[RP TownTalk] Charter Amendment on Debt Limit

[Alan K. Thompson]

Friends and Neighbors,

A constituent contacted me Saturday about the dense block of legalese on
page 3 of the Town Crier, wanting to know why it was there and what it
meant, and wanting me to share the answer not just with her but with other
residents of the Town.

The block of text is a "fair summary" of a change the Town Council is
considering making (tonight!) to the Town Charter, and the reason it is
there is that we are required to publish either the full text of the change
or a fair summary of the change.  This summary was (I believe) written by
our bond counsel. She is an excellent legal advisor, but apparently her
ability to translate that knowledge into something non-lawyers can
understand is not as strong.  I'll try to do a better job of that in this
message.

Before getting into the charter change itself, I'm going to review (for
reasons that will become clear later) a topic that's been discussed here
before: Tax Increment Financing (TIF). I'm going to use an example at hand,
the funding of the bridge (and road) crossing the CSX tracks from Rivertech
Court to the Cafritz development.

TIF is for a development project that will greatly increase the value of a
piece of property, but that needs publicly-funded infrastructure before the
project can go forward.  In the case of the Cafritz Project, the land is
currently valued at $1,449,600, and, at full build-out, the property is
expected to be worth approximately $300 million, a factor of 200 over the
current value.  Before full build-out can happen, by the terms of the
zoning change that allows the development (and other legal agreements), the
bridge must be built, with all but $5 million of the cost is to be funded
by tax dollars.

If we assume a total cost of the bridge of $14 million (within the range of
current estimates), the Town's share would be $3 million. With a 30-year
loan at 5 % interest, payments of just under $200,000 per year would be
required.

While the tax revenue at full build-out will greatly exceed $200,000 per
year, a lot of things could happen between where we are now and full
build-out, and those of us on the Council want to be sure that the
taxpayers of Riverdale Park aren't required to make those payments if the
project has run into problems.  That's where TIF comes in - the payments
are made not from the general revenues of the Town, but ONLY from the
increased revenue from the project.  Under our current tax rate, the
property generates less than $10,000 in tax revenue each year. In 2014 we
are expecting total revenues of more than $300,000 from the parts of the
development completed by then, assuming everything goes according to plan
(with even higher revenues in years after that).

If everything goes as expected in 2014 (including the amount for the
bridge, interest rate on the loan, etc.), then $200,000 of the tax revenue
will go to pay the loan, and $100,000 will come to the Town as general
revenue, to be spent on anything else.

If things DON'T go according to plan in some way, and there is only
$100,000 in tax revenue from the project, then the Town will keep the
$10,000 in tax revenue that we currently receive, $90,000 will be spent to
pay the loan, and the investors for the loan won't get the rest of the
payments that year -- the Town will NOT have to pay for the bridge from our
general tax revenues.

This sort of financing - TIF - is very different from the form the Town has
used for many decades, so-called "general obligation" (GO) financing, where
the Town put's its "full faith and credit" into paying for a loan, which
means that the Town will pay the loan payments no matter what happens.  GO
financing is how we have paid for police vehicles, road improvements,
equipment for Public Works, etc.  Because putting the "full faith and
credit" of the Town behind such loans is a big deal, the amount of debt
that the Town can take on is limited by the Town Charter (Section 619 of
the Charter limits debt to 2 % of the assessed value of property in the
Town).  The impact of a TIF loan on the Town is much less, because the
terms of the loan WON'T require tax increases or service cuts if revenues
are less than expected.

This is where we come back to the proposed change in the Charter.

The State of Maryland law that allows TIF financing specifically excludes
the debt assumed under TIF from limits like the one in our Charter, so we
can take out a loan using TIF, and it would NOT count against our 2 %
Charter limit on debt. The fact that our Charter is not absolutely clear on
its compliance with the State's law introduces a little bit of uncertainty,
and in the world of finance, uncertainty increases interest rates (and loan
payments).

By amending our Charter to be clearly compliant with State Law, as the
legislation described on page 3 in the June Town Crier will do, we can make
sure that we have room within our 2 % limit to borrow money for other
projects, and also that more revenue from the Cafritz improvements well
come into the Town's general revenue stream.

I hope this letter, as long as it is, cleared up any questions you might
have about TIF financing and the Charter amendment under consideration.

Best,

Alan K. Thompson
Ward 2 Town Council Representative and Finance Committee Chair
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