By Eric Berman
September 01, 2017
During January 2017, Eide Bailly posted an article Tax Abatement Disclosures; Best Practices in Implementing GASB Statement No. 77. For December 31st year-end governments, the implementation of GASB Statement No. 77 presented some lessons learned. As a reminder, every government is different and subject to differing sets of laws and regulations that may require understanding prior to undertaking the disclosure.
Case #1 below is an Eide Bailly client that has successfully implemented GASB Statement No. 77. Care must be taken as the facts may be different for each government’s circumstance. Case #2 is from a city in the same state. The cases show the range of potential disclosures.
Case #1 – County Abatements
In this example, a county signed abatement agreements totaling approximately $1,035,000 out of a total amount of property tax revenue of approximately $106 million. As a reminder, GASB Statement No. 77 has a focus on disclosure rather than accounting and financial reporting. This particular county was not subject to agreements made by another government that reduced the county’s tax revenue. The county decided to aggregate information as allowed by GASB Statement No. 77. Had the county chosen to disclose agreements individually, they may have set a quantitative threshold for disclosure.
The County’s disclosure was as follows:
Section ______ of the State Statutes authorizes counties to negotiate incentive payments for the County’s portion of any Business Personal Property Taxes (BPPT) for any business wanting to establish a new business facility or expand an existing facility in the County. The abatements are issued each year the agreement is in effect. The County Government negotiates BPPT abatement agreements on an individual basis as an incentive to attract new businesses, stimulate economic development and to create or retain jobs. There are no provisions for recapturing the abated taxes. The County has fully negotiated and completed tax abatement agreements with 20 entities as of December 31, 201X for an aggregate BPPT abatement of approximately $1,035,000.
Case #2 – City Abatements
In this example, a city offers various incentive agreements and subsidies in order to increase economic development. In this case, the agreements are performance-based. The city does not apply an abatement to taxation until the receiving party has met performance goals. This reduces much of the potential problem of recapturing tax abatements after a post-audit has found that requirements of the agreement were not met. The city also has aggregated information similarly to the county in Case #1.
The City’s disclosure is as follows:
The economic development division offers individual business incentive packages to attract new businesses to the city to grow the local economy and to provide quality job opportunities for city residents. Incentive agreements are entirely discretionary and are considered on a case-by-case basis by the city council. A written agreement is required and no agreement is final without formal action by city council.
All incentive agreements are performance based. Performance based means that before any monies are disbursed; the business shall meet or exceed the specific performance measures identified in the incentive agreement. Specific performance measures may include: (a) meeting the requirements of the eligibility threshold for jobs and wages; (b) requiring new revenues generated by the business to equal or exceed the total dollar amount of the incentive provided during the period of the incentive agreement by rebate or refund; (c) requiring any rebate or refund to come from the revenues actually generated by that business; or (d) requiring the completion of significant development review process milestones such as successful completion and issuance of a development permit, building permit, or certificate of occupancy.
Incentive packages vary and may include a direct subsidy for public infrastructure costs or a rebate of permit fees, use taxes, property taxes, or sales taxes. Rebate of sales and use taxes will only be considered for new taxes generated by the business. The city does not rebate existing sales and use taxes generated by a business. All incentive agreements are subject to annual appropriations by city council as required in the State Constitution and the City Charter. Some of the agreements have provisions for recapturing the abated taxes if specific performance measures are not maintained. As of December 31, 201X, the city has nine active incentive agreements in place. In 201X, the city’s expenditures include approximately $6,746,000 in tax abatements.
One Last Look on How to Gather the Information
Many clients have asked something similar to ‘where do I start?’ As seen in the above cases, economic development is a good place to find this information. Within the government, the office that keeps minutes from governing board meetings and general counsel’s offices may also have information relating to tax abatements.
Tax abatements may also come from other levels of government and forced upon a lower level of government. Many states may have tax abatement programs and force counties, cities or other districts to reduce taxes based on that agreement, even if they had minimal or no part in negotiating the terms and conditions of the agreement. In such cases, the lower level of government will have to work with the higher level of government to obtain information required by GASB Statement No. 77. However, less information is needed in such circumstances as the lower level of government’s role was limited.
For audit purposes, the focus is on completeness. Once all the information is gathered, including any multiple-level agreements, testing will include compliance with the agreement, including if funds were recaptured where required. Commitments made by the government to the entity receiving the abatement are also important. These usually involve additional or improved infrastructure.
Finally, if the government is subject to a non-disclosure law or agreement, compliance with GASB-77 may be difficult as the law may restrict information. Governments should follow the law disclosing only to the extent allowed and disclose the law’s existence.
Should you have any questions on implementing GASB Statement No. 77, please contact your Eide Bailly partner.