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Letter to Senator Mark Montigny and Representative David Flynn,
Co-Chairs, Joint Committee on Bonding, Capital Expenditures and State Assets
Shirley Kressel’s response to February 13, 2008 testimony by Hal Davis and Bill Griffin

Re: H.159/S.146 creating Chapter 40T
February 27, 2008

Dear Senator Montigny and Representative Flynn:

As you recall, I testified and submitted 9 pages of testimony at your Feb. 13, 2008 hearing on Ch. 40T.

The authors of this bill, Hal Davis and Bill Griffin, made a number of assertions at the hearing that need specific response. They have also made statements in public internet postings that should be addressed. I am writing to comment on these claims, which are highlighted and in italics below.

Unlike other development incentives, 40T does not use state money.

In fact, 40T does use state and municipal money:

  1. 1. Tax expenditures through tax-exempt bonds.
  2. 2. Tax-exempt operation by the Local Improvement District of revenue-producing improvements (e.g., sports, theater, transportation, utility and energy-producing facilities).
  3. 3. Eligibility for direct government subsidies, in competition with their host municipalities.
  4. 4. Replacement of certain parcel assessments by taxes where a 40T district also becomes a DIF (district improvement financing).1
  5. 5. If the project fails or the buyers default, the government may have to take costly action to protect the community.

The 40T district will be “self-funded.”

It will be funded by those who occupy the developer’s finished project – a sub-group of taxpayers, who may not even be aware of their obligation at the time they take occupancy.

And they may end up paying more in bond service than they would have paid in taxes:

  • No competitive bidding may lead to higher construction costs.
  • Towns may exact from the developer additional works unrelated to the project (turning a portion of the “assessment” into a “tax” and thus exceeding the District’s authority).
  • The bond includes administrative costs of the District (office rent, staff, supplies, consultants).
  • Bond fees maybe higher for 40Ts than for municipalities which can negotiate economies of scale.
  • They won’t know to negotiate for a discounted buying price, but they may have to disclose the bond at sale and discount their selling price.

Most 40Ts will be small neighborhood projects like sewers, or downtown parking garages. Greg Bialecki talked about big projects; we’re concerned about the small people. Examples: Town of Wales – Lake George homeowners need $7.5M wastewater plant; Barnstable needs a performing arts center to save the businesses.

Mr. Davis usually pleads for 40T to help a group of homeowners with faulty septic systems build sewage plants. However, bond-issuing fees are substantial, and as he has told me, bonds only make sense for big development projects with high infrastructure costs. The Bank of America agent testified that the average project cost for his special assessment bond issues is about $20 million.

Mr. Davis cited 150 homeowners in Wales who want a $7.5 million sewer treatment plant; at this level, a bond issue would probably not make economic sense. Further, residential projects require a Local Improvement District, the administrative costs of which would be rolled into the bond. The interest rate on a bond backed by homeowner assessments (especially after the current fiasco!) may be higher than on a “full faith and credit” municipal bond. Also, there is public financial aid available for Title 5 septic remedial action. So it may actually cost more to do this through 40T than through individual repairs.

Last week, I spent some time looking into his Wales, Barnstable and Bridgewater examples to find financial information, and to my surprise, after talking to locals, found little or no evidence of interest, either by the towns or by potential assessment-payers, in establishing a self-assessing sub-municipality for these purposes, or even awareness of the pending 40T option.

Mr. Davis testified that he hadn’t worked out the financials of his cited potential 40T applications, so it’s not clear that this would be a likely use for 40T – especially because infrastructure for residential projects could only be bonded by a Local Improvement District, with its administrative costs and complex politics. Without confirming information, I would assume this “little people” market is more theoretical than realistic.

The Cape Cod Bay sewer issue was also brought to the Committee as a 40T candidate, by a “concerned citizen” who also happens to be in the bond business. Mr. Davis has posted this to a Boston community group:

Let’s assume you are a resident of the Cape concerned about the estimated $3 billion that will be required to prevent pollution to Cape Cod Bay. You see, almost the entire Cape is on septic systems and has poor soil conditions. Does anyone think that this staggering amount necessary to provide a modern sewer solution will be handed to us by the feds? Is the State going to come through with all the dough? I doubt there is the political will in our towns to undertake a series of Prop 2 1/2 overrides to bond finance a significant portion of that sum. Local property tax payers have said enough! This is why I am intrigued by the proposed Chapter 40T…

If the entire Cape has to be sewered, the “District” would involve all the residents, not just a sub-group of neighbors taking on a betterment fee for infrastructure that exclusively improves their property value. At this scale, it has to be a governmental function. He says: Local property tax payers have said enough! Well, who would pay the 40T assessments? It’s going to be the same people who would pay a Prop 2 1/2 override tax. 40T doesn’t create any new pockets for money to come from; it is simply a shell game to end run Prop 2 1/2, so officials can wash their hands of their responsibility for public services.

Further, I have found evidence that if a town won’t bond for a particular infrastructural improvement, there is often a reason other than cost. For example, a road that a developer wants in Needham is actually on the MPO plan already, for public construction; the 40T would be an effort to expedite it, but it needs a connector anyway so it could not be permitted, even if it could be bonded. In East Bridgewater, another Davis example, the EPA has required sewering for the high school, so it’s not a question of a few hold-out homeowners in a neighborhood vote. It must be done, and the question is mainly about the efficiency of simultaneously sewering other nearby town buildings; for this project, there would be no particular homeowner beneficiaries to assess. The remaining issue is whether to extend the system to a priority set of homes. But the residents appear to oppose even a quasi-public sewer authority for this purpose; a new sub-municipal government where some neighbors tax others seems unlikely to gain acceptance.

If 40T is not useful for benign low-budget self-help neighborhood projects, it must be meant for large developer projects, as Greg Bialecki envisioned. In that case, a development team would be awarded governmental powers over a District, including the power to “enter upon and dig up” private property without compensation and to issue tax-exempt bonds and collect assessments with no regulation, operating within and beyond the boundaries of the District. The Committee staff and counsel might formulate a few possible scenarios and think through their implications.

I think it is generally agreed that the biggest problem in Massachusetts is the high cost of housing that is driving out our young folks with the very skills we need to retain in this state. Part of this problem is the high cost of infrastructure such as roads, water, sewer and public transit.

Mr. Davis is confusing some issues. The housing price bubble was caused by real estate speculators (whom 40T would subsidize and encourage) and sellers/brokers of “creative financing” who earned fees for foisting debt on homebuyers who had no idea what they were getting into. The 40T legislation doesn’t provide for consumer disclosure, so it lets the 40T developers do the same to the unsuspecting buyers of their units. Better planning for density and mid-range housing would be a better remedy.

Mr. Davis also implies that 40T can help solve the affordable-housing shortage. However, low-income people are not good candidates for homes burdened by additional infrastructure assessments. And as renters, they would end up paying the bonds without having any voice in the process. The likeliest 40T use for housing is a single developer buying a large tract of open land, or a swath of urban housing stock he will demolish or rehab, and create many profitable high-end housing units.

We have a huge backlog of unfunded infrastructure projects.

This implies that 40T can be used for our crumbling bridges, transit, etc. But 40T is not for free-standing infrastructure; it is for infrastructure as part of an economic or residential project. Perhaps the idea is that towns could get developers to pay for general public works in return for 40T approval, but this would saddle bond-payers with special assessments for facilities that don’t exclusively benefit their property values – which would make the assessments a tax, exceeding the LID’s authority. It would also defeat the public labor and bidding laws.

The 40T concept rests on special assessments.

The concept really rests on a new and arcane form of debt issued by private interests functioning as governments, but without the constraints of the public-integrity laws protecting taxpayers, labor, consumers, and citizens generally. I’ve heard several people question the constitutionality of 40T; I believe it requires a legal analysis before any further action is taken.

If special assessments are the concept, betterments and Industrial Development Finance Agencies are already available. The first keeps the debt under municipal management; the second takes the debt off the municipal bond ledger and into a quasi-public agency, but still under a governmental aegis. Ch. 40T “development zones” could get infrastructure bonded through MassDevelopment or MassHousing, per Mr. Bialecki’s idea, but I would prefer to eliminate the quasi’s and authorities and incorporate their work into accountable government.

Betterment areas under Ch. 80 are possible, but those bonds, Mr. Davis complains,

  • are backed by the municipality’s “full faith and credit” so the municipality bears the risk of collecting assessments.
True, but the collapse of a big development or of a big credit scheme will adversely affect local government.
  • are not issued until the improvements are completed, so the town carries the interest.
The bonds can be structured to recover that interest.
  • are limited to roads, sidewalks, sewers and water, while 40T would be able to fund an unlimited variety of improvements as infrastructure. …. performing arts center … private dams ….
MGL Ch. 80 does not expressly limit the improvements for which betterments can be imposed, although sidewalks, roads, water and sewer are mentioned.
  • are issued without public notice or public hearing.
Betterments require a public vote of the local council and thus public notice. I assume local councils provide for public information and comment for something as important as imposing a new tax. Also, betterments often involve eminent domain takings, and require notice and specific appeals processes.

The 40 petition has to have consent from 80% of parcel owners holding 80% of the district acres, so one large owner can’t oppress the little guys.

In most large projects, there will only be one owner at consent time; the future bond-payers aren’t there yet. In other cases, 20% of the property owners in the District can become unwilling captive bond-payers.

A detailed improvement plan must be approved by a vote of the local council.

Yes, although only by a single simple-majority vote. In Boston, by charter, “… all loans voted by the city council shall require a vote of two thirds of all the city councillors and shall be passed only after two separate readings and by two separate votes, the second .. not less than fourteen days after the first.” The single vote to create the 40T “municipality” grants unlimited bonding, non-contiguous land annexation and other powers to the new District.

The fact is that municipalities generally do not have the resources to analyze these complex and untested political and financial mechanisms, and all the planning consequences; they are unevenly matched against sophisticated development consultants and attorneys. To empower them create new govermental “bodies corporate and politic, and subdivisions of the commonwealth,” enticed by the promise of “free” public facilities, is simply not prudent and will lead to unintended consequences they are not prepared to handle.

Many oversights are built into 40T.

My testimony addresses the almost total absence of oversight and regulation of 40T operations after the municipal approval is granted. Further, the bill states that any “proceedings of Ch. 40T” would prevail over any conflicting state or municipal laws. Beyond the municipal approval vote, there is virtually no oversight or regulation.

Mr. Davis posted to the community that “the 40T District is subject to a standard municipal audit by the Commonwealth.” The bill’s language: “The local improvement district shall be subject to an audit of its accounts in the manner provided in section 40 of chapter 44.”

This is an interesting point, implying State financial oversight and public record disclosure. However, I was told by a DOR official that the Commonwealth stopped conducting municipal audits decades ago due to staffing cuts. DOR, by its Regulations, “encourages” local governments to do their own audits, hiring an accounting firm of their choice. The 40T developer is allowed to appoint his own auditor.

Audits are only required of municipalities receiving over half a million dollars of federal money. If conducted, an audit must be sent to DOR, which might write a letter of recommendations if serious problems are evident, but has no enforcement power.

I assume Mr. Davis is familiar with this “standard municipal audit by the Commonwealth.” The bill and Mr. Davis’s post are technically correct but misleading.

There are hundreds of special assessment districts in Mass., and thousands across 39 states.

There has indeed been a proliferation of assessment districts, but none of them are actually a private development corporation anointed as a district government. They are all quasi-governmental entities of various sorts. Further, public satisfaction with them is not unqualified.

The LID is needed to give the “taxpayers” control over the construction for 5 years, the term of the prudential committee’s first members.

This is unclear, as no taxpayers are involved in LID control. The owner-developer will appoint the prudential committee for the term specified in the petition, not necessarily 5 years.

40T bonds are a safer risk than mortgage-backed bonds because the lenders will step in and pay delinquent assessments to protect their collateral.

Again, unclear. The lenders are scattered bondholders; they can’t step in to pay assessments. Underwriters won’t do that. They don’t step in to pay delinquent taxes or mortgages to forestall foreclosure; why would they pay delinquent assessments? California’s Mello-Roos special-assessment districts are seeing high foreclosure rates.

The LID is required to bond for housing infrastructure, as MassDevelopment won’t issue bonds for residential projects.

MassDevelopment does issue bonds for housing projects. In 2004, MassDevelopment gave its own chair, Robert Beal, $70 million in bonds – half of it tax-exempt – for his luxury residential tower at 131 Clarendon St. in the Back Bay. Its 2006 Annual Report states: “Between FY 2004 and FY 2005, MassDevelopment financed or managed 589 projects representing an investment of more than $4 billion in the Massachusetts economy. These projects are supporting the creation of 5505 housing units,…” If it bonds for housing, it could bond for housing infrastructure.

These are high-credit bonds – they’re secured by taxes.

I think Mr. Griffin meant “secured by assessments” – which are much like property taxes, hybridized with mortgages. If a homeowner can’t pay those, he can’t pay 40T assessments, so these bonds are no more secure than the other “innovative financing” instruments created for the benefit of the real estate industry. The aphorism “safe as houses” has lost its truth.

The 40T district is not simply a financing tool. It is also a power transfer from elected government to self-appointed, land-ownership-based profit-interested parties, with almost unlimited opportunity for self-dealing and abuse. This adds to the toolbox of privatized financing mechanisms that proliferate as governments continue to slash their budgets, in a vicious cycle that erodes public-integrity laws and decreases governmental accountability.

I urge the Committee to either vote this bill down, or put it into a study where a thorough legal and financial analysis can be made.

Shirley Kressel
27 Hereford Street
Boston, MA 02115

1. Ch. 40Q “Section 1: “Project costs”, any expenditure made or estimated to be made or monetary obligations incurred … reduced by any income, special assessments or other revenues, other than tax increments, received or reasonably expected to be received by the city or town in connection with the implementation of this plan.”
Ch. 40T appears to reverses Ch. 40Q (which requires that assessments reduce the tax diversion) by allowing a developer to issue a tax-exempt bond under 40T, arrange for the state to pay his parcel’s portion of the bond debt through 40Q diversion of taxes, and keep collecting from other owners in the district.
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