1. 1998 Bonds
.
CITY OF
CHANHASSEN
690 City Center Drive, PO Box ]47
Chanhassen, Minnesota 55317
Phone 612.937.]900
General Fax 612.937.5739
Engineering Fax 612.937.9152
Pnblie Safety Fax 612.934.2524
lXi>b www.cÎ.chanhassen.mn.us
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MEMORANDUM
TO: Mayor and City Council
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FROM:
Don Ashworth, City Manager
DATE:
June 10, 1998
SUBJ:
Tax Increment Funding/Refunding Bonds of 1998
[Note: This memorandum has been prepared in concert with all of our
professionals--Ron Batty, Kennedy & Graven (Tax IncrementfBonding
Attorney); Rob Tautges, Tautges Redpath & Company (Auditor); Dave
MacGillivrary, Springsted (Financial Advisor); and Pam and 1. They are all,
including myself, reluctantly supporting the recommendations being made at the
end of this report and believe that that recommendation is the best solution to a no
win situation, i.e. the state legislature created a $700,000 deficit in TlD No. I for
1997, Is Tautges happy with treating that "matter of factly" as a part of their 1997
audit comments to the city/state? Definitely not! Wil1 they underplay it if we
have adopted a plan to remove the deficit even though state law is clear that "no"
fund in a city shall be in a deficit position? Answer: Reluctantly yes, Is our bond
attorney happy with the final recommendation? Probably not. State law is clear
that no TlF dollars generated in one county can be spent in another county, For
Kennedy & Graven to provide an opinion that we can use the Hennepin County
TlF dollars to help solve the problems we are having in TIF District No. 1 was a
significant compromise, I will discuss my trepidations later in this
memorandum,]
The city council asked for pros and cons of the various solutions to the TlF
District No.1 problem. Alternatives included:
. Special Tax Against Parcels in TIF District No.1: The 1998 law, which
allows for a supplemental tax on parcels in a tax increment district which has
a deficit created by the state, is ambiguous at best (my interpretation). The
city must have an incentive agreement with a business in the district to
establish this additional tax. What does "incentive agreement" mean?
Rosemount entered into an agreement with the city in, let's say, 1985. The
land write-down was $J.7M and public improvements were $,6M. Their
estimated taxes were approximately $750,000 per year (our 3 year payback
policy), but the actual taxes exceeded $ 1M/year (maximum reimbursement
was capped in the agreement at the $2.3M level). Bonds issued to cover the
incentive costs provided to Rosemount included several other projects, some
of which may have had a 15 year maturity. Is Rosemount subject to the
The City of Chanhassen, A growing community with clean lakes, quality schook, a charming downtown, thriving businesses, and beautifùl parks. A great place to live, work, and pia}
Mayor and City Council
June 10, 1998
Page 2
special tax? Was there an expiration date in the agreement? Does
Rosemount's actual payment of$14M constitute full payment of the $2.3M in
initial incentives? Does the fact that the bonds (not really related to
Rosemount) are still outstanding through the year 2000 change the picture?
When the bonds are retired in 2000, would the special tax apply for 200 I,
2002 and 2003? I am sure that you will have Ron Batty twitching in his seat
regarding these questions. To the best of my knowledge, there is no case law
on these issues,
· Big Picture: Before placing Ron on the hot seat on any of the above issues, I
think it is important to look at the bigger picture. Specifically, TIF District
No. I has a total tax capacity value of$3.5M which generates approximately
$5.2M in taxes. To achieve Mr. MacGilJivrary's needed $500,000+/year
shortfall, we would have to establish a 15% increase in property taxes if all
parcels in TIF District No. I could be taxed. I know that Prince's property
would not be subject to the tax and, again, it would be questionable as to
whether or not parcels such as Rosemount could be taxed. The loss of major
parcels such as these could easily change the estimated tax to parcels
qualitying for the special tax to at least a 30% increase. I did not consider this
to be a reasonable alternative and I apologize to the council for not further
explaining why I did not explore this option further.
· Reserves/Other Fund Balances: Rob Tautges will be present Monday
evening. I have asked him to review the work efforts carried out by their firm
in looking at the existing fund balances and reserves as well as capital project
funds that may help reduce the existing problem. A number of compromises
have already occurred to produce the results requested by the council. I
mentioned that I was reluctantly supporting my own recommendation. Why?
The reason is that the refunding plan already includes $700,000 and $1.2M in
land sale proceeds. These dollars could have been used to continue the
payment to the school district, reduce taxes, or to construct an addition to the
library. Once these dollars become merged, as part of the fund balance of
TID No. I, these dollars can never be used for any of the uses cited above. I
am not happy that the current plan takes away all future city council decisions
in regards to the usage of these funds.
'. Tax Increment Versus Property Taxes: Tax increment can only be used to
provide incentives to new businesses (using their own newly generated taxes)
as well as for necessary public improvements. When we transfer dollars from
the general fund or special revenue funds to a tax increment district, we have
truly taken general property tax dollars and used them in a fashion that was not
initially anticipated by either the city or the state. By contrast, should anyone
of the tax increment districts resurrect itself, we cannot then take those dollars
Mayor and City Council
June 10, 1998
Page 3
and use them for some other purpose generally funded by property taxes. An
example would be the Hennepin County tax increment district. The recent
phenomenal growth in that district has generated an estimated $5M in
revenues over the course of the life of that district. The plan encompasses two
potential uses for those monies--State Highway 101 north of Highway 5 and a
minor public improvement project on Dell Road. Current estimates are that
the reconstruction of Highway 101 will be approximately $5M and a
reasonable guess as to the local share could be 20% ($IM). The local share, in
all likelihood, would be paid for in concert by Eden Prairie, Chanhassen,
Hennepin County, and Carver County. I believe our maximum liability wil1
be $500,000. So what happens to the $3M-$4M that is projected to be
remaining when the district ceases? Monies wil1 be returned to Hennepin
County, who wil1 then redistribute it to the Eden Prairie School District,
Hennepin County, and City ofChanhassen in proportion to the level of taxes
for each ofthose entities, i.e. our share would be approximately 15%. The
pooling concept, as recommended, ensures that these dollars can be made
available to help with the TIF problem existing in TlD No. I and can be done
in a fashion that all businesses, whether Hennepin or Carver County
businesses, can share in their fortunes and misfortunes without placing a
burden on the general property taxes of the city.
. Will Pooling Hurt the City's Ability to Carry Out Other Needed
Projects?: Maybe yes. Maybe no. As stated above, I know of no other
public projects for which the TlF being generated in Hennepin County can
legally be used. If eventually (year 2002), the decision is made that there truly
is $3M-$4M left in that fund, then the answer would be no. If the city council
believes that the city should be paying all costs for all public improvements
(water tower, watermain, sewer, roads, etc.) in the Steiner Development, then
the answer would be yes. Dedicating these dollars towards the TlD No. I
deficit does hurt the ability of the city to carry out public improvements in the
Steiner Development. However, there are other means by which these same
improvements can occur without the usage of tax increment, i.e. special
assessments, user charges, fees, state aid, etc. A decision today to consider
pooling as one of our means by which to solve TlD No. I problems does not
produce an immediate liability to the Steiner Development. The decision as to
whether any of those dollars would be used for TID No. I would not be made
until the year 2002. In the meantime, each individual project in the Steiner
Development could be reviewed in terms of the increment being generated.
[Remember Todd's revenue forecasts are conservative in that if the building
isn't there, he doesn't count it.]
. Interest Costs: The council was reluctant to approve a solution which would
add $IM in interest costs between now and 2003. What was not considered is
Mayor and City Council
June 10, 1998
Page 4
the fact that we will spend approximately $200,000 more if this deficit is
funded internally, i.e. the 100 companies that we currently operate (general
fund, enterprise fund, 50 construction funds, etc., etc.) are funding the
$700,000 deficit for TID No. I in 1997 as well as the projected $2M/I998,
$3M/1999, etc. These companies are providing a temporary loan at exactly
the same rate that they would have received had their money been in our
portfolio, i.e. 6% to 7%. As the principal amounts are exactly the same,
whether financed internally or externally, the only difference is interest rates.
With an internal rate of approximately 6.5% and an external rate of 5%
(proposed refunding bonds of 1998), we will pay $100,000 to $200,000 by not
doing the refunding. By contrast, internal funding presents all kinds of
questions by Moody's, Standard & Poor, State of Minnesota, etc. We simply
cannot allow this to occur. Refunding, matching revised revenues to revised
expenses, has to be approved.
RECOMMENDATION
As stated at the beginning of this memorandum, each of the professionals who we
have employed to best advise us on how to solve the TID No. I problem are
probably reluctant to say that this is the best solution they have ever seen. Even
though Tautges may be unhappy that the city ended with a $700,000 deficit in
1997, I can assure you that unless we take positive action, a $2M deficit will exist
at the end of 1998; and that will assuredly generate major comments by the rating
agencies, state, etc. We simply cannot allow this to happen. We do not want to
place the city back into the time frame when Chanhassen was in the news
regarding investments. Refunding must occur. In addition, it is recommended
that the council approve the pooling concept as the means by which the long term
deficit in TID No. I will be corrected. I would also recommend that the city
council consider authorizing the attorney's office to prepare a loan agreement
between the city and the EDA whereby the $1.2M and $700,000 in land sale
dollars be considered as a loan to the EDA and, assuming that the conservative
financial projections being used by Mr. MacGilJivrary are just that~onservative,
that reimbursement would then occur to the city.
[Note: The above recommendation does not preclude the city from seeking
special legislation to allow TID No. I to be extended for one year (solves the
entire problem). Golden Valley did receive relieffor their tax increment district
for almost the same reasons as we would seek relief (Golden Valley had more
democrats that sat on the conference committee than we did.) Although the
extension of the district should be pursued, we cannot wait until May of 1999 to
act on a plan to solve the TID No. I problem.]
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