Kara Millonzi is a School of Government faculty member.
As discussed in a previous post, a North Carolina municipality may establish a special tax district that encompasses its central downtown area to raise money to fund “downtown revitalization.” See G.S. 160A-536(a)(2). The special tax district is commonly referred to as a Business Improvement District or BID. Many municipalities create and maintain BIDs to provide targeted services in their downtown areas—such as marketing, additional security, supplementary trash collection, and community activities to enhance the downtown area and promote and benefit its commercial entities. Questions often arise as to whether a unit may engage in capital projects in the BID and, if so, what type and how are the projects funded?
Funding Capital Projects in BID with General Municipal Revenue
The answer to the first question is “yes.” A municipality may undertake capital projects in a BID to the same extent that it undertakes them in the rest of its territory. And it may finance the projects with General Fund dollars, which include property tax proceeds, local sales and use tax proceeds, and other unrestricted revenue sources. It also may fund certain, authorized capital projects by imposing special assessments on the real properties in the BID that benefit from the projects. (For more information on imposing special assessments, including a list of authorized projects, click here.) And, if the capital projects relate to one or more of the municipality’s public enterprises (for example, water or sewer services) the unit may finance the projects with Enterprise Fund monies, which include periodic user charges and impact or capacity fees.
Funding Capital Projects in BID with BID Tax Revenue
There is an additional option to fund capital projects in a BID. A municipality may use the proceeds generated by the special tax levied on (non-exempt) real and personal properties in the BID (BID tax). G.S. 160A-536(b) provides a non-exclusive list of activities that can be supported with the special tax revenue in a municipality’s downtown area. The list includes: “improvements to water mains, sanitary sewer mains, storm sewer mains, electric power distribution lines, gas mains, street lighting, streets and sidewalks, including rights‑of‑way and easements therefor, the construction of pedestrian malls, bicycle paths, overhead pedestrian walkways, sidewalk canopies, and parking facilities both on‑street and off‑street, and other improvements intended to relieve traffic congestion in the central city, improve pedestrian and vehicular access thereto, reduce the incidence of crime therein, and generally to further the public health, safety, welfare, and convenience by promoting the economic health of the central city or downtown area.” (emphasis added)
The statutory authority is very broad and supports the expenditure of BID tax proceeds on any capital project that generally benefits the downtown area. For example, in addition to the projects specifically listed in the statute, a municipality likely may use BID tax monies to provide grants to property owners in the downtown district to make façade or other structural improvements to their buildings.
Issuing Debt to Fund Capital Projects in BID
What about borrowing money to finance the capital projects in the BID? Municipalities are authorized to borrow money according to five different statutory methods: (1) general obligation bonds (G.S. 159, Art. 4); (2) revenue bonds (G.S. 159, Art. 5); (3) special obligation bonds (G.S. 159I); (4) installment-purchase financings (G.S. 160A-20); and (5) project development financings (G.S. 159, Art. 6).
All of these financing mechanisms are available to a municipality to fund capital projects in its downtown area, subject to each mechanisms’s unique restrictions and limitations (which will be the topic of a future post). A municipality may use General Fund revenues (and in some cases, Enterprise Fund revenues) to make debt service payments on the loans used to finance projects in the BID. It also may use BID tax proceeds to repay the loans, with one additional restriction. If the municipality borrows money by issuing general obligation bonds, the municipality’s governing board must first hold a successful voter referendum to approve the issuance of the bonds. G.S. 160A-543 specifies that in the voter referendum, there must be approval by a majority of voters who vote in the referendum municipality-wide and a majority of voters who vote in the referendum within the district in order to use BID tax proceeds to make the debt service payments.