Tax Increment Financing

 By: Elizabeth Thyer, CPA |  email

Tax Increment Financing is something almost every municipality is dealing with. Created by Chapter 403 of the Code of Iowa, tax increment financing allows counties and cities to capture the increment (increased) taxes generated from the construction or expansion of buildings and infrastructure.

There are four steps to the tax increment financing process. The first is to incur an obligation within the urban renewal area. This obligation could be general obligation debt, revenue bonds, internal loans or advances, or development or rebate agreements. The second step is the certification of the obligation to the County Auditor. Once the obligation has been certified, the increment revenue is collected. The final step in the tax increment financing process is the repayment of the tax increment financing obligations.

As the tax increment financing process is a complex one, we have seen many audit findings related to this process. One of the audit findings is not using the forms provided by the Department of Management to certify tax increment financing obligations to the County Auditor. The Department of Management has developed forms to facilitate the certification process and to insure that the proper amounts are certified. It is important that each tax increment financing area complete these forms annually to track the obligations related to that area to determine that the proper amount of tax increment is collected and available to repay obligations. County Auditors, make sure you are completing the required reconciliation process after the tax increment financing obligations are certified as that will be something we ask for when we come for the audit.

Another problem we have seen is that entities are not certifying the proper amount when an obligation is incurred. The total principal and interest to be paid over the life of the obligation should be certified as tax increment financing obligations on the December 1st certification after the obligation is incurred. However, if the obligation is a rebate agreement, only the current year portion should be certified annually. The most common finding we have seen is the use of tax increment financing revenues for items not representing debt payments. Remember, tax increment financing dollars can only be used for the repayment of obligations.