COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. No.: 0882-05

Bill No.: Perfected HCS for HB 289

Subject: Cities, Towns and Villages; Economic Development; Economic Development Department; Taxation and Revenue - General.

Type: Original

Date: March 6, 2003

FISCAL SUMMARY

* Subject to appropriation. Language in the proposal indicates "may."

** Income and expenses for each fiscal year net to zero.

Numbers within parentheses: ( ) indicate costs or losses.

This fiscal note contains 11 pages.

ASSUMPTION

Officials from the Department of Economic Development (DED) state the bill requires an initial appropriation of fifty million dollars, with subsequent appropriations of the lesser of previous year's new revenue plus $50 million or $150 million, but annual appropriation is capped at $100 million.

DED states that it appears the mechanism for using state revenue for a project would allow 100% of the state increment to go back to a project, thus there would be no net benefit to the state and perhaps a net loss to the state in TSR.

DED states that new to the Committee Substitute is a modified definition of "baseline year" which serves as the basis for calculating state increment. The application of this revised definition is not clear but it appears it could, in conjunction with the new definition of "out of state business", result in a net loss to the state in TSR purported to be net new increment. Also, this version has a sunset date, in which no new projects could be approved after January 1, 2013.

Assuming that the program would require work on at least 25 projects per year and an amount of up to

ASSUMPTION (continued)

$100 million total, DED assumes it would need one Economic Development Incentive Specialist II (at $37,488 annually) plus associated costs to administer their part of the program. The DED costs would need to be appropriated through General Revenue. A billing could be sent and costs recovered from the locals from the increment funds. The reimbursement would be paid back to GR funds when received.

Applications for state financing are made to the Missouri Development Finance Board (MDFB), which forwards its determination to DED. DED states that it is not clear exactly what role DED has in regards to approval or disapproval of an application at that point. It is assumed that DED would be charged with generally administering the program after an application is made. The MDFB anticipates the need for one professional (at $55,000 annually) and one support person (at $28,500 annually), plus associated costs to perform the work required of the Board. The MDFB assumes a total cost of roughly $170,000 in each of the three fiscal years in the fiscal note. All cost for MDFB are assumed to be local because they are assessed and re-payed.

In response to a similar proposal from last year, the MDFB assumed they could administer the program with one additional FTE. Therefore, Oversight has reduced the expenses of the MDFB to reflect the one professional FTE at costs anticipated on last years' fiscal notes.

Oversight has, for fiscal note purposes only, changed the starting salary for the Economic Development Incentive Specialist II to correspond to other such positions within DED. This decision reflects a study of actual starting salaries for new state employees for a six month period and the policy of the Oversight Subcommittee of the Joint Committee on Legislative Research.

Officials from the Office of Administration - Budget and Planning (BAP) state the proposal makes the following changes:

Section 99.918 (14) definition of major initiatives. BAP stated that it is unknown the additional number of municipalities which would participate under this section.

Section 99.939.3 allows the General Assembly to appropriate up to five percent of the state sales tax increment portion of other net new revenues generated by the development projects to the "community development corporation revolving fund", beginning January 1, 2004. It also states that at no time shall the sum of grants exceed one million five hundred dollars annually. Other net new revenues are defined as, the amount of state sales tax increment or state income tax increment or the combination of the

ASSUMPTION (continued)

amount of each increment. BAP assumed this may increase Total State Revenue, but could have a negative impact on the General Revenue Fund.

Section 99.960.1 and 4 allows a municipality to submit an application to the Missouri Development Finance Board for approval of the use of other net new revenues to fund one or more development projects through state supplemental downtown development financing. Subsection 4 states that at no time shall the annual amount of other net new revenues for state supplemental downtown development financing exceed one hundred million dollars. BAP assumed this has no impact to Total State Revenue.

Section 99.960.6 allows the Department of Economic Development, the Office of Administration and the Department of Revenue to charge a fee to recover costs from the municipality fund for evaluation, administration and implementation of development plans. BAP assumed this could increase Total State Revenue.

And finally, Section 99.963.2 allows the General Assembly to annually appropriate up to one hundred fifty million dollars to the state supplemental downtown development fund. BAP assumes this would have no impact on Total State Revenue, but could have a negative impact on the General Revenue Fund.

In response to a previous version of this proposal, officials from the Department of Revenue (DOR) stated the proposal states that DOR would provide "the aggregate baseline year amount of state sales tax revenues and the aggregate baseline year amount of state income tax withheld on behalf of existing employees, reported by existing businesses within the development project area". Businesses currently report withholding taxes by company, not by location of employees. This provision would require businesses within the project area to provide this data by location to DOR. Without some idea of the number of businesses involved in the project area, the number of locations, employees and system changes necessary to compile this data, there would be an unknown cost to DOR to implement this legislation.

Officials from the Office of the State Treasurer and the City of Kansas City each assume this proposal would not fiscally impact their respective agencies.

In response to a previous version of this proposal, officials from the Department of Transportation assumed this proposal would not fiscally impact their agency.

ASSUMPTION (continued)

Officials from the City of St. Louis and St. Louis County did not respond to our request for fiscal impact.

Oversight assumes the loss of revenue for the state is $0 to ($100 million), since the proposal is permissive to any Missouri municipality and the Downtown Economic Stimulus Authority may designate various portions of the city as development areas, as long as they meet the specified requirements and there is a cap on the annual amount of "other net new revenues" of $100 million. The annual amount the General Assembly can appropriate each year from the General Revenue Fund to the State Supplemental Downtown Development Fund is the lesser of net new revenues (capped at $100 million) plus $50 million, or $150 million.

Oversight also assumes that all costs incurred by DOR and DED shall be paid out of the State Supplemental Downtown Development Fund. Oversight also assumes the DED will, in accordance with Section 99.960 (6) and (7), charge a fee to the various municipalities to cover their costs to administer the program. This fund could require a General Revenue appropriation if DED is not able to

recoup the expenses incurred by the State. Oversight further assumes DED will disburse all of the remaining monies in the State Supplemental Downtown Development Fund to the local governments in charge of the various projects.

This proposal could impact Total State Revenues.

FISCAL IMPACT - Small Business

This proposal would impact small businesses that are within a designated development areas as defined by the municipality's Downtown Economic Stimulus Authority.

DESCRIPTION

This proposal:

(1) Allows municipalities to create a Downtown Economic Stimulus Authority, as long as certain findings are made;

(2) Establishes the State Supplemental Downtown Development Fund, which will be administered by the Department of Economic Development;

(3) Defines "other net new revenues" as a percentage of state sales taxes and state income taxes generated within the development area. Other net new revenues are the state's contribution to the

DESCRIPTION (continued)

downtown development projects. The state income tax portion is based on the salaries and wages paid by businesses in the development area to new employees in new jobs. No more than 2% of these state income taxes can be deposited into the State Supplemental Downtown Development Fund. The contribution of state sales taxes is the additional state sales tax revenue collected by businesses in the development area in a given year as compared to what was collected in the baseline year. For businesses that relocate to the development area, the state sales tax contribution is the additional state sales tax revenue collected in the development area as compared to what was collected in the year prior to relocating to the development area;

(4) Requires the municipality to deposit 50% of the Economic Activity Taxes (EATS) generated within the development area in its special allocation fund. EATS are the additional revenue generated by taxes within the development area that are greater than the taxes which were generated in the same development area in the baseline year. EATS do not include personal property taxes, hotel/motel taxes, licenses, fees, or special assessments;

(5) Requires Payments in Lieu of Taxes (PILOTS) that are attributable to the increase in the current equalized assessed valuation of real property that is over the initial equalized assessed valuation to be deposited into the municipality's special allocation fund;

(6) Allows the General Assembly to annually appropriate up to $150 million into the fund;

(7) Requires the department to disburse financing from the fund annually in amounts determined by the certificates of approval for projects. If the revenues in the fund are not sufficient to equal the amounts indicated on certificates of approval, the department will disburse revenues on a pro rata basis to all

approved projects;

(8) Prohibits municipalities from obligating state funds prior to receiving a certificate of approval from the department;

(9) Allows municipalities to apply for money from the State Supplemental Downtown Development Fund by submitting an application to the Missouri Development Finance Board. The substitute explains the requirements of the applications;

(10) Prohibits the amount of state supplemental downtown development financing approved for a project from being greater than the projected state benefit of the development project;

DESCRIPTION (continued)

(11) Prohibits the approved state contribution to the State Supplemental Downtown Development Fund from exceeding $100 million annually;

(12) Prohibits development projects from using both state supplemental downtown development financing and tax increment financing simultaneously;

(13) Prohibits moneys from the State Supplemental Downtown Development Fund from being used for the construction, maintenance, or operation of sports stadiums;

(14) Requires each authority to be governed by a board of commissioners with from five to 14 members. One board member will be appointed by the school districts within the development area and the remaining members will be appointed by the mayor or chief executive officer of the municipality. Initially, members will serve staggered terms of one, two, and three years. Thereafter, terms will be for three years;

(15) Outlines the powers of the board;

(16) Requires each municipality to establish a minority business plan to ensure that minority-owned businesses are provided good faith opportunities to participate in the procurement of goods and services within the development project;

(17) Explains the requirements of the development plan;

(18) Allows the municipality or the authority to issue bonds for the development project but prohibits the state from issuing bonds for the development project;

(19) Explains the manner in which ad valorem taxes and payments in lieu of taxes will be divided among the affected taxing districts;

(20) Requires a joint committee of the General Assembly to review the act every five years, beginning in 2008. A report must be issued to the Speaker of the House of Representatives and the President Pro Tem of the Senate no later than February 1 following the year in which the review was conducted;

(21) Requires each municipality to submit an annual report concerning the status of the development plan to the Director of the Department of Economic Development;

DESCRIPTION (continued)

(22) Requires the director to submit a report to the Governor, the Speaker of the House of Representatives, and the President Pro Tem of the Senate summarizing the information submitted by

the municipalities. This report must be submitted by April 30 of each year;

(23) Defines "central business district";

(24) Considers the reasonable costs incurred by the departments of Economic Development and Revenue and the Office of Administration for processing applications for funding to be considered allowable development project costs. These costs can include the portion of salaries and expenses paid by the departments of Economic Development and Revenue that can be reasonably allocated to each development project; and

(25) Prohibits lawsuits protesting the creation of an authority or anything relating to the development plan, project, or area from being brought more than 90 days after the effective date of the ordinance creating the authority.

Relating to the Community Development Corporation Revolving Fund, the substitute:

(1) Requires Kansas City, St. Louis City, and St. Louis County to establish a community development corporation revolving fund for the purpose of providing funds to community development corporations to stimulate economic development, housing, and other public benefits leading to the development of economically sustainable neighborhoods;

(2) Requires that the fund be administered by a board with 13 members appointed by the mayor or chief executive officer of the municipality. Of these 13 members, one must be a member of the local regional community development association and one must be an owner of a minority business;

(3) Allows the General Assembly to appropriate up to 5% of the state sales tax increment portion of other net new revenues generated by development projects certified for state supplemental downtown development financing to be deposited into the State Supplemental Downtown Development Fund for the purpose of providing grants to Kansas City, St. Louis City, Boone County and St. Louis County for community development corporation revolving fund programs; and

(4) Prohibits the sum of the grants from exceeding $1.5 million annually.

DESCRIPTION (continued)

This legislation is not federally mandated, would not duplicate any other program and would not require additional capital improvements or rental space.

SOURCES OF INFORMATION

Department of Economic Development

Department of Revenue

Office of the State Treasurer

City of Kansas City

Department of Transportation

Office of Administration - Budget and Planning

NOT RESPONDING: City of St. Louis, St. Louis County

Mickey Wilson, CPA

Director

March 6, 2003