Technical Information Release  TIR 06-26: Bonds for Public Infrastructure Improvements under St. 2006, c. 293, §§ 5--12

Date:	12/26/2006
Referenced Sources:	Massachusetts General Laws

Tax Administration

I. Introduction.

This Technical Information Release sets forth rules for implementing St. 2006, c. 293, §§ 5 - 12, part of An Act Relative to the Economic Development of the Commonwealth (the Act), relating to financial assistance for public infrastructure improvements. Under the Act, the Massachusetts Development Finance Agency (MDFA) is authorized to issue bonds to finance infrastructure improvements that will support economic development projects. The funds from the bonds may be used to finance the construction of streets, sidewalks, water and sewer service, and similar improvements. Private developers will construct the improvements, and once complete, the infrastructure improvements will generally be turned over to the local municipality. During the construction phase and prior to occupancy, the developer will pay local assessments to the municipality that will be used to finance the debt service on the bonds. After the project is complete and occupied and the infrastructure improvements have been turned over to the local municipality, the Commonwealth takes on the responsibility for paying the debt service on the bonds associated with the project.

Approval of a project to be funded by bonds issued pursuant to the Act is a multi-stepped process. First, a developer must apply to a municipality for project approval. Each proposal from a developer must include, among other things, a financial analysis estimating the new state tax revenues to be generated as a result of each commercial component of the development. The municipality must approve the project and agree to participate in its development by a two-thirds vote of the municipality's governing authority. Once the municipality approves a project, the municipality and the developer jointly submit the project to the MDFA and the Secretary of Administration and Finance (A&F). The Secretary of A&F is required to approve, disapprove, request additional information, or request an amendment to the application within sixty days. As part of the approval process, the Department of Revenue (DOR), to the extent practicable, must certify that the amount of new state tax revenues allocable to the project will be at least equal to the projected maximum annual debt service, as determined by A&F, on the bonds to be issued to fund the public infrastructure improvements related to the project. Subsequently, when a commercial component of a project approved by A&F is complete and occupied, the DOR must annually determine and certify the new state tax revenues generated by each such component, after the DOR has received the relevant data necessary to make the determination, and must determine the extent of any resulting surplus or shortfall after comparing new state tax revenues with the allocable annual debt service on the bonds that is apportioned to each component.

For so long as the new state tax revenues for each component meet or exceed the allocable debt service, the Commonwealth will pay the debt service on the bonds. If the new state tax revenues generated by a component of a project are insufficient to pay the allocable debt service (after offsetting a shortfall with any surplus generated by other components), the municipality in which the project is located must pay the amount of the shortfall. If the municipality does not pay the shortfall amount, the Treasurer of the Commonwealth is directed by the statute to reduce amounts of local aid to the municipality by the shortfall amount.

This Technical Information Release sets forth certain responsibilities of the Secretary of A&F and the DOR in approving and certifying projects, and in determining a surplus or a shortfall with respect to an approved project. Interested persons must contact the municipality where the project is to be located for guidance on the local approval processes. This Technical Information Release addresses only certain specified requirements and procedures under the Act. DOR may supplement this TIR with further guidance at a later date. The Act contains a number of specific requirements and procedures that are beyond the scope of this document.

II. Project Approval.

A. Project defined.

The MDFA, established pursuant to G.L. c. 23G, § 2, is authorized by the Act to borrow money and issue bonds for the purpose of financing public infrastructure improvements associated with a certified economic development project (project). A project is defined in the Act to include, among other things , the acquisition, construction, expansion, improvement or equipping of industrial, manufacturing, office, retail, research and development, residential or other commercial facilities, and all lands, buildings, and other structures, and all infrastructure improvements in the parcels owned by the developer. These parcels are described in the Act as an "economic development district."

B. Original Application with Local Municipalities.

1. Preliminary steps.

Prior to a project being eligible for financing under the Act, the developer is required to file an economic development proposal with the municipality, which is a detailed plan for development of a project. This proposal must include, among other project specifications, a financial analysis estimating the amount of new state revenues to be generated as a result of each commercial component of the project and the total new state revenues to be generated by all commercial components of the project.

2. Definitions of "new revenues", "new state tax revenues", "eligible new jobs", "commercial components", and "dedicated revenues"; relationship to statutory objectives and preparation of application.

"New revenues" are defined by statute, at St. 2006, c. 293, § 5, as follows:

revenue derived from a commercial component of an economic development project by the creation of any eligible new jobs or by new commercial activity that would otherwise not have taken place in the commonwealth on said commercial component . . . .

"New state tax revenues" are defined by statute, at St. 2006, c. 293, § 5, as follows:

any new revenue, less any dedicated revenue, collected by the commonwealth from the commercial components of a certified economic development project from: (i) the taxes imposed by chapter 62 of the General Laws on wages [for personal income tax purposes] as defined in section 1 of chapter 62B of the General Laws and on a partner's distributive share of earned income of a partnership that is subject to taxation as Part B taxable income in accordance with section 17 of said chapter 62; (ii) the excises imposed by section 2 of chapter 64H of the General Laws [sales tax]; and (iii) the excises imposed by section 3 of chapter 64G of the General Laws, section 22 of chapter 546 of the acts of 1969 [room occupancy excise] and paragraph (a) of section 9 of chapter 152 of the acts of 1997 [convention center finance fee] . . . .

"Eligible new jobs" are defined by statute, at St. 2006, c. 293, § 5, as follows:

"Eligible new job", shall be deemed created in the commonwealth on the first day for which Massachusetts personal income tax withholding is required in connection with the compensation paid to the employee employed within a commercial component of an economic development project or the first day for which Massachusetts estimated tax payments are payable by a partner of a partnership occupying all or a portion of a commercial component of an economic development project; provided, however, that a job shall not be considered an eligible new job pursuant to this act if the job replaces a job elsewhere in the commonwealth; provided further, that the term "eligible new job" may be more fully defined by rules, regulations or guidelines promulgated by the secretary or the commissioner, which may include, among other things, retained jobs.

"Commercial components" are defined by statute, at St. 2006, c. 293, § 5, as follows:

any component of an economic development project comprising industrial, manufacturing, office, retail, research and development or other commercial facilities, or any combination thereof, including any project component comprising mixed industrial, manufacturing, office, retail, research and development, commercial and residential facilities, as more fully described in or determined in accordance with a certified economic development project; as used in this act, the term "commercial facilities" shall mean facilities used in connection with any trade or business.

"Dedicated revenue" is defined by statute, at St. 2006, c. 293, § 5, as follows:

new state revenue specifically attributable to an economic development project that is pledged or dedicated by statute to specific purposes other than as provided in this act and not available for appropriation, including, but not limited to, monies dedicated to the Massachusetts Bay Transportation Authority and the State and Local Contribution Fund under the provisions of section 35T of chapter 10 of the General Laws, monies dedicated to the Massachusetts School Building Authority and the School Modernization and Reconstruction Trust Fund under the provisions of section 35BB of chapter 10 of the General Laws, monies dedicated to the Massachusetts Convention Center Authority and the Convention Center Fund under the provisions of section 10 of chapter 152 of the acts of 1997, and monies dedicated to the Massachusetts Tourism Fund under the provisions of section 35J of chapter 10 of the General Laws.

Thus, generally stated, new state tax revenue is revenue derived from a commercial component of a project by the creation of any eligible and net new jobs or by new commercial activity that would otherwise not have taken place in Massachusetts. New state tax revenue does not include, for example, personal income tax revenues attributable to wages of employees or income of partners where such wages or partner income simply reflect the income of persons whose jobs have been relocated by tenants of the project from another site in Massachusetts, except to the extent that it is reasonably demonstrated that such wages or other income reflect income derived from a net increase in jobs in Massachusetts or reflect income derived from jobs that were retained in Massachusetts by reason of the project.

Interested taxpayers should contact the municipality where the project is to be constructed for instructions on how to submit a proposal. The statutory criteria detailing the required elements of the proposal are found at St. 2006, c. 293, § 7.

After receiving a proposal, the municipality is required to hold a public hearing to allow local input on the proposal. Within one year of the public hearing, the municipality is required to take action on the proposal by approving it disapproving it, requesting an amendment, or requesting further information. Approval of a proposal shall be evidenced by a 2/3 vote of the municipality's governing body. For statutory guidance on the municipal approval process, see St. 2006, c. 293, § 7(b).

C. Application with the Massachusetts Development Finance Agency and the Secretary of Administration and Finance.

1. Application by the municipality and the developer.

Upon approval of the proposal by the municipality, the municipality and the developer are required by statute to jointly file the proposal with the MDFA and A&F. A&F must review the proposal, and within 60 days of its receipt must take action on it by approving it, disapproving it, requesting an amendment, or requesting further information.

The statute permits the developer to amend the proposal with the permission of the municipality and the Secretary of A&F. If the amendment will result in an increase in the total amount for which a municipality will be required to provide "local infrastructure development assistance" (as defined at St. 2006, c. 293, § 5) under the Act, the amendment must receive the approval of a 2/3 vote of the governing body of the municipality.

The application should include all documents and other materials that were filed with the municipality or submitted in connection with the public hearing held by the municipality.

2. Process for Review and Potential Approval by the Secretary of Administration and Finance.

a. General rules.

The Secretary of A&F is permitted by statute to certify proposed projects, subject to satisfaction of certain conditions described further below.

The statute places certain limits on the scope, timing, and location of projects that may be approved, as follows:

The secretary shall certify no more than 5 economic development proposals received pursuant to the provisions of this act in a total amount not to exceed $ 200,000,000; provided further, no economic development proposal which secured municipal approval prior to the effective date of this act shall be certified by the secretary; provided further, that no economic development proposal shall be certified by the secretary after January 1, 2012; and provided further that the secretary shall not approve more than 2 economic development proposals from any one municipality.

St. 2006, c. 293, § 7(d).

b. Specific rules for each project.

i. Certification by DOR of projected new state tax revenues.

One statutory condition for the Secretary of A&F's certification of a proposal is a certification by DOR, to the extent practicable, that the amount of annual new state tax revenues allocable to all commercial components of the economic development project following completion and occupancy will be at least equal to the projected maximum annual debt service due on the bonds, as determined by A&F, that fund the project's infrastructure improvements. This process is more fully described in Section II, D of this Technical Information Release, below.

ii. Certification of financing commitments.

The Secretary of A&F must also certify that the developer has received satisfactory commitments for financing sufficient to fund the costs of construction of the proposed project, exclusive of those public infrastructure improvements to be financed by MDFA. The Secretary will consider all elements of funding available to the developer, including equity and other amounts to be supplied by the developer and other persons. The developer must furnish evidence that it has obtained a blanket performance bond or other security satisfactory to the Secretary of A&F and payable to MDFA, securing the developer's obligation to complete the construction of the project and public infrastructure improvements included in the proposal, in an amount equal to or greater than the outstanding principal amount of any bonds to be issued by MDFA to finance the costs of the public infrastructure improvements.

iii. Certification that the municipality has established a liquidity reserve.

The Secretary of A&F must also certify that the municipality seeking project approval has established a liquidity reserve for each assessment parcel within the project in an amount equal to twice the total annual debt service due on the bonds allocable to the assessment parcel. This reserve must be funded by the municipality and must be maintained as long as the municipality is obligated to provide local infrastructure development assistance with respect to that parcel.

iv. MDFA approval.

The Secretary of A&F may certify a proposal only after receiving certification of approval from MDFA.

D. Department of Revenue Certification.

1. General requirements.

In performing its review function under the approval process, DOR will require sufficient detail about the developer's data, estimates, calculations, methodology, and other information as to each of the relevant types of new state tax revenues so that DOR will be able to make a judgment concerning the reasonableness of the developer's information, estimates and projections (where applicable), conclusions, and other items submitted. Estimates and projections, where applicable, are to be forecasted on an annual basis for the expected term of the bonds; data for each commercial component of the project must be presented separately as well as being presented as an aggregate of the new state revenues to be generated by all commercial components of the project. See St. 2006, c. 293, § 7(a)(iv). The Commissioner may specify the manner for providing this information. The application must state clearly the party that will be responsible for providing all information required for annual certification, and the manner by which the responsible party will ensure that this data is produced annually (see section III, B, below). DOR reserves the right to allow an alternate reporting mechanism, at the request of the applicants, if the required data does not yet exist, or is not available.

For each tax type, the amount of tax revenue lost as a result of any businesses displaced by the project must be netted out of the totals, as well as all dedicated revenues. The future projected revenues that would be lost from any displaced businesses must be adjusted for anticipated inflation.

DOR will require copies of all feasibility studies. These studies and estimates should, at a minimum, contain the following data:

The number of "current" and "projected" tenants (to the extent known) in the project area, including their names and taxpayer ID's and location (city or town) (to the extent known);

The types of each business conducted by current and projected tenants.

2. Specific data elements required.

a. Personal income tax data.

Current number of jobs and the projected net number of new jobs in each business;

Wage and other income data for these jobs, including wage information by employee and information by partner concerning partner compensation derived from ordinary income for personal services (excluding capital gains).

b. Sales tax data.

Currently generated total sales and projected total sales by business type;

Currently generated net taxable sales and projected net taxable sales;

Currently generated sales taxes and projected sales taxes, less taxes that are dedicated revenues.

c. Room occupancy tax data.

Current number of new hotel rooms and their occupancy rates and projected number of new hotel rooms and their occupancy rates;

Current room occupancy tax revenues and projected net room occupancy tax revenues, less dedicated revenues.

III. Procedures following certification by the Secretary of Administration and Finance.

A. Executing the infrastructure development assistance agreement.

Upon receiving project certification from the Secretary of A&F, the Commonwealth, acting through the Secretary of A&F, the municipality, acting through its treasurer, MDFA, and the developer will jointly enter into one or more infrastructure development assistance agreements, according to the detailed requirements at St. 2006, c. 293, § 8. In general, the agreement will provide that the developer will construct the public infrastructure improvements that are within the certified project and, once completed, will convey the improvements to the municipality, or to another political entity, under the terms of the agreement. During the construction period and until occupancy, the developer will pay an infrastructure assessment to the municipality that will equal the annual debt service owed on the bonds attributable to the project.

The agreement for each certified economic development project shall allocate the debt service payable in each fiscal year on bonds issued by MDFA under the Act among the commercial components of the certified project in the same proportion as the amount of projected new state tax revenues for each commercial component bears to the aggregate projected new state tax revenues for that project.

B. Annual certification by the Department of Revenue

After completion and occupancy of the first commercial component within the certified project, the Commissioner of Revenue shall determine and certify to the Secretary of A&F and to the treasurer of the municipality the amount of new state tax revenues generated with respect to each commercial component of the certified project that is completed and occupied. The Commissioner may specify the manner by which DOR is to be provided this information. As noted in section II.D.1, the project application jointly filed by the developer and the municipality is required to state clearly the party that will be responsible for providing all information required for this annual certification, and the manner by which the responsible party will ensure that this data is produced annually.

For each tax type, the amount of revenue lost as a result of businesses displaced by the project should be netted out of the totals, as well as any dedicated revenues. The future projected revenues that would be lost from displaced businesses must be adjusted for inflation.

The following additional data shall be provided to DOR each year for each project:

The name and taxpayer ID number for each new tenant in the project area;

The social security number or taxpayer ID number for each employee or partner, and information for each employee and partner as to the wages for each employee and the partner compensation derived from ordinary income for personal services (excluding capital gains);

The net number of new jobs per business. Note: where new employees in the development project have been transferred from elsewhere in the Commonwealth, the party responsible for furnishing this information must demonstrate the extent to which there has been a net increase in jobs, and the extent to which state tax revenues have been derived from that net increase.

The total sales and net taxable sales for each relevant business.

The number of new hotel rooms, and their net room revenues.

The sales taxes and room occupancy taxes that have been generated, less dedicated revenues.

DOR reserves the right to allow an alternate reporting mechanism if the required data does not yet exist, or is not available.

IV. Results of annual review by the Department of Revenue

If and for so long as the Commissioner of Revenue determines that the new state tax revenues generated by a completed and occupied commercial component of a certified project are greater than the allocable debt service apportioned to that commercial component, giving rise to a surplus, the Commonwealth will provide "state infrastructure development assistance" by paying the allocable debt service apportioned to that commercial component. If the Commissioner of Revenue determines that the new state tax revenues generated by a completed and occupied commercial component of a certified project are less than the allocable debt service apportioned to that commercial component, the municipality must pay the shortfall amount to cover the debt service on the bonds attributable to that commercial component. Note that a shortfall from one commercial component of a project may be offset by a surplus generated from another, based on an aggregate figure of all surplus amounts (less any shortfalls) for the same fiscal year generated by all components of a project certified under the Act. When the cumulative annual state tax growth amount for an assessment parcel allocable to a commercial component first exceeds an amount equal to the allocated full bond amount for such commercial component, plus an amount equal to all interest accrued on such component bond amount to date, the municipality shall have no obligation thereafter to provide local infrastructure development assistance with respect to such commercial component of an assessment parcel. See St. 2006, c. 293, § 10(b).

To the extent the municipality fails to pay any shortfall amount to the Commonwealth, the Secretary of A&F is required to certify the amount unpaid to the State Treasurer, and the Treasurer will reduce amounts of local aid accordingly.

V. Other consequences of financing under the Act.

A certified project receiving assistance under the Act is not eligible for:

(i) designation as a TIF (Tax Increment Financing) zone pursuant to G.L. c. 40, § 59;

(ii) The tax credit at G.L. c. 63, § 38N, the Economic Opportunity Area Credit;

(iii) a community development action grant pursuant to G.L. c. 121B, § 57A;

(iv) a public works economic development program grant under St. 1981, c. 732, § 17, first para., clause (c); or

(v) any other economic assistance program as may be determined by the Secretary of A&F or the Commissioner of Revenue. As of the date of issuance of this Technical Information Release, neither the Secretary nor the Commissioner has identified any other economic assistance programs (including tax incentives) for which recipients of assistance under the Act shall not be eligible, but either the Secretary or the Commissioner may identify such programs in the future.


/s/ Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

 

AL:MTF:dt

December 26, 2006

TIR 06-26