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Jay Hedges
Locally Sponsored Economic Development
"Tools" For Your Community

By JAY HEDGES, Director
Illinois Department of Commerce and Community Affairs

With the decline in federal funding for community development activities, Illinois communities increasingly recognize that they will be the ones responsible for creating new development, jobs, and tax revenues. To do this, they are relying more on financing tools and techniques made possible by state enabling legislation rather than upon federal or state discretionary programs.

Some of the key local financing tools which can be used by local governments in Illinois include tax increment financing, special service area financing, industrial revenue bonds, and property tax abatement. This article will briefly describe these financing techniques.

Tax Increment Financing
Tax increment financing is a technique that communities may use to stimulate the renovation and redevelopment of declining or blighted areas. The legislation allows a community to capture the increase in local property taxes resulting from private development in these designated blighted areas to pay for the public costs involved. Those tax increment financing districts formed before 1987 can also capture the increase in state and local sales taxes; districts formed before 1988 may capture the increase in utility taxes.

Often, general obligation bonds are issued by the municipality to pay for such costs as property acquisition, clearance or rehabilitation of buildings, street and utility improvements, development of parking facilities, and streetscaping.

Some communities have also used tax increment proceeds to pay for direct incentives to developers. Such incentives are usually made following an agreement with a private developer who undertakes a project that will help revitalize the TIF district and provide increased property taxes. Some cities have established rehabilitation loan funds that can be used to help finance the renovation of buildings in the TIF project area. Other cities use TIF proceeds to subsidize up to 30 percent of the construction period loan interest incurred by a developer.

Special Service Area Financing
The 1970 Illinois Constitution grants authority to counties and municipalities to provide "special services" to targeted geographic areas within their jurisdictions that are less than the entire corporate area. Special service area financing can be used to provide special or additional improvements or services needed in a certain area without burdening the entire community with a debt or operating tax.

Under special service area financing, the governmental unit extends an additional property tax on the benefiting property owners, or may impose other types of taxes such as a sales tax or an employee head tax. Special service area projects can also be paid, in part, through revenues generated by the special service. For example, the revenues from new parking meters or parking permits might be used to pay a portion of project costs.

Currently, Illinois communities have established over 180 special service areas for a variety of purposes: free parking, parking garages or lots, sidewalk snow removal, ambulance services, extra security, streets and sidewalks, commercial attraction programs, water and sewer facilities, streetscaping, and development of plazas and pedestrian malls.

Industrial Revenue Bond Financing
Tax exempt industrial revenue bonds (IRB's) have

January 1988 / Illinois Municipal Review / Page 11

been an integral part of economic development in Illinois for over 15 years. This technique has been used by more communities than the other development tools previously outlined. IRB's are tax exempt bonds issued by communities on behalf of private businesses for development purposes. Since a company's credit, and usually a mortgage on a property, secure the bonds, they are not a governmental liability. Because the interest on such bonds is tax exempt, a company can obtain interest rates that are lower than those on conventional business loans. The community benefits from the increased employment and tax base resulting from the private development project.

Small issue tax exempt IRB's can be used as a source of financing by industrial firms to construct, expand, or equip buildings, or by agricultural concerns to buy real estate and depreciable property. Manufacturing firms and first-time farmers are the only business concerns that are currently eligible to use tax exempt bonds.

The 1986 Federal Tax Reform Act classifies small issue IRB's within a larger group of tax exempt "private activity" bonds that can be issued by governmental units. Within the federal guidelines, government-issued "private activity" tax exempt bonds can be used for other community economic development projects including: airports, multi-family rental projects, certain parking facilities, sewage and solid waste disposal facilities, and water supply systems. Qualified redevelopment bonds can be used in tax increment financing districts for acquisition and clearance of properties, rehabilitation of property acquired or owned by a local government, and relocation activities.

Property Tax Abatement
A final tool that is important to communities is property tax abatement. This program allows any taxing district in Illinois to grant a property tax abatement to an industrial or commercial firm if:

it has located within the taxing district during the preceding calendar year from another state,
it has been newly created in Illinois during the past year and proposes to or has located an industrial or commercial operation in the area, or
it is expanding a previously existing facility in the area.

All or part of the property taxes owed by a firm may be abated for up to ten years with a maximum of $1 million per project. The business benefits from the reduction in taxes which frees money for other business uses; the community benefits from increased payrolls, increased tax revenue, etc.

The Department of Commerce and Community Affairs' Office of Urban Assistance has prepared publications that provide more information on these financing techniques. They are available tree of charge from the Office at 620 East Adams, Springfield, Illinois 62701 or call 217-785-6193.

Page 12 / Illinois Municipal Review / January 1988

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