Tax Cap Legislation and PILOTs - Final

Saratoga Office:
MEMORANDUM To: Raymond Callanan, Chairman, Saratoga County IDA Dennis Brobston, President, SEDC From: Michael Ndolo Date: March 12, 2012 Re: Tax Cap Legislation and PILOTs
PO Box 3367 Saratoga Springs, NY 12866 Phone: 518.899.2608 Fax: 512.777.5045 Other Offices: Scarborough, ME Burlington, VT Austin, TX
The Saratoga County Industrial Development Agency (SCIDA) and the Saratoga Economic Development Corporation (SEDC) asked Camoin Associates to examine the fiscal implications of the recently-enacted New York State property tax cap legislation with respect to Payment in Lieu of Taxes (PILOT) arrangements granted by Industrial Development Agencies. Specifically, the SCIDA/SEDC asked us to evaluate whether the granting of PILOTs for future economic development purposes might adversely impact the ability of municipalities and school districts to raise revenue. CONCLUSION The conclusion of our analysis is that, indeed, the granting of PILOT agreements will lower the total amount of revenue that municipalities and school districts can raise from their local tax base, all other factors held constant. This is because the assessed value of the real property improvements associated with the PILOT arrangement is ignored for the purposes of calculating the Tax Base Growth Factor. With a suppressed Tax Base Growth Factor, the municipality or school district has a lower maximum local revenue level (which includes both the maximum tax levy plus any PILOT payments) than if the PILOT did not exist. We believe that this constitutes a serious threat to economic development in New York State. PILOTs are one of the few effective tools that communities in New York State have to promote economic development. In effect, the way the legislation is currently formulated, school districts and municipalities are materially adversely affected by PILOT arrangements. As such, it is natural to assume that school districts and municipalities may strongly oppose any PILOT agreements. We can identify two possible solutions to this problem. The first and best solution would be to amend the statute so that the assessed value of any property that becomes tax exempt due to a PILOT here-forward is included into the Tax Base Growth Factor calculation as if it were taxable property. The second and more complicated solution would involve two steps: (1) at the expiration of any PILOT agreement entered into after the effective date of the tax cap legislation, allow the newly taxable assessed value of the property to be included in the Tax Base Growth Factor calculation of that year, and (2) for those same PILOTs agreements1, exclude the value of associated PILOT payment made in any year of the PILOT from the PILOT Payments
1
i.e. Only those entered into after the effective date of the tax cap legislation.
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Memorandum March 12, 2012 Raymond Callanan, Chairman, Saratoga County IDA Dennis Brobston, President, SEDC Tax Cap Legislation and PILOTs Page 2 of 13
Receivable in Prior Year and PILOT Payments Due Current Year lines.2 Note, however, that this second solution only partially cures the adverse effects of the tax cap legislation.3 What follows is an illustration of how this adverse impact occurs. While the example is simplified for the purposes of easy comprehension, the mathematics hold to more real life scenarios. We also provide the sources we used, relevant statutes, and the calculation tables used in the example. EXAMPLE The example below assumes that the subject community (which we will refer to as the School District)4 has a property tax base assessed at $1 billion dollars and levies $20 million in property taxes. Currently the School District receives no PILOT payments from any properties. The local IDA is approached with a project that would add $60 million of new tax base to the School District in two phases: in year one, an office building valued at $10 million and in year two, a manufacturing building valued at $50 million. The School District currently charges $20 of tax per $1,000 of taxable assessed valuation. Therefore, absent a PILOT, the project would incur a School District property tax bill of $1,200,000 after phase two is complete.
Assumptions Original Taxable Assessment of Community New Taxable Assessment Approx Tax Rate per $1000 Tax Rate % Tax Due on New Tax. Assessment w/o PILOT Base year tax levy
$1,000,000,000 $60,000,000 $20 2.00% $1,200,000 $20,000,000
If, however, the IDA induces the project with PILOT agreements, the new assessment of $60 million would instead become tax exempt. In this example, we assume SCIDAs normal PILOT arrangement of a 5-year PILOT on the office building starting in Year One and a 10-year PILOT for the manufacturing building starting in Year Two (for simplicity sake, we have assumed the tax rate, assessment and other factors remain constant). Note that, in Year Twelve, the manufacturing buildings PILOT expires and no PILOT payment is due. Instead, the property will become fully taxable and the owners will pay $1,200,000 in property tax payments. We further assume that the office property will pay $100,000 per year in PILOT payments from Year One to Year Five and the manufacturing building will pay $500,000 per year starting in Year Two through Year Eleven.
See tables used in the example provided below and the GML 3-c excerpt in appendix, lines (c)(iii) and (c)(vi). Specifically, the second proposed solution solves the problems associated with the tax exemption under a PILOT agreement for the period following the expiration of the PILOT. However, during the life of the PILOT agreement, the total levy + PILOTs will still be inferior to the amount of total taxes that could be levied absent a PILOT. The amount of the adverse effect is directly proportional to the exemption percentage in any given year (i.e. as the exemption percentage declines, so declines the adverse effect.) 4 We use a school district in this example because school districts are likely to be the type of entity most affected by the tax cap legislation. This is because school districts in general rely heavily on their ability to levy property taxes.
3
PILOT Assumptions New Value Added to Tax Base Growth Factor PILOT $0 $100,000 $10,000,000 $600,000 $50,000,000 $600,000 $0 $600,000 $0 $600,000 $0 $500,000 $0 $500,000 $0 $500,000 $0 $500,000 $0 $500,000 $0 $500,000 $0 $0
Year 1 2 3 4 5 6 7 8 9 10 11 12
Note: the value of the improvements made in a given year is not factored into the calculation of the Tax Base Growth Factor until the following year. Therefore, in this example, we show the Year One $10 million investment affecting the Tax Base Growth Factor as of Year Two. Using these assumptions, we have performed the following calculations to show how the same $60 million project would affect tax cap calculations under two scenarios: (1) without PILOTs on the proposed project, which would instead pay property tax, and (2) with PILOTs. In the No PILOT scenario, the Tax Base Growth Factor is 1.01 in Year Two, demonstrating that the School Districts tax base has indeed expanded by 1%, rendering an Adjusted Prior Year Levy of $20,604,000. Then, an Allowable Levy Growth Factor5 of 2% is applied to arrive at a Maximum Allowable Levy of $21,016,080. No PILOT payments are due, so that figure is the School Districts total local tax revenue for the year. However, under the PILOT scenario, the Tax Base Growth Factor is 1.00. The current years anticipated PILOT payment of $100,000 is backed out to arrive at the Maximum Allowable Levy of $20,208,000. To arrive at the School Districts total local tax revenue, we then add back in the $100,000 of PILOT revenue for a total local tax revenue (Levy + PILOTs) figure of $20,400,000.
As per law, the Allowable Levy Growth Factor is the lesser of 2% or the inflation factor. We have assumed a 2% Allowable Levy Growth Factor for all years.
Year Two No PILOT $1,000,000,000 $10,000,000 $1,010,000,000 1.0100 $20,400,000 $20,604,000 $0 $0 $20,604,000 $412,080 $0 $0 $21,016,080 $20,400,000 $21,016,080 3.02% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $20,300,000 $20,300,000 $100,000 $0 $20,400,000 $408,000 $600,000 $0 $20,208,000 $20,400,000 $20,808,000 2.00% $208,080
Prior Year Taxable Assessment New Taxable Assessments Current Year Taxable Assessment Tax Base Growth Factor Prior Year Tax Levy Times Tax Base Growth Factor PILOT's Receivable in Prior Year Prior Year Capital Tax Levy Adjusted Prior Year Levy Allowable Levy Growth Factor PILOT Payments Due Current Year Current Year Exclusions Maximum Allowable Levy Prior Year Levy + PILOTS Current Year Levy + PILOTs % Increase on Prior Year Adverse Effect on Levy + PILOTs
+ =
+ =
+ 2% +
+ 2% +
Therefore, with the same $10 million real property improvement in Year One and expansion to the School Districts stock of real property, in Year Two the School Districts entire local tax revenue is $208,080 less in the PILOT scenario than the No PILOT scenario. We stress here that this is the result not of the PILOT payments themselves (which are both subtracted and then added back into the equation to arrive at the maximum amount), but because the PILOT arrangement exempted the real property improvements and thereby suppressed the Tax Base Growth Factor. We performed these calculations for all years of the PILOT terms and for the first year after the second PILOTs expiration (see appendix). The results are shown in the summary table on the following page. We have held all factors constant through the entire analysis (i.e. tax rate, assessment base, exclusions, etc.) for the purposes of isolating and clearly illustrating just the effects of the PILOT arrangements.
Maximum Current Year Tax Levy + PILOTs Year No PILOT With PILOT Adverse Impact 1 $20,400,000 $20,400,000 $0 2 $21,016,080 $20,808,000 $208,080 3 $22,497,610 $21,224,160 $1,273,450 4 $22,947,562 $21,648,643 $1,298,919 5 $23,406,513 $22,081,616 $1,324,897 6 $23,874,643 $22,523,248 $1,351,395 7 $24,352,136 $22,973,713 $1,378,423 8 $24,839,179 $23,433,188 $1,405,991 9 $25,335,962 $23,901,851 $1,434,111 10 $25,842,682 $24,379,888 $1,462,793 11 $26,359,535 $24,867,486 $1,492,049 Total Adverse Impact During PILOT Term $12,630,108 12 $26,886,726 $25,364,836 $1,521,890
Note: Year 12 and beyond adverse impact at 2% CAGR
Starting in Year Two and for each and every year thereafter, the School District is adversely impacted by the PILOT agreement. Critically, even after the expiration of the second PILOT agreement, the adverse impact continues because the value of the real property is not added to the Tax Base Growth Factor6. Therefore, this new tax base is forever lost to the School District. APPLICABILITY TO OTHER PILOT SITUATIONS The adverse impact of the property tax cap in situations where a PILOT is used can be calculated fairly simply, as shown below. Specifically, the difference between the PILOT and the No PILOT scenario in any given year should be7: Project Assessment * (Tax rate/1000) * (1.02 ^ Year) Where Project Assessment is the value of real property subject to the PILOT in the first year(s) of the PILOT(s), Tax Rate is the then-current tax rate of the municipality/school district in question, and Year is the year number of the year in question. So, in year 10 of our example, the Project Assessment is $60m, the Tax Rate is 20, the Year is 10. $60,000,000 * 20 / 1000 * (1.02^10) = $1,462,793 (rounded). If, however, the Tax Rate in Year 10 rose to 25, we can calculate that the adverse effect in that year would be $1,828,492 (rounded). SOURCES USED We consulted the following sources for our analysis: Telephone conversation with Ms. Nora McCabe, Assistance Director, Policy and Research, Division of Local Government and School Accountability, Office of the State Comptroller. nmccabe@osc.state.ny.us
6 7
Source: http://www.tax.ny.gov/pdf/publications/orpts/capguidelines.pdf, page 3, last line. Note that this is assuming the Allowable Levy Growth Factor is 2% in each and every year of the analysis.
Presentation of Ms. McCabe to the NYSEDC IDA Sections Conference January 18, 2012. Available online to NYSEDC members at the NYSEDC website. Telephone conversations with Mr. Tim Maher, Director of Regional Operations, Office of Real Property Tax Services, Department of Tax and Finance. tim.maher@tax.ny.gov Guidance documents regarding the property tax cap law and implementation found at the website of the Office of the State Comptroller: http://www.osc.state.ny.us/localgov/realprop/index.htm
STATUTES Below are excerpts from General Municipal Law and Real Property Tax Law relevant to the discussion. Note that the Tax Base Growth Factor we defined above is simply the quantity change factor described herein plus one. Our thanks go to Kevin McAuliffe of Hiscock & Barclay, LLP for providing these excerpts.
GML 3-c Excerpt (a) Subject to the provisions of subdivision five of this section, beginning with the fiscal year that begins in two thousand twelve, no local government shall adopt a budget that requires a tax levy that is greater than the tax levy limit for the coming fiscal year. Provided however the tax levy limit shall not prohibit a levy necessary to support the expenditures pursuant to subparagraphs (i) through (iv) of paragraph (g) of subdivision two of this section. (b)(i) The commissioner of taxation and finance shall calculate a quantity change factor for each local government for the coming fiscal year based upon the physical or quantity change, as defined by section twelve hundred twenty of the real property tax law, reported to the commissioner of taxation and finance by the assessor or assessors pursuant to section five hundred seventy-five of the real property tax law. The quantity change factor shall show the percentage by which the full value of the taxable real property in the local government has changed due to physical or quantity change between the second final assessment roll or rolls preceding the final assessment roll or rolls upon which taxes are to be levied, and the final assessment roll or rolls immediately preceding the final assessment roll or rolls upon which taxes are to be levied. (ii) After determining the quantity change factor for the local government, the commissioner of taxation and finance shall proceed as follows: (A) If the quantity change factor is negative, the commissioner of taxation and finance shall not determine a tax base growth factor for the local government. (B) If the quantity change factor is positive, the commissioner of taxation and finance shall determine a tax base growth factor for the local government which is equal to one plus the quantity change factor. (iii) The commissioner of taxation and finance shall notify the state comptroller and each local government of the applicable tax base growth factors, if any, as soon thereafter as such factors are determined.
Memorandum March 12, 2012 Raymond Callanan, Chairman, Saratoga County IDA Dennis Brobston, President, SEDC Tax Cap Legislation and PILOTs Page 7 of 13 (c) Each local government shall calculate the tax levy limit applicable to the coming fiscal year which shall be determined as follows: (i) Ascertain the total amount of taxes levied for the prior fiscal year. (ii) Multiply the result by the tax base growth factor, calculated pursuant to paragraph (b) of this subdivision, if any. (iii) Add any payments in lieu of taxes that were receivable in the prior fiscal year. (iv) Subtract the tax levy necessary to support expenditures pursuant to subparagraph (i) of paragraph (g) of subdivision two of this section for the prior fiscal year, if any. (v) Multiply the result by the allowable levy growth factor. (vi) Subtract any payments in lieu of taxes receivable in the coming fiscal year. (vii) Add the available carryover, if any. (d) Whenever the responsibility and associated cost of a local government function is transferred to another local government, the state comptroller shall determine the costs and savings on the affected local governments attributable to such transfer for the first fiscal year following the transfer, and notify such local governments of such determination and that they shall adjust their tax levy limits accordingly. RPTL 1220. Definitions. When used in this title: 1. "Change in level of assessment" means the net percentage increase or decrease in the assessed valuation of all taxable real property in an assessing unit from one final assessment roll to the next, other than increases or decreases in the assessed valuation of special franchises, transportation properties of railroads subject to a ceiling assessment, wholly exempt properties, and other than increases or decreases in value attributable to physical or quantity changes in the property. 2. "Change in level of assessment factor" means a multiplication factor which represents the change in level of assessment. 3. "Material change in level of assessment" means a change in level of assessment of two percent or more in any one year. 4. "Physical or quantity change" means but shall not be limited to either an increase in assessed value from the prior roll resulting from new construction, property annexed from another assessing unit, and the addition of property omitted from the prior roll, or a decrease in assessed value from the prior roll resulting from fire, demolition, and the deletion of duplicate parcels from the roll. A physical or quantity change does not result from the splitting or merging of parcels. RPTL 575. Assessor's annual reports. The assessor shall annually file with the commissioner reports which shall include information relating to changes in levels of assessed valuation, changes in the condition and ownership of real property and other information as the commissioner may require by rule and regulation.
Year One No PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000
Prior Year Taxable Assessment New Taxable Assessments Current Year Taxable Assessment Tax Base Growth Factor
+ =
+ =
Prior Year Tax Levy Times Tax Base Growth Factor PILOT's Receivable in Prior Year Prior Year Capital Tax Levy Adjusted Prior Year Levy Allowable Levy Growth Factor PILOT Payments Due Current Year Current Year Exclusions Maximum Allowable Levy Prior Year Levy + PILOTS Current Year Levy + PILOTs % Increase on Prior Year Adverse Effect on Levy + PILOTs
+ 2% +
$20,000,000 $20,000,000 $0 $0 $20,000,000 $400,000 $0 $0 $20,400,000 $20,000,000 $20,400,000 2.00%
+ 2% +
$20,000,000 $20,000,000 $0 $0 $20,000,000 $400,000 $100,000 $0 $20,300,000 $20,000,000 $20,400,000 2.00% $0
Year Two No PILOT $1,000,000,000 $10,000,000 $1,010,000,000 1.0100 $20,400,000 $20,604,000 $0 $0 $20,604,000 $412,080 $0 $0 $21,016,080 $20,400,000 $21,016,080 3.02% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $20,300,000 $20,300,000 $100,000 $0 $20,400,000 $408,000 $600,000 $0 $20,208,000 $20,400,000 $20,808,000 2.00% $208,080
+ =
+ =
+ 2% +
+ 2% +
Year Three No PILOT $1,010,000,000 $50,000,000 $1,060,000,000 1.0495 $21,016,080 $22,056,480 $0 $0 $22,056,480 $441,130 $0 $0 $22,497,610 $21,016,080 $22,497,610 7.05% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $20,208,000 $20,208,000 $600,000 $0 $20,808,000 $416,160 $600,000 $0 $20,624,160 $20,808,000 $21,224,160 2.00% $1,273,450
+ =
+ =
+ 2% +
+ 2% +
Year Four No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $22,497,610 $22,497,610 $0 $0 $22,497,610 $449,952 $0 $0 $22,947,562 $22,497,610 $22,947,562 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $20,624,160 $20,624,160 $600,000 $0 $21,224,160 $424,483 $600,000 $0 $21,048,643 $21,224,160 $21,648,643 2.00% $1,298,919
+ =
+ =
+ 2% +
+ 2% +
Year Five No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $22,947,562 $22,947,562 $0 $0 $22,947,562 $458,951 $0 $0 $23,406,513 $22,947,562 $23,406,513 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $21,048,643 $21,048,643 $600,000 $0 $21,648,643 $432,973 $600,000 $0 $21,481,616 $21,648,643 $22,081,616 2.00% $1,324,897
+ =
+ =
+ 2% +
+ 2% +
Year Six No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $23,406,513 $23,406,513 $0 $0 $23,406,513 $468,130 $0 $0 $23,874,643 $23,406,513 $23,874,643 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $21,481,616 $21,481,616 $600,000 $0 $22,081,616 $441,632 $500,000 $0 $22,023,248 $22,081,616 $22,523,248 2.00% $1,351,395
+ =
+ =
+ 2% +
+ 2% +
Year Seven No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $23,874,643 $23,874,643 $0 $0 $23,874,643 $477,493 $0 $0 $24,352,136 $23,874,643 $24,352,136 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $22,023,248 $22,023,248 $500,000 $0 $22,523,248 $450,465 $500,000 $0 $22,473,713 $22,523,248 $22,973,713 2.00% $1,378,423
+ =
+ =
+ 2% +
+ 2% +
Year Eight No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $24,352,136 $24,352,136 $0 $0 $24,352,136 $487,043 $0 $0 $24,839,179 $24,352,136 $24,839,179 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $22,473,713 $22,473,713 $500,000 $0 $22,973,713 $459,474 $500,000 $0 $22,933,188 $22,973,713 $23,433,188 2.00% $1,405,991
+ =
+ =
+ 2% +
+ 2% +
Year Nine No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $24,839,179 $24,839,179 $0 $0 $24,839,179 $496,784 $0 $0 $25,335,962 $24,839,179 $25,335,962 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $22,933,188 $22,933,188 $500,000 $0 $23,433,188 $468,664 $500,000 $0 $23,401,851 $23,433,188 $23,901,851 2.00% $1,434,111
+ =
+ =
+ 2% +
+ 2% +
Year Ten No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $25,335,962 $25,335,962 $0 $0 $25,335,962 $506,719 $0 $0 $25,842,682 $25,335,962 $25,842,682 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $23,401,851 $23,401,851 $500,000 $0 $23,901,851 $478,037 $500,000 $0 $23,879,888 $23,901,851 $24,379,888 2.00% $1,462,793
+ =
+ =
+ 2% +
+ 2% +
Year Eleven No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $25,842,682 $25,842,682 $0 $0 $25,842,682 $516,854 $0 $0 $26,359,535 $25,842,682 $26,359,535 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $23,879,888 $23,879,888 $500,000 $0 $24,379,888 $487,598 $500,000 $0 $24,367,486 $24,379,888 $24,867,486 2.00% $1,492,049
+ =
+ =
+ 2% +
+ 2% +
Year Twelve No PILOT $1,060,000,000 $0 $1,060,000,000 1.0000 $26,359,535 $26,359,535 $0 $0 $26,359,535 $527,191 $0 $0 $26,886,726 $26,359,535 $26,886,726 2.00% With PILOT $1,000,000,000 $0 $1,000,000,000 1.0000 $24,367,486 $24,367,486 $500,000 $0 $24,867,486 $497,350 $0 $0 $25,364,836 $24,867,486 $25,364,836 2.00% $1,521,890
+ =
+ =
+ 2% +
+ 2% +

Tax Cap Legislation and PILOTs - Final

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Saratoga Office:

$1,000,000,000 $60,000,000 $20 2.00% $1,200,000 $20,000,000

$20,000,000 $20,000,000 $0 $0 $20,000,000 $400,000 $0 $0 $20,400,000 $20,000,000 $20,400,000 2.00%

$20,000,000 $20,000,000 $0 $0 $20,000,000 $400,000 $100,000 $0 $20,300,000 $20,000,000 $20,400,000 2.00% $0

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