Surprise leaders discuss special tax districts

Surprise City Hall [file photo]

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What rules should local leaders consider for establishing Community Facilities Districts? What kinds of notification requirements, if any, should they impose?

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By Matt Roy, Independent Newsmedia

City leaders have started looking into city policies to protect homeowners in the wake of a new state law.

The Surprise City Council and Planning and Zoning Commission met to discuss ramifications of state law passed last year, which changes rules for establishing and managing a Community Facilities District during the panels’ May 14 joint session at City Hall, 16000 N. Civic Center Plaza.

At the heart of the matter is SB1480, a bill approved by the Arizona Legislature and signed by Gov. Doug Ducey in April 2017.

The new rules could fast-track the process to create CFDs, which are sometimes used by developers and communities as an alternative funding mechanism to pay for infrastructure and special amenities.

As a special taxing district, a CFD allows a developer to seek bond funding to cover some project costs, which are then passed on to future homeowners in those communities in the form of secondary property tax rates.

Typically, the infrastructure paid for by CFDs is limited and could include anything from wet utilities and roadways, to parks and recreational facilities.

The special district not only defers some of the developers’ project costs, but also helps them get cheaper financing than they might otherwise qualify for, explained Lindsey Duncan, finance director for the city.

“The CFD works by selling bonds to construct or acquire the qualified public infrastructure or enhanced municipal service,” said Ms. Duncan. “But then we sell municipal bonds through the municipal bond market. These are federal income tax-exempt bonds from the interest, so we can take advantage of lower interest rate environments to do so.”

The extra tax is paid only by the residents of that community on top of they city’s existing primary and secondary property tax levy, she explained.

In one of the city’s two CFD communities, Marley Park, residents living in the area’s 2,900 original home sites pay an additional $3.70 per $100 of annual assessed value on top of their homeowner’s association fees and the city’s normal $0.7591 per $100 assessment.

District 5 City Councilman Skip Hall wanted questioned why developers had asked for the Marley Park CFD in the first place.

“Can you tell us the rationale that justified that CFD?” Mr. Hall asked.

Built in 2004, Marley Park was among the first new developments in the area and the developer sought to add additional, special features to the project, Ms. Duncan explained.

“The developer having the CFD to reimburse them for public infrastructure allowed them to make greater investments in community infrastructure, including the community pool, the clubhouse, the tree-lined streets, and other amenities,” Ms. Duncan said.

Apart from making it easier to finance projects, CFDs can add value to properties, making them more marketable and enabling developers to defer the cost, which can sometimes take 20 to 30 years to repay, she explained.

But where Marley Park took on the burden to acquire something above-and-beyond what was then being offered in neighboring communities, future special districts could be established to pay for basic infrastructure, such as streets and sanitation, which have usually been paid for up front by developers during construction, Vice Mayor Ken Remley suggested.

“My water lines coming to my house, my sewer, these are things that are municipal utilities basically,” Mr. Remley said. “Why would that be part of a CFD necessarily? Unless it’s a gated community or something, streets are something taken care of by the city anyway.”

Mr. Remley also raised concerns that proliferation of CFDs, should the city adopt many more than those already on the books, could create an administrative burden for the city.

Mr. Hall said another challenge will be ensuring new homebuyers are made aware of the additional costs associated with purchasing in a CFD neighborhood.

“My experience, I’m just going to tell you, at Marley Park … I went to the sales office and nobody said anything about the CFD,” Mr. Hall said. “This disclosure here, in a residential environment, really is important.”

District 1 Councilman Roland F. Winters Jr. shared the concern over clarifying disclosure requirements.

“Obviously this whole thing is fraught with problems,” Mr. Winters said. “It’s obvious the developer got this under our legislature in Phoenix and got this thing passed. And it’s a state statute and there’s not much we can do about it …I’m concerned the homebuyer is not going to be informed of this extra amount of money.”

District 2 Councilwoman Nancy Hayden echoed that concern, saying the practice can potentially fool homeowners into paying more than the realize.

“All I is see is it’s a way of selling houses and they come off cheaper, when in actuality there’s more of a debt that they don’t even know about a lot of times and I just find it really awkward,” Ms. Hayden said. “You know, if you’re going to sell a house, sell it for what it’s worth, sell it for what your costs are. Be up front about it. This just seems like a tricky way to attack they buyer. It’s a false statement up front.”

District 3 Councilman Patrick Duffy said special spending may appeal to many during a strong economy. But taking on additional long-term burdens could come back to haunt some communities.

“This is the point that worries me the most,” Mr. Duffy said. “I don’t think we learned our lesson from 2008. We’re going back to the same road … we’re seven-plus years into a bull market. How much longer is that going to last? So, then what happens? Now I’ve got a bunch of neighborhoods with high property taxes. There’s no guarantee that economic development is going to come. These CFDs last 20 years. How many market cycles is that?”

Patrice Kraus, legislative director for the League of Arizona Cities and Towns, explained homeowners are responsible to know what they’re signing up for.

“Homeowners always have a responsibility to review their taxes and assessments to determine whether a community is right for them. People who purchase homes in CFDs should understand the financial obligations that are part of owning a house in these communities,” Ms. Kraus stated.

Despite the risks, with proper consideration and oversight, CFDs can be a tool to spur development and create better communities, she suggested.

“It has always been important that local elected officials and their staffs carefully examine the impact of CFDs on their communities and for them to fully understand the financial obligations these special districts create,” Ms. Kraus stated. “CFDs have been highly successful in Arizona and the role that local government has played and will continue to play on behalf of their residents has been one of the reasons for this success. City leaders had that responsibility prior to the changes in the law and they will continue to have that responsibility under this new legislation.”

Next steps

How taxing districts are formed and managed, as well as what reporting requirements are imposed, will largely be determined by the rules and criteria devised by city officials and enacted by City Council.

Staffers will develop recommendations to share with the council at future public work sessions and meetings, allowing for further consideration and public input before leaders enact any changes to city’s current CFD policies, which were adopted in 2003.

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