CHICAGO -- The elimination of school operating property taxes in Michigan will go beyond schools by cutting into tax increment financing debt issued by local development authorities.

Bryan Crough, chairman of the Michigan Development and Financing Association, which represents TIF authorities across the state, said a new state law eliminating $6 billion in school property taxes beginning in July 1994 will mean a revenue loss of 60% to 65% for the authorities.

School taxes are generally a major part of the mix of local property taxes used to support TIF districts. In those districts, the incremental increase in all the property taxes collected is used to pay for infrastructure improvements for commercial, industrial, or residential projects. Or it is used to back bonds that pay for those improvements.

The association, which is completing a survey of TIF authorities, estimates that 447 of them have been established since 1975, the year state law began permitting the districts. According to Cynthia Faulhaber, a partner at Miller, Canfield, Paddock and Stone, a Michigan-based bond law firm working with the association, the authorities have since issued about $475 million of bonds.

Faulhaber said while the bonds are backed by TIF revenues, most of the issues carry as security the limited tax general obligation pledges of the local governments.

"For the most part they are smaller issuers and smaller amounts of debt that are not rated and not insured, but backed by the full faith and credit [of the local governments]," she said.

The development and financing association is also worried about the future of economic development infrastructure projects funded with TIF debt. Without school property taxes, the group wonders how these projects can be undertaken. Faulhaber said the group estimates that $230 million of bonded projects are now on hold.

State officials, who have been deliberating on property tax reform for 20 years, took the dramatic and unexpected step in July of killing property taxes dedicated to school operating budgets without having a plan to replace those revenues or to ensure the security of debt backed by them. The Legislature's action did not affect voter-approved property taxes for unlimited tax GO debt.

Crough, who is also the executive director of the Traverse City Downtown Development Authority. said the loss of the school property tax revenues for the TIF districts will put pressure on the governments to come up with revenues.

Rating agency officials said they are concerned about TIF debt, but are waiting to see how the state will address the problem.

The secondary market for the debt is in limbo as well.

Bruce Coleman, a first vice president in the municipal underwriting and trading department at Michigan National Bank, said he has not seen many TIF bonds in the secondary market. "even for bid."

"Maybe people are afraid to bring them out and see what they're worth." he suggested.

Crough said the governments are hopeful that the solution worked out between lawmakers and Gov. John Engler will restore full funding of TIF obligations.

The Engler administration is committed to finding a revenue source "to provide adequate debt service for TIF obligations," said Nick Khouri, Michigan's chief deputy treasurer. "It's in everyone's interest to see that all bondholders are protected and debt service is paid in a timely manner."

But what that revenue source will be is anyone's guess. Administration officials who are crafting a plan to finance schools in the wake of the property tax elimination are not saying much.

Khouri, a member of the governor's task force. said the plan will be unveiled in October. Engler has set a yearend deadline for having a school funding plan in place.

Meanwhile, State Rep. Gregory Pitoniak. D-Taylor, has introduced bills that would fill the funding gap on TIF debt with state appropriations. Pitoniak said his plan would provide for an annual appropriation to cover any debt service shortfalls caused by the lack of school property taxes. In addition to debt currently outstanding, his measures would cover TIF projects financed between now and April 1.

The problem with the plan, which Pitoniak acknowledges, is that the current Legislature cannot compel future Legislatures to make the appropriation.

Faulhaber of the bond law firm said that kind of revenue substitution would not be as secure as TIF revenues because an annual appropriation is not "predictable or certain."

Pitoniak said he has "broad support" for his legislation, which he introduced to make lawmakers think about the problem now facing local development authorities.

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