CHICAGO -- Anticipated property tax reforms in Wisconsin could hurt the ability of tax increment financing districts to support debt service and could weaken tax increment financing as an economic development tool if state lawmakers fail to change existing laws, according to Standard & Poor's Corp.

In April, Gov. Tommy Thompson signed into law a measure that requires the state to reduce property taxes by paying 66.5% of school costs by 1997. That plan will decrease municipalities' overall millage rates, which will result in decreased incremental revenues for tax increment financing districts, Standard & Poor's said in this week's issue of CreditWeek Municipal.

About $25 million of the $116 million tax increment financing revenues collected annually in the state would be in jeopardy under the law, according to Mark Bugher, the state's revenue secretary.

Kenneth A. Gear, an associate director at Standard & Poor's, said that some ratings could be affected if Wisconsin officials "do nothing" to remedy the expected reduction in tax increment financing revenues.

Without any changes in the current law, many tax increment financing districts "will not meet the revenue projections they relied on in developing their infrastructure spending programs," which could require cities to pay debt service from their operating revenues, Standard & Poor's said.

Tax increment debt in Wisconsin typically is secured by a municipality's full faith and credit pledge in addition to tax increment revenues, the rating agency said.

In addition, tax increment financing could be hampered or eliminated as an economic development tool if existing laws are not changed, Standard & Poor's said.

Gear said state officials may be willing to address the problem before the law is implemented by 1997.

Bugher said that Thompson is "keenly aware of the problem" and is considering a number of proposed solutions. State lawmakers will address the proposals in January 1995, he said.

The proposals include:

* Lengthening the lives of tax increment financing districts by extending or eliminating their mandatory termination after 23 years.

* Permitting municipalities to shift tax increment revenues from a performing district to a nonperforming one.

* Adopting a "hold-harmless" plan that would set aside as much as $25 million in state loans and grants for affected municipalities.

* Offering a secondary security pledge for tax increment financing districts by pledging the state's full faith and credit.

Gear said that lengthening the lives of the districts and adopting the holdharmless plan appear to be the most plausible options and would be "an easy way to solve the problem."

He added that the hold-harmless proposal is similar to one adopted in Michigan, which earlier this year approved a plan to eliminate property taxes for school operating purposes and increase state funding of schools.

Under the Wisconsin tax reform law, a bipartisan commission will draft a plan to find $1 billion so the state can increase its share of school funding to 66.5%. The statewide reduction in property taxes will average about 22%, according to Standard & Poor's.

To ensure that property taxes are reduced, the law automatically limits a school district's levy to 10 mills, starting in 1997. The average current school levy is 17 mills.

Until 1997, Wisconsin will give schools $171 million of a $217 million state budget surplus to curb the need for property tax increases to fund schools. School districts already have an annual revenue increase cap of $190 per pupil or the annual inflation rate, whichever is greater.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.