PORT ANGELES — As the city of Sequim considers a new funding mechanism aimed at promoting economic development, fire districts across Clallam County are raising warning bells about the impact the mechanism could have on junior taxing districts’ revenue.
The mechanism, tax increment financing (TIF), is seen as a way for entities to spur new development and growth by publicly funding needed infrastructure costs.
TIF is utilized when a tax increment entity — either a city, county or port district — establishes a geographical tax increment area, according to Brian Snure, owner and attorney at Snure Law Office in Des Moines, Wa., who represents fire districts. The entity then funds the public improvements needed for development in that area by issuing bonds, which are repaid through collecting additional property tax revenue generated within the area.
Currently, Sequim is considering creating a 363-acre tax increment area that had a 2023 assessed value of about $57 million. That would help pay for two sewer lift stations on West Sequim Bay Road, a project estimated to cost about $19.7 million.
“I understand why they want to use TIF, the value in what they’re trying to do,” Snure said. “If you’re a city, county or port district and someone says, ‘I have a revenue scheme you can implement and other people fund a major part of your bills,’ why would you say no?”
However, when an entity decides to create a tax increment area, it has an impact on junior taxing districts whose taxable property lies within that area, Snure said.
“It’s presented as being too good to be true, because it really is too good to be true,” Snure said. “There are consequences to this.”
When a TIF is created, the assessed valuation is frozen for the period chosen, up to 25 years. So, while junior taxing districts will still get some taxes from that area, they will not get any revenues gained from new development or jumps in assessed valuation that occur while that area is frozen, Snure said.
“It diverts money from you,” Snure told a collection of fire district representatives during a presentation in February. “The main tax revenues that flow out of the development in a tax increment area would go to the TIF entity.”
For example, Snure said a 25-year tax increment area could be created by a city in an area that has a total assessed value of $100,000. If a fire district has a maximum levy rate of $1.50 implemented, it will get $150 from that area.
If a development then builds a hotel that brings the total assessed value up to $1 million, the total taxes collected with that levy rate would be $1,500. However, the fire district would still only get $150. The remaining $1,350 would be diverted to the city to help repay the costs of infrastructure that it helped fund.
State and school levy property taxes are excluded from the TIF mechanism.
Despite the fact most junior taxing districts are not getting any of the revenue generated by new development, they are still affected by the development. For example, Snure said fire districts would have a larger burden than pre-development due to the increased levels of service brought in by the hypothetical hotel.
“That’s the challenge of the TIF,” Snure said. “You don’t get the money, yet you’re expected to provide the level of service.”
Taxpayers outside the tax increment area would then be subsidizing the service that is provided within the area, Snure said. And, to help pay for the additional levels of service needed, junior taxing districts may need to ask for levy lid lifts.
“Everyone else in the fire district outside the tax increment area, their taxes are going to go up, and they are going to be subsidizing services for the remainder of the 25 years in that tax increment area,” Snure said of the hypothetical time period.
The taxes of those within the tax increment area would also go up if a levy lid lift is implemented, but all the additional revenue would be funneled to the TIF entity. If the entity’s bonds get paid off before the plan’s time is up, then the tax increment area would sunset.
There are rules that limit TIFs, Snure said. TIF entities are restricted to creating only up to two non-overlapping tax increment areas of up to 25 years, they have to adopt an ordinance identifying what public improvements are being funded through TIF, and the total tax increment areas created by the entity cannot exceed $200 million in assessed value, or more than 20 percent of the TIF entity’s total assessed value.
The entity also must create a project analysis that identifies what development would be anticipated with and without the tax increment area, prove development would not happen without TIF and assess the impact of the TIF on the junior taxing districts.
However, Snure said he thinks the entities often underestimate the impacts a tax increment area will have on junior taxing districts.
The entity creating the area also must have two public hearings explaining the plan to the public, although they are not required to input public feedback or consult with junior taxing districts when building the plan, Snure said.
Mitigation is legally required, however, if the tax increment area will impact at least 20 percent of the assessed value of an affected junior taxing district, or if the district can prove a projected increase in the level of service directly related to the increment area.
At this early stage in the process, Clallam County Fire District 3 (CCFD3) Fire Chief Justin Grider said the city has been good partners and willing to talk through the potential impacts of its plan. CCFD3 covers Sequim and surrounding areas.
“They have not operated in a vacuum in this regard,” Grider said. “I’ve been very pleased with the city’s willingness to be open and honest with us.”
In February, Sequim submitted its TIF project analysis to the Office of the State Treasurer. It is now undergoing a three-month review.
While the application is being reviewed, City Manager Matt Huish said the city is working with its TIF consultant and outside legal bond counsel to address further questions. At the moment, however, he said the city has not decided if it is going to move forward with a TIF option or another traditional infrastructure financing option.
If the city pursues the plan, Grider said CCFD3 will have to work on mediation to help offset the financial burden it will incur.
When a TIF is created for an area, the theory is it will generate new construction and increase the assessed value of the area in ways that might not occur without the TIF. Once that area comes “online,” or once the bonds are paid back, the junior taxing districts will see benefits from the new construction and increased valuations.
Although no jurisdictions in Clallam County have implemented a TIF — Sequim appears to be the only municipality considering it — fire districts are worried that other entities will see its benefits and jump at the opportunity.
“I think the more jurisdictions that utilize the TIF to establish infrastructure for planned development, I think other municipalities will look into that possibility and feasibility of doing that as well,” said Keith Cortner, president of the Olympic Peninsula Fire Commissioners Assocation.
At this point, Cortner said the only way junior taxing districts can prepare is to stay informed, educate citizens and be ready to advocate for themselves if a TIF is proposed.
“Information is knowledge. Knowledge is information,” he said. “(We have to) be aware of the program, how the program works and what our options are once it occurs, if it occurs.”
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Reporter Emma Maple can be reached by email at emma.maple@peninsuladailynews.com.
