OLR Bill Analysis

sSB 1

AN ACT CONCERNING TAX FAIRNESS AND ECONOMIC DEVELOPMENT.

SUMMARY:

This bill authorizes several initiatives to strengthen municipalities' fiscal capacity and minimize disparities resulting from the property tax on motor vehicles.

The bill restructures the state's payment in lieu of taxes (PILOT) programs by establishing minimum annual payments and a method for disbursing PILOT grants when appropriations are not enough to fund the full grant amounts. It also modifies the distribution formulas for the Mashantucket and Mohegan Fund grants that are currently linked to the state's PILOT grants.

The bill establishes a mechanism for sharing state sales and use tax revenue in the Municipal Revenue Sharing Account (MRSA) with municipalities and the state's nine regional councils of government (COGs). It apportions 90% of the revenue to municipalities according to the formulas it specifies and 10% to the COGs on a per capita basis.

The bill authorizes a regional property tax base revenue sharing program for municipalities within a planning region (see BACKGROUND) to share up to 20% of the property tax revenue generated on specified commercial and industrial (C&I) property. The bill requires a COG's member municipalities to unanimously agree to participate in the program in order to implement it. Those that do must (1) tax C&I property at a composite mill rate, based in part on the average mill rate in their regions, and (2) share up to 20% of the property tax revenue generated by the growth in their C&I property tax bases since 2013.

Lastly, beginning with the 2015 assessment year (for taxes to be paid in FY 17), the bill allows municipalities to tax motor vehicles at a different rate than other taxable property, but caps the motor vehicle rate at 29.36.

EFFECTIVE DATE: July 1, 2016, unless otherwise noted below.

1-22 — PILOT PROGRAM

The bill restructures the state's PILOT programs, requiring municipalities to receive minimum annual grant amounts equal to the amounts they received in FY 15. It maintains the existing PILOT reimbursement rate schedule, but establishes minimum reimbursement rates for a subset of PILOT-eligible properties that apply when the appropriation for the grants is not enough to fully fund them.

Eligible Property and Reimbursement Rates ( 1-6)

By law, the state makes annual PILOT payments to municipalities to reimburse them for a part of the revenue loss from (1) state-owned property, Indian reservation and trust land, and municipally owned airports (“state, municipal, and tribal property”) and (2) private nonprofit college and hospital property (“college and hospital property”). Under current law, these PILOTs are based on (1) a specified percentage of taxes that each municipality would otherwise collect on the property and (2) the amount the state appropriates for the payments.

Beginning in FY 17, the bill sunsets the current PILOT programs and requires all PILOTs to be paid under a new consolidated program that establishes a minimum grant amount. The new program reimburses municipalities for the same types of property, at the same reimbursement rates, using the same application and payment process as the current program. As under current law, the rate is (1) 45% for state-owned property, (2) 77% for college and hospital property, and (3) between 45% and 100% for other specified properties (see BACKGROUND).

The bill also retains the following PILOTs for municipalities that host specified properties or institutions:

1. $100,000 to Branford for Connecticut Hospice,

2. $1 million to New London for the U.S. Coast Guard Academy, and

3. an additional $60,000 to Voluntown for state-owned forest land.

Eligible Municipalities ( 1)

Under current law, only towns and boroughs are eligible for state, municipal, and tribal property PILOTs. The bill conforms the law to current practice by extending such PILOTs to cities, consolidated towns and cities, and consolidated towns and boroughs.

As under existing law, the bill provides college and hospital property PILOTs to towns, boroughs, cities, consolidated towns and cities, and consolidated towns and boroughs, and village, fire, sewer, or combination fire and sewer districts, and other municipal organizations authorized to levy and collect taxes.

Prorated Grant Amounts ( 1)

Under current law, the PILOTs are proportionately reduced if the amount appropriated is not enough to fund the full amount to every municipality. The bill maintains this requirement, but adds two mitigating features. It requires each municipality to receive PILOTs that equal or exceed their total FY 15 PILOTs. It also establishes a minimum reimbursement rate for specific types of PILOT-eligible property, based on a municipality's mill rate. PILOTs for all other eligible properties must be proportionately reduced, as under current law. In either case, each municipality must receive PILOTs that equal or exceed the amount they received in FY 15.

Minimum Reimbursement Rate. The bill establishes a minimum reimbursement rate for PILOTs on (1) state-owned property (i.e., the category of state-owned property reimbursed at 45%); (2) private, nonprofit colleges and universities; (3) nonprofit general and chronic disease hospitals; and (4) certain urgent care facilities (see BACKGROUND).

Under the bill, the Office of Policy and Management (OPM) must rank each municipality based on (1) its mill rate and (2) the percentage of tax-exempt property on its grand list, excluding correctional and juvenile detention facilities and municipally-owned property (other than municipal airports). OPM must give boroughs and districts the same rankings as the municipalities in which they are located.

The bill sets a minimum reimbursement rate for municipalities based on this ranking, as shown in Table 1.

Table 1: Minimum PILOT Reimbursement Rates

Municipalities

College and Hospital Property

State-Owned Property

10 municipalities with the highest percentage of tax-exempt property and a mill rate of at least 25

42%

32%

Next 25 municipalities with a mill rate of at least 25

37%

28%

All other municipalities

32%

24%

Under the bill, the grants must be increased proportionately if the amount appropriated for the grants is not enough to fully fund them, but exceeds the amount necessary to fund the minimum reimbursement rates shown above.

Reporting Requirement ( 1)

The bill requires OPM, beginning by July 1, 2017, to annually report for four years to the Finance, Revenue and Bonding Committee on the PILOTs and include its recommendations for changes.

Mashantucket Pequot and Mohegan Fund Distribution ( 9)

Current law annually allocates a portion of the Mashantucket Pequot and Mohegan Fund to municipalities according to distribution formulas that are linked to the state, municipal, and tribal property and college and hospital property PILOTs ($20,000,000 and $20,123,916, respectively). The bill instead sets each municipality's distribution of the funds equal to the amount they received in FY 15. It also makes a conforming change to reflect the bill's PILOT provisions.

EFFECTIVE DATE: July 1, 2016, except that the provisions sunsetting the current PILOT programs are effective July 1, 2015.

23 & 25 — MOTOR VEHICLE PROPERTY TAX MILL RATES

Beginning with the October 1, 2015 grand list, the bill allows municipalities to tax motor vehicles at a different rate than other taxable property, but caps the motor vehicle rate at 29.36. (Municipalities annually assess all property for taxes on October 1 and begin taxing the property on the following July 1, when the new fiscal year begins.) It makes a conforming change to a provision allowing municipalities with more than one taxing district to set a uniform citywide mill rate for taxing motor vehicles.

EFFECTIVE DATE: October 1, 2015, and applicable to assessment years beginning on or after that date.

24 — MUNICIPAL REVENUE SHARING ACCOUNT (MRSA) DISTRIBUTIONS

sSB 946, reported favorably by the Finance, Revenue and Bonding Committee, directs a portion of sales tax revenue to MRSA (see BACKGROUND). Beginning October 1, 2016, this bill requires OPM to distribute that revenue to municipalities and the state's nine regional COGs. It apportions 90% of the revenue to municipalities according to the formulas it specifies (see below) and 10% to the COGs on a per capita basis. OPM must calculate the per capita grants to COGs based on the most recent Department of Public Health (DPH) population estimate.

The bill also eliminates the current process for distributing MRSA funds, which requires OPM to (1) provide manufacturing transition grants to municipalities and (2) distribute any remaining funds according to a specified municipal revenue sharing formula.

Basis for Municipal Distribution

The formula for distributing MRSA funds to municipalities depends on a municipality's motor vehicle mill rate (MVMR). As explained below, it gives more weight to municipalities with relatively high motor vehicle mill rates by setting a 25-mill threshold and basing the distribution on whether a municipality's MVMR is above or below that threshold.

Formula for Distributing Funds to Municipalities below the Threshold. OPM must calculate grant amounts for municipalities below the 25-mill threshold using the bill's per capita and pro rata formulas. A municipality's grant is the lesser of the per capita and pro rata distributions.

OPM must calculate each municipality's per capita distribution by multiplying the municipality's share of the state's total population (based on the most recent DPH estimate) by the total sales tax revenue in MRSA.

OPM must calculate each municipality's pro rata distribution using a multi-step formula, as follows:

1. First, it must calculate a municipality's “weighted mill rate,” which is its MVMR for FY 15 divided by the average FY 15 MVMR for all municipalities.

2. Next, it must multiply the municipality's weighted mill rate by its per capita distribution. (This step increases a municipality's share of the sales tax revenue if the municipality's FY 15 MVMR is greater than the statewide FY 15 MVMR average and lowers it if the MVMR is less than that average. The bill refers to the outcome of this step as the “municipal weighted mill rate calculation.”)

3. OPM must then (1) divide the municipal weighted mill rate calculation by the sum of all municipal weighted mill rate calculations and (2) multiply the result by the total sales tax revenue in MRSA, thus yielding the municipality's pro rata distribution.

Grant Formula for Municipalities At or Above the 25-mill Threshold. The formula for municipalities at or above the 25-mill threshold also begins by calculating the per capita and pro rata distributions, but OPM must select the greater of the two amounts and increase it based on a specified ratio. OPM must determine that ratio by:

1. subtracting the total pro rata grants for municipalities below the 25-mill threshold from the total per capita grants for such municipalities and

2. dividing the difference by the sum of the pro rata and per capita distributions for municipalities at or above the 25-mill threshold.

Presumably, OPM must multiply the ratio by the per capita or pro rata distribution in order to increase it.

The bill caps the grant amounts for specified municipalities. It caps Hartford's grant at 5.2% of the municipal MRSA distributions, Bridgeport's at 4.5%, New Haven's at 2.0%, and Stamford's at 2.8%. OPM must redistribute any funds remaining after determining these caps to all other municipalities with MVMRs at or above the 25-mill threshold according to the pro rata distribution formula used to determine their initial grant amounts.

Proportionate Reductions

OPM must proportionately reduce each municipality's grant if the total amount of grants for all municipalities exceeds the available MRSA funds.

Spending Penalty

Beginning in FY 18, OPM must reduce the grant amount for those municipalities whose spending (minus debt service) exceeds the bill's spending limit. Each fiscal year, OPM must determine the municipality's percentage growth in spending in the prior fiscal year (compared to the previous year) and reduce the grant by an unspecified amount if the growth rate exceeds 2.5% or the inflation rate, whichever is greater.

Reducing or Eliminating MRSA Funds

The bill imposes procedural requirements on bills to reduce or eliminate MRSA funds. Before the legislature can enact any bill that would reduce or eliminate these funds, the Appropriations and Finance, Revenue and Bonding committees must approve the bill by a three-fifths vote. It is unclear whether this provision is enforceable against future legislatures (see BACKGROUND).

EFFECTIVE DATE: October 1, 2015

26-30 — PROPERTY TAX BASE REVENUE SHARING PROGRAM

The bill authorizes COGs to establish a property tax base revenue sharing program under which the municipalities in their planning regions (1) tax C&I property at a composite mill rate, based in part on the average mill rate in their regions, and (2) share up to 20% of the property tax revenue generated by the growth in their C&I property tax bases since 2013, which the bill designates as the base year. The revenue sharing must be administered by an auditor elected by a COG's members.

The bill allows a COG to implement the program only if its member municipalities unanimously authorize it to do so. It appears that COGs must decide whether to participate by August 1, 2016.

It allows COGs to establish the program beginning with the 2015 assessment year and, for those doing so, requires municipalities to begin, on or after January 1, 2017, annually remitting revenue sharing payments by February 1, for redistribution as described below.

Mill Rate

Growth in C&I Property Tax Base. In regions implementing the revenue sharing program, the growth in a municipality's C&I property tax base must be taxed at a composite rate determined according to the following formula. Under the bill, growth in a municipality's C&I property tax base is measured as the difference between the total assessed value of its C&I property for the current year, minus the total assessed value of its C&I property for the base year (“increase from base year”).

The bill defines C&I property as real property used for:

1. selling goods or services, including nonresidential living accommodations, dining establishments, motor vehicle services, warehouses, distribution facilities, retail services, banks, office buildings, multipurpose buildings, commercial condominiums for retail or wholesale use, recreation facilities, entertainment facilities, airports, hotels, and motels; and

2. producing or fabricating durable and nondurable man-made goods from raw materials or compounded parts.

It includes the lot or land on which a building is situated and any accessory improvements, including pavement and storage buildings, but excludes any real property located in an enterprise zone.

Municipal Commercial Industrial Mill Rate. The bill requires municipalities in participating COGs that have experienced an increase in their C&I tax base from the base year to tax C&I property at a “municipal commercial industrial mill rate,” rather than their local mill rates. Municipalities that have experienced no change or a decrease in their C&I tax base since the base year must tax C&I property using their local mill rates.

The municipal commercial industrial mill rate is calculated according to a formula that incorporates the average mill rate in the municipality's planning region (“regional mill rate”) and the municipality's mill rate for the following fiscal year (i.e., the mill rate effective July 1 of the current year). Although the bill does not specify when the municipality must calculate this rate, presumably it would do so after finalizing its budget for the following year (typically in May or June).

The mill rate is determined by dividing the sum of the following three amounts by the total assessed value of the municipality's C&I property for the current assessment year:

1. the revenue sharing percentage determined by the COG (i.e., 0.2 or less) multiplied by the (a) increase from the base year and (b) regional mill rate;

2. 0.8 multiplied by the (a) increase from the base year and (b) municipal mill rate for the following fiscal year; and

3. the total assessed value of C&I property for the base year (“municipal base value”) multiplied by the municipal mill rate for the following fiscal year.

Revenue Sharing

Percentage. The municipalities in a planning region that implements the program must share a portion of the revenue generated by the growth in their C&I tax base. Each COG implementing the program must determine the revenue sharing percentage. That percentage, which must be 20% or less, is a variable in the formulas used to calculate the (1) municipal commercial industrial mill rate and (2) municipal contribution to the area-wide tax base, described below.

Municipal Contribution to the Area-Wide Tax Base. Starting January 1, 2017, each municipality in a participating COG must annually remit, by February 1, its property tax revenue sharing payment (i.e., its “municipal contribution to the area-wide tax base”) to the administrative auditor (see below). The payment is a portion of the property taxes paid on the growth in the municipality's C&I tax base since 2013, based on the regional mill rate.

The municipality must calculate the payment amount by (1) multiplying its increase from the base year by the revenue sharing percentage set by the COG, (2) dividing that number by 1000, and (3) multiplying the result by the regional mill rate.

Municipal Distribution Index. By March 1, annually, the administrative auditor must distribute the property tax revenue sharing payments according to a distribution index based on municipal fiscal capacity (“municipal distribution index”). For each municipality, the index equals the municipality's population multiplied by a ratio measuring the average fiscal capacity in the region compared to the municipality's fiscal capacity.

Specifically, the ratio's numerator is the assessed value of all real property in the planning region, including PILOT-eligible property, divided by the region's total population (“average fiscal capacity”). The denominator is the total assessed value of all real property in the municipality, including PILOT-eligible property, divided by the municipality's total population (“municipal fiscal capacity”).

The auditor must distribute the revenue sharing payments in the same proportion as the municipality's municipal distribution index bears to the total of all municipal distribution indices with the region. In other words, if the municipality's fiscal capacity is the same as the regional average, its share of the funds will be the same as its share of the region's population. If its fiscal capacity is above the regional average, its share will be smaller. If its fiscal capacity is below the regional average, its share will be larger.

Municipalities must use the revenue sharing payments in the same way and for the same purposes for which they use real property tax revenue.

Administrative Auditor

The bill requires each COG implementing the program to elect, from among its members, an administrative auditor to coordinate the property tax revenue sharing payments under the program. The COG must elect the auditor by August 1, 2016 and in succeeding even-numbered years. If a majority of the COG's members is unable to agree on a person to serve as the auditor, the OPM secretary must appoint one from among the members.

The auditor serves for two years and until the COG elects his or her successor. If he or she ceases to serve as a COG member during his or her term, a successor must be chosen to serve for the unexpired term, in the same manner in which the original auditor was chosen (i.e., by the COG or OPM secretary).

The auditor must use the planning region's staff and facilities. The COG's member municipalities must reimburse it for the marginal expenses its staff incurs. Each municipality's share of the total expenses is based on its relative share of population in the region. Annually, by February 1, the auditor must certify, to each municipality's treasurer or other fiscal officer, the amount of total expenses for the preceding calendar year and the municipality's share of the expenses. The treasurer or officer must pay such amount to the planning region's treasurer or fiscal officer by the following March 1.

EFFECTIVE DATE: October 1, 2015, and applicable to assessment years beginning on or after that date, except for the provision requiring COGs to elect an administrative auditors, which is effective October 1, 2015.

BACKGROUND

Planning Regions

By law, the OPM secretary designates the state's local planning regions. There are currently nine regions: Capitol, Greater Bridgeport, Lower CT River Valley, Naugatuck Valley, Northeastern, Northwest Hills, South Central, Southeastern, and Western.

PILOT Rates for Specific Types of Property

By law, PILOT reimbursement rates differ for specific types of properties, as shown in Table 2.

Table 2: PILOT Rates for Specified Property Types

Type of Property

PILOT (% of lost tax revenue)

State-Owned Property PILOT

Correctional facility or juvenile detention center

100%

John Dempsey Hospital permanent medical ward for prisoners

100

Mashantucket Pequot reservation land (1) designated within 1983 settlement boundary and (2) taken into trust by the federal government for the Mashantucket Pequots on or after June 8, 1999

100

Land in any town where more than 50% of the land is state-owned

100

Connecticut Valley Hospital

65

Mashantucket Pequot reservation land (1) designated within the 1983 settlement boundary and (2) taken into trust by the federal government for the Mashantucket Pequots before June 8, 1999

45

Mohegan reservation land taken into trust by the federal government

45

Municipally owned airports

45

State-owned property

45

College and Hospital PILOT

U.S. Department of Veterans Affairs Connecticut Healthcare Systems campuses

100

Private, nonprofit colleges and universities

77

Nonprofit general and chronic disease hospitals

77

Certain urgent care facilities

77

Legislative Entrenchment

Legislative entrenchment refers to one legislature restricting a future legislature's ability to enact legislation. For example, CGS 2-35 previously prohibited appropriations bills from containing general legislation. (This provision has since been repealed.) In Patterson v. Dempsey, 152 Conn. 431 (1965), the Connecticut Supreme Court held that this provision of CGS 2-35 was unenforceable, writing that, “to hold otherwise would be to hold that one General Assembly could effectively control the enactment of legislation by a subsequent General Assembly. This obviously is not true, except where vested rights, protected by the constitution, have accrued under the earlier act. ”

Related Bills

sSB 946, favorably reported by the Finance, Revenue and Bonding Committee, splits the state's 6.35% sales and use tax rate into a 5.85% “state revenue tax” and 0.5% “municipal revenue tax” and directs the revenue attributed to the “municipal revenue tax” into MRSA.

sSB 1070, favorably reported by the Planning and Development Committee, (1) consolidates the state's two PILOT programs into a single program, (2) expands it to include other types of tax-exempt property, and (3) restructures the statutory formulas for the grants.

COMMITTEE ACTION

Planning and Development Committee

Joint Favorable Substitute Change of Reference

Yea

12

Nay

9

(03/27/2015)

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

Yea

29

Nay

19

(04/30/2015)