Purpose

• The bill changes how excess tax increments from Tax Increment Financing (TIF) districts are handled. It requires an annual determination of excess increments, sets timelines for use or return, and adds rules about decertifying districts if excess increments aren’t used. It also tightens reporting and clarifies how excess increments are calculated and distributed.

Main Provisions

• Annual determination of excess increments

  • The local TIF authority must annually determine the amount of excess increments for each district, using the district’s TIF plan in effect as of December 31 and the increments and other revenues received by December 31.

• How excess increments must be used or returned

  • Any excess increments must be spent or returned within nine months after the year ends.
  • If excess increments exist, they must be returned to the county auditor unless there is an outstanding qualifying pay-as-you-go (PAYGO) contract and note, in which case the district may not be decertified immediately.

• Decertification when excess increments exist

  • If there are excess increments and no PAYGO contract/note exists, the district must be decertified unless a nine-month deferral rule applies (see below).

• Deferral of decertification (with conditions)

  • The decertification requirement can be deferred if, within nine months after December 31, a modification to the TIF plan is approved that increases the total costs that may be paid with increments beyond the amount of the excess increment.
  • The deferral expires nine months after the next year in which there is an excess increment, provided there are no further approved modifications that would increase costs beyond the excess and the district has no outstanding PAYGO contract and note.

• How excess increments are calculated

  • Excess increments equal the net amount of all increments collected since certification, after subtracting prior excess increments paid/returned, and after subtracting the total costs the TIF plan authorizes to be paid with increments, with several adjustments:
  • Subtract costs paid from sources other than tax increments.
  • Subtract other revenues dedicated to those costs and received.
  • Subtract principal and interest due on outstanding bonds (not prepaid in a prior year).
  • Increase by transfers of increments made to reduce deficits in other districts.

• Authorized uses of excess increments

  • Excess increments may be used to:
  • Prepay outstanding bonds,
  • Discharge the pledge of tax increment for outstanding bonds,
  • Pay into an escrow account dedicated to bond payments, or
  • Return the excess to the county auditor.

• Distribution of returned excess increments

  • When excess increments are returned, the county auditor must distribute them to the city or town, county, and school district where the TIF district is located, in proportion to their local tax rates.

• Special provisions for older districts

  • For districts certified before August 1, 1979, excess increments are defined as the amount on hand at December 31 minus debt obligations, per the rules in the bill.

• Reporting requirements

  • The county auditor must report to the commissioner of education, by February 1 each year, the amount of any excess tax increment that was distributed to a school district for the previous year.

• Definitions and exemptions

  • “Outstanding bonds” means bonds secured by increments from the district.
  • The State Auditor may exempt an authority from reporting calculations for a calendar year if the authority certifies that the total plan-authorized increments exceed total collected increments by at least 20%.

Notable Changes to Law

• Adds a formal, annual process to identify and handle excess increments, with concrete deadlines (nine months) for using or returning them.
• Creates a potential decertification trigger tied to excess increments, but allows a deferral mechanism tied to plan modifications that increase authorized costs.
• Establishes a clear framework for how excess increments are calculated, including multiple deductions and increases.
• Requires distribution of any returned excess to affected local governments based on local tax rates.
• Tightens reporting requirements to the education department and offers a possible exemption path for certain authorities.

How This Sits with Existing Law

• Builds on the existing TIF framework by adding detailed rules for surplus increments, when to decertify districts, how to treat such increments, and how to report and distribute funds.
• Introduces a structured incentive (or pressure) to modify TIF plans in ways that increase authorized costs, in order to avoid decertification.

What It Aims to Accomplish

• Improve oversight and accountability for excess tax increments.
• Ensure excess increments are used for bond-related purposes or promptly returned to taxing jurisdictions.
• Provide a mechanism to decertify districts that fail to absorb or appropriately apply excess increments, while allowing careful deferral if legitimate plan changes are pursued.
• Increase transparency through required reporting to the Department of Education and potential State Auditor exemptions in specific scenarios.

Notable Terms

• Excess increments
• Tax increment financing (TIF)
• Tax increment financing district
• Decertify
• Pay-as-you-go (PAYGO) contract and note
• TIF plan
• Outstanding bonds
• Principal and interest
• Escrow account
• Transfers of increments
• Section 469.1763 subdivision 6
• Section 469.175 subdivision 4
• County auditor
• Commissioner of Education

Relevant Terms

• excess increments
• tax increment financing
• TIF district
• decertification
• PAYGO
• pay-as-you-go contract
• principal and interest
• outstanding bonds
• escrow account
• transfers of increments
• nine months
• county auditor
• commissioner of education
• modifications to TIF plan
• debt obligations
• bond prepayment
• bond pledge
• reporting requirements
• 1979 districts
• 20 percent exemption (reporting exemption)