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City of Falcon Heights STAFF REPORT DATE: 18 November 1994 TO: Mayor and Councilmembers FROM: Susan Hoyt, City Administrator Steve Apfelbacher, Financial Ad sor RE: Brief history of tax increment financing in Falcon Heights THE PURPOSE OF TAX INCREMENT FINANCING A. Economic development. Tax increment financing is an economic development tool that municipalities use to finance development or redevelopment activities that would not be able to occur without some form of initial public financial assistance. B. Financial assistance. The type and form of financial assistance provided by a municipality varies substantially depending upon the municipality and the project. Initially cities frequently sold general obligation bonds to pay for project costs which could include the acquisition of property or necessary public improvements to expedite the development. The city would pay for this debt with tax increment revenues generated from the private development that occurs when the city undertook the project costs. However, as municipalities have become more sophisticated about TIF financing options, other forms of public financial assistance are being used rather than relying on general obligation bonding. Some communities now use a "pay as you go" approach when the developer pays for the costs that were previously paid for by the city and is reimbursed through tax increment revenue received from the project. Legislative changes in the law also affect how tax increment financing is used. II. THE FINANCIAL MECHANISM USED IN TAX INCREMENT FINANCING A. Tax capacities. Tax increment financing provides municipalities with a mechanism to raise revenue by capturing the new net tax capacity gained from the increased market value on the development or redevelopment of a property in a tax increment district. Original net tax capacity (also called base value). The original net tax