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Excess Increments

What are excess increments?

The general public often uses the term "excess increments" loosely to refer to extra increments that the city has available to use for purposes beyond the original development proposal. However, "excess increment" is also a legal term with a precise, and much narrower, meaning and important legal consequences. Minn. Stat. § 469.176, subd. 2. In general, excess increments rules apply in situations when the total increments that have been collected from a district exceed the authorized expenditures of tax increments under the TIF plan. The excess increment rules are intended to ensure that overlapping taxing districts (i.e., the county and school district) share in the taxes generated by the TIF district that are not needed to fund the TIF plan.

How are excess increments calculated?

The law establishes an elaborate set of rules to determine whether a district has excess increments. It is perhaps easiest to understand these rules by expressing them as a series of calculation steps.

Step 1. Determine the total amount of increments collected from the district since its inception or certification. This is based on the broad definition of increments and includes developer repayments of amounts funded with increments, investment income earned on increments, and so forth.

Step 2. Subtract any amount of excess increments that were distributed in a prior year to the city, county, and school district. Since excess increments are calculated for the life of the district, this subtraction is made to prevent double counting of increments that previously were distributed.

Step 3. Subtract the total amount of costs authorized by the TIF plan to be paid with increments. This is the basic calculation: has the district collected more increments than it is authorized to spend? If so, it has excess increments. (The amount of authorized costs is adjusted as provided in Steps 4 through 6. The total amount of these adjustments cannot exceed the amount of authorized costs, though.)

Step 4. Add the amount of the authorized costs that were paid with non-increment revenues. For example, if part of the authorized costs were paid with a federal or state grant, then increments are not needed to pay these costs. This adjustment does not apply to revenues, such as advances or interfund loans, that are to be repaid with increments.

Step 5. Add nonincrements revenues that have been received and are dedicated to pay these costs, but that have not actually been used to pay the costs (and thus are not counted under Step 4). Similar to Step 4, to the extent these nonincrement revenues have been received to pay authorized costs, increments are not needed to do so.

Step 6. Add the amount of principal and interest payments that are due on bonds in future years and that have not been prepaid. (Under the excess increment rules, future principal and interest obligations are counted in the year when they are due or when they are prepaid.) The resulting amount is the excess increment for the district.

When are excess increments determined?

The law requires the development authority to determine whether a district has excess increments at the end of each calendar year. This determination is made based on revenues actually received by year end.

What are the permitted uses of excess increments?

Excess increments must be used for either of two basic purposes:

  1. Prepaying outstanding bonds – this can be done directly (if permitted by the bond agreement) or by funding an escrow account for the bonds or otherwise discharging the bonds.
  2. Distribution to the city, county, and school district in proportion to their respective tax rates. The county auditor makes these distributions. If there are no bonds outstanding, this is the only permitted use of excess increments. If all of the contractual obligations of the district have been satisfied, the authority could also decertify the TIF district early. For pre-1990 districts, the authority may wish to amend the TIF plan to authorize new uses of increments. This would allow only future increments to be used for these new purposes, since past increments would still be considered to be excess increments.

Do special reporting requirements apply to excess increments?

Yes, the county must report any excess increments distributed to the school district to the state department of education. This is intended to allow re-computing of the school's state aid.

November 2009