In the fall of 2013, a blog post on special assessments for financing infrastructure included a short description of the Town of Hillsborough’s use of this finance strategy. Hillsborough was the first local government in North Carolina to borrow money and pledge special assessments as security for a loan. In learning more about this tool, we have conducted informational interviews with the local elected and administrative leadership. A series of blog posts will differentiate special assessments from other project financing tools, shed light on unique aspects of the implementation process, and review the town’s areas for deliberation.
The following provides background on the Town of Hillsborough’s case, and then discusses various financing options for project infrastructure.
In 2004, the Town of Hillsborough approved the Waterstone Development with Stratford Land developers, as a commercial and residential economic development initiative. The development plan included three infrastructure phases, with Phase 3 providing critical access and amenities to the planned community, including a parkway and community park. Years after Waterstone Development’s approval, the Great Recession slowed the project as the final phase was underway, threatening over $20 million in previous investments. To avoid default, and yielding to pressure from their lenders, Stratford Land requested additional financial assistance from the Town of Hillsborough. Specifically, the developers wanted the town to levy special assessments within the project area to provide financing for completion of the necessary infrastructure, and recover costs from past infrastructure investments.
In consideration of this request, the Town of Hillsborough thoroughly reviewed the purpose, alternatives, and process for levying special assessments. As other municipalities consider special assessments as a project financing tool, a primary question might be, What is the alternative?
Special Assessment or…..?
For the Town of Hillsborough, the primary objective was to finance infrastructure that supported their economic development goals. In North Carolina, project development financing (commonly referred to as tax increment financing or TIF) and special assessments are two tools available for funding public infrastructure projects that will benefit or incent private development, which for the Town of Hillsborough included roads and community amenities. Although the Town of Hillsborough did not consider project development financing, other municipalities might seek an alternative tool to special assessments.
In general, project development financing is a type of debt financing used by local governments whereby a county or city establishes a project development district and borrows money to fund public infrastructure projects that will benefit and incentivize new private development in the district. (Further descriptions of development financing are described here.) Specifically with project development financing, a government does not use current resources, but rather borrows money in anticipation of paying back the loan with the increased property tax revenue generated due to the private development in the project development district. On the contrary, special assessments do not always involve borrowing money, but rather allows the property owners to pay for public infrastructure that benefit those properties. For the Town of Hillsborough, the local government did not want to pay for improvements from their general fund revenue; therefore levying special assessments was a tool that required the property owners to pay for the public infrastructure, as originally proposed through the development plan. The town borrowed money and pledged the special assessment revenue as security for the loan. It also will use the special assessment revenue to make its loan payments.
The technical difference between the financing tools is the revenue pledged as security for the loan. With project development financing, the unit pledges the projected incremental increase in property tax revenue generated by new private investment. The private investment is incented by the public infrastructure projects that the unit funds with the borrowed monies. With special assessment bonds, the unit pledges the assessments and uses this revenue stream to make its debt service payments.
What are the divergent financial risks?
A successful tax increment financing project relies on actual property values increasing according to projections, due to the private investment. As with any other project, there is a risk of predictions for additional revenue falling short, requiring the local government to pledge additional securities. Other North Carolina local governments have pledged sales tax as an additional security or established a minimum assessed value to address this concern.
A successful special assessment project relies on the current and future property owners’ ability to pay the levied assessment. There is the risk of the development falling through and missed payments, or payments may only be recouped through foreclosure. Therefore, the local government has to minimize risk through assuring that the development plan is completed or ensuring that there is sufficient value in the property being assessed to cover the loan payments if foreclosure is necessary.
In general, what does a special assessment offer?
Of course, every project requires different financing approaches. Yet, special assessments offer a method for local governments to not commit current resources for project financing. Ideally, in the long run, the developer would not pay the assessments either, so the development and the government have created a mutually beneficial position. However, with all projects there is the risk that plans can always fall through.
Maggie Parker is a candidate for the MPA and MCRP graduate degrees. She is also a Community Revitalization Fellow with the School of Government’s Development Finance Initiative (DFI).