Shirley Kressel Testimony on 40T 2-13-08 || Massachusetts Coalition for Healthy Communities

The bill lacks basic consumer protection requirements regarding disclosure to buyers regarding the debt obligation, lien and foreclosure possibility. There is no provision for loan default. The state and municipality are promised freedom from accountability in case of project failure or assessment delinquency.

The proponents have offered to increase accountability by making the municipal council the district governing committee. This would create untenable conflicts of interest and devide the accountability of elected officials.

At a presentation of 40T to the Town of Plymouth, officials expressed many concerns about the powers of a district, its relationship to the existing government, and questions of long-term accountability, foreseeing a "nightmare" scenario.

If 40T’s goal is revenue bonds for infrastructure that do not draw on municipal budgets or bond caps, existing programs could be combined or amended to keep all public functions, issuing bonds, owning public facilities, and collecting payments, in government hands. These include betterment districts, Industrial Development Finance Agencies, expanded MassDevelopment and MassHousing bonding powers (with added public oversight), Ch. 40Q (District Improvement Financing), and I-Cubed. Impact fees are proposed by Comprehensive Planning Act II.

However, rather than depending on quasi-public agencies and pass-through fees to camouflage the burden on taxpayers for funding public services, we should seek to enable our governments to support our basic services with tax revenues.

This Committee is aware of this, as evidenced by these SNH quotes from your recent bond-budget hearing:
Citing the potential for quasi-public agencies or municipalities to "blow up" financially, Montigny asked, "When will we learn our lesson?" "I’m advocating more restraint, more transparency and more control than what I’m sure all of these quasis would hope for," he said. "Most of the scandal and fraud and corruption has happened because there has been arm’s length control." "…quasi-public agencies …should be under tighter supervision." "All taxpayer money should be under the control of our government," [Jay] Gonzalez said that …the state would likely be asked to intervene if an independent agency were to falter…

Congressman Barney Frank, Chair of House Financial Services Committee, wrote about the mortgage crisis: "An absence of prudent regulation caused tragedy" "…a massive increase in innovative financial activity that …poses serious dangers…new pools of capital structured in a fashion that allows them to avoid …scrutiny…" (op-ed attached)

We don’t need another credit crisis, rooted in creative financing for investors speculating in real estate – and in real estate debt — to learn our lesson: that ultimately, the people will look to our government officials to pick up the pieces after the shell game collapses. Ch. 40T proposes yet another vehicle to fund infrastructure for new or existing developments letting state and municipal governments avoid raising taxes or adding to their bond burden. As described by proponents, it is irresistible: free private money for development that will bring growth and new taxes for the town.

The mechanism – just as with regular property taxes – forces the end users of the infrastructure (property owners or tenants) to pay for it. But Ch. 40T would do it by letting the private developers issue the tax-exempt bonds, build the improvements, and collect the payments from those residents.

To do this, 40T creates a new form of government, unlike anything we’ve ever had in Massachusetts. The state would let municipalities charter the developers to become the government for the infrastructure area — a municipality within a municipality.

To empower these private parties to issue tax-exempt bonds, collect the payments, and own/maintain/operate public facilities, municipalities would have to allow the private property owners/development corporations to become separate municipal governments within their existing city or town boundary. These for-profit entities would actually be "bodies corporate and politic and subdivisions of the Commonwealth" approved by municipalities, and would have public powers to issue tax-exempt municipal bonds; to acquire or build, and operate, revenue-producing public facilities and earn bond-sale profits free of taxes; and to collect debt-service payments from buyers of their projects and from tenants on the land. (This is a form of privatized tax collection, and to the degree that the developer could collect penalties and other excess payments and offsetting subsidies, would become tax-farming.)

To be able to issue tax-exempt municipal bonds, these private developers must be made true governmental entities, that is, to have at least one of the following public powers: eminent domain, general taxation, or police power. This year’s version of the bill does not give them power of taking by eminent domain, and they were never to have general taxation power; but they do have police powers, which include the right to regulate/constrain the use of private land without compensation, for purposes of building their improvements, as discussed below.

One fundamental problem with Ch. 40T is at the governance level: The purpose of this new hybrid form of government is to benefit the private property owners/developers who initiate and govern it. In this crucial way, this "municipal government" is different from all other governmental and quasi-public agencies, which are given their powers to further the public interest. Yet, a 40T would sit within existing municipalities, and jurisdiction would be blurred; citizens would have two masters over their land, one democratically elected and publicly accountable, the other self-appointed and serving investors. One collects taxes for public services, the other collects "infrastructure assessments, special assessments, charges, and fees."

A second fundamental problem is at the end-user level: It creates a new form of debt for homeowners: real-estate-backed private municipal revenue bonds. These will be added to the debt burden of unsuspecting homebuyers (who aren’t yet on site to vote for or against), as well as existing home and business owners and tenants (20% of landowners/acres may vote against and still be included; tenants can’t vote at all). The bonds will be sold, like mortgages, into the investment stream of debt and derivatives and other instruments bought by public and private investors; brokers and handlers and attorneys each get a fee and move it along, with no one accountable for problems – e.g., foreclosure — experienced by real people upstream. We’ve already learned how that works. Who would have thought that sub-prime mortgage loans would enrich, and impoverish, so many all over the world, and bring down the global house of credit? It all seemed like a good idea at the time; after all, high-yield real estate debt was a "sure thing." Chapter 40T is the next "sure thing."

Consider 40T key provisions and their implications:

Establishment of 40T development zone and Local Improvement District: