Our previous post discussed the Chicago Inspector General’s Report “Recommendations for Improving the SSA Establishment Process” dated June 4, 2012 (the “IG Report”).  The IG Report focused on SSA #46, a south side SSA that overlapped three TIF Districts.  As a result of the overlap, the SSA tax rate levy on properties within the SSA was approximately 30% higher than anticipated, angering SSA taxpayers.  Ultimately, the City Council terminated SSA #46.

The IG Report offered suggestions to streamline the SSA process and improve coordination with the City’s Department of Housing and Economic Development for greater transparency and more accurate projections of the impact of the SSA tax.  Another possibility, however, is the ability of the SSA sponsor agency to coordinate with the City so that money attributable to the SSA tax that would otherwise be deposited in the TIF District Special Tax Allocation Fund (STAF) be paid to the SSA for SSA funded improvements.  Section 65 ILCS 5/11-74.4-3(q) of the Illinois TIF Statute allows a municipality to either retain tax increment generated by an SSA tax and use that increment for SSA projects or transfer that increment to the TIF District’s STAF.

This is not the first time that the Inspector General’s Office has examined the relationship between TIF and SSA.  Earlier in 2012, the Inspector General’s Office published “Analysis of Special Service Area Taxes and Tax Increment Financing Funds.”  In this Report, the Inspector General’s Office concluded that TIF Districts receive an unintended benefit when an SSA overlaps a TIF.  If an SSA tax is levied on property within a TIF District, it is not only extended on the Base Equalized Assessed Value (EAV) of property within the TIF District to meet the SSA tax levy, but it is also levied on the incremental EAV of the property within the TIF District.  SSA taxes generated on the base EAV are paid to the SSA.  Normally, SSA taxes generated on the incremental EAV are paid into the TIF District’s STAF.  However, the City has the authority to pay SSA tax generated on the incremental EAV to the SSA instead.

Encouraging coordination between the City and the SSA sponsor agencies by making them aware of this provision of Illinois TIF law is another way to improve the City’s SSA process.

A report released on June 4, 2012 by the Chicago Inspector General’s Office (the “IGO Report”) examines the City’s Special Service Area (SSA) taxing district establishment process. The report, entitled “Recommendation for Improving the SSA Establishment Process”, analyzes SSA #46 and explains how a TIF District impacts an SSA tax levy if an SSA taxing district overlaps an existing TIF District.

The following steps are required to establish an SSA in Chicago:

• A sponsor agency must complete a feasibility report (which includes a PIN analysis) and an SSA application.

• The City’s Department of Housing and Economic Development (DHED) must approve the SSA application.

• The sponsor agency holds local  stakeholder  meetings  and establishes public support levels with collaboration from the local alderman and DHED.

• The City Council’s Finance Committee holds a public hearing.

• The City Council votes on the establishment of the SSA.

According to the IGO Report, SSA #46 was established in December 2009. The first SSA tax levy was included in the second installment of the 2009 property taxes (collected in the fall of 2010). Because the 2009 property tax increase resulting from the SSA was significantly higher than the SSA taxpayers expected, the City Council elected to terminate SSA #46 in February 2011.

The IGO Report concluded that several factors, including inaccurate PIN analysis, miscommunication with SSA #46 taxpayers and failure by the HED to review the SSA establishment process led to higher than anticipated SSA taxes. For example, the IGO Report found that the PIN analysis for SSA #46 was inaccurate because the SSA sponsor agency failed to consider the effect of the three overlapping TIF Districts on the SSA tax levy.

To levy an SSA tax, the sponsor taxing agency must establish a budget (the dollar amount of the proposed SSA tax) and then derive an SSA tax rate by dividing the budget by the combined equalized assessed value (EAV) of all properties in the proposed SSA taxing district (SSA Tax Rate = Budget / Combined Property EAV).  The SSA tax levy for each taxpayer is then calculated by multiplying the EAV of each taxpayer’s property by the SSA tax rate (SSA Tax = Property EAV x SSA Tax Rate).

If the SSA taxing district overlaps an existing TIF District, the combined EAV used to derive the SSA tax rate must be adjusted. When a TIF district is created, its then current EAV is defined as base EAV.  Any EAV increase over the base is defined as incremental EAV. Property taxes generated by incremental EAV are deposited in the TIF fund. Only property taxes generated by the base EAV can be distributed to overlapping taxing agencies. Therefore, in order to calculate the SSA tax rate, only the base EAV (instead of the total EAV) for properties located both in an SSA taxing district and a TIF District (the “Overlapping SSA and TIF Area”) should be added to the total EAV for properties in the non-overlapping area (SSA Tax Rate = Budget / (Base Property EAV in Overlapping SSA and TIF Area + Property EAV in Non-overlapping Area)).

The EAV used to determine the tax rate for SSA #46 did not reflect the presence of the overlapping TIF Districts. As a result, while the sponsor agency estimated that the SSA tax rate would equal 1.5%, the actual SSA tax rate shown on the tax bills was 1.982%, approximately 30% higher. Although the total property tax collected for the 1.982% SSA tax levy is more than the budget amount, only the portion of the taxes attributable to the base EAV of properties located in the Overlapping SSA and TIF Area and the total EAV of properties located in the non-overlapping area can be distributed to the SSA tax sponsor taxing agency. The SSA taxes collected on the incremental EAV of properties located within the Overlapping SSA and TIF Area are deposited in the TIF District Special Tax Allocation Fund.

The IGO Report is available on the Chicago Inspector General’s Office website at: http://chicagoinspectorgeneral.org/wp-content/uploads/2012/06/IGO-Recommendations-for-Improving-the-SSA-Establishment-Process_final.pdf