. Canelas announced that [the municipality] is thinking of using the TIF process to promote economic development in selected areas of town. As mentioned earlier, it is a strategy in [the Municipality of Anchorage's] 2020 Comprehensive Plan. The first area of focus is the proposed Muldoon Town Center, which would seem to be an excellent test case because it has a private sector sponsor who has site control over most of the proposed area. [The municipality] is seeking the most appropriate methods for the municipality to respond to this private sector initiative. [The municipality] believes that overall HB 521 is an excellent step to provide the broad flexibility necessary to find the best model. MR. CANELAS informed the committee that the municipality doesn't anticipate needing TIF proceeds to finance or loan funds to private development of improvement districts as provided on page 1, line 6. Overall, the municipality doesn't believe that it's good public policy to use local property tax proceeds to pay for private development. Although some communities do this through enabling statutes, [the Municipality of Anchorage] intends to focus the TIF efforts on funding public sector improvements such as infrastructure, which would compliment private sector initiatives. Therefore, [the municipality] would prefer that the language "or private" on page 1, line 6, be deleted. Mr. Canelas informed the committee of the municipality's support of the expanded definition of improvement areas, which goes beyond the traditional notion of using TIFs for blighted areas. This expanded definition of improvement areas follows the pattern around the country. In conclusion, Mr. Canelas characterized HB 521 as good legislation. Number 2728 MARK PFEFFER, Koonce, Pfeffer, Bettis Architects; Venture Development Group, testified via teleconference. Mr. Pfeffer informed the committee that "we" are involved with redevelopment efforts for the Muldoon Town Center area. "We are in support of HB 521," he stated. He noted the belief that HB 521 would enhance the existing laws for redevelopment of blighted areas. From Mr. Pfeffer's personal and private sector experience, he said that redevelopment of blight[ed areas] is problematic in numerous ways in relation to planning, social, and financial issues. Anchorage has dealt with the planning issues through the adoption of the Anchorage 2020 plan. In the Muldoon area, Mr. Pfeffer pointed out that his firm has worked cooperatively with the municipality and social service providers in order to work through the social issues involved with redevelopment of the blighted areas. In regard to financial issues, substantial challenges remain. He related the belief that redevelopment in the [Muldoon] area will generally involve a balance between private and public investment. The existing TIF recognizes this; however, the current law contains ambiguities that would be clarified by the proposed new language of HB 521. As mentioned earlier, HB 521 clarifies that both GO and revenue bonds are appropriate bonding methods for the TIF. Furthermore, HB 521 redefines "blight." Mr. Pfeffer concluded by reiterating support for HB 521. REPRESENTATIVE MURKOWSKI recalled Mr. Canela's suggestion to delete the reference to private improvements because the municipality doesn't anticipate using any funds for private development. She requested that Mr. Pfeffer comment. MR. PFEFFER related the belief that there are instances where it would be appropriate for private development. However, he acknowledged that this would be treading on new ground. Therefore, until there is a specific use, Mr. Pfeffer said he would be amenable to the proposed deletion because most of the application will be for public infrastructure. If a situation arises in which it would be appropriate to use for [private development], it would be coordinated with local government and return to the legislature for clarification [in statute]. REPRESENTATIVE MURKOWSKI surmised then that Mr. Pfeffer would be able to move forward with the Muldoon Town Center without having a provision in HB 521 that would allow for the funds to go to the private development. MR. PFEFFER replied yes. Number 2498 REPRESENTATIVE SCALZI referred to page 2, lines 5-7, and related his understanding that there would be no level of support from the individuals in the area. The municipality will make the distinction and pledge these bonds on behalf of the residents, and the residents will pay through a property tax assessment. He asked if that was correct. MR. PFEFFER pointed out that Representative Scalzi's understanding assumes that there would be an assessment in the area for the improvements. However, the mill rate applied against the assessed value in the area stays the same in that area as throughout the rest of the municipality. The only thing generating the additional tax revenue is increased value because of private sector development. Mr. Pfeffer clarified that Representative Scalzi was correct in regard to the properties in the area paying for the improvement. However, those properties aren't assessed an additional tax. "It's the increase in value that occurs because of the new improvements added to the area, because public infrastructure has been added," he explained. Number 2381 REPRESENTATIVE HALCRO recalled testimony that one of the reasons the Muldoon project is such a good project is because much of the area is controlled by private hands. Representative Halcro asked if Mr. Pfeffer's suggestion is to leave in private because that seems appropriate if the Muldoon project is to move forward. Otherwise, Representative Halcro surmised that the money couldn't be spent on the property. MR. PFEFFER related his understanding that the city doesn't want to see the proceeds used to help pay for private commercial development. These proceeds could be used to pay for public improvements such as sewer, water, trails, or even to acquire property for public use. The private sector wants to see a commitment from the local government in order make public improvements in the area. Because [the private entity] knows those public improvements are going to occur, the [private entity] is willing to make private investments on private property. Mr. Pfeffer said that there may be some instances in which it would be appropriate for the TIF to be used for private improvements. However, those [instances] haven't been distinguished yet and thus we're willing to [go along] with the suggested deletion for now. Number 2226 REPRESENTATIVE SCALZI referred to page 2, lines 8-12, which he read to say that the municipality isn't obligated to make payments to those bonds issued for a special assessment, while there is no prohibition against the municipality collecting a different tax rate for that particular area. Therefore, he asked if, under current statute, [the private entity] has the ability to have differential tax mill rates within a jurisdiction. MR. VAN SANT replied yes. REPRESENTATIVE SCALZI inquired as to why that section is included. He reiterated his earlier question as to why this legislation is even necessary. MR. VAN SANT answered that he didn't know why [the section] was included. REPRESENTATIVE SCALZI related his impression that this ability is already available [under current statutes]. Number 2057 TIM ROGERS, Legislative Program Coordinator, Municipality of Anchorage, testified via teleconference. Mr. Rogers explained that under the TIF the mill rate isn't being increased but rather the proceeds of the increased assessed valuation is being pledged in order to pay for the improvements. Although this may be a fine differentiation, it is a significant one in regard to the purposes of redevelopment of blighted areas. REPRESENTATIVE MURKOWSKI, in regard to why HB 521 is necessary, explained that HB 521 was advanced in order to expand the definition of improvement area so that the undeveloped area around the blighted area could be incorporated in the definition. Furthermore, the legislation clarifies that there is an option to choose between revenue bonds, GO bonds, or a combination of the two. REPRESENTATIVE HALCRO related his belief that the difference [between current statute and HB 521] would be in the repayment mechanism. Currently, the system operates under the notion that the mill rate will stay the same. However, the development through the bond process will result in an increase in property tax values, which will be pledged to repay the debt service. On the other hand, with special improvement districts a tax credit is given for a couple of years and then it has to be repaid. Again, if the property values decrease, Representative Halcro questioned from where the revenue would come to pay the debt service. REPRESENTATIVE SCALZI asked if more money is being budgeted for Board of Equalization hearings. MR. ROGERS replied no. Mr. Rogers turned to revenue bonds and clarified that the bond holders, not the city, would be taking the risk in regard to whether the property values rise or fall. For example, in a situation in which the property values decreased and there were no incremental taxes to fund the debt repayment, the bond holders would face the risk. The taxpayers wouldn't be sought to [pay] the difference. Number 1751 DEVEN MITCHELL, Debt Manager, Treasury Division, Department of Revenue, provided the following clarifications. In regard to the ramifications for a community utilizing a GO bond, Mr. Mitchell pointed out that a community must vote to pass the GO bond. Therefore, the input in regard to the willingness to take the risk that the TIF would be insufficient would be done upfront. In regard to the comment that an investor would take all the risk when using a revenue bond, Mr. Mitchell disagreed. He pointed out that assemblies and city councils will have flexibility when structuring revenue bonds. In order to [obtain] investment grade revenue bonds, probably more than a tax increment as security to bond holders will be required because otherwise it would become speculative and require more paid in interest. Again, that would be a decision made at the local level. MR. MITCHELL turned to the difference between an LID and a TIF. He identified a potential difference with an LID as the increment on the taxes. Furthermore, the taxes increase because of the improvements. Therefore, one would be taxed at the increased rate on the increased value. However, with the [TIF] there is no increased rate but rather the difference in what would otherwise would be paid. MR. MITCHELL pointed out that the private improvements included in HB 521 allows the use of tax exempt financing within a municipality for essentially private projects. He characterized this as perhaps an unintended consequence. He explained that under the tax code revisions of 1986 each state is allowed a private activity cap allocation, which is currently $225 million for Alaska. This money is available for certain mortgage loan programs, student loan programs, redevelopment projects, and industrial development projects. With the current language [in HB 521] if a developer convinced a municipality to ask for a private activity cap, then part of the $225 million tax exempt financing would be used to fund the private project. CO-CHAIR MEYER inquired as to whether [the department] is supportive of the bill. MR. MITCHELL answered that [the department] is indifferent. He commented that HB 521 allows development in areas where it is probably needed. How [the legislature] wants to use the state's limited ability to finance things on a tax exempt basis is a state decision. REPRESENTATIVE KERTTULA related her understanding that the federal law allows the state the ability to grant up to $225 million. She surmised that there isn't a fund somewhere. MR. MITCHELL further explained that since the federal government took away the ability to finance things on a tax exempt basis, the federal government provided the aforementioned annual cap. Therefore, each state has to decide how to use this. Alaska primarily uses this cap for the Alaska Housing Finance Corporation's (AHFC) First-Time Homebuyer's program and the student loan program. He noted that it has been used for power projects that the Alaska Industrial Development and Export Authority (AIDEA) has developed. Alaska has the minimum cap and [has about the same number of requests as the cap can fill]. Number 1425 REPRESENTATIVE KERTTULA inquired as to how much of the cap is utilized for student loans and First-Time Homebuyer's program. She asked if the cap is currently being met. MR. MITCHELL replied yes, the cap is fully utilized. The cap was increased in 2001 and 2002 to its current $225 million. However, the First-Time Homebuyer's program has been very successful and takes whatever it can from the cap. REPRESENTATIVE KERTTULA surmised then that [passage of HB 521] would place more pressure on the private activity cap because more applicants will want to use that [financing]. MR. MITCHELL answered that such would be a potential if the private improvement [language is left in HB 521]. If the bill merely refers to public improvements, then the pressure wouldn't be there because it would be limited to what could otherwise be financed with tax exempt financing. CO-CHAIR MORGAN asked if any other organizations use this cap. MR. MITCHELL specified that AIDEA does utilize the cap. However, AIDEA is project driven and thus hasn't made a request for some time. He noted that last year, the North Slope Borough made a request for a clean water project at a BP facility. Over the last couple of years, the primary users of the cap have been AHFC and the student loan program. The student loan program uses about $30 million a year. Number 1288 REPRESENTATIVE MURKOWSKI moved that the committee adopt Amendment 1: Page 1, line 6, Delete "or private" There being no objection, Amendment 1 was adopted. Number 1195 REPRESENTATIVE HALCRO moved to report HB 521 as amended out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, CSHB 521(CRA) was reported from the House Community and Regional Affairs Standing Committee.