Special assessments are a public finance mechanism that some may consider “old as dirt,” as use of this public finance instrument dates to pre-colonial Britain and seventeenth-century America. Today, special assessments are often used in many states to back what many refer to as “dirt bonds” to develop land as well as other economic development and energy efficiency improvements. This post aims to provide a basic understanding of the use of special assessments as a community development tool in other states, and to highlight the sparse use of special assessments in North Carolina generally and for community development purposes.
Types of Special Assessment in North Carolina
For those not familiar with special assessments, they operate by imposing a “tax” on a property for a specific public benefit provided to that property. The special assessment revenues collected are then used to pay off the costs of providing the public benefit. There are two types of special assessments in North Carolina; the traditional form of special assessment (county statutes and municipal statutes) and a recently authorized critical infrastructure special assessment (county statutes and municipal statutes).
The traditional form of special assessments in North Carolina has been limited to narrow purposes: streets, sidewalks, and other specifically enumerated purposes (for a comprehensive discussion of traditional and critical infrastructure special assessments, see Kara Millonzi’s public finance bulletin here). Other states have expanded the use of special assessments to allow them to be used for a wide variety of purposes and even to allow other units of government to levy them. For example, Florida allows local governments to fund services such as fire protection and also allows sub-units of government, such as a Community Development District (CDD), to fund a much broader array of capital improvements (including parks and other facilities such as golf courses).
North Carolina expanded the possible uses of special assessments considerably in 2009 by authorizing use of critical infrastructure special assessments (outlined by Kara in the above linked article, as well as previous blog posts here and here). The critical infrastructure special assessment allows for a much wider range of potential community development uses, including airports, art galleries, industrial parks, shell buildings, distributed energy generation systems, and numerous other uses (listed in Kara’s public finance bulletin). The legislation also expanded the possible avenues for assessment-backed debt, such as revenue bonds. While these expansive powers are provided for local governments, North Carolina does not allow for sub-units of government (such as Florida’s CDD) to levy special assessments or issue special assessment backed debt.
Use of Special Assessments for Community Development in North Carolina, Georgia, and Florida
Despite legal authority to implement many of the same community development activities through special assessments, North Carolina utilizes special assessments much less extensively than some states. For fiscal year 2010, per the State Treasurer’s Office, all municipalities in North Carolina (excluding one municipality which includes impact revenues in its calculation of special assessment revenues) collected $4.1 million in revenues. Counties reported over $3.455 million in special assessment revenues over the same period. Critical infrastructure assessments have not been used to this point, although two cities, Mooresville and Hillsborough, considered using the critical infrastructure special assessment.
North Carolina’s use of special assessments pales in comparison to our sister states in Georgia and Florida. In Augusta, Georgia, a city with a population of just under 200,000 residents, revenues from special assessments in that city alone were just over $2 million. Florida units of government also use special assessments more extensively than in North Carolina. For example, the city of Boca Raton, a city with a population of just under 85,000 residents, collected $1.2 million in special assessment revenues in its most recent fiscal year, and has approximately $13.545 million in outstanding special assessment backed bonds (click here for Boca Raton’s most recent financial statements). While these examples are large amounts, Florida’s sub-units of government also incur a significant amount of Florida’s special assessment backed debt. Some, including Governor Rick Scott, are concerned that CDDs and other special districts that utilize special assessments are using the tool recklessly. Critics may have a point: as of August 2011, the Bond Buyer reports that Florida CDDs are in default on $5.1 billion in special assessment backed bonds (or about 70 percent of the total CDD bonds that are outstanding).
Regardless of past defaults on special assessment backed debt, there are new proposed uses and bonding authorities for the special assessment authority in Florida, including a $2 billion judicial bond validation for distributed energy projects in the state. Distributed energy projects are typically energy generating technologies that are located at or near the end user of the electricity (an example of this type of system is a solar panel affixed to a property owner’s land or property). This new bonding authority was granted as part of a financing regime known widely as “property assessed clean energy” (PACE).
PACE uses the special assessment authority of a unit (whether a local government or a sub-unit of government in some states) to place an assessment on a property, which is then used to secure financing for distributed energy and energy conservation projects. These PACE assessments, as typically structured, are voluntary—meaning that a property owner must ask the unit in for the assessment. After owners assume the assessment, the unit will package a number of assessments together and then incur debt, which is backed by the pledged assessment revenues from the voluntary participants. Funds are then distributed from the unit to the property owner, who uses the funds to install the distributed energy or energy conservation improvement. The property owner then pays back the cost of the improvement through a long-term special assessment. For details on nationwide implementation and further discussion of PACE, click here.
Florida’s authorizing PACE statute contains several provisions to ensure that the property owners who undertake these PACE assessments are solvent, including the voluntary nature of the assessment, a maximum ratio of twenty percent of property values to assessments that may be levied, a requirement that the property owner is solvent and has not been in default for a number of years, and notice provisions to mortgage holders when property owners assume the PACE assessment voluntarily. This can be seen as a positive development, considering the history of defaults seen earlier in this blog. Twenty-eight states, including North Carolina and Georgia, have authorized a form of PACE, although implementation of PACE has been sparse to this point. Regardless of implementation, use of PACE in other states (including Colorado and California as well) shows another example of other states using the assessment authority to generate community development opportunities.
Since passage of the critical infrastructure assessment in North Carolina, local governments have enjoyed an additional tool in their community development toolbox that mirrors the abilities of units in other states. However, this tool has remained unused, while other states have continued to use special assessments more frequently. Concerns may abound that North Carolina would experience similar pitfalls as other states, such as seen in the experience of Florida with its CDDs. While Florida has attempted to build safeguards into its statutes for specific uses of special assessments, North Carolina has a significant state oversight body (the Local Government Commission) that is designed to help to avoid defaults seen in other states. However, use of the critical infrastructure assessment comes with a shelf life in our state. The legislation that authorized critical infrastructure special assessments sunsets on July 1, 2013, and, without reauthorization, is unlikely to be utilized.
Adam C. Parker is a rising third-year law student at the UNC School of Law and is currently serving as a Summer Law Clerk at the UNC School of Government.