- Why do we need Chapter 40T?
- How would bonds be issued to fund Chapter 40T projects?
- What type of infrastructure improvements could be financed under Chapter 40T?
- How would the assessments that pay back the bonds be handled?
- Who would own and benefit from the public improvements financed under Chapter 40T?
- What liability does the city, town or the Commonwealth have if the bonds are in default?
- Would it not be simpler if a municipality used betterments or assessments that it would impose on the benefited real estate?
- Does Chapter 40T seek to avoid the restrictions of Proposition 2½?
- How widely used are bonds that fund public infrastructure and repaid exclusively through special assessment or betterment fees?
- Does the creation of a Local Improvement District, (if necessary for the Chapter 40T financing) create new forms of government or take control away from our legislature?
- What safeguards does Chapter 40T provide for property owners within a proposed Development Zone?
- What oversight is there for a Chapter 40T financing?
Why do we need Chapter 40T?
Massachusetts has a huge backlog of unmet infrastructure needs. Additionally, we need to fund future needs such as new roads, water and sewer extensions, necessary to support residential and commercial development that is actively supported by a municipality. It is apparent that our taxpayers are strongly resisting increasing local and state taxes. However, there are property owners that want to self-fund needed improvements if they can find the right financing mechanism. Chapter 40T provides this mechanism to fund infrastructure for projects, supported by, but not funded by, a municipality.
How would bonds be issued to fund Chapter 40T projects?
If the infrastructure is primarily for a commercial project, the Massachusetts Development Finance Agency (“MassDevelopment”) would be the issuer. If it is primarily residential in nature, a Local Improvement District would issue the bonds.
What type of infrastructure improvements could be financed under Chapter 40T?
In addition to the most common needs for sewer, water and road improvements the legislation could be used to fund a variety of infrastructure needs such as bridges, lighting, traffic lights, signage and traffic control systems, parking, including garages, public safety and public works buildings, parks, landscaping of public facilities, cultural and performing arts facilities, recreational facilities, marine facilities such as piers, wharfs, bulkheads and sea walls, transportation stations and related facilities, shuttle transportation equipment, fiber and telecommunication systems, facilities to produce and distribute electricity, including alternate energy sources such as co-generation and solar installations, and the investigation and remediation of environmental problems. Improvements do not include housing or commercial buildings, only the supporting infrastructure. Any improvements must be described in an Improvement Plan submitted with the petition asking that the municipality approve the use of Chapter 40T.
How would the assessments that pay back the bonds be handled?
The assessments would be made by the local municipality, MassDevelopment or a Local Improvement District as identified in the Improvement Plan. The method of assessment must treat all property owners within the same class on the same basis. Assessments could be made on assessed property valuation, frontage on roads, the size of a lot or any other equitable basis. However, the method of assessment as well as the maximum impact on each parcel must be stated in the Improvement Plan. Only property within the Development Zone, the area designated in the Improvement Plan that benefit from the improvements, would pay the assessments.
Who would own and benefit from the public improvements financed under Chapter 40T?
None of the improvements could be owned by a developer or private party. All improvements must be owned by the municipality, the State or a Local Improvement District if the municipality does not want to assume responsibility for any of the improvements. A Local Improvement District, if used, would be a limited purpose political subdivision and required to act as a public body. The public improvements cannot be turned over to a private developer after the financing is complete nor may he profit from their use.
To qualify under Massachusetts law and federal tax law, the real estate within the Development Zone must enjoy a particular and distinct benefit from the improvements over and above general benefits conferred on real property to the public at large in the town or city. Of course, the residents of the city or town may also benefit indirectly to some extent and will surely benefit from the increased tax base produced by the infrastructure improvements for the Development Zone. For example, a parcel of real estate will be generally worth more worth with a new road or public sewer access. It makes no difference if the improvements are made for a new real estate project or for an existing neighborhood. Betterments and assessments are currently used by our municipalities for both situations in Massachusetts.
What liability does the city, town or the Commonwealth have if the bonds are in default?
Absolutely none. The bonds would be issued by either MassDevelopment or a Local Improvement District and not the local municipality or State. Chapter 40T specifically states that:
“Any bonds or notes issued by the issuer under this chapter, shall contain on the face thereof a statement to the effect that neither the commonwealth nor the municipality shall be obliged to pay the same or the interest thereon, and that neither the faith and credit nor taxing power of the commonwealth or of the municipality is pledged to the payment of the bonds or notes.”
The bondholders rely only on the security of the betterment lien placed on the benefited real estate within the Development Zone described in the Improvement Plan.
Would it not be simpler if a municipality used betterments or assessments that it would impose on the benefited real estate?
In most cases the municipality would need to bond the cost of the improvements and be responsible for the collection of betterments or assessments and the repayment of the bond debt service. Since under the General Laws, municipalities can only place a betterment lien on the benefited property when the improvements are completed, the municipality must carry the interest costs in its budget during construction. The General Laws are also not particularly clear on what improvements can be repaid through betterments or assessments. Existing statutes require that property owners repay these charges within a maximum of 20 years. Under Chapter 40T, property owners could repay over 35 years or at any earlier time they choose to prepay.
Does Chapter 40T seek to avoid the restrictions of Proposition 2½?
No, not at all. Proposition 2½ is limited to ad valorem property taxes. In fact the Massachusetts Finance Committee Handbook specifically states: “Betterments and special assessments are not considered taxes, so are not included within the limitations of Proposition 2½.” Logically, 2½ was not intended to prevent property owners from voluntarily assuming special assessments that are not a burden to other taxpayers.
How widely used are bonds that fund public infrastructure and repaid exclusively through special assessment or betterment fees?
Currently, about thirty-five states issue such bonds, annually aggregating about $15 billion without pledging the credit or local property taxes of the city or town. These are used to fund a variety of public infrastructure projects. Unfortunately, Massachusetts is missing out on this funding source.
The expansion of this financing to additional states is evidence of its success. In California, there has been some controversy with a program called the Mello-Roos Community Facilities Act of 1982. While still actively used in that state, some property owners have objected to the imposition of additional taxes on top of the ordinary property tax bill. The key “problem” with Mello-Roos and the difference with Chapter 40T financing is that Mello-Roos imposed taxes are NOT assessments or betterments. Under Mello-Roos, as opposed to Chapter 40T, there is no requirement that the special tax be apportioned on the basis of benefit to real estate. A betterment or assessment is a fixed dollar amount that pays for improvements that legally must increase the value of the real estate that is benefited from and paying for the improvements. In California, assessment districts similar to Chapter 40T have been in existence since 1915 and do their business without controversy.
Does the creation of a Local Improvement District, (if necessary for the Chapter 40T financing) create new forms of government or take control away from our legislature?
A Local Improvement District is not created by a developer or property owners but by the local city or town at the request of the property owners willing to self-tax themselves to fund need improvements. As a concept, a Local Improvement District would be nothing new in Massachusetts. The 2002 US Census list more than 400 districts existing in Massachusetts that were created by either special act of the legislature or by cities and towns under our General Laws. These bodies go about their specialized business quietly and provide valuable infrastructure and services to the residents of the Commonwealth. These have served as legal models for the Local Improvement District.
The General Laws are replete with examples permitting the creation of such districts our cities and towns without further legislative action. For example, as early as 1870, the legislature enacted Chapter 40, Section 44 of the General Laws permitting towns to create rudimentary “improvement districts”. This demonstrates a recognition of the Chapter 40T concept as early as the 19th century. Other examples include:
Clearly, the legislature already permits cities and towns to create certain types of districts to carry on the public’s business. Our cities and towns should similarly be permitted to use a Local Improvement District for infrastructure projects they support.Fire Districts: Ch. 48, Sec. 62
Regional Refuse Districts: Ch. 40, Sec. 44E
Water and Sewer Commissions: Ch. 40N, Sec. 4
Regional Water and Sewer Districts: Ch. 40N, Sec. 25
Beach Districts: Chapter 40, Section 11A
What safeguards does Chapter 40T provide for property owners within a proposed Development Zone?
Under existing law, betterments can be charged against real estate by a board of selectmen or city council without any public hearing, without town meeting approval, in the case of a town, and without the consent of even one property owner! Contrast this with the much more stringent requirements of Chapter 40T. You must have:
- A petition signed by owners of at least 80% of tax parcels owners (and the owners of 80% of the acreage) within the proposed Development Zone to start the process.
- A detailed Improvement Plan must be attached to the petition describing exactly what the infrastructure needs are, how they will be financed, what the assessments will be and the boundaries of the Development Zone. Any deviation requires that you begin the whole process again, including a new public hearing etc.
- A fully noticed public hearing must be held.
- Even with 100% approval of the property owners, you need the board of selectmen’s or city council’s approval. Anything less than 100% consent requires town meeting approval.
- The town can reject the petition for any reason if it dislikes the project.
What oversight is there for a Chapter 40T financing?
In fact, there is a great deal of oversight. The legislation provides that:
- The detailed provisions of the Improvement Plan submitted with the petition, reviewed at a public hearing and approved by the town or city must be followed.
- Any deviation requires a new petition of the property owners, a new public hearing and a new approval by the municipality.
- If a Local Improvement District is established, the members of the Prudential Committee that manage the District can be removed for cause by the municipality.
- New members of the Prudential Committee are selected by the selectmen or the mayor and city council.
- The Local Improvement District, if any, is subject to a standard municipal audit by the Commonwealth.
- The District is subject to the open meeting law, public records law and other statutes such as those dealing with public safety.
- Once in existence, any assessments or betterments levied by a Prudential Committee requires a properly noticed public hearing (Unlike betterments imposed by cities and towns under the General Laws).