State and local governmental entities (“Governments”) nationwide will soon face new financial statement disclosure requirements regarding existing tax incentive agreements. While the GASB encourages Governments to begin compliance efforts now, the new rules will first apply to the fiscal year ended 6/30/2017. The new rules were published as Statement No. 77 (“GASB 77”) in August 2015 and specifically cover “tax abatement agreements,” which are broadly defined as any agreement between a Government and an individual or entity that lowers tax revenue in exchange for some form of economic development commitment from the individual or entity. The new rules are intended to increase the transparency of governmental economic development efforts, giving taxpayers, underwriters, and investors alike a better idea of the impact of tax incentives on a Government’s ability to raise revenues.

The new rules require Governments to disclose not only tax abatement agreements entered into by the reporting government itself (the “Reporting Government”), but also tax abatement agreements entered into by other Governments if those agreements lower the tax revenues of the Reporting Government. For example, if a municipality receives less property tax revenue than it otherwise would have received because of a tax abatement agreement entered into by the county, then the municipality must disclose that tax abatement agreement in its financial statements.

The new rules allow Governments to either disclose tax abatement agreements on an individual basis or on a consolidated or aggregate basis. If a Government chooses to disclose agreements individually, the Government is allowed to limit disclosure to only specific agreements that meet or surpass a quantitative threshold established by the Government.

The new rules require disclosure of the types of taxes abated, the method of abating those taxes (i.e. whether by reducing assessed value or by reducing tax rates), the provisions for recapturing abated taxes, the types of commitments made by the recipients of tax abatements, and the gross dollar amount (on an accrual basis) by which the Government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements.

Discussion

New rules passed by the Governmental Accounting Standards Board (“GASB”) require state and local governmental entities (“Governments”) to disclose tax abatement agreements in notes to annual financial statements. The new rules were published as Statement No. 77 (“GASB 77”) in August 2015 and effective for all periods beginning after 12/15/2015. Thus, the first impact from GASB 77 (for most Governments) will be felt with respect to the financial statements for the period ended 6/30/2017. The new rules are intended to increase the transparency of governmental economic development efforts, giving taxpayers, underwriters, and investors alike a better idea of the impact of tax incentives on a Government’s ability to raise revenues.

The GASB defines a tax abatement as: “A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to the economic development or otherwise benefits the governments or the citizens of those governments.” This definition clearly applies to fee-in-lieu-of tax payments and special source revenue credits, both of which are typically granted in exchange for a promise of economic development expenditures, job creation, or some combination of the two. According to the GASB, the substance of a transaction will control over its form or title when determining whether a particular transaction is a tax abatement.

The GASB requires disclosure of both (1) tax abatement agreements entered into by the reporting government itself (the “Reporting Government”) and (2) tax abatement agreements that are entered into by other governments if those agreements reduce the Reporting Government’s tax revenues. Thus, if a city or a public school district receives less tax revenue than it otherwise would have because of a tax abatement agreement entered into by the county government, the city or public school district must disclose that tax abatement agreement in its financial statements.

GASB 77 allows a Government to disclose tax abatement agreements either (1) individually or (2) in an aggregated fashion. If a government chooses to disclose tax abatement agreements individually, the Government is allowed to select a quantitative threshold below which the Government will not individually disclose an agreement.

Regarding tax abatement agreements entered into by the Reporting Government, the following must be disclosed:

1. brief descriptive information, including:


1. Names, if applicable, and purposes of the tax abatement programs
2. the specific taxes being abated
3. the authority under which tax abatement agreements are entered into
4. the criteria that make a recipient eligible to receive a tax abatement
5. the mechanism by which the taxes are abated, including
1. how the tax abatement recipient’s taxes are reduced, such as through a reduction of assessed value
2. how the amount of the tax abatement is determined, such as a specific dollar amount or a specific percentage of taxes owed
6. provisions for recapturing abated taxes, if any, including the conditions under which abated taxes become eligible for recapture
7. the types of commitments made by the recipients of the tax abatements
2. the gross dollar amount, on an accrual basis, by which the government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements


3. if amounts are received or receivable from other governments in association with the foregone tax revenue:


1. the names of the governments
2. the authority under which the amounts were or will be paid
3. the dollar amount received or receivable from other governments
4. if the government made commitments other than to reduce taxes as part of a tax abatement agreement, a description of:


1. the types of commitments made
2. the most significant individual commitments made


1. the government should continue to disclose such commitments until the government has fulfilled the commitment


5. if tax abatement agreements are disclosed individually, a brief description of the quantitative threshold used by the government in deciding which agreements to disclose


6. if a government omits specific information required by this Statement because the information is legally prohibited from being disclosed, a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition


1. In South Carolina, most of the recognized exemptions to disclosure of public records under the Freedom of Information Act (“FOIA”) have been construed by the Courts to be discretionary exemptions, meaning that the public body may disclose the information but is not required to do so. These discretionary exemptions would probably not qualify as a “legal prohibition” against disclosure under GASB 77.


7. Tax abatement agreements that are entered into by a government’s “discretely presented component units” and that reduce the government’s tax revenues should be disclosed according to these provisions if the government concludes that the information is essential for fair representation (based on the application of GASB 14, The Financial Reporting Entity). Otherwise, such tax abatement agreements should be disclosed pursuant to the rules below for tax abatement agreements entered into by other governments.

Regarding tax abatement agreements entered into by other governments that reduce the Reporting Government’s tax revenues, the following must be disclosed:

1. brief descriptive information, including the names of the governments entering into the tax abatement agreement and the specific taxes being abated


2. the gross dollar amount, on an accrual basis, by which the reporting government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements


3. if amounts are received or receivable from other governments in association with the foregone tax revenue:


1. the names of the governments
2. the authority under which the amounts were or will be paid
3. the dollar amount received or receivable from other governments


4. if tax abatement agreements are disclosed individually, a brief description of the quantitative threshold used by the government in deciding which agreements to disclose


5. if a government omits specific information required by this Statement because the information is legally prohibited from being disclosed, a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition


1. In South Carolina, most of the recognized exemptions to disclosure of public records under the Freedom of Information Act (“FOIA”) have been construed by the Courts to be discretionary exemptions, meaning that the public body may disclose the information but is not required to do so. These discretionary exemptions would probably not qualify as a “legal prohibition” against disclosure under GASB 77.

For further assistance in understanding the consequences of the new disclosure rules or for help in structuring compliance efforts going forward, feel free to reach out to one of Parker Poe’s State and Local Government team members.