Special Assessments Taskforce - September 27, 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, September 27, 2018.
Present: Kent Busek, Gloria Palm Conner (via conference call), John Cosgriff, Don Dabbert Jr., Kristy Fremstad, Curtis Goroski, Commissioner Tony Grindberg (Chair), Kevin Hanson, Jeff Volk and Bill Worth.
Absent: Jim Bullis, Commissioner Tony Gehrig, Bernie Dardis.
Call to Order:
Commissioner Grindberg presiding.
Approve Minutes from September 6 meeting:
Mr. Busek moved to approve the minutes from the September 6, 2018 meeting. Second by Mr. Volk. There was unanimous approval.
Taskforce Member Comments:
Commissioner Grindberg said he proposes the next meeting date to be over the lunch hour on Friday, October 12th. He said Commissioner Gehrig has asked that Bismarck Taskforce Member Dustin Gawrylow and Bismarck City Administrator Keith Hunke be invited.
Finance Department Presentation:
Director of Finance Kent Costin shared a presentation on the basic concepts of specials in Fargo, including how they are used and the magnitude of the use of specials both historically and presently.
He introduced Terry Heaton, Client Representative with Springsted, Inc., Fargo’s municipal financial adviser. Springsted helps issue special assessment bonds to fund projects which are then paid for over the long term by special assessments, he said, and he and Ms. Heaton work together on bond deals. He said the other entity involved is bond counsel, which keeps the City in line with all the minutia of the North Dakota Century Code. It is tightly prescripted by state law, he said, although there is some opportunity locally.
Mr. Costin gave an overview on how municipal finances are managed and budgeted, the revenue streams and expenditures. About 20 percent of revenue comes from state and local intergovernmental revenue, he said, with fees being managed by local decisions and rate setting. He said a goal is keeping the general fund in balance on a sustainable basis. He said State law allows the transfer of funds from utilities, primarily water and wastewater, into the general fund. Transfers have been used for many years and the numbers are growing now that Fargo has become a regional provider for water and wastewater. State aid peaked at about $9 million when oil revenue was going up; however, now it is about $6 million, he said. However, the local economy and State sales tax revenue is starting an upward trend again, he said. Since it is all interrelated, he said, any decisions or recommendations made here may have a spillover effect on overall operations. A good share of the monies collected are being spent on protecting the community, taking care of the community and being a good steward of the infrastructure assets, he said. In examining the pie charts on 2019 Budgeted Revenues and Expenses, he pointed out that property tax revenue amounts do not even cover the costs of Public Safety. He said if there were no other revenue sources there would be a heavier reliance on property taxes. Sales tax revenues are all presently dedicated to infrastructure, he said. General Funds Resources Trends over the last five years shows revenue growth as fairly flat, he said. Property taxes are the most stable, reliable source of revenue, he said, and Fargo has a strong tax base that is growing. Because of the strong economy, valuations have increased, he said, and the City Commission has chosen to manage that increase by reducing the mill levy by 7.25 mills over the last four years, reducing the impact to homeowners with increased valuations.
Special Assessment Financing and Bonding:
Mr. Costin shared bonding advantages and disadvantages. He said this process allows the opportunity for large amounts of capital to build infrastructure facilities. Without it, he said, a pay-as-you-go basis would result in far less projects. He said it simply does not work to pay for the demands of the community in cash. Fargo has high quality bonds and good rates, he said, low tax-exempt financing rates are obtained and bonds are issued to Wall Street investors. He said the process is pro-development, allowing developers needing capital, whether small, large or somewhere between, to participate. He said 14 years ago, on the recommendation of the last taskforce, most of the amortization debt went from 18 years to 25 years, resulting in a lower impact to the taxpayer and the interest rate has been lowered.
In response to a question from Kent Busek about whether this really brings more developers to the table since there seems to be a limited pool, Mr. Volk said he feels it does. He said it brings in a different type of developer and allows the development community to be those who live here.
Mr. Dabbert said his perspective on it is that banks are relied on to underwrite each developer. He said it is not a blank check for any one developer, developers are required to put up a letter of credit, which is 50% of the Improvement District and with new banking regulations, it can be easier to get a loan and put a mortgage on the property than it is to get a letter of credit, he said. The cost of capital is the key driver, he said, and the rate through bonding low-cost tax-exempt financing is still a lower rate than any local or national bank would offer regardless if privately or municipally financed. He said the cost to the end user is most often a lower interest rate on the infrastructure financing portion.
Ms. Palm Connor said the fact that national developers are not coming to the community may be actually driving the cost of homes up. She said she hears from people moving into the community that the price for homes with specials added is much more expensive than other communities. She said she intends to ask MLS (Multiple Listing Service) for data to find the average price of a home with specials rolled in. The average price for a home is consistent with the national average, she said; however, that does not take into account the cost of specials.
In response to a question from Mr. Volk about whether information on financing could be separated into categories such as: green field for the lots; green field to do trunk systems to get to the lots; reconstruction of streets to houses; and reconstruction of arterials, Mr. Costin said that data could be tabulated. Mr. Volk said knowing the trending and magnitude of those four categories would be helpful to understand those trends.
In response to a question from Mr. Dabbert on whether the information includes intercity flood protection or non-green field expenses, Mr. Costin said almost 95% of the flood protection projects have been paid for by sales tax or incorporated into the Diversion budget. He said LOMR (Letter of Map Revision) requirements represent a significant impact since those costs are being added to the project’s cost and driving the price of specials up. He said as the area being built is moving south, LOMAR costs are increasing. Removing LOMR from project costs is one thing to consider to make it more affordable, he said; however, that puts the City on the hook to find resources.
Mr. Costin said the decision on how long to amortize specials is a local decision. He said major categories of specials are amortized over 25 years; however, sidewalks and street lights are lower due to some of those assets not lasting as long as underground pipe. He said there is the option of lobbying the Legislature if the desire is to amortize over a longer period. Revenue from engineering and administrative fees is not an insignificant revenue piece of the equation, he said. Fees are assessed based upon gross construction cost, he said, and applied and shared in accordance with the cost share policy. He shared a table of fee structure cost recovery data showing a growth in the number of FTE staff working on projects each year demonstrating some of the administrative costs.
Mr. Costin shared statistics on new vs. reconstruction projects to illustrate where money is being spent. He said the engineers attempt to strike a balance between the resources applied. He said staff looked at inflation and the average cost increase of infrastructure construction components from 2010 to 2017 was 82.37% and calculates to about an average 10.3% inflation rate. He said that is significant and certainly contributes to the cost of specials. He said it is important to be cognizant that inflation contributes to costs of specials. He said the initial shift of cost share from 30% to 50% was based on trying to catch up with inflation, which had not been done routinely and the jump was a little far. He explained that the City recently made a policy adjustment from a 70-30 cost share to 50-50. He said 70-30 means 70% of the project cost is paid by the City and 30% gets assessed. As part of managing sustainability it is important to be cognizant of inflation and who is paying what cost share, he said. It used to be managed by using a cap of x dollars/foot; however, if caps are not indexed as inflation increases, the City ends up eating a bigger slice of the pie.
In response to a question from Mr. Busek about whether the City is making up the difference due to the policy change from 70-30 to 50-50, Mr. Costin said City money had to be shifted into these funds to cover the costs. He said this is for reconstruction, not green field.
In response to a question from Ms. Palm Connor about whether component costs are materials only or include labor, Mr. Costin said it includes everything that the contractor charges. He said cost of pipe/commodities could analyzed and work could be done on the labor side as well. He said City labor costs could be lower than private costs, he said.
Mr. Costin said one issue of contention brought up was why specials are marked up once they are bonded. He said the concept came about in the 1981 Legislature, allowing a 1.5% over bond rate fee. He said Fargo lowered its fee from 1.5% to 1% after the last taskforce. He said Fargo is a strong community and people pay their specials so there was comfort in lowering the fee rate. He said most other ND cities are charging 1.5% and many MN cities are in the 2.0% to 2.5% range. There are two options in the Century Code to account for debt issuance costs, he stated, either assess directly or recover costs indirectly using the markup to pay for it over time. Fargo, he said, chooses the later through the debt service fund, which has been the methodology for years. He said a recent bond sale of $43 million had a total closing cost of 1.6% of the face value of the debt, or $691,500.00, which gets made up over time through the assessment process in the debt service fund. It costs money to bond, he said, no different than any other type of closing cost. There is risk related to markup, he said, if taxpayers do not pay their specials the City is still obligated to make the debt payments. If the money is not in the funds to pay that debt, which now is about $30 million per year, it would be required to collect the money by levying general property taxes to cover it. There is always a risk of disaster, too, he said.
Mr. Dabbert said it is important to note that if there were an economic downturn, the risk for the developer is 50%.
Ms. Heaton said she did some analytics about various levels of the markup and why it is used. She said the markup recovers the cost of bond issuance, acts as contingency for deferred or delinquent assessment payments to offset risk, protects taxpayers and creates a fund balance over time. It is a GFOA best business practice, and the City of Fargo has an AA plus bond rating, the second highest possible. The City gets good interest rates, she said, most recently 3.37%, so with the 1% add-on the borrowing rate is 4.37%. A taxpayer can prepay at any time if they can get a better rate, she said. Bonds have a “call,” she said, for example a 25-year bond cannot be prepaid until year 10. She said that means once bonds are issued, the City counts on the interest coming in due to the City incurring interest on them. Homeowner prepayments are trending upward, which creates a gap or cash flow shortfall for the City since they are locked in for 10 years, she said. When specials get prepaid, the City stops getting interest payments from the property owner, however; still has to pay interest on the debt, she said.
Mr. Costin said leaving the surcharge at 1% is a reasonable rate to sustain over the length of the debt service fund. He said reducing it to something like .5% is not significant when it is drilled down to the parcel level. He said the reason for transferring remaining funds into the general fund is basically due to how it is allowed by Century Code. There is currently some discussion on it at the Legislative level, he said, so there changes could be coming. He shared the following opportunities to consider:
• Modification of cost share in assessment policy (cost shifting).
• Incremental adjustments to replace assessment revenue (cost shifting or new revenue streams).
• Remove cost categories from assessment project costs (LOMR's) (cost shifting).
• Do less capital projects and lower homeowner cost share (project management).
• Lower the threshold for prescribed rejection of bids received. Current threshold is 140% of engineers project estimate per North Dakota Century Code (project management and local cost containment initiative).
• Consider reverse bidding procedures to lower bid results (creative concept).
• Don't bid projects after date certain as bid prices rise later in the year (management timing).
• Consider passing along interest rate savings on refunded bond issues (debt fund management).
• Seek low interest fixed rate loans from State agency (Legislative initiative).
• Study feasibility of using federally subsidized SRF loans to finance reconstruction projects (alternative capital source).
• Allow citizens to purchase original issue Fargo tax exempt bonds (taxpayer benefit).
In response to Mr. Busek asking about competition between contractors as it relates to bid prices, Mr. Volk said that is affected by what goes on in the rest of the country. He said during the oil boom years there were few companies bidding; however, in today’s environment there can be dozens. He said even in the private sector, it is difficult to predict bidders.
In response to a question from Mr. Volk about whether there is a dedicated fund for each project or for each bond issue, Mr. Costin said State law allows aggregation of individual projects into one single fund. For instance, he said, recently for the $43 million in bonds there were 29 or 30 individual projects bundled together in aggregate, sold as one transaction. He said the City keeps track of assessments and all those assessment districts feed that one single bond fund.
In response to a question from Mr. Volk about whether reverse bidding is contrary to state law, Mr. Costin said it is; however, it can be important to challenge State law since it can become outdated. He said he sees an opportunity for some flexibility in exercising Home Rule Authority. Fargo is in a unique situation in North Dakota, he said, as a large regional center the requirements for the community and demand for sustained funding are greatly different than the rest of the state.
Mr. Volk said it is important to understand which decisions are discretionary and which are not. He said it gets complicated in these discussions to know what tools are available today for decision making.
Commissioner Grindberg said the goal is a report of the taskforce’s work, which should include a spreadsheet perhaps listing what is under local control and what is under “archaic law.” He said the work of the taskforce and its recommendations, along with Bismarck’s efforts, can create some momentum to influence change at the legislative level. He said Fargo manages pretty well under the requirements of the Century Code and common business practices. To position this for the next 10, 12, 20 years will likely involve legislative change, he said, however; that has to be defined.
Mr. Goroski said state law could provide more options on how specials could be done since one size does not fit all.
In response to a question from Mr. Goroski about whether the increase in the costs for public safety is related to the growth and increased infrastructure versus more controlled growth, Mr. Costin said while costs have increased, it may not all be related to the size of the footprint of the city. He said perhaps it can be related to the type of activities going on as Fargo becomes a larger, regional city.
Mr. Dabbert said the Homebuilders Association has done studies locally and nationally showing with the tax base and all the other economic stimulators of any one new house, the average return on investment is about three years to the city.
In response to a question from Mr. Dabbert on if something like LOMAR were taken out of the special assessments bucket, who would pay for it, Mr. Costin said there could be a couple of options. He said the City could absorb it or tell the developer it goes with the cost of the land and to charge the homeowner with the cost of the property.
Division Engineer Tom Knakmuhs said developers do not have to special assess, they can build the infrastructure and charge it into the lot price. He said City’s requirements would be the same whether special assessed or not; the Engineering Department would work with the developer through developing, reviewing and overseeing the plans, and reviewing the infrastructure installation.
Mr. Dabbert said he does not see cost savings. The project and the cost are basically the same until it comes down to the markup, and the contractor price would be the same whether public or privately bid. There would be administrative oversight since the City is not going to take anything substandard, he said. Special assessed financed or private financed simply shifts the burden from one entity to the other, he said.
Mr. Costin said the fees are about the same; however, the City would not have the ability to charge a fee if it is moved to the developer which means the City would lose revenue.
Mr. Knakmuhs said in-house green field development is charged an 11% engineering fee. He said if a developer wants to do it all privately, hire an engineer and contractor, etc., there would still be a 4% oversight fee for time reviewing and helping oversee the project through construction and ultimately accepting it.
Mr. Costin said predominately taxpayers let their specials ride. While some do not want to pay a dime of interest and pay them off right away, he said, others feel if they are going to move out of the property, why pay off the specials.
Mr. Hanson said much of the decision to pay off specials could be due to timing. He said a few years ago when interest rates dropped down, it was beneficial for people who had specials at 8 or 9 percent interest rates to pay them off.
Mr. Dabbert said even if a developer installs all the local improvements, that does not exempt that property from having special assessments already incurred or forthcoming on that property.
Commissioner Grindberg said the next meeting will include a presentation on the Bismarck Taskforce and discussion on the list of opportunities Mr. Costin presented, along with other ideas.
In response to a question from Ms. Palm Connor about whether the engineers estimate is included when bids are called for on a project, Mr. Knakmuhs said an engineer’s estimate is included as public information in the City Commission agenda upon creation of an Improvement District. In a recent example, he said, a new green field development came in 20% over the engineer’s estimate and the developer did not feel lots would be saleable with that amount of special assessments. The Engineering staff worked with the developer and recommended denial of that award, he said. A different timeline was determined, giving more flexibility to contractors and when it was bid again, it came in 10% to 15% under the engineer’s estimate.
Tim Stallman said he owned a house in Jefferson City, Missouri and never once paid special assessments. He said he feels specials can be eliminated and an object of this taskforce needs to be to find out how other cities are doing this and to implement some system other than these “evil” specials. He said he is concerned how specials affect older property owners. His theory is that the laws in the Century Code did not originate from the people, he said, instead it came from engineering companies and those who profit from specials.
The meeting was adjourned at 9:12 a.m.