TIF Interfund Loans – Use Them or Lose TIF

February 10, 2011 in TIF, Uncategorized

What are Interfund Loans?

An interfund loan is simply a borrowing between city funds, with or without an interest component. One fund swaps cash with another fund for some specified purpose, such as capital, operating or cash flow. The fund that received the cash repays it over time. Sounds easy, doesn’t it? However, it gets complicated when tax increment is involved.

History

In 2001, the Minnesota Legislature amended TIF law (MN Statutes, Section 469.178, Subdivision 7) to allow for interfund loans to be included as an authorized vehicle through which funds could be borrowed for tax increment purposes and repaid with tax increment revenues. The State was concerned that TIF authorities were using TIF to reimburse expenditures from years ago without documentation that TIF was ever intended to be used.

Stipulations were attached to the law which said that an authority had to adopt a resolution before funds were spent and at the very least, must include the principal amount, interest rate and maximum term. And, oh by the way, the interest you can charge is limited to the greater of two statutory rates, which change yearly. (MN Statutes Section 270C.40, or the interest rate on unpaid taxes and MN Statutes Section 549.09, or the interest rate on court judgments) Just a bit more complicated. All loans made after July 31, 2001 must abide by these new rules. Loans made prior to that date were ratified by law, or grandfathered in.

Why are They Needed?

Interfund loans can be a handy vehicle to finance certain costs if there is another  internal source that has the funds available. They can be useful because they are quicker to adopt (just a resolution) and they are less expensive because you don’t have to pay costs of issuance. Authorities typically adopt an interfund loan for their TIF districts in order to finance startup costs such as financial advisory and legal fees associated with creating the TIF district, negotiating the terms of assistance and preparation of a development agreement. They can also be used to pay for hard costs such as land acquisition and construction of a project. This leads us to a very important point.

Things to Watch Out For

You MUST adopt the resolution prior to spending the funds or you run the risk of not being able to reimburse yourself through future TIF collections. For example,  if you do not adopt an interfund loan resolution before you spend $500,000 from a capital project funds for construction, you won’t be able to reimburse yourself with TIF generated from that district. You will have to find another source. You are up the proverbial creek without a TIF paddle (this applies to  consultant costs as well since there is no minimum amount that is allowed to be reimbursed without an interfund loan).

Who Adopts the Resolution?

Typically the TIF Authority must adopt the resolution.  This means your EDA, HRA, Port Authority Board, or City Council depending upon which entity is the administrative authority for the TIF district.  If you expend money before the TIF district is established, have the governing body adopt a resolution when creating the TIF district.  If an EDA or HRA is borrowing from City funds, you may need to have both entities adopt a resolution.

Administration

The resolution the TIF authority adopts must spell out how much is being borrowed, over what time period and what interest is to be charged. Remember, you can’t exceed the statutory limits on interest rate. Currently (2011), the limit is 4%. The resolution should state that the interest rate will either float as the two rates float on an annual basis or remain constant over time. As far as administration goes, you will need to make sure the TIF Authority adopts the resolution prior to spending the funds, that the interfund loan is actually booked in your general ledger system, that you are monitoring that your interest rate does not exceed the maximum and that the amount borrowed does not exceed the adopted amount.

We are not in the business of offering legal advice. What we can share is our experience with situations which may or may not be similar to yours.  TIF law changes, their effective dates and statutory interpretations can be very complex.  Because an interfund loan is now defined as a ‘bond’ for TIF purposes, we will always encourage you to seek the advice of qualified legal counsel for specific legal questions.