## Facts

- South Dakota enacted SDCL ch. 11-9 authorizing municipalities to create tax increment districts, adopt redevelopment project plans, issue tax increment bonds and notes, and repay project costs from a segregated tax increment fund.
- Tax increment financing captures increases in property tax revenues within a district above a base assessed value and deposits the increment into a special fund to pay redevelopment costs.
- The statute required procedures including notice and hearing, planning commission involvement, limits on total assessed value placed in districts, and findings that a defined portion of the district was blighted and that improvements would increase district property values.
- The City of Huron created a tax increment district by resolution dated March 7, 1983; Huron and Rapid City indicated an intent to issue bonds under the statute.
- The Attorney General, joined by two municipal taxpayers, brought an original proceeding seeking a declaration that SDCL ch. 11-9 was unconstitutional and a writ prohibiting the cities from proceeding.

## Issues

1. Whether SDCL ch. 11-9 violates state constitutional limits on municipal indebtedness, municipal lending or giving of credit, and taxation/public-purpose requirements.
2. Whether tax increment bonds payable from the increment constitute unconstitutional “debt” or an unlawful pledge of municipal credit.
3. Whether allocating the tax increment to a special fund to repay redevelopment costs violates constitutional requirements governing levy and use of tax revenues.

## Decision

- The Supreme Court of South Dakota upheld the constitutionality of SDCL ch. 11-9.
- The court denied declaratory relief and denied the requested writ of prohibition.
- The court concluded that tax increment financing reallocates a portion of increased tax revenues generated within the district rather than imposing a new or nonuniform tax.
- The court treated tax increment bonds payable solely from the tax increment fund as not constituting general obligations of the municipality and thus not violating constitutional municipal debt limitations.
- The court rejected the claim that the statute constituted an unconstitutional loan or pledge of municipal credit, characterizing the program as financing public redevelopment of blighted areas.

## Legal Principles

- Statutes are presumed constitutional; challengers bear the burden of showing a constitutional violation.
- Under the special-fund doctrine, obligations payable solely from a designated special fund and not backed by general taxing power or general revenues are not “debt” within constitutional municipal debt limits.
- Tax increment financing may constitutionally dedicate increased ad valorem tax revenues from redevelopment-related valuation growth to a special fund when taxes continue to be levied in the ordinary, uniform manner.
- Redevelopment of blighted areas and related public improvements constitute a public purpose that may justify the use of public revenues under legislative authorization.

## Conclusion

The court sustained South Dakota’s tax increment financing statute, holding that tax increment bonds payable only from the increment fund did not create unconstitutional municipal debt or an impermissible pledge of credit and that dedicating captured increased tax revenues to redevelopment costs served a valid public purpose.


Meierhenry v. City of Huron, 354 N.W.2d 171 (S.D. 1984)