Tax Type
Local Taxes
Property Tax
Description
Tax Increment Financing by Localities
Topic
Constitutional Provisions
Local Taxes Discussion
Date Issued
03-22-1988
[Opinion - Virginia Attorney General: 1988 at 546]
REQUEST BY: Honorable Hunter B. Andrews Member, Senate of Virginia P.O. Box B Hampton, Virginia 23669
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
You ask whether H.B. No. 240, as it was passed by the 1988 Session of the General Assembly, violates any provision of the Constitution of Virginia. This bill utilizes the concept of tax increment financing to authorize localities to incur indebtedness for redevelopment of "blighted areas,"1 with debt service to be provided in whole or in part from the increased property tax revenues resulting from the redevelopment.
I. Legislation Authorizes Tax Increment Financing for Redevelopment of Blighted Areas
House Bill No. 240 amends the Code of Virginia by adding in Ch. 32 of Tit. 58 a new Art. 4.1, consisting of §§ 58.1-3245 through 58.1-3245.5, which authorizes the local governing body of any county, city or town to adopt tax increment financing by ordinance. The public purpose of the bill is stated in § 58.1-3245.1:
It is hereby found and declared that blighted areas exist in the Commonwealth, and these areas impair economic values and tax revenues, and endanger the health, safety, morals and welfare of the citizens. . . . Local governments should encourage private investment in development project areas in order to enhance the real estate tax base of such areas and to eliminate blighted conditions. It is essential to the public interest that governing bodies have authority to finance development project costs by using real estate tax increments to encourage private investment in development project areas.
The local tax increment financing ordinance authorized by new § 58.1-3245.2 designates a "development project area"2 and provides for the allocation of any tax increment, defined as the increase in property tax revenues from real estate within the project area since January 1 of the year preceding the effective date of the ordinance, to the Tax Increment Financing Fund (the "Fund").
New § 58.1-3245.4 authorizes the issuance of bonds to finance project costs within a development project area. These obligations are subject to the requirements and limitations of the Public Finance Act, §§ 15.1-170 through 15.1-227. These obligations are secured by the Fund and may also be secured by net revenues of all or part of any development project, all real estate and tangible personal property taxes, and any other taxes or anticipated revenues that the locality lawfully may pledge.
Tax increment financing "obligations" are defined in new § 58.1-3245 as "bonds, general obligation bonds and revenue bonds as defined in § 15.1-172(e), (f) and (g) of the Public Finance Act . . . and any other form of indebtedness which the county, city or town may incur." § 15.1-172(f) defines "general obligation bonds" as the bonds of any county, city or town requiring a levy of ad valorem taxes and also including any obligations which may be additionally secured by a pledge of revenues, special assessments or funds derived from any other source.
II. Constitutional Provisions
The local debt provisions of Art. VII, § 10 of the Constitution of Virginia (1971) and the credit clause provision of Art. X, § 10 are relevant to your question.
Article VII, § 10 provides:
(a) No city or town shall issue any bonds or other interest-bearing obligations which, including existing indebtedness, shall at any time exceed ten per centum of the assessed valuation of the real estate in the city or town subject to taxation, as shown by the last preceding assessment for taxes. . . .
(b) No debt shall be contracted by or on behalf of any county or district thereof . . . except by authority conferred by the General Assembly by general law. The General Assembly shall not authorize any such debt . . . unless in the general law authorizing the same, provision be made for submission to the qualified voters of the county or district thereof . . . for approval or rejection by a majority vote of the qualified voters voting in an election on the question of contracting such debt. Such approval shall be a prerequisite to contracting such debt.
Any county may, upon approval by the affirmative vote of the qualified voters of the county voting in an election on the question, elect to be treated as a city for the purposes of issuing its bonds under this section.
Article X, § 10 prohibits the lending of credit "of any county, city, town, or regional government . . . directly or indirectly, under any device or pretense whatsoever" to any private enterprise. This provision must be read in the context of the established principle that, when a statute is for a public purpose, "incidental benefits to private entities do not make unconstitutional efforts by governmental entities to serve the needs of the government." City of Charlottesville v. DeHaan, 228 Va. 578, 588, 323 S.E.2d 131, 136 (1984).
III. House Bill No. 240 Satisfies Debt Restrictions of Art. VII, § 10
House Bill No. 240 authorizes the issuance of debt secured by a pledge of ad valorem tax revenues in the Fund.3 See §§ 58.1-3245.2 and 58.1-3245.4 in H.B. No. 240. Other taxes and net revenues of development projects also may be pledged to bonds issued to finance development project area costs.
Because the bill authorizes localities to incur debt, it is subject to the constitutional debt limitations of Art. VII, § 10. Under that constitutional provision, cities and towns may incur debt without referendum, but are subject to a ceiling based on the assessed value of real property, subject to certain exceptions not applicable to bonds authorized under H.B. No. 240. See Art. VII, § 10(a). On the other hand, counties, unless they elect to be treated as municipal corporations, are not subject to a debt ceiling, but must submit such obligations to referendum. Article VII, § 10(b).
The Public Finance Act statutorily implements the constitutional requirements discussed above. See, e.g., § 15.1-176 (cities);4 § 15.1-1855 (counties); 1977-1978 Att'y Gen. Ann. Rep. 334, 335. § 58.1-3245.4 of H.B. No. 240 mandates that all tax increment financing bonds must comply with the requirements and limitations of the Public Finance Act. Based on the above, it is my opinion that the debt provisions of H.B. No. 240 satisfy the constitutional restrictions of Art. VII, § 10.6
IV. Article X, § 10 Credit Clause Provisions Not Violated by H.B. No. 240
House Bill No. 240 also requires an examination of the prohibitions in Art. X, § 10 against any county, city or town lending its credit directly or indirectly to private enterprise. § 58.1-3245.1 of this legislation declares that blighted areas exist in the Commonwealth and constitute a public danger. It provides further that local government should encourage private investment in designated blighted areas and that "[i]t is essential to the public interest that governing bodies have authority to finance development project costs by using real estate tax increments to encourage private investment in development project areas."
The legislation does not define "development projects" or "development project costs." § 58.1-3245.4 of H.B. No. 240 does require, however, that tax increment financing obligations are to be issued subject to the limitations and restrictions of the Public Finance Act. For purposes of that Act, "project[s]" to be financed are limited to "any public improvement or undertaking for which the [county, city or town] is authorized by law to appropriate money, except for current expenses, including, without limiting the generality of the foregoing . . . highways, streets, alleys, curbs, sidewalks, gutters, bridges, boulevards, parks . . . wharves, docks . . . storm sewers, culverts and drains." § 15.1-172(h). In other jurisdictions adopting tax increment financing, the traditional projects undertaken have included public improvements such as streets, sidewalks, utility lines and parks. See, e.g., Wolper v. City Council of City of Charleston, 287 S.C. 209, 216, 336 S.E.2d 871, 875 (1985).
Such projects are public in nature. Under the principle established in City of Charlottesville v. DeHaan that "incidental benefits to private entities" in a public project do not constitute the lending of credit to private enterprise, it is my opinion that undertaking these projects in a blighted area does not violate Art. X, § 10.
V. Tax Increment Financing Established in H.B. No. 240 Does Not Violate Constitution of Virginia
In summary, it is my opinion that H.B. No. 240 is not violative either of Va. Const. Art. VII, § 10 or Art. X, § 10. Although the bill is subject to the debt limitations of Art. VII, § 10, it complies with those limits by mandating that tax increment financing obligations are subject to the limitations and restrictions of the Public Finance Act and to local charters. The legislation also satisfies the credit clause prohibition of Art. X, § 10 because tax increment financing has a public purpose -- to remove blighted areas which endanger the public health, safety, morals and welfare -- and the projects to be undertaken are public in nature.
1 The phrase "blighted area" is defined in H.B. No. 240 as "any area within the borders of a development project area which impairs economic values and tax revenues, causes an increase in and spread of disease and crime, and is a menace to the health, safety, morals and welfare of the citizens of the Commonwealth; or any area which endangers the public health, safety and welfare because commercial, industrial and residential structures are subject to dilapidation, deterioration, obsolescence, inadequate ventilation, inadequate public utilities and violations of minimum health and safety standards; or any area previously designated as a blighted area pursuant to § 36-48 of the Code of Virginia." § 58.1-3245.
2 "Development project area" is defined as "a blighted area designated for development or redevelopment in an ordinance passed by the local governing body." § 58.1-3245.
3 These bonds would be general obligation bonds because they are payable from a pledge of ad valorem taxes. See § 58.1-3245 and § 15.1-172(f).
4 Section 15.1-176 contains the constitutional debt ceiling for debts of cities and towns not to exceed ten percent of the assessed valuation of the real estate therein as shown by the last preceding assessment for taxes.
5 Section 15.1-185 provides, in part, that counties have the power to contract bonded debt, provided that the qualified voters of such county shall approve such debt by a majority vote.
6 The legislation also makes the obligations subject to the requirements and limitations of charter provisions. The reference to charter provisions recognizes that cities and towns may elect to proceed under the Public Finance Act or their charters. See § 15.1-171; 1981-1982 Att'y Gen. Ann. Rep. 44, 45-46. I assume for the purpose of this Opinion that the debt provisions of the various charters reflect the constitutional requirements of Art. VII, § 10. In restricting the obligations authorized under H.B. No. 240 to such charter provisions, therefore, the constitutional limits of Art. VII, § 10 would be met.
Attorney General's Opinion