Building the Ideal Financing Toolbox (cont.)

Today, most IDBs support expansions of existing manufacturing facilities, although many states and localities market IDBs for business attraction purposes. IDBs can be used to finance a variety of manufacturing activities, and the portion dedicated to “core manufacturing” (i.e., the production line where the product is made or processed) may be financed with bond proceeds without limitation.

However, the rules governing the use of IDBs are extensive. Communities with quality IDB programs work tirelessly to understand the possible tax-exempt transactions, and often combine IDBs with other debt financing options to provide additional support.

So if tax-exempt bond programs are so useful, why doesn’t every community have one? The answer is that they are not easy to run. They require due diligence, open books and a great deal of oversight – the price of doing business in the tax-exempt world. But for entities that have figured out how to do it, fees can pay for the entire cost of the running the program.

Bond finance is not the only source of broad-based financing. Other programs such as loan guarantees, infrastructure pools, grants and direct loans also are important. These programs can be tailored to meet the needs of designated industry sectors such as small business, manufacturing or innovation ventures.

Targeted financing

Area-based: Tax increment finance and special assessment districts
Tax increment finance (TIF) and special assessment district financing have become the primary funding mechanisms for the development of defined geographic areas. TIF captures the future increases in property or sales taxes that new development generates in order to finance the present cost of improvements (such as infrastructure, land acquisition, demolition, utilities, planning costs and more) in economically sluggish or blighted areas.

TIF provides local governments with a mechanism that does not rely on federal funds, escapes state limits on revenue and expenditures and does not apply new taxes on municipal taxpayers. States authorize local governments to designate TIF districts, and city, county or nonprofit redevelopment entities usually administer them.

The use of TIF by local governments varies widely around the country. Some communities have become experts, some are just starting to understand its use and others possess the authority but haven't used it. A total of 49 states and the District of Columbia have TIF legislation, with North Carolina, New Jersey, Delaware, and Massachusetts recently adopting laws. Arizona is the only state without TIF enabling legislation.

There are some key tenets to using TIF successfully. A community that plans to use TIF needs to have a thorough understanding of the enabling legislation – the capacity and guidelines under which they are allowed to use it. That’s important not just for economic developers, but also for the local elected officials who will be approving the districts and projects. TIFs require outside expertise, so communities should hire highly competent bond counsel and financial advisors – professionals who understand the law and the community’s objectives for the project or district.

Community buy-in also is critical to using TIF successfully. Local governments should be as open and inclusive as possible in the process of putting a district in place, holding meetings and charrettes with property and business owners, affected school systems and the community at large. Communities also should have policies in place for processing the project and the bond sales, thus ensuring consistency, disclosure and transparency in how initial and future districts are implemented.

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