Kansas Attorney General Opinion 1992-063

ROBERT T. STEPHAN
ATTORNEY GENERAL
May 14, 1992
ATTORNEY GENERAL OPINION NO. 92- 63
Ms. Mary F. Carson
Bond Counsel for the City of Edwardsville,
Kansas
Gilmore & Bell
Financial Plaza II, Suite 150
6800 College Blvd.
Overland Park, Kansas 66211-1533
Re: Cities and Municipalities--Buildings, Structures
and Grounds; Redevelopment of Central Business
District Areas--Special Obligation Tax Increment
Bonds; Payments in Lieu of Taxes
Synopsis: K.S.A. 12-1770 et 222., when read in its
entirety, authorizes cities to grant 10-year tax
exemptions to improved property within
redevelopment districts. Such an exemption is
consistent with the act's stated purpose found in
K.S.A. 12-1770 to "promote, stimulate and develop
the general and economic welfare of the state of
Kansas and its communities and to assist in the
development and redevelopment of central business
district areas of cities, blighted areas located
within cities and enterprise zones located within
cities, thus promoting the general welfare of the
citizens of this state. . . ." Payments in lieu of
taxes are contractual in nature and origin and
should not be treated as part of the tax increment
on improved redevelopment property. Such
obligations are a matter of contract and should not
be characterized as a statutorily imposed tax.
Cited herein: K.S.A. 12-1740; 12-1770; 12-1771;
12-1742; 12-1774; 12-1775; 12-1778; 79-201 Second.

Dear Ms. Carson:
As bond counsel for the city of Edwardsville, Kansas, you
seek an Attorney General opinion on questions relating to the
establishment of a redevelopment district (district) pursuant
to K.S.A. 12-1770 et seq., and the use of a tax increment
financing structure which would involve a ten year tax
exemption and payments in lieu of taxes.
You pose two questions for our consideration, each of which
will be addressed separately. Your first question is whether
it is within the city's authority pursuant to K.S.A. 12-1770
et seq. to issue tax-increment bonds to finance
redevelopment construction and at the same time grant a
10-year property tax exemption for the district improvements.
As background, you explain that the proposed financing
structure for the district would involve two separate bond
issues: the issuance of industrial revenue bonds pursuant to
K.S.A. 12-1740 et seq., to finance the construction of a
major commercial distribution facility, and the issuance of
special obligation tax increment bonds pursuant to the
provisions of K.S.A. 12-1774, to finance certain improvements
to the site in the city where the facility would locate. The
owners of the facility have asked the city to grant a 10 year
tax exemption to the facility under K.S.A. 79-201a Second or
pursuant to provisions of the Kansas constitution authorizing
such exemptions. The city in turn would enter into an
agreement with the owners of the facility to make payments in
lieu of taxes of approximately 10% of the amount which would
otherwise be collected if the property were not granted an
exemption. The agreement would be in effect for the 10 year
period of the exemption.
During the 10 year period the city would not realize any
property tax increment from the redeveloped property and would
not have funds to pay the special obligation tax-increment
bonds if payments were due on such bonds during the period of
exemption. To allow for both the issuance of the
tax-increment bonds and the 10 year tax exemption on the
redeveloped property the city is considering the issuance of
capital appreciation bonds requiring payment of principal and
interest only after completion of the 10 year exemption period
and when the city begins to realize the property tax increment
on the redeveloped property.

You note that you have examined the applicable statutes and
believe that the proposed financing structure is permissible.
You seek our concurrence in this judgment.
K.S.A. 12-1774 provides authority for Kansas cities to issue
special obligation bonds to finance the undertaking of
redevelopment projects. The statute provides:
"[S]uch special obligation bonds shall
be made payable, both as to principal and
interest: (A) From property tax
increments allocated to, and paid into a
special fund of the city under the
provisions of K.S.A. 12-1775, and
amendments thereto;
"(B) from revenues of the city derived
from or held in connection with the
undertaking and carrying out of any
redevelopment project or projects under
this act;
(C) From any private sources,
contributions or other financial
assistance from the state or federal
government; or
"(D) by any combination of these
methods.
"The city may pledge such revenue to the
repayment of such special obligation bonds
prior to, simultaneously with or
subsequent to the issuance of such special
obligation bonds." (Emphasis added.)
K.S.A. 12-1771(h) requires that the increment in ad valorem
taxes, which is defined as that amount of tax in excess of
what was produced prior to the redevelopment project, "shall
be apportioned to a special fund for the payment of principal
and interest on any special obligation bonds or full faith and
credit tax increment bonds issued to finance such
project. . . ." K.S.A. 12-1778 reaffirms these provisions.
The tax-increment provisions are found in K.S.A. 12-1775.
K.S.A. 12-1775(b) states that "[a]ll tangible taxable
property located within a redevelopment district shall be
assessed and taxed for ad valorem tax purposes pursuant to law

in the same manner that such property would be assessed and
taxed if located outside such district. . . ." K.S.A.
12-1775(c) provides in relevant part:
"Beginning with the first payment of taxes
which are levied following the date of
approval of any redevelopment district
established pursuant to K.S.A.
12-1771 . . . real property taxes received
by the county treasurer resulting from
taxes which are levied subject to the
provisions of this act by and for the
benefit of a taxing subdivision . . . on
property located within such redevelopment
district constituting a separate taxing
unit under the provisions of this section
shall be divided as follows: . . ."
The statute next provides for division of such taxes between
the various taxing subdivisions entitled to them and for the
payment of the increment to a special fund of the city as
provided by K.S.A. 12-1774(a)(1)(A). Nowhere in the statute
is there a requirement mandating or providing a specific time
frame after which ad valorem taxes must be levied. The
statute is, in our opinion, primarily a procedural statute
principally concerned with directing the ministerial task of
levying taxes. Direction is given in K.S.A. 12-1775(b) to
assess tax property within a redevelopment district in the
same manner as property located outside the district. Since
property outside a redevelopment district may also qualify for
a tax exemption and K.S.A. 12-1774 specifically sanctions the
issuance of industrial revenue bonds under K.S.A. 12-1740 et
seq., to finance construction of facilities within a
redevelopment district it is difficult to conclude that the
direction to levy taxes in a redevelopment district in the
same manner as on other property was meant to preclude
granting a tax exemption on redevelopment property.
This construction is supported by standards of statutory
review as set forth in Kansas case law:
"In construing statutes, the legislative
intention is to be determined from a
general consideration of the entire act.
Effect must be given, if possible, to the
entire act and every part thereof. To
this end it is the duty of the court, as
far as practicable, to reconcile the

different provisions so as to make them
consistent, harmonious, and sensible."
State v. Adee, 241 Kan. 825, 829, 740
P.2d 611 (1987).
"In determining legislative intent, courts
are not limited to consideration of the
language used in the statute, but may look
to . . . the purpose to be accomplished,
and the effect the statute may have under
the various constructions suggested."
Citizens State Bank of Grainfield v.
Kaiser, 12 Kan.App.2d 530, 535, rev.
denied 243 Kan. 777 (1988).
Applying these guidelines to construe the act at hand it is
reasonable to deduce that while the drafters may not have
directly contemplated that a tax exemption would be a
component of a tax-increment finance plan involving the
issuance of capital appreciation bonds pursuant to K.S.A.
12-1770 et seq., they did not intend to preclude
municipalities from utilizing this option. When the act is
read in its entirety it becomes significant that various
methods of payment for special obligation bonds are provided
for in K.S.A. 12-1774(a)(1)(A), (B), (C), and (D). It is
clear that the legislature intended that cities be afforded
both flexibility and latitude in structuring their financial
obligations under this act. K.S.A. 12-1774(a)(1)(D) provides
for the pledge of revenues to the repayment of special
obligation bonds and states it may be "prior to,
simultaneously with or subsequent to the issuance of such
special obligation bonds." The legislature conferred upon
cities the ability to choose among several revenue
possibilities which might be available to pay for special
obligation bonds and authorized the pledge of revenues at
various points in time including subsequent to the issuance of
such bonds. The act when read in its entirely certainly
bolsters the contention that a tax-exemption and delay in the
collection of revenues for a period of time is permissible.
The argument for tax exemption is also strengthened when the
act's purpose stated in K.S.A. 12-1770 is considered:
"It is hereby declared to be the purpose
of this act to promote, stimulate and
develop the general and economic welfare
of the state of Kansas and its communities
and to assist in the development and
redevelopment of central business district

areas of cities, blighted areas located
within cities and enterprise zones located
within cities, thus promoting the general
welfare of the citizens of this state, by
authorizing cities to acquire certain
property and issue special obligation
bonds . . . for the financing of
redevelopment projects. . . ."
While we are not unmindful that a strict construction of
K.S.A. 12-1775 could be argued to require a levy of taxes
immediately following establishment of a redevelopment
district, such an interpretation seems neither warranted or
required. To construe the statute in a manner which
necessitates the immediate imposition of taxes on a
redeveloped property thereby potentially driving away exactly
the type of industry the act attempts to promote and seek and
which defeats the act's cited purpose seems contradictory and
inconsistent with the act's intent. It is, therefore, our
opinion that the city may grant a 10-year tax exemption to the
redevelopment district consistent with the provisions of
K.S.A. 12-1770 et seq.
Your second question is whether the payments in lieu of taxes
(PILOTS) contracted for during the ten-year exemption period
should be considered part of the property tax increment
realized on the redeveloped property. It is our opinion that
PILOTS should not be considered part of the property tax
increment realized on the redeveloped property.
While we are unable to find any Kansas case law which sheds
definitive light on the subject, the treatment of PILOTS in
Kansas statutes and by other authorities suggests that
payments made pursuant to a contractual agreement are simply
that -- contractual payments.
Under K.S.A. 12-1742 all payments made pursuant to an
industrial revenue bond lease agreement other than rental and
origination fees are deemed "payments in lieu of taxes," an
axiomatic phrase. The statute also states:
"Payments in lieu of taxes received
pursuant to agreements . . . shall include
all fees or charges paid for services
normally and customarily paid from the
proceeds of general property tax levies
except for extraordinary services provided
for the facility or an extraordinary level

of services required by a facility.
Payments in lieu of taxes may be required
only upon property for which an exemption
from ad valorem property taxes has been
granted by the state board of tax appeals."
Payments required by such agreements are unlike taxes in that
they are not required by any statute. Courts in jurisdictions
which have addressed this issue are in agreement with this
analysis and have distinguished contractual obligations from
taxes in holdings that have found:
"A tax is a charge imposed by the
legislature for the purpose of revenue.
It is not founded on contract and does
not establish the relationship of debtor
and creditor. It is an enforced
proportional contribution levied by
authority of the state." Bailies v.
City Council of City of Des Moines, 102
N.W. 813 (Iowa 1905), quoting and adopting
definition in Meriwether v. Garrett,
102 U.S. 472, 26 L.Ed. 197 (1880).
"A tax is a legal imposition, exclusively
of statutory origin, and liability to
taxation must be read in statute or it
does not exist." Bentee v. Bugbee,
137 A. 552, 553 (N.D. 1927).
The Missouri courts when presented with a similar situation
wherein PILOTS were collected under the real property tax
increment allocation redevelopment act, in an amount equal to
that which would have been assessed and levied as tax
increment, found the PILOTS were not a tax. The court held
that the payments were contractual in nature and characterized
them as special assessments levied against property for
improvements provided under a redevelopment plan. The court
stated that "an exaction demanded by . . . government for a
special privilege or for specific purposes and not intended to
be paid into the general fund to defray general public needs
or governmental expenditures is not a tax. Tax Increment
Fin. Com'n v. J.E. Dunn Const., 781 S.W.2d 70(Mo.
1989).
PILOTS are also distinguishable from taxes in that state law
does not require PILOTS to be equivalent to all or any portion
of the taxes which would be otherwise due. Nothing requires

the payments to be anything but a contractually agreed upon
amount.
We are cognizant that two aspects of PILOTS are similar to
general property taxes. First, pursuant to Kansas law the
proceeds of PILOTS are distributed proportionately (see
e.g., K.S.A. 12-1742) to each of the taxing subdivisions in
which the exempt property is located based on the amount each
jurisdiction's total mill levy bears to the aggregate levy of
all the taxing jurisdictions. Second, the payments are then
utilized for general public purposes in the same manner as
general property taxes. We do not believe that these
similarities are sufficient to make PILOTS equivalent to
general property taxes as supported by previously cited case
law.
In conclusion, it is our opinion that PILOTS are readily
distinguishable from taxes in that they are not statutorily
imposed obligations and are instead solely a matter of
contract. We find, therefore, that the PILOTS should not be
considered or in any way treated as a part of the property
tax - increment realized on the redevelopment property.
Very truly yours,
ROBERT T. STEPHAN
Attorney General of Kansas
Rebecca E. Floyd
Assistant Attorney General
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