Playing the Percentages

In yesterday’s discussion of city finances, many tax abatement misconceptions were dispelled but the issue of Indiana’s 2% constitutional debt limit was again raised. And, again, it was asserted that New Albany had unconstitutionally surpassed it by financing a small portion of the Scribner Place development. Ever vigilant, our Senior Editor asked an extremely pertinent question:

the new albanian said...
Con-Dem wrote: We are constitutionally bound to a 2% debt limit, which we surpassed with Scribner Place.

We hear this repeated all the time, but is that really true?

Con-Dem answered that it is.

The fact of the matter is that the City of New Albany didn’t issue any debt for Scribner Place. The New Albany Redevelopment Authority, as a legally recognized separate entity, did. The Redevelopment Authority’s 2% is calculated independently of the city’s, meaning that taken together they can issue debt equaling 4% of net assessed property value.

While that’s good information, it’s irrelevant in this and most cases of Indiana public finance. The bonds issued were done so as part of a lease structure, a perfectly legal and commonplace financing method not bound by the 2% debt limit. The truth is, Scribner Place financing doesn’t affect our debt limit at all.

As the State Board of Tax Commissioners explained in a preliminary fair market value report to an Indiana General Assembly study committee in 1996:

Local governments in Indiana, like most local governments throughout the nation, rely on the local property tax base to generate revenue to repay debt issued to finance capital improvement projects. Local governments can sell general obligation (GO) bonds which are supported by the full, faith and credit, or unlimited taxing power, of the entire taxing unit. But there are state constitutional and statutory provisions that restrict the ability of local governments to issue GO debt in Indiana. 


Article 13, Section 1 of the Indiana Constitution limits the total principal indebtedness of any political subdivision to no more than 2 percent of the net assessed valuation of taxable property within the taxing unit. The debt limitation applies to 2 percent of net assessed valuation, not 2 percent of true tax value. The constitutional debt limit applies to each municipal corporation individually, and not in the aggregate to municipal corporations which may cover the same area or include the same taxpayers. This has led to the establishment of many overlapping municipal corporations (e.g., school, jail) and special taxing units (e.g., special districts such as fire, library, parks and recreation, sanitation, and redevelopment authorities) that use the same property tax base as the general government to finance capital improvements.


Local government property-tax backed debt in Indiana consists primarily of non-GO bonds because of these debt limits. Most local property-tax backed bonds sold in Indiana are lease rental bonds. During 1992-1995, more than $2.3 billion in lease rental bonds were sold, compared to only $218 million in unlimited tax (GO) bonds. Lease rental bonds account for 88 percent of all of bonds sold by local entities in the state. Most general governmental and school corporation lease rental bonds are repaid directly from lease rental payments that are raised from property tax revenues.


Lease rental bonds are popular with local governments precisely because they are not subject to the 2 percent debt limit.

In our case, the city’s portion of the lease rental payments are covered with Economic Development Income Tax funds, with property taxing authority used only as a backup mechanism in order to secure a better interest rate.

In a discussion of TIF districts, Ball State’s Center for Economic and Community Development explains the lease arrangements thusly:

When other tax revenues are pledged to enhance a TIF financing, Indiana constitutional debt limit restrictions often dictate that the financing be structured as a lease. Under this structure, a separate entity known as a redevelopment authority is created by ordinance of the unit's legislative body. The redevelopment authority then issues bonds, constructs the project, and leases it back to the redevelopment commission. The commission then pays lease rentals to the authority from TIF and the other pledged revenues in an amount sufficient to pay the authority bonds.

Lease rental bonds are a fundamental method of local government finance across the country and have been since the 80s. Their use gives municipalities flexibility to finance projects while creating more attractive situations for investors.

As the Tax Commission clarifies:

Unlike most lease rental bonds sold throughout the nation, Indiana lease rental bonds do not contain an annual appropriation-out clause enabling the government to annually withhold debt service payments.

In effect, such lease rental bonds are structured as synthetic GO bonds. This provides Indiana lease rental bonds with two additional layers of repayment security that is absent most other lease rental bonds in the nation. The additional layers of security have been fine tuned over the years so that, research shows, investors favorably view Indiana lease rental bonds since they exhibit interest costs no different than GO bonds.

With weight loss inducing regularity, generally accepted modern practice has been met with alarmism and rumor mongering in New Albany. It’s difficult to tell exactly how such rumors get started, but it’s easy enough to figure out who preys upon the fears of those factions that insist on their perpetuance.

In a supposed statement of his core values, 3rd District Council Member Steve Price let’s us know that he was the one who informed citizens “how we by-passed the 2% constitutional debt limitation” in financing Scribner Place as if it were some sort of conspiracy he’d personally uncovered. Mind you, he’s the same guy who once told a room full of constituents that we were spending all of our EDIT money on Scribner Place. We’re actually spending less than 10%.

Given that important decisions need to be made concerning the other 90%, it might be best not to rely on 100% ignorance and those who think that's all we can do.