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2021-092 2020 Net Revenue Report on Economic Development IncentivesDate: October 29, 2021 Report No. 2021-092       INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: 2020 Net Revenue Report on Economic Development Incentives BACKGROUND: In 2009, the Department of Economic Development created the initial “Return on Investment Report” to examine the fiscal impact to the City made by the businesses that have received property and sales tax incentives, evaluate the efficiency of the public investment, and to guide future policy decisions. The following changes have been made to the report over the years:  2010: State of Texas and Denton County Transportation Authority sales tax revenue was added.  2013: The report was expanded to include the ad valorem revenue for Denton County, which includes both the incentives in which the County has partnered with the City, as well as the revenue from the incentives that the County did not invest in.  2015: Inclusion of Denton Independent School District (DISD) information.  2016: The report was redesigned and can be distributed as one-page City summary or complete report.  2020: The report was redesigned and condensed. The attached 2020 Net Revenue Report is the eighth update of the report, which provides an overall look at what the City of Denton received in the way of direct benefits (property and sales tax revenues) as well as the indirect benefit of new jobs created or existing jobs retained by those companies and developments that received incentives. The report covers a tax year schedule, so there is a time delay of when the report is released. The property tax valuation is based on the values that are released by the Denton Central Appraisal District (DCAD) for the previous tax year. The certified valuations, released at the end of July, are compiled from the DCAD website and sent out on a City of Denton Verification Form to the appraisal district.1 The tax bills are distributed from Denton County in October. The calculations for the contested properties are prepared upon receipt of the Verification Form from the appraisal district, which occurs sometime after October until the delinquency deadline in the early part of the following year, if the property valuation is contested. DCAD also contracts out some of their accounts to Wardlaw, which may also delay the valuation data for incentives. The remaining incentive rebates are calculated, checked and processed in the Spring. The report provides information through 2020 and includes the following:  Property valuation (cumulative since year agreement approved, excluding base year)  Property tax generated (cumulative since year agreement approved, excluding base year)  Sales tax generated – if applicable (cumulative from initiation of sales tax monitoring)                                                              1 The City of Denton Verification Form also includes a request for the breakdown of the Business Personal Property (BPP) that is not available on the website and a section that notifies the City if the property is being contested. The incentive calculations occur for the uncontested properties following the receipt of the forms from DCAD. The City notifies DCAD if the threshold has been met by companies for all of the tax abatements. Date: October 29, 2021 Report No. 2021-092        Net property and sales tax revenues (total revenues less incentives)  Cost/benefit Percentage (net revenue divided by the incentive and multiplied by 100)  Ratio of Return (net revenue less incentive, then divided by the incentive)  New jobs created by project Standard economic development practice for impact analysis is 10 years, so the incentives in the report are tracked for 10 years regardless of the term. For example, an incentive with a term of seven years is tracked for an additional three years until the 10-year period is reached. An incentive is not deducted for the remaining three years following the term. This practice allows for more of a “apples to apples” comparisons between incentives. Incentives for expansion projects such as Jostens, Peterbilt Motors, and Flowers Foods are based only on the new value created by the project. The existing valuation that was relative to each of these projects was not included in the calculations. FISCAL INFORMATION: The City has awarded 35 incentives to foster development in the community, with 27 being represented in this report. The remaining incentives have not initiated, were terminated, or are not ad valorem or sales tax based. The City has invested $29.9 million in tax-related incentives, and in return, has benefited from a net increase in property and sales tax revenues of $91.6 million since the inception of the incentive program in 1999. The cost benefit percentage for all incentives awarded is 307%. There have been 10,581 jobs created or retained by incentivized projects. The table, which follows, provides the net revenue summary for the City, County and school district. City, County and DISD Net Revenue Summaries Total of all Property Incentives Ratio of Return City of Denton Denton County Denton ISD Cumulative Property Valuation $9,444,847,886 $4,306,191,483 $4,469,212,423 Cumulative Property Tax Generated $62,087,732 $10,813,945 $67,618,682 Cumulative Sales Tax Generated $59,417,524 $0 $0 Cumulative Property & Sales Tax $121,505,256 $10,813,945 $67,618,682 Less Incentives $29,886,144 $1,118,570 $621,572 Net Property and Sales Tax Revenue $91,619,112 $9,695,375 $66,997,110 Cost Benefit Percentage 307% 867% 10,779% Ratio of Return 3.1 8.7 107.8 Date: October 29, 2021 Report No. 2021-092       Denton County has participated in a total of eight Denton incentives, and Denton Independent School District has participated in two Denton incentives. Texas school districts were at one time able to offer tax abatements similar to those of cities and counties, but that authority was repealed by the Texas Legislature.2 CONCLUSION: Incentives are an important tool that can be used to attract or retain private investment in Denton. Since the majority of the incentive options available to Denton are tax based, tracking and reporting on the cost/benefit of the incentives awarded by City Council enhances transparency, supports fiscal responsibility, and aids in future decision-making regarding incentives. ATTACHMENT(S): 2020 Net Revenue Report STAFF CONTACT: Erica Sullivan Economic Development Program Administrator (940) 349-7731 Erica.sullivan@cityofdenton.com REQUESTOR: Staff initiated PARTICIPTAING DEPARTMENTS: Economic Development STAFF TIME TO COMPLETE REPORT: 35+ hours                                                              2 School finance involves a complex funding formula from a number of different federal, state and local funding sources. It is important to note that the report uses the entire DISD tax rate, which includes the Maintenance and Operations (M&O) and Interest and Sinking (I&S) tax rates. The M&O portion of the tax rate is used for salaries, utilities, supplies etc. The I&S portion of the tax rate is used to fund payments on debt service for facilities and is the only portion of the DISD tax rate that is not affected by funding from the State of Texas.       Report on Net Revenue from  Incentivized Economic  Development Projects                      City of Denton   Economic Development Department                                  2020   2020 City of Denton Net Revenue Report  1        BACKGROUND AND PURPOSE  The City of Denton promotes high‐quality development that improves the quality of life of its residents. The City  uses economic development incentives to stimulate private development  and redevelopment, expand the tax  base,  generate  jobs,  and  enhance  the  local  economy.  Denton  is  home  to  several  corporate,  regional,  and  international headquarters, as well as central distribution and maintenance facilities. The City facilitated a number  of these projects by granting incentives to make the project feasible and to reimburse the costs of required public  infrastructure.     In 2009, the City of Denton Economic Development Department created the initial Net Revenue Report to examine  the fiscal impact made by the businesses that have received property and sales tax incentives from the City,  evaluate the efficiency of the public investment and to guide future policy decisions. State and DCTA sales tax  revenue were added in 2010. In 2013, the report was expanded to include the revenue for Denton County, which  includes both the incentives in which the County has partnered with the City, as well as the revenue from the  incentives that the County did not invest in. The report comprised all of the taxing entities with the inclusion of  Denton Independent School District (DISD) in 2015. The report was redesigned in 2016 and again in 2020.    This is the eighth update of the report, which provides a comprehensive look at the fiscal impact made by the  businesses that have received property and/or sales tax incentives from the City and evaluates the efficiency of the  public  investment.  The  total  incentive  received  by  the  company,  the  City  tax  revenues  generated  since  the  agreement was initiated and the cost/benefit of the projects are  provided.  In  addition,  the  report  includes  information regarding state, Denton County Transportation Authority (DCTA), Denton County, and DISD ad valorem  and sales tax revenues created by these developments.              CITY OF DENTON  The City has awarded 35 incentives to foster development in the community, with 27 being represented in this  report. The remaining incentives have not initiated, were terminated, or are not ad valorem or sales tax based. The  City  has  invested  $29.9  million  in  tax‐related  incentives,  and in  return,  has  benefited  from  a  net  increase  in  property and sales tax revenues of $91.6 million since the inception of the incentive program in 1999. The cost  benefit percentage for all incentives awarded is 307%. Chapter 380 sales tax rebate incentives represented the  highest percentage at 335%, followed by Chapter 380 property tax rebates and property tax abatements at 202%  and 298%, respectively. There have been 10,581 jobs created or retained by incentivized projects.                           10,581                                        307%                                         $9.4B                                      $91.M                      New Jobs                                    Benefit                              Property Valuation                      Net Revenue    Table 1: City of Denton Summary  Total of all Property Incentives  Property Tax Totals Sales Tax Total Total Cumulative Property Valuation $4,469,212,423 $4,975,635,463  $9,444,847,886  Cumulative Property Tax Generated  $28,606,136  $33,481,596  $62,087,732  Cumulative Sales Tax Generated $0 $59,417,524 $59,417,524  Cumulative Property & Sales Tax   $28,606,136  $92,899,120  $121,505,256  Less Incentives $8,539,236 $21,346,908 $29,886,144  Net Property and Sales Tax Revenue  $20,066,900  $71,552,212  $91,619,112  Cost Benefit Percentage 235%335%307% Jobs Created/Retained 6,861  3,720 10,581   2020 City of Denton Net Revenue Report  2        TAXING JURISDICTIONS  The Ratio of Return is included below. See Appendix A for information on the methodology for this report.                       3:1                                     8:7                                 107:8  City of Denton                          Denton County                     Denton ISD  Table 2: City, County and DISD Summaries  Total of all Property Incentives Ratio of  Return City of Denton Denton County Denton ISD  Cumulative Property Valuation $9,444,847,886  $4,306,191,483  $4,469,212,423   Cumulative Property Tax Generated  $62,087,732   $10,813,945   $67,618,682   Cumulative Sales Tax Generated $59,417,524  $0  $0   Cumulative Property & Sales Tax   $121,505,256   $10,813,945   $67,618,682   Less Incentives $29,886,144  $1,118,570  $621,572   Net Property and Sales Tax Revenue  $91,619,112   $9,695,375   $66,997,110   Cost Benefit Percentage 307% 867% 10,779%  Ratio of Return 3.1 8.7 107.8   The 2020 report provides the ad valorem revenue that Denton County received from all of the incentives awarded  by the City of Denton. The cost/benefit is also provided for the seven Tax Abatements and the two Chapter 380  Agreements in which the County jointly participated with the City to stimulate economic growth. Chapter 312 of  the  Texas  Property  Tax  Code  authorizes  taxing  entities  to  provide  tax  abatements.  Chapter  381  of  the  Local  Government Code authorizes counties to provide loans or grants to support economic development activities.    The County has invested a total of $1.1 million in tax related incentives, and in return, has benefited from a net  increase in property tax revenues in the amount of $9.7 million since the inception of the incentive program in  1999. The cost/benefit for all of the incentives awarded (joint and City only) is 867%. The cost/benefit from all of  the tax abatements and Chapter 380/381 property tax incentives was 526% and 3,038%, respectively.     The report was expanded in 2015 to include the ad valorem revenue that DISD has received from all the incentives  awarded  by  the  City.  The  cost/benefit  is  also  provided  for  the two  tax  abatements  in  which  DISD  jointly  participated with the City to stimulate economic growth. (Note: Texas school districts were at one time able to  offer  tax  abatements  similar  to  those  of  cities  and  counties,  but  that  authority  was  repealed  by  the  Texas  Legislature). It is also important to note that the report uses  the  entire  DISD  tax  rate,  which  includes  the  maintenance and operations and interest and sinking portions of the tax rate.    DISD has invested a total of $621,572 in tax related incentives, and in return, has benefited from a net increase in  property tax revenues in the amount of $67.0 million since the inception of the incentive program in 1999. The cost  benefit percentage from all of the tax abatements alone was 6,364%. The cost/benefit from all of the incentives  awarded is 10,779%.                2020 City of Denton Net Revenue Report  3      DIRECT AND INDIRECT IMPACTS    Graph 1: New Taxable Value Created in Denton  $1,840,438,844  $4,975,635,463  $2,628,773,579   $‐  $1,000,000,000  $2,000,000,000  $3,000,000,000  $4,000,000,000  $5,000,000,000  $6,000,000,000 Chapter 380 Property Tax Chapter 380 Sales Tax Property Tax Abatements     Graph 2: New Jobs Created in Denton      STATE AND LOCAL SALES TAX REVENUES  Table 3 provides the breakdown of the total revenue to City, State,  and  the  Denton  County  Transportation  Authority (DCTA) from sales taxes generated at the major retail developments that have received incentives from  the City of Denton. The State of Texas collects sales and use taxes from all retail sales and taxable services. The  State has directly benefited from the incentives awarded for these mixed‐use developments. Since 2005, the State    2020 City of Denton Net Revenue Report  4      of Texas has received a total of $246 million in additional sales tax revenues as a result of the incentives awarded  by the City. The state revenues comprise 76% of the total sales taxes generated by these mixed‐use centers.    Table 3:  City, State, and DCTA Sales Tax Composition    Rates Totals  Total Sales     $3,937,099,600   Total City Sales Tax Generated $0.02  $59,056,494   Total State Sales Tax Generated $0.06  $246,068,725   Total DCTA Sales Tax Generated $0.01  $19,685,498   Total Sales Tax Generated  $0.08   $324,810,717   Confidential information has been removed, but is included in the total      Table 4:  Total City, State, and Local Sales Tax Cost/benefit  Development Totals  Sales Tax Generated $324,810,717  Less Sales Tax Incentive $20,985,878   Total Net Revenue $303,824,839   Cost Benefit Percentage  1,448%   Chart 1: City Sales Taxes Generated and Rebated      CONCLUSION  Incentives are an important tool that can be used to attract or retain private investment in Denton. Since the  majority of incentive options available to Denton are tax based, tracking and reporting on the cost/benefit of the  incentives  awarded  by  City  Council  enhances  transparency,  supports  fiscal  responsibility,  and  aids  in  future  decision‐making regarding incentives.      2020 City of Denton Net Revenue Report  5      APPENDIX A  METHODOLOGY  This report represents the eighth update of the Net Revenue Report. The incentives are tracked for ten years  regardless of the term. Standard economic development practice for impact analysis is ten years. For example, an  incentive with a term for seven years is tracked for an additional three years until the ten‐year period is reached.  An incentive is not deducted for the remaining three years following the term. This is standard practice and also  allows for more commensurable comparisons between incentives.     The ad valorem or property tax valuation is based on the values that are released by the Denton Central Appraisal  District (DCAD) for the previous tax year. The certified valuations, released in July, are compiled from the DCAD  website and sent out on a City of Denton Verification Form to the appraisal district. This form also includes a  request for the breakdown of the Business Personal Property (BPP) that is not available on the website and a  section  that  notifies  the  City  if  the  property  is  being  contested.  The  incentive  calculations  occur  for  the  uncontested properties following the receipt of the forms from DCAD. The City notifies DCAD if the threshold has  been met by companies for all of the tax abatements. DCAD also contracts out some of their accounts to Wardlaw.  The tax bills are distributed from DCAD in October. The calculations for the contested properties are prepared  upon receipt of the Verification Form from the appraisal district, which occurs sometime after October until the  early part of the following year.    Sales tax is collected by calendar year and is based on the allocation month that the sales tax report from the Texas  Comptroller of Public Accounts is received. Sales tax is generated two months prior to the receipt of the reports  from the state comptroller. Sales tax generated in December 2019 is reported to the City in February of 2020, for  example. Historical tax rates for Denton County and DISD, dating back to 1999, were gathered for this study from  DCAD, Denton County, and DISD. The terms for the incentives were provided by Denton County and DISD, as  several of the agreement terms and investment percentages differ from the terms of the City.     Property tax is included from the base year of the economic development agreements or the first tax year that was  available from DCAD when the initial report was compiled. Sales tax revenue reflects the revenues received since  the initial tracking began or the grant payments were initiated. For example, the Unicorn Lake Agreement was  approved in 2004; however, the first grant payment was made in 2009 after the thresholds were met. Property  valuation  for  Unicorn  Lake  is  cumulative  since  2006  and  sales  tax is provided beginning in 2009. Sales tax  monitoring for Rayzor Ranch began in 2010 prior to the receipt of the first payment in July 2012 to assist the City  with preparing  the  5‐year  forecast during the  budgeting  process. The incentive for Golden Triangle Mall was  initiated in the summer of 2016, so only half of a year of rebates are included in the report. Tracking for the  development began in 2013.    School finance involves a complex funding formula from several different federal, state and local funding sources.   As aforementioned, the report uses the entire DISD tax rate, which includes the Maintenance and Operations  (M&O) and Interest and Sinking (I&S) tax rates. The M&O portion of the tax rate is used for salaries, utilities,  supplies etc.  The I&S portion of the tax rate is used to fund payments on debt service for facilities and is the only  portion of the DISD tax rate that is not affected by funding from the State of Texas.    This study seeks to aid in the decision‐making process by providing the net revenue from the incentivized projects.  The calculations for the net revenue and cost/benefit are included below.    Net Revenue = Revenues (property only and or sales tax generated) ‐ incentive    The report carries these calculations a step further to obtain the Cost/benefit of the incentive projects.    2020 City of Denton Net Revenue Report  6        Cost/benefit Percentage = Net revenue/incentive X 100    It is important to note that the report only gathers the sales tax generated from the projects which received a sales  tax incentive. These include: Denton Crossing, Unicorn Lake, Rayzor Ranch, Golden Triangle Mall, Buc‐ee’s, WinCo  and O’Reilly. Other projects, such as Schlumberger, generate sales taxes that would not have been generated in  Denton if the business had not located in this community. This study takes a more conservative approach and does  not include the sales taxes for the ad valorem only incentives.    The rate of return provides the net revenue of the taxes generated relative to the cost of the incentive, as a ratio.  The ratio of return for the City in 2020, for example, was 3:1. Another way of putting this is that the City received 3  times the revenue of the incentive forgone. The formula is presented below.    Ratio of Return = Net Revenue (property only and or sales tax generated‐incentive)/incentive                                                                        2020 City of Denton Net Revenue Report  7                      2020 Update Prepared by:  Erica Sullivan, Economic Development Program Administrator                        City of Denton  401 N. Elm St.  Denton, Texas 76201  940‐349‐7776