View PDF of Commissioner Gehrig's Special Assessments Elimination Plan
Commissioner Tony Gehrig is issuing the following statement:
Special assessments have been a problem for home and business owners for decades. This system allows the City to “mortgage” our taxes and charge residents interest on the loan. In many cases, the interest payments are higher than the actual taxes being collected.
Since my first run for Fargo City Commission in 2012, this issue has been brought up to me by taxpayers over and over again. It appears to be universally hated. Even if we ignore the extreme examples of some people being hit with hundreds of thousands of dollars in assessments, this system negatively affects thousands of residents each year and the issue is growing worse, as you will see from reading the following paragraphs (see slide one).
Perhaps the worst aspect of specials is that they are unpredictable. One day you could have your house paid off, and the next day you receive a $25,000 assessment notice like many of our friends on North Broadway. In some cases, these specials will drive retired Fargo residents out of their homes. There has to be a better way, and there is.
Background Information and Baseline Assumptions:
- The amount Fargo has special assessed has been dramatically rising. In 2015, Fargo assessed residents only $3.7 million. In 2017, Fargo assessed residents $24 million, which is an increase of more than six times than just two years prior (see slide one).
- New development in other cities is funded by private bank loans to the developer, who recoups those dollars at the time of the sale. Specials for new development amount to an incentive for sprawl.
- More often than not, the loan for specials comes at a higher rate than a mortgage and that rate cannot be refinanced for the resident like a home mortgage can.
- Fargo’s utility rates are consistently lower than most North Dakota cities (see slides five and six).
- Fargo subsidizes the Water and Sewer plan with a ½ cent sales tax (see slide two).
- In general, Fargo diverts 20% of its water and sewer plants’ revenues and places that money into the City’s general fund. These diverted dollars do not go to fund utility improvement or maintenance.
The Plan:
There are two basic types of special assessments in Fargo: those funding new infrastructure and those replacing existing infrastructure.
New Infrastructure:
Specials on new lots, sometimes called "green field expansion,” cover everything required to convert an empty lot into a fully-finished lot. Think of curbs, gutters, light poles and sidewalks. All of these things cost money and, in general, the City uses special assessments to cover these costs. It is common to see specials reach $40,000 or more to make this transformation possible. More often than not, the loan for specials comes at a higher rate than a mortgage and that rate cannot be refinanced for the resident like a home mortgage can.
Ending new infrastructure specials should be easy. Just stop doing it. Instead of the City playing the role of the bank, we can allow private banks to retake that role. In this model, the developer simply goes to the bank, gets a loan for the work and then recoups the money with the sale of the home. This is in direct contrast to the current model, which involves the City giving money to the developer to install the infrastructure.
Consumers benefit from my plan via the securement of a more favorable interest rate. Special assessments generally have a higher interest rate than a conventional mortgage, which can ultimately amount to an additional $100 or more a month for a homeowner. This proposed new system also reveals the true cost of the home, which is important.
The upside for the City is that we would no longer need to manage public debt to sustain development. Fargo is currently in debt for about $450 million due to specials. Yes, that is correct -- $450 million in debt for special assessments. We simply do not need to be doing it, and we should immediately stop assuming this risk on our balance sheet.
Existing Infrastructure:
Projects like the North Broadway reconstruction show that replacing existing infrastructure can be very costly. In our current system, that means if you happen to live near Broadway, you could be assessed over $20,000 just like that. But if we don’t special assess people, how do we pay for the things we need?
Fargo uses a ½ cent sales tax to subsidize the water and sewer plants. Currently, that ½ cent tax brings in around 12 to 14 million dollars (see slide three). As the City grows and more business comes to Fargo, that amount naturally grows as well.
We know that our sales tax takes in between $12-14 million (2017 we took in less than 2016). How much do we usually special assess per year? From 2013 to 2017, on average, we special assess $13.3 million (see slide one).
As you can see, the sales tax dollars we are using to prop up the water and sewer plants could cover the cost of replacing existing infrastructure, paid for today with special assessments.
The obvious question has likely revealed itself by now; if we are using the sales tax to pay for infrastructure, how will the water and sewer plants survive without that revenue? The simple answer is they will not and, therefore, the revenue must be replaced by increasing utility fees.
As stated in the background and assumptions section, Fargo’s utility rates are much lower than the majority of North Dakota cities. We have worked hard to keep those costs low. However, keeping the costs low and replacing that revenue with sales taxes is a large reason we have special assessments. Something has to give if we want specials to end.
On average, if Fargo increases the fees for the water and sewer plants a total of $19 per month, that will cover the lost sales tax revenue. Additionally, even with that increase, Fargo’s utilities will be right in line with what other cities charge.
Now, I can hear many people out there saying, “You are raising my taxes!” But here is what I want everyone to understand -- if you have $2,000 or more special assessed to your house, you are likely paying more in interest than I am proposing for an increase in utilities (see slide four). The goal is to have a predictable and sustainable tax instead of erratic and expensive assessments that cannot be foreseen by the average taxpayer.
By removing specials and asking for an increase in utility rates, all residents will be saving money because we will not be charging interest on your infrastructure. Additionally, we will know the true cost of our utility. Finally, we will be much more sensitive to taking 20% out of the utility fund and putting it in the general fund if we can see what our utilities actually cost.
The Good, the Bad, and the Ugly:
Good:
- If this plan is accepted, you will never be special assessed again unless you ask to be. For example, if you want your private alley repaved, you can ask to be assessed instead of securing a loan from a bank.
- Fargo will not have $450 million in liability due to assessments; this is a dramatic risk on our balance sheet.
- We will not be mortgaging our infrastructure, which means you will not be paying interest on your roads, pipes, etc.
- Fargo will no longer be incentivizing urban sprawl.
Bad:
- Utilities rates will go up; but, overall, you will still be saving money and you will never have to worry about a $25,000 assessment hitting your home. Also, remember that we sell water and sewer service to other communities.
Ugly:
- If you have a special assessment currently, you will have to pay it. Like everything, there must be a starting point and an end point. We cannot ignore a problem like this any longer, and those of us who have assessments will have to take one for the team if this problem is ever to be solved.