The concept of a special assessment contains little dark secrets that city officials like to keep to themselves. The ability to assess the cost of maintenance — a questionable concept at best — is the only thing allowing many cities to avoid facing their true reality. Elected officials and the public need to understand assessments, their legal and practical implications, and the dramatic shift that is likely to happen as more taxpayers resist paying them.
Last Friday, I received a couple of boisterous reactions by email to the Baxter assessment story I linked to. These guys were livid, and I suspect many others will be as I discuss it more fully here today. I too often forget that people don't know this stuff. I've been immersed in it for years and have, as a mostly powerless bystander, become numb to it. Thanks for the reminder — this will be eye opening for many.
As we've discussed here for years, almost all of America's cities are financially insolvent. They have far, far more liabilities than they have revenue that they can tap into to pay for those commitments. This is the result of 60 years of the Suburban Experiment, a development pattern that creates (for a while) the illusion of wealth by allowing cities to exchange near term cash benefits associated with new growth for long term liabilities associated with infrastructure maintenance. We're now in the long term and, financially, everything is breaking down.
City managers and other public officials that argue with me on that last paragraph (and there are getting to be fewer and fewer that do) almost universally depend on one funding mechanism as the key to remaining solvent: the special assessment.
For many cities, the special assessment is a magic money machine. The idea is simple. The city does a project. The costs of that project are assessed (charged) to the property owners that benefit from the project. To make things go smoothly, the city generously finances the project at reasonable terms and collects the money "painlessly" in the same way that property taxes are collected.
If it were only this simple.
Anyone who listened last week to the health care testimony at the U.S. Supreme Court knows that a big deal was made over the government's ability to tax versus the government's ability to collect money in other ways. Among other things, the 5th Amendment to the Constitution states that individuals may not:
... be deprived of life, liberty, or property, without due process of law...
The 14th Amendment ensured that states (and by extension, cities) would be bound by these same provisions. At the time it was adopted, the Obama administration argued to us -- the masses -- that the health care impact fee was not a tax, but to the court last week they insisted that it was. Why? Because the government has the authority to tax citizens but it can't take your property (money) by other means without due process (nor can they delegate that authority to others, aka: insurance companies). This is not a small nuance; it is the basis of our government.
What if the government decided that you should pay an extra $20,000 in taxes this year. Not anyone else, just you. That would be illegal, a violation of your rights to equal treatment under the law and due process. Now, if the government decided to tax every family an extra $20,000 in taxes this year, they may have a revolt, but the tax would not single out any one person (or specific individuals) and would thus be legal. There is a lot of legal nuance here and attorneys can and will argue over this for as long as we are a country, but in a broad sense, the government can't take your money unless they tax you or go through a process that affords you the right to appeal (like a fine you can argue in court or, in this case, a special assessment).
So special assessments are not taxes. It is a charge in exchange for a benefit. I'm going to go back and quote the 5th Amendment again.
... nor shall private property be taken for public use, without just compensation.
Here's how this applies: If the city takes your money to build a street — not through taxing everyone but through a special assessment on you — you have to receive "just" compensation. Is your compensation that you get to drive on the street? No, everyone has that right since it is a public street. So what is your compensation?
It is the value that is added to your property from the improvement. That is it. Period. End of discussion.
Let's put some real numbers on this. Your property is worth $200,000. The city goes out and improves the street in front of your house. The cost is $14,000 per property. After the project, your property is now worth $205,000. What is the maximum your special assessment can be?
The answer: $5,000. That is the amount that your property increased in value due to the project.
But the cost was $14,000 per property. Who pays the rest? That is where the general taxpayer comes in. If the project is for the public good, then tax everyone to pay for it. If the project benefits just you and a few others, that benefit will be reflected in the increased value of your property and can be captured through the special assessment process.
I actually find that Wikipedia (bless their souls) do an awesome job of explaining this. From their entry for special assessment (my emphasis added):
The property tax most citizens are aware of is known as an ad valorem tax. This tax is used to fund general or day-to-day government operations. An ad valorem tax is commonly levied on both real and personal property. A property tax is based upon a property's market value. The ad valorem tax levy is based upon a "millage rate" which never varies from parcel to parcel. The foundation principles for ad valorem taxes are that each property is valued according to its market value (equity) and that each property is taxed based upon a single millage rate that applies to everyone (uniformity).
Special assessment levies are not ad valorem property taxes even though they may be collected on a property tax bill. A special assessment is based strictly upon the concepts of "need" and "benefit." Special assessments require a finding that the public improvement is "needed" for a reason consistent with the law which permits the special assessment and that each property specially assessed receives a unique, measurable and direct benefit from the public improvement that was needed. The basic idea is, if government funds make a property more valuable, the government has the right to get money back from a property owner. This contrasts significantly with the ad valorem tax which is extracted to fund government operations that are designed to benefit all citizens.
If I could underline "measurable" twice, I would.
There are some of you that see the clear problem at this point, but for those that don't, let me point it out to you. You live on a paved road. You are refinancing your home and get an appraisal that says it is worth $200,000. The road in front of your house is in rough shape and the city needs to fix it, which they do in the weeks after your appraisal. The cost they want to assess you is $14,000. In light of the assessment, the bank requests a new appraisal. You had a paved road with cracks and potholes before and now you have a smooth, paved road. How much is your house worth?
Very likely, it is still going to be worth $200,000. If you had gone from a gravel road to a paved road, maybe you would have seen an increase in value. Maybe, but the form that appraisers use and the comparables they review don't get into the quality of the pavement. There is an inherent assumption that, since a property fronts a paved road and since the property owner pays taxes, that road is going to be maintained. It is a rare case that a simple maintenance project is going increase the value of a property.
Let me give you another example to drive this point home and show you that roads and streets are the least of our problems. Look at that water pipe buried in the ground. The one you've been paying a water bill for decades supposedly to maintain. Let's say the city knows that pipe is old and needs to be replaced before it becomes a costly maintenance burden and so they dig it up and put in a new pipe. How much more is your property worth now that it gets water from a shiny new pipe instead of an old, worn out pipe? Pretend you were out of the country for the six months that this happened and arrived home without knowing. Would you notice a difference? It is really hard to argue that something adds value when it is imperceptible.
Now the city managers, engineers and finance directors are all hopping mad at me. Let me ask their question for them: If there are four homes on a cul-de-sac and the city has to go in and fix the street, replace the sidewalk, replace the sewer pipe and the water pipe, and the cost is $400,000, who, Mr. Marohn, are you suggesting pays for that? Nobody is using that infrastructure except for those four homes. Shouldn't they each pay $100,000? Isn't that fair since they are the only property owners that benefit?
My answer is simple: It is public infrastructure, taken over by the city for maintenance through a public process, and it is now the city's to maintain at full cost of that maintenance, minus any increase in property value the project might create. If the city did not think this infrastructure served a public purpose, it should not have taken it over and assumed the maintenance liability.
Now that is very inconvenient — in fact it is devastating — to the wishes of city officials. As we've demonstrated many times, the amount they are collecting through property taxes and fees pays only a tiny fraction of the cost of maintaining this infrastructure. They rest they assume they can make up through government transfer payments, taking on debt and through special assessments. If they can't — and they really can't, if they are challenged -- it destroys their budget and the gig is up.
I've found that there is an art to assessing improvements that keeps this all from turning too ugly for a city. Let me again go back to the Wikipedia entry for special assessments:
Among the unique characteristics of the special assessment is one that makes a special assessment particularly onerous for ordinary citizens. A special assessment levy enjoys a legal benefit known as a "presumption of validity." This means that it is much harder and usually, much more difficult to appeal than the ad valorem property tax most citizens are familiar with. This happens because it is difficult for the ordinary citizen to recognize that an error in the special assessment procedure or methodology has occurred and the resources a taxpayer must use to fight a special assessment levy are more expansive and costly than resources to fight an improper ad valorem tax on their real estate.
If your real estate taxes are messed up, you go to a hearing with some proof of that and there is a board that, while not always accommodating, will typically hear reasoned arguments. If your special assessment is messed up, you have to go court. Not only that, before you go to court you have to file proper objections with the city indicating that you are contesting the assessment. This all has to be done within certain time frames or your right to appeal is lost.
To fight your assessment, you will need to hire an attorney and an appraiser willing to testify in court. This is going to cost you between $6,000 and $10,000. Let's say that your assessment is $14,000 -- are you going to pay $10,000 in hopes of getting a verdict, at the district court level, that is 100% in your favor and that the city — with more resources and more to lose — won't appeal to higher levels? Not likely.
So there is an incentive for the city's approach to become devious. Keep the assessment low enough to where it is more expensive to fight it than to simply pay it. Make the project complicated — don't simply fix the infrastructure but improve it in some marginal way, like a wider shoulder or something — so that more expertise is needed to ascertain what is going on. Make the assessment process as prefunctory and opaque as legally permissible to avoid the opportunity for substantive objection. Of course, since this is all being done for the "greater good", the deviousness is justified as what is needed to "get things done". At least that is what we tell ourselves.
I've seen poor, uneducated people living in trailer houses assessed more than their home was worth. I've seen well-heeled property owners negotiate their own "insider" terms of assessment. I've seen citizens forced, through the assessment process, to pay for improvements that actually devalue their property and their neighborhood. The end of our video, Conversation with an Engineer, lays out this irony of ironies.
In recent years when property values were rising and the real estate market was liquid, the special assessment process ran into few objections. If the assessment was too high, people could sell their property, typically make a lot of money, and buy something else. Progress was not worth fighting over since all seemed to be benefiting. Today is a much different story. Add to rising property taxes to falling home values and a frozen housing market, and I anticipate there will be some aggressive resistance to the special assessment process.
And when that happens, even the smug city officials that believe they have everything under control, that they need not be concerned with the public return on investment, that special assessments are the perfect tool for routine maintenance -- even they will need to acknowledge that we've long passed the time when we need to start building strong towns.
Charles Marohn is a Professional Engineer licensed in the State of Minnesota and a member of the American Institute of Certified Planners. He is president of Strong Towns, a non-partisan, non-profit organization that advocates for changes in development patterns and a complete understanding of the full costs of methods of growth.