Special Assessments Taskforce

Boards, Commissions & Committees

September 6, 2018 Minutes

The second meeting of the Special Assessment Taskforce was held in the City Commission Room at Fargo City Hall at 7:30 o'clock a.m., Thursday, September 6, 2018.

Present: Jim Bullis, Kent Busek, Gloria Palm Conner, John Cosgriff, Don Dabbert Jr., Bernie Dardis (ex-officio), Kristy Fremstad, Commissioner Tony Gehrig (ex-officio), Curtis Goroski, Commissioner Tony Grindberg (Chair), Kevin Hanson and Jeff Volk (via teleconference).

Absent: Darrell Christianson and Bill Worth.

Commissioner Grindberg presiding.

Approve Minutes from August 28 meeting:
Ms. Fremstad moved to approve the minutes from the August 28, 2018 meeting. Second by Mr. Bullis. There was unanimous approval.

History and overview:
John Shockley, Ohnstad Twichell Law Firm, gave a presentation on the history of special assessments and an overview of current policies. He said his presentation is not an attempt to give opinions or offer choices, only to provide background due to the fact that he and his law firm have had a great deal of experience working with cities including West Fargo, Moorhead, Jamestown, Bismarck and Williston, as well as private developers in western North Dakota and western Minnesota. He said nearly all 50 states have some form of special assessments and in North Dakota, the first reference to special assessments was in 1887. He explained special assessment general procedures, the main methods of assessment, length of time for assessments, interest rates, bonds, green field and reconstruction issues and other matters. He said after an improvement district is created and a project is completed or substantially completed, then it is special assessed. He said most cities levy 100 percent to the improvement district; however, cities can buy down the assessment with tax revenue and specials are levied depending on the benefit to each lot or parcel of land. He explained there are three methods of assessment – front footage, square foot for drainage/storm sewer and equivalent unit for water or sewer service. He said the maximum payment length of time in Fargo is 30 years for sewer and street service and the interest rate can be 1.5 percent above the going rate, which is allowed by law. The 1.5 percent protects cities from delinquencies, he said, as well as a downturn in housing or if a developer walks away from a project. No matter the circumstances, he said, the city still has to make the bond payments. He said with green field projects, the advantage for cities installing infrastructure is the city controls the engineering and construction management and oversight. He said it is advantageous to the developer as they do not have carrying costs and banks have rules on how much they will loan for infrastructure. The disadvantages to green field development is how the level of security is set, what are the qualifications for developers and what is the cost to the City to administer the project. With developer-funded green field projects, the City does not have to take risk. He said the developer has lower engineering costs than the City and can keep design costs down and there are no specials for homeowners due to the fact that all costs are added to the lot price; however, developers do not have to follow public bidding laws. When a developer puts in green field infrastructure, the City loses all control and there is the possibility of wrong sizes installed, infrastructure put in the wrong location, plastic versus concrete and more. He said Minneapolis had developers install infrastructure, then a developer went bankrupt and even though it was private, the residents went to the city for help. The city is taking a risk that the developer will finish the project and if they do not, it leads to less lots for the public and higher prices at a time when a home ownership is encouraged. Infrastructure requires a lot of capital, he said, and in Williston and Minot, there is not a lot of new development due to the fact that developers have to put in infrastructure and they and the banks are afraid of an economic downtown. Even if private developers put in the infrastructure, he said, city inspections are still required. Other issues include warranty, regional infrastructure costs, collector streets and oversize infrastructure costs. He said a city still has to pay for those big-ticket items. When a city uses special assessments in order to mitigate risks, a city will draw on a letter of credit and control the number of lots to be developed. Very stringent developer agreements are required, he said, and if there is a paradigm change, the city attorney will have to put in a lot of time, there will have to be security to finish infrastructure in case of an economic downturn and the city has to address nuisance issues such as mowing. With brown field or reconstruction, he said, many cities use sales taxes for those costs; however, it is statutorily restricted how a city can use sales tax unless it is specifically voted on for infrastructure use. He said utility rates could be increased; however, that affects residents on fixed incomes. He said some of the alternative models could be state direct aid to cities for reconstruction and oversize infrastructure. He said that would be a significant amount of cash from the Legislature and due to the economy in North Dakota, the state may have to look at collecting more income taxes. He said another option is general obligation refunding improvement bonds where municipalities issue new bonds in order to raise funds to retire existing bonds. He said Minnesota has a minimum special assessment of 20 percent of the total cost of a project. He said figuring out what to do with the remaining 80 percent can be a policy challenge as to whether to levy it on people benefitting the most or to spread it across the entire city. Another option, he said, is impact fees for a new development, which would deal with oversize structures. He said he is not clear if impact fees are permitted in North Dakota due to the fact that specific legislation would be needed. Other options, he said, are to not create new developments, build vertical development, limit lot size, narrow the roads and focus on urbanization, all of which reduces specials but increases the amount of property taxes collected. He said special service district and street utility fees are popular in Colorado, Florida and Texas. He said improvement districts in those states are run by the developer and the developer can impose a fee. He said that way, the developer stands or fails on their own and their bond defaults rather than the city’s. He said that was proposed to the North Dakota Legislature; however, it did not go far. Street and water utility fees could increase, which would go into a fund for reconstruction of streets.

In response to a question from Mr. Dabbert asking who benefits from lower interest rates and what happens to excess funds for specific improvement districts, Mr. Shockley said lower interest rates generally benefit the property owner. He said amounts going into the fund are pledged to repay the bonds.

In response to a question from Commissioner Gehrig, asking when a bond is paid and there are leftover funds, where do those leftover funds go, Mr. Shockley said he would defer that question to Finance Director Kent Costin.

Ms. Connor said if a homeowner pays off their specials, they think they will get that money back when they sell. She said as a real estate professional, what she sees happening is a buyer looks at a $400,000.00 home where the specials have been paid off and across the street, there is a similar home priced at $350,000.00 with $50,000.00 in specials. She said a buyer will not look at the $400,000.00 house and instead likes the $350,000.00 house, but they are not factoring in the specials still owed on that home. She says she sees the same thing happening with lots and real estate agents need to better educate their clients.

In response to a question from Mr. Bullis asking if bond excess money could be used to reduce special assessments, Mr. Shockley said that would have to be a policy decision by the City.

In response to a question from Mr. Goroski asking about the North Dakota Century Code and does it require cities to use special assessments or are there other tools, Mr. Shockley said special assessments are not required. He said some western North Dakota cities receive a Gross Production Tax, which is used to pay for infrastructure. He said, unfortunately, a Gross Production Tax is not possible in Fargo.

In response to a question from Mr. Goroski asking if a street utility fee is possible, Mr. Shockley said there was a case recently in North Dakota involving raising traffic fines over what was state law and the court said it was not permitted. The same may be said in court about street utility fees, he said. There are street utility fees in Minnesota; however, he said, Minnesota has a more liberal interpretation of Home Rule Charter. He said with the legislative session in North Dakota coming up, the street utility fee is an option. He said the City of Fargo cannot impose street utility fees to pay for infrastructure; however, with legislative authority, it would be a tool. He said some of the next questions would be how much money is needed and what is the right amount to charge a resident. He said it would be better to have specific legislative authority to do it and there is none now.

Mr. Dardis said cities do not do any additional follow up when a bond is assessed. He said if there is excess money it is not tracked and the public cannot find out once assessment bonds are issued.

Mr. Shockley said the City can identify fees and the City can only take in the amount that is needed to pay the bond plus administrative fees. He said if the engineers estimate is higher than actual cost, any excess money bonded for a district must stay in that district, therefore many times the City will not levy out the last year or so of specials.

Mr. Shockley said most cities that do not have engineering departments put in hard costs for a specific engineering firm. He said for cities that have an in-house engineer, they charge a percentage fee, which is pushed back into the budget. Many cities contract with private engineering firms for a set fee and they do not track the hours.

In response to a question from Ms. Connor about what private sector engineering firms charge, Mr. Shockley said it varies with most in the 11 percent to 16 percent rate.

Finance Director Kent Costin said the percentage for engineering fees is policy-based and there is a wide range of engineering costs, whether it is in-house or a private firm. He said he will have more financial analytics at the next meeting and include how much the City collects in fees and how much that affects the Engineering Department budget. He said residual funds from bonds can be transferred to the general fund per the Century Code, which has an indirect benefit to all taxpayers when they are worked into the City budget.

Blake Crosby, Executive Director of the North Dakota League of Cities, said there has been a lot of discussion over the years about special assessments and a solution has not been found. He said there are very few options for calculating costs for green field construction and existing infrastructure repair, maintenance and replacement. He said the taskforce should look at fixed costs versus variable costs. He said there is no way around construction costs and issuance fees associated with special assessments such as advertising, bonding, carrying costs and the time value of money. When a city special assesses, they are the bank and the market bond rating is fixed. He said bond market reviews cost money and there are collection and administrative costs when someone does not pay their specials. He said some homeowners prepay specials and there are those who do not pay; therefore, there has to be some funds set aside for that risk so a city does not go into a deficiency, especially in green field development where a developer could walk away. He said another point of discussion with developer-funded green field infrastructure is that it requires more inspection. He said with special assessments there are many fees, including annual interest, administrative and engineering fees, quality testing, inspection and legal costs. He said in every state, if they did not have special assessments, the alternative for green fields is to make the developer pick up the cost of infrastructure, then turn the maintenance over to the city. That possibility has been discussed, he said, and it has its bad and good sides; however, he advised the taskforce to thoroughly discuss those issues with lending institutions and developers. He said another point of discussion should be how much tax-exempt property is in Fargo and how many roads go by tax-exempt properties such as NDSU, Sanford, schools and churches. In the end, he said, somebody has to pay. He said impact fees are not allowed and it would take special legislation in place of special assessments. He said the taskforce should look at smaller lots due to the fact that the size of lots directly affects special assessments forever. He said construction costs have increased exponentially over the past years, which has a huge impact on special assessments. He asked the taskforce to consider the impacts of deferred maintenance and the typical lifespan of infrastructure. He said the bottom line is infrastructure costs a lot of money and there needs to be more citizen education. He said the “Bakken Premium” also needs to be considered with things ramping up again in western North Dakota. He said bids are going to be higher due to the fact that contractors are going where the money is. He said some estimates could be as much as 30 percent to 50 percent higher than engineering estimates and the city has no control of those costs. He said the tendency is to not do as much maintenance as is necessary due to legislative pressure on property taxes. Infrastructure costs a lot of money, he said, and the price is not going down. He said specials are not easy to understand and some cities are considering street utility fees, including Bismarck and Grand Forks. He said it would be a good idea for the taskforce to invite city officials from Bismarck and Grand Forks to discuss this option and if it would fit with Fargo. He said special assessments will be addressed in the upcoming legislative session and another option to consider is to bond through the Bank of North Dakota, with those bonds used only for infrastructure. He said using Legacy Fund money strictly for water projects would take off some pressure. He said he advises caution if the taskforce’s final report is presented to the Legislature. He said Fargo is not the same as Grand Forks and Bismarck and special assessments are a local government situation. He said there are some statutory requirements and he would not be pleased if the Legislature said what Fargo is doing is what all cities should be doing. He said another option might be to come to the understanding this may be as good as it gets.

Special Assessments Coordinator Dan Eberhardt said protestability is by square footage. He said as roads are put in, one road might have a return, which is an added value. He said his department compensates for all of those issues depending on longevity, uniformity and the differences in the services.

Commissioner Grindberg said the City Commission hopes a taskforce report will be ready in December that includes legislative recommendations. He said this is a very difficult subject and if the taskforce is going to make change, it is also going to mean legislative change. He said he is going to advocate for those changes statewide and how to do business differently. He said the group has to look to the legislative side as a way to navigate through any substantial change. He said one size does not fit all and any statutory changes need to be dealt with. He said the taskforce wants to work with everyone involved to advance change. He said at the September 27 meeting, there will be only one agenda item which will be Mr. Costin’s deep dive into finance.

The meeting was adjourned at 9:10 a.m.