TIF: No Use for General Government Purposes

May increments be used for the cost of government operations?

Minnesota law generally prohibits local governments from using increments for general government purposes. For example, increments generally cannot be used to pay for providing police and fire protection, road maintenance, or similar operating costs. Rather, they may only be used for a limited set of "project costs" that are defined under the development authority enabling laws. Minn. Stat. § 469.176, subd. 4. However, the TIF law also contains specific prohibitions intended to prevent use of increments for general government purposes, even if they qualify under the authority law as project costs.

What is the general policy rationale for these restrictions on TIF use for general government purposes?

TIF captures the taxes imposed by all of the levels of government (i.e., city, county, school, and special taxing districts). Cities and development authorities, however, have nearly total control over TIF. If cities were allowed to fund their general operations with increments, in some situations it could create the opportunity to shift city costs to school and county taxpayers located outside of the city. As a result, the law limits use of TIF for general government purposes.

May TIF be used to construct public improvements?

Yes, TIF is frequently used for public improvements, such as sewer, water, roads, sidewalks, and similar improvements. In many cases, these improvements are directly related to or part of the real estate developments that generate the tax increments. However, there is no explicit requirement that these improvements relate to the development generating the increments or be located within the TIF district.

May TIF be used for government buildings?

No, increments cannot be used to finance the construction of government buildings. The law prohibits use of increments for a building that is used "primarily and regularly for conducting the business of a" governmental unit. Minn. Stat. § 469.176, subd. 4g(b). This prohibition applies to virtually any type of governmental unit, whether local, state, or federal.

What types of buildings are covered by the prohibition?

The statutory language contains three key terms that determine the scope of application of the prohibition:

1. Primarily. The building must be used "primarily" by the governmental unit. This suggests that a building could be financed with TIF, if more than half of it is used for nongovernmental purpose. For example, a private office building in which less than half of the offices were used for governmental offices would not be disqualified. Put another way, TIF could be used to finance part of a building for government use, if the other parts consist of more than half of the building.
2. Regularly. The building must be used "regularly" by the governmental unit. Occasional or irregular use to conduct government business is permitted. This language likely was intended to make sure that buildings that are infrequently or occasionally used by a government are not prohibited.
3. Conducting the business of the governmental unit. The building may not be used to "conduct" the business of the governmental unit. This appears to be a broad prohibition that covers any building used to carry out any of the governmental unit's legitimate functions. Thus, under this view, it would apply not only to a city hall but also to fire stations, libraries, and so forth. This seems consistent with the history of the statute which previously allowed exemptions from the general prohibition for social and recreational facilities. The prohibition would not apply, however, if the governmental entity retained ownership in a financing capacity but did not otherwise directly use the building (e.g., if it owned the building, but leased the building to a private entity).

What government buildings are exempt from this prohibition?

Parking facilities are permitted. Minn. Stat. § 469.176, subd. 4g(b). Under prior law, increment could be used for "social, recreational, or conference facilities" or "a commons area used as a public park[.]" These exemptions were eliminated effective January 1, 2000. 1999 Minn. Law 2177-78, 2189, ch. 243, art. 10 §§ 2, 29. In fact, the law now prohibits any use of increments for these types of facilities (regardless of government ownership or use), except private meeting facilities. Minn. Stat. § 469.176, subd. 4l.

Do other prohibitions apply to limit TIF use for general government purposes?

Yes, the law contains two other limits.

1. TIF may not be used to avoid levy limits.
2. Tax increments may not be used to pay for improvements that serve mainly decorative or aesthetic purposes.

What are the rules governing decorative and expensive public improvements?

The law prohibits use of increments for two types of public improvements. These prohibitions are in addition to those on public buildings:

1. Improvements that principally serve a decorative or aesthetic purpose. This prohibits use of increments to pay for public art (sculptures, paintings, and so forth), banners, plantings (e.g., flowers, bushes, and trees), and other similar items where the purpose is decorate or make an area beautiful.
2. Improvements or equipment where materials or design double the cost relative to more similarly used materials or design (e.g., the use of brick pavers versus concrete for a walkway or road where the result is to double to the cost). Minn. Stat. § 469.176, subd. 4g(c)(1)(ii).

These prohibitions, however, do not apply to properties listed on the historic register or in a historic district.

August 2024