Special Assessments Taskforce - November 1, 2018 Minutes
The Special Assessments Taskforce meeting was held in the City Commission Room at Fargo City Hall at 7:30 o'clock a.m., Thursday, November 1, 2018.
Present: Jim Bullis, Kent Busek, Gloria Palm Connor, John Cosgriff, Kristy Fremstad, Curtis Goroski, Commissioner Tony Grindberg (Chair), Kevin Hanson, Jeff Volk and Bernie Dardis.
Absent: Don Dabbert Jr., Bill Worth, Commissioner Tony Gehrig and Jeff Volk.
Call to Order:
Commissioner Grindberg presiding.
Approve Minutes from the October 12, 2018 meeting:
Mr. Bullis moved to approve the minutes from the October 12 meeting, with an amendment to attendance which listed Jeff Volk twice. Second by Mr. Busek. There was unanimous approval.
Commissioner Grindberg said he sees the next steps as possibly going down two separate paths, new construction and redevelopment. He said as the taskforce moves forward with its report and delivery to the citizens, another thing to consider is whether to make recommendations on legislative changes.
Mr. Cosgriff shared a summary of some of what has been covered, including construction costs vs. financing costs. He said he was involved with this same topic in 2003, and it seem there are two major components lumped together and called special assessments, construction costs and finance mechanisms. He shared some ideas in construction, engineering and administration where there may be some cost savings.
Discussion and comments included:
• In 2018, special assessment costs were $33.9M, 79% in costs;
engineering and admin were $5.9M, 13.8%, other costs, testing, inspection, incidentals, etc. $1.3M, 3.1%; construction interest $1.76M, $4.1%.
• Construction costs are the biggest driver and there is no city share in new construction. Could focus on construction costs.
• The policy returned to is homeowner pays 30%, City pays 70%.
• The 70% comes from sales tax, utility funds, fees, etc.
• At the end of the day, it is the taxpayer that pays.
• The 2003 taskforce focus was design standards. Changing design standards lowered specials; however, narrower streets and thinner pavement may not be holding up as well and it may not be the long-term solution.
• Cheaper materials could be used.
• Everyone has an opportunity to bid.
• Engineers do an estimate and if bids come within 140%, the low bid is accepted, which is a big variance.
• Construction is cyclical, and impacted by economic changes.
• Could look at the amenities that are starting to be added in
• LOMAR work brings the discussion on diversions, flood plains, etc.
• Inflation is a factor.
• City vs. private engineering?
• Inspections could be pushed back to private sector.
• Would changing design standards save money?
• Projects need to be tracked - land acquisition, underground quality control, quality testing, legal costs, construction interests.
• Specials are looked at as a bad thing. They are a financing mechanism.
• Bonds are sold on 25-year amortization – could look at 30 years.
• Interest rate determined by bond market. Normal markup is 1% charged by City. The 1% is the City’s risk pool.
• Bonds are fixed interest rate. If rates drop homeowners, can borrow from lender.
• City is locked into cost of capital, interest rate structure.
• As bond issue works through, excess is not hidden – it goes to general fund to offset general expenditures of the City.
• If 1% upcharge is reduced to 1/2% it’s about $10/month differential for the homeowner.
• The City could find another way to pay for specials - Bismarck is finding other utility streams to pay.
• Before coming to a conclusion on dollar value, we must understand the total bill.
• Numbers can be defined, where are we focusing our attention? How do we pay for it?
• Transparency is needed; the homeowner needs to understand what they face and how to plan financially.
• A homeowner has a choice on amenities and is able to plan financially for new construction.
• New neighborhoods could have a maintenance fee to pay for desired amenities.
• Nobody likes surprises, perhaps a maintenance, utility fee or something to spread it out.
• Can look at reducing costs but they can’t be eliminated.
• If original costs of green field construction is driven down by reducing standards, the result is quicker replacement. Replacing is more expensive than original construction.
• Reducing standards just raises the ante on somebody else to rebuild infrastructure sooner.
• What decisions can the City make and what is statutory?
• Does the taskforce know the scale of the problem and what drives its creation?
• Can the City change the rate charged to a homeowner after a bond refinance?
• Where does the cash go at the end of a bond issue?
• There should be an attempt to stop collecting on new subdivision costs as soon as they are paid. That group of homeowners paid and should capture the benefit when the bond issue is paid off.
• Quit building excess money and transferring it to general fund.
• Adequate infrastructure is essential for business and growth.
• How does the City balance financing its infrastructure to be competitive and fair to residents.
• How successful has the City been in managing risk (cost and how was it mitigated)?
• How much money does the interest add-on generate, where does it go?
• If the goal is for something by the first part of December, the focus should be on how to pay the bill.
• Need to get away from specials. There are things behind the scene that is pure overhead.
• There are multiple mechanisms to pay, focus on how to pay the bill.
• Could do away with property tax/specials and transfer it all to income tax.
• The City doesn’t plan green field development, assumptions must be made.
• Financing special assessments is a big part of revenue for the entire City.
• City engineers are pros and can be relied on to decide design standards to protect the City in the long run.
• A developer is locked into a state process and has to start 15 months to 18 months in advance of the market to get it organized, engineered, approved, bid, etc. That process may be a soft spot to save some money.
• Developers have to use the economy of scale.
• Perhaps the City pays only for arterial roads and something for collectors, while pools, entrance monuments and amenities get built into lot cost. The City does not build them nor maintain them. Maybe leave it to a developer on a
5 to 10-year basis to see if it helps.
• It’s expensive to build. The median home price is going up and income is staying low.
• Cutting specials impacts revenue just moves taxation down the road.
• The State Legislature will not allow the City of Fargo to impose an income tax.
• The Legislative session starts soon, what do we want to list as changes in Century Code? It could be bidding requirements, lobby for fast track of legislation to put $25M/year to drive down such costs to citizens. If that gets driven through it will have ties to this taskforce to figure out the ultimate strategy policy change.
• A list of recommendations and thoughts, as well as public meeting input for citizen engagement, is needed to develop a draft template and plan for January 3rd, then see what the Legislature brings.
• The “Prairie Dog” bill would be a windfall and has a growth component which for West Fargo is projected at $12.75M, more than they collect a year for sales tax.
• Need more options at the state level for how cities pay the bill.
• There needs to be two different discussions: new construction and reconstruction.
• Public feels complacency and not looking for alternatives got us here.
• There is no transparency in the 1% upcharge/interest add-on for risk and not knowing the total dollar for a full year or all the projects.
• Look at the transparency of how it is determined a project moves forward and how notification happens to homeowners.
• A homeowner gets a letter in the mail a project is happening in three months and then is just expected to prepare for it and that may not always be realistic. Fargo has a large sales tax pool to use as a variable to help its taxpayers.
• Engineering and administration are added on, yet not tracked. It’s unknown whether the City is making money or losing money.
• A developer has an option to use special assessments or pay cash.
• Developers compete against the cities if they do it privately.
• If it were more economical for developers to go private, it would be happening.
• A percent to the interest rate should be completely separate from engineering fees and administration costs.
• The interest rate adds costs to the homeowner for green field construction. When bonds are paid off early, does the homeowner get the advantage of that fund? If so, it is a risk management tool that the homeowner does not pay extra for at the end. If not, then the homeowner is paying extra and it is transferred to the general public.
• Recently, a homeowner could get a lower interest rate on a 30-year mortgage than the price the city charges, making it less expensive for a homeowner to build specials into a 30-year mortgage than paying them off separately.
• There was nothing compelling from the Bismarck representatives about why the developer chose to privately finance.
• A homeowner is paying all this money, yet in the end the money does not all stay in the new subdivision. How does that get rectified in the accounting costs and expenditures?
• An issue when the developer puts in infrastructure is that has to be added to the price of the home when they sell it.
• Is a financing methodology thrown out because someone does not understand it?
• A lender may not finance a home at $450,000.00 with specials; but may finance the same home for $350,000.00 with specials financed by the City.
• Banks try to equalize it; it is still a lien against the property.
• It comes down to personal choice when purchasing a new home.
• Homeowners want to know what their monthly payment will be and want assurances it is not going to change.
• Education by Realtors has improved.
• Older neighborhoods have potential for extra costs for infrastructure.
• Most homeowners do not understand they are only paying 30% and 70% comes from other taxing sources.
• There may be programs to look at from the legislative standpoint to help individuals.
• If the City does not issue a bond, the risk is zero.
• Must the City be involved in the construction in the first place if design standards are set and they inspect?
• Could try removing the City from the equation for green fields for awhile.
• West Fargo would have to be on board.
• Perhaps let Bismarck run the test of suddenly stopping specials and see the outcome. That dramatic of a change may not be the answer.
• If the city profits on something, wouldn’t that profit be applied to things normally taxed?
• If private developers saw a way to have a price advantage and finance through banks, that would happen. It’s a different discussion than someone living in an older home with no option to control it.
• What are other cities/states doing? Many places do not use them like North Dakota.
• Without specials there will be user fees, utility upcharges, etc.
• What the options are to pay for infrastructure - split it out into reconstruction and green fields.
• Maybe repayment of locals gets paid differently than arterials or collectors.
• It would be short-sighted of the Legislature to not look at the total taxation for the state.
• What is the most fair option dealing with the person that has been in their home 30-40 years and gets hit with a big infrastructure bill?
• There is no fair tax. No magic bullet.
• What does the community need for infrastructure?
• If infrastructure goes into disrepair there is degradation.
• What is the outcome of not spending the money? Decline?
• How to stop/start when there are existing specials.
• Can the City lower administrations or other costs? Live with less? Lower interest?
• Maybe caps to avoid hitting someone with $60,000?
• Simplistic to say switch to user fees to cover repair & maintenance; the City would have to buy the infrastructure back to make it fair.
• Sales tax?
• Specials demonized; however, by law they are tied to benefitted improvements.
• More explicit explanations by the City would help with sticker shock.
• How much could the Prairie Dog fund cover?
• Diversion costs are out there too.
• Most people understand they are benefitting and are willing to pay a reasonable cost.
Commissioner Grindberg said it is important find a date in a couple weeks when everyone can attend, possibly November 19th or 20th. He said he will spend time with staff and come back with a one or two page draft plan/road map that covers green fields, existing neighborhoods, legislative changes, cost of construction and capturing thoughts from prior meetings into an outline/discussion document.
Kent Costin said the financial affairs of the City are intricate and interconnected with many moving parts. There are still educational opportunities and financial concepts that can be focused on, perhaps lowing the cost of financing by working with the state. This is a statewide issue, he said; however, what is good for Fargo is not necessarily even relative to most other cities in the State. Some of this may have to go by way of Home Rule Charter, he said. There are needs beyond infrastructure, including public safety, transportation, health care, etc., he said, and while money is made on a process, it is offset by an expense that is not funded anywhere.
Mr. Dardis said it would be helpful for consistency between the two cities to include representatives from West Fargo in the discussions with staff.
The meeting adjourned at 9:06 a.m.