Chris Pieper Discusses Possible Changes for Transportation Development Districts (TDDs)

By Chris Pieper

A high-profile state audit of Transportation Development Districts (TDDs) could mean big changes for this frequently-used economic development tool.  Developers, property owners and businesses should take steps to ensure compliance with current law and prepare for uncertainty in the wake of calls for a “total overhaul” of the TDD law.

For nearly 30 years, Missouri law has authorized the creation of TDDs to finance, construct and maintain transportation-related projects (e.g. streets, parking lots, etc.), typically through debt secured by revenue from a sales tax imposed on retail sales within the district.[1]  Missouri State Auditor Nicole Galloway’s recent audit of TDDs identified what she described as “questionable practices,” “little oversight or transparency,” and “self-dealing and conflicts of interest.”[2]  The audit reviewed information on the 205 existing TDDs and conducted an in-depth review of a representative sample of twelve TDDs.  State Auditor Galloway announced her findings at press conferences around the state, generating news coverage and editorials calling for TDD reform[3] and prompting additional audits and investigations.[4]

The audit’s findings and recommendations focused on three areas—(1) weaknesses in the current TDD law; (2) weaknesses in administration of TDD law by the Missouri Department of Revenue (DOR); and (3) violations of the TDD law by existing TDDs.

  1. Weaknesses in the Current Law

The audit focused on weaknesses in the current TDD law that allow the formation of districts and imposition of sales taxes without voter approval or sufficient public scrutiny, due primarily to the fact that approximately 81 percent of TDD governing boards are controlled by the developer/property owner(s).  To encourage greater public scrutiny, the audit recommends the General Assembly require formation of a TDD be approved by a public governmental body—similar to the municipal approval required for a Community Improvement District or Tax Increment Financing (TIF) District.  Similarly, the audit recommends requiring any sales tax imposed to be approved by voters of the entire city or county within which the TDD is located, suggesting a return to the pre-1997 TDD law, which required a city or county-wide vote.[5]  The audit also recommends a “but-for” determination and economic impact statement similar to TIF or even a more in-depth economic impact analysis like that required for state economic development programs such as Business Use Incentives for Large Scale Development (BUILD).

The State Auditor also criticized the current TDD law for allowing “significant conflicts of interest” within the governance of districts controlled by the property developer/property owner(s).  For example, the audit criticized the potential conflict of interest where a developer/property owner-controlled board votes to award themselves construction contracts or to approve payments for the work. The audit also criticized the ability of TDDs to extend sales taxes without approval by a court or other public entity, highlighting a TDD that extended its sales tax from 13 to 40 years.  To address these findings, the auditor recommended the General Assembly require an independent third party like a Local Transportation Authority (LTA) to review and approve procurement, extension of TDD taxes, and district expenditures, or require that the LTA or representatives of the general public make up a controlling majority of the TDD board.

The audit also criticized the current law for allowing TDDs to collect sales taxes in perpetuity through a lease and/or maintenance of the project as an eligible project cost, thereby allowing the sales tax revenues to be used to pay the developer/property owner(s) for the use and maintenance of their assets. In addition, the audit noted that current law does not require sales taxes to be rescinded immediately upon the district obligations being repaid.  To address these findings, the audit recommends the General Assembly require TDDs to define eligible project costs at formation, prohibit leases of private assets and maintenance as allowable project costs, and require TDDs to rescind the sales tax as soon as project costs have been repaid and to disburse any remaining proceeds to area school districts.

  1. Weaknesses in Administration of the Current Law

The audit also highlighted weaknesses in DOR’s administration of the current law, particularly its failure to adequately track TDD boundaries and the resulting incorrect taxes being collected in nearly half of the TDDs selected for in-depth review. As an example, the Rock Bridge TDD in Columbia received sales taxes for a year from a business that was outside its borders and only stopped doing so when the State Auditor alerted the business to the error.  The auditor’s recommendations to the DOR included more rigorous enforcement and more frequent communication to prevent improper taxation.

  1. Violations of the Current Law

The audit also noted multiple violations of the current law on the part of the twelve TDDs selected for in-depth review. All twelve had at least one business that violated the law by failing to notify customers of the additional sales tax and more than half did not have a single business that was in compliance with this requirement.  A third of the TDDs reviewed had boards of directors that were in violation of state law, including situations where registered voters had moved into the district and situations where the board was no longer active or had less than the required number of board members.  In addition, nearly half of the TDDs that included TIF districts failed to adequately track the TDD portion of the project costs, allowing TDD revenues to impermissibly fund TIF projects. To address these violations, the audit recommended stiffer fines and penalties and assigning an independent governmental body, such as an LTA, the responsibility for ensuring compliance.

Conclusion

The State Auditor’s interest in special taxing districts such as TDDs is not new, nor is it likely to end with this audit.  One of the Auditor’s primary legislative proposals during the 2016 legislative session was clarifying the process for TDDs to file annual financial statements with the State Auditor’s Office and authorizing DOR to collect fines for violations.[6]  This provision was signed into law alongside Senate Bill 1002, which was also advanced by the State Auditor and which provided her office new authority to audit Community Improvement Districts (CIDs).[7]  Auditor Galloway has already begun to use that power, announcing earlier this year the audit of two St. Louis area CIDs.[8]

The TDD audit was released late in the legislative session, and no major changes occurred this year.  However, with the positive press reactions and signals that follow-up audits and investigations of TDDs are forthcoming, it is likely that the State Auditor will continue pressing the General Assembly during the interim. Developers, property owners and businesses involved with a TDD or contemplating a TDD should be aware of the possibility of additional investigations and audits, should take time now to ensure compliance with current law, and be prepared to address any efforts related to TDD reform during the 2018 legislative session.

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[1] During 2014 and 2015, the 205 current TDDs collected approximately $143 million in TDD sales taxes and are estimated to have more than $1 billion in outstanding project costs.  Transportation Development Districts Audit, Report No. 2017-020,  April 2017.

[2] Transportation Development Districts Audit, Report No. 2017-020,  April 2017.

[3] http://www.stltoday.com/news/local/govt-and-politics/auditor-missouri-s-taxing-district-law-allows-unethical-practices-poor/article_ef84fda0-3823-5e5d-8616-6b69c2f12d1f.html ; http://www.columbiamissourian.com/news/local/state-auditor-blasts-transportation-development-district-laws/article_ff14a9ea-1e3c-11e7-9539-4f1dc92c13f6.html ; http://www.missourinet.com/2017/04/11/missouri-auditor-calls-on-lawmakers-to-overhaul-tdd-legislation-galloway-mentions-stoneridge-shopping-area-in-jefferson-city/; http://www.news-leader.com/story/news/local/ozarks/2017/04/13/state-auditor-slams-tax-districts-questionable-practices-including-one-springfield/100321272/ ; http://themissouritimes.com/39422/galloway-asks-changes-tdd-laws-uncovering-massive-oversight/ ; http://www.newstribune.com/news/local/story/2017/apr/11/audit-rips-stone-ridge-tdd/669224/ ; http://news.stlpublicradio.org/post/missouri-state-auditor-calls-overhaul-transportation-development-district-laws ; http://www.semissourian.com/story/2402075.html ; http://www.stltoday.com/news/opinion/columns/the-platform/editorial-missouri-taxpayers-in-debt-for-billion-from-unaccountable-tax/article_a195bd91-35b4-598b-834c-6bf87ecad44b.html; http://www.kansascity.com/opinion/editorials/article144749504.html.

[4] http://www.stltoday.com/business/local/city-will-investigate-washington-avenue-taxing-districts/article_8c2d75ab-e5cb-546a-acf8-6433cda043d6.html

[5] Following the 1997 amendment to the TDD law the most significant subsequent change to the TDD law occurred in House Bill 191 (2009) —the major economic development bill of that session, which included a number of reforms to tax credits and special taxing districts to prevent opposition from legislators otherwise opposed to the tax credit expansions also found in the bill.

[6] House Bill 1418 (2016).

[7] http://www.kansascity.com/news/business/article86684372.html.

[8] http://www.stltoday.com/business/local/missouri-auditor-galloway-to-investigate-two-area-special-taxing-districts/article_48f405ec-1713-5871-aa87-b59daa49b4ec.html.