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Joint Committee on Bonding, Capital Expenditures and State Assets
H. 159/S. 146 to create Chapter 40T of MGL
Testimony of Shirley Kressel, MLA February 13, 2008


SUMMARY:

Ch. 40T lets municipal officials shift financial responsibility for public infrastructure by chartering a new, untested form of government, developer-run municipalities within existing municipalities, to issue tax-exempt bonds and, in turn, shift responsibility for debt payments to end-use property owners and tenants. These districts could:
  • Be established with consent of only 80% of owners of private parcels and acres in the proposed boundary; tenants have no vote, nor do owners of public land included in the boundary.
  • Largely mirror their host municipal governments, causing confusion and competition between the jurisdictions.
  • Operate exempt from many laws that assure public transparency and accountability.
  • Acquire existing public infrastructure, and land to build infrastructure, anywhere in the municipality.
  • Escape Prop 2 1/2 limits, but could impose payments including ad valorem assessments, i.e., property taxes.
  • Enter and dig up any private property to site infrastructure without eminent domain’s due process or compensation.
  • Operate their bonded improvements, including revenue-producing facilities such as parking garages, shuttle bus systems, cultural and athletic venues, toll roads, and water and energy supply plants, free of taxation.
  • Circumvent state laws regarding labor protection and competitive bidding.
  • Get other government subsidies to offset their assessments.
  • Conduct their bonding and assessment processes free of state or municipal supervision.
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:
  • A 40T may be established with the consent of only 80% of owners and acres in the District (Sec. 2b)
  • Up to 20% can be captured into the District involuntarily. This is taxation without representation.
  • Tenants upon the land have no vote (even though they will end up paying the assessments), only landowners. Again, taxation without representation, and feudal property-based power.
  • 40T may levy "infrastructure assessments" or "special assessments" on real estate, leaseholders, or other property interests (Sec. 5a).
  • 40T is exempted from limitations set by Proposition 2 1/2, yet it can levy "special assessments" by value of property per municipal assessment (Sec 5b) and "assessments, betterments, special assessments, charges or fees" in addition to "infrastructure assessments" (Sec. 1) This appears to be much broader taxing power. And ad valorem assessment is a tax subject to Prop 2 1/2.
  • 40T can lien and foreclose on property (Sec. 5a). However, it is unclear what happens if 40T payments are in default but not municipal property tax.
  • State and city property can be included in a District, but no consent is required (Sec 2b).
  • There is no limit to the number or size of 40T Districts in a municipality (Sec. 2a).
  • Nothing prohibits a single developer from creating multiple Districts.
  • It is possible for a business, a homeowner, or a tenant, to end up involuntarily in multiple assessing Districts if they are created after s/he moves in.
  • 40T’s are governed by a self-designated 5-member prudential committee made up of property owners (Sec. 2b); 3 is a quorum; two can decide (Sec. 4b).
  • There is no limit on the length of the term of the prudential committee members. They stay in office for the term specified in their petition, or until replaced by the local government (Sec 2b). Members are never elected by the assessment-paying owners/tenants in the District.
  • 40Ts can acquire land outside the District boundary to acquire, build or operate project infrastructure (Sec. 3d5). So there is no limit on the size of a District, and parcels need not be contiguous.
  • 40T can acquire existing public infrastructure and facilities inside and outside the boundary for the benefit of the district (Sec 3d6, 3d11).
  • 40T can operate water supply, sewer/drain and other betterments and collect assessments; and prudential committee decisions replace local council/popular vote on decisions. (Sec 3d12)
  • 40T can compete with host municipality for state and federal grants, loans, etc. (Sec 3d17)
  • 40T can issue bonds at its discretion (Sec. 6 l) and remain in existence as long as bonds are outstanding or it owns and operates/maintains infrastructure (Sec 15).
  • 40T ends after 40 years, unless there’s outstanding debt or other obligations by 40T or MDFA (Sec. 15).
  • Municipal government can vote to extend a 40T, but not to terminate (Sec. 15).
  • 40T infrastructure often necessitates other public infrastructure, e.g., water supply, road connectors, etc.
  • 40T projects often necessitate other public services for their projects, e.g., schools, libraries.
  • 40Ts may fiscalize municipal decisions, favoring big profitable projects that can spin off a lot of infrastructure (including extras for the town) rather than projects meeting community needs or furthering long-term town or regional plans.
  • Bonding fees and expenses are substantial, so 40T favors big developers unfairly over small companies.
  • Big landowners (including tribes, institutions, speculative accumulators) can sway governments.
  • 40Ts can presumably join and vote in municipal associations, and sway state policy.
  • Municipalities seldom have legal resources equal to those of big developers, and are at a disadvantage in negotiating terms.
"Taking" power without eminent domain:
  • The 40T can "enter upon and dig up any private land in the development zone" to build and maintain its infrastructure improvements (3d6). This is a taking of an easement or a land interest by police power, lacking eminent domain’s due process and compensation requirements. It presumably also applies to land the 40T acquires outside the original boundary of the development zone, so apparently the 40T can enter upon and dig up private property anywhere in the host municipality to build their roads, pipes, energy plants, waste treatment plants, etc.
  • The 40T can take by foreclosure the property of an owner who defaults on assessments (Sec. 5a).
  • The host municipality can take private property by eminent domain (especially by using 40Q in addition to 40T, which the bill’s author anticipates), and instead of holding public competitive bidding per Ch. 30B, can transfer it to the 40T per bill’s exemption to Section 16 of Ch. 30B (Sec. 3d5).
Regulation and oversight:
  • If any state or municipal laws conflict with 40T, 40T controls (Sec 13a). Other laws apply (Sec 13b).
  • Open Meeting Law applies only to notice of meetings; minutes and votes are not published (Sec. 4a1(2)).
  • 40T bonds can be issued without any state or municipal consent (Sec 6(L), 6b).
  • Multiple bond issues for same project are allowed (Sec 6b). This would presumably necessitate additional assessments.
  • "The infrastructure assessments established by the assessing party shall not be subject to supervision or regulation by any department, division, commission, board, bureau, or agency of the commonwealth or any of its political subdivisions… " (Sec 5a)
  • All bookkeeping will be done by the 40T prudential committee, and only property owners within the development zone, or agents of the state or municipality, can see the documents (Sec 9).
  • Chapter 268A (conflict of interest law) doesn’t apply to prudential committee members if they disclose an interest in the improvement plan (Sec 10). Since all have an interest, the law becomes inapplicable.
Exemption from labor and bidding laws:
  • All labor laws can be circumvented by host municipalities, by contracting with private developers to build public infrastructure and then buying it at cost. "Not withstanding any general or special act to the contrary, the municipality, the local improvement district, if any, or any other public facilities owner are each authorized to contract with 1 or more owners of real estate within a development zone to acquire or undertake improvements within the development zone. Upon completion, such improvements shall be conveyed to the public facilities owner, provided that the consideration for said conveyance shall be limited to the cost of said improvements." (Sec 5d)
  • Labor protections for maintenance workers in public buildings (Ch. 149 Section 27H) are excluded. (Sec. 3d6)
  • No state inspection or enforcement of Ch. 149 labor laws. (Sec. 3d6)
  • Exempt from bid-splitting prohibition so can evade all of Ch. 149 (Sec. 3d6)
  • Civil service laws Ch. 31 do not apply to anyone employed by the District (Sec. 3d6)
  • 40T can make intergovernmental agreements – exempt from Ch. 30B bidding and procurement laws — with municipalities, the state, and other public or quasi-public agencies for services necessary to acquisition or construction of the improvements in the development zone. (Sec 3d4)
Bond service payments:
  • "Infrastructure" defined as eligible for bonding is almost unlimited, including private-use facilities and revenue-producing utilities, e.g, "parking garages, 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." (Sec. 1)
  • No bonding is allowed for improvements located in so-called "gated communities" that restrict access to the general public, but private development areas, where the public can enter for a fee, or where free speech and assembly are not allowed, are eligible (private roads, parks, recreational facilities, etc.) Sec. 1
  • Bonds include administrative costs – attorney fees, 40T bureaucracy, contractors and consultants, plus payments to municipality if hired to collect assessments, etc. (Sec. 4a)
  • Bonds include costs of improvements the municipality "exacts" from the developer not exclusively benefiting the 40T.
  • 40T may increase assessments on some parcels (e.g., the 20% involuntary) if others default (another form of "taking" of property’s value) (Sec. 5a)
  • No disclosure is specified for home buyers, tenants, and other bond-service payers regarding bond assessments, liens, foreclosure possibility.
Securitization of bonds:
  • The bill securitizes the bonds and declares it purchasable by public agencies, e.g., employee pension plans; private investors and individuals (Sec 6i).
  • The bill overrides any laws and provisions in the charters of private corporations in the state, including utility companies and common carriers, financial institutions and the host municipality itself, to let them buy and sell these bonds and to make contributions to the issuer, all without any regulatory approval by the state. Sec 6i
  • There is no provision for default on the bonds by the developer.
  • Bond issuer may give information for bondholders’ benefit or other investors (Sec 11). But no independent disclosure is required.
Costs to taxpayers:
  • An equity issue: some people will pay more for public services – property taxes plus new assessments.
  • Proliferation of assessments districts will encourage State to cut local aid to municipalities, leading to yet more assessment districts and balkanized public services.
  • Because no bidding is required, citizens may pay more for infrastructure construction and operation.
  • Local Improvement District (LID) property and revenues are exempt from all taxes, fees, and assessments, including taxes on bond sale profits and on revenues from revenue producing "infrastructure" – e.g., cultural, arts and recreation facilities and utility plants (Sec 7).
  • Tax-exempt bonds for construction of works that are not truly public forfeits bond-holder income tax.
  • No recourse against municipality for any obligations or liabilities of LID (Sec 14). But if development fails, municipality may still have to deal with blight, services built for or needed by any new occupants.
  • When a LID ends, its property goes to the municipality (Sec. 15). But after forty years or more, the municipality gets it when it needs repair/replacement.
  • If a 40T development zone is within a municipal 40Q (District Improvement Financing) tax-increment financing area, MassDevelopment will issue the bonds. Any individual 40T parcel owner can get permission to have the incremental municipal property taxes apply to the infrastructure costs and have his assessment reduced or eliminated. Sec 8 This is the reverse of current 40Q, where special assessments reduce the infrastructure cost to be covered by diversion of municipal property taxes.
  • In 40Q districts, the municipality can take private property for redevelopment, count it as a project cost, and transfer it to 40T developer; he would pay through diversion of his own incremental property taxes, rather than through assessment payments.
  • Waiving the "inflation factor" appears to provide that the developer will get more credit for property tax accrual than the actual growth of the property value.
Reactions from one town:

At a recent public meeting I attended, Chapter 40T was presented to the Planning Boards and Selectmen of the Town of Plymouth. Plymouth officials foresaw many problems based on past experience with similar “creative financing” experiments.
  • One pointed out the Town’s failed effort with a parking development agency, and noted that while officials can try to shift the responsibility and risk to non-municipal entities, when something goes wrong residents look to the government to fix the problem.
  • One official said 40T seemed a tool for "secession" of property owners from the town and operation as a separate political entity. He thought a few big owners could come in and change the character and demographics of the town. He was concerned that a “deep-pocketed” developer could buy up large areas of land and trap the 20% of involuntary owners into a district, a concern shared by others.
  • Another said it looks like a good idea and would lure towns in, and leave them later to pick up the pieces; even if the intention is good, he foresees a “nightmare” down the line.
  • Others echoed the concern, from their experience, that officials are left cleaning up the problem, and yet they’d have little expertise in the workings of the new entity and little control over it once it borrows money and sets up certain dynamics.
  • Several feared that over the years, Selectmen change, and next generation would have no understanding of the complicated agreement and the powers of the District government.
The local council as the 40T governing prudential committee:

To address the fear of duplicate or competing governmental municipal jurisdictions, the proponents have suggested letting the local municipal council serve as the 40T governing prudential committee, to make the 40T private government more "public." Of course, this creates fundamental conflicts of interest, since the council is mandated to promote the interests of the whole municipality, and the prudential committee’s job is to promote the financial interests of the developer.

The council would be both the petitioner and the approver of the District. The council would have to approve its own “improvement plan” for the 40T project, deciding if the plans are “not inconsistent” with the local plan. The council would be contracting with itself for land transfers, service agreements, infrastructure purchases, building of non-union public infrastructure. The council as a government body would be subject to the Open Meeting Law and Public Record Law, and all labor, bidding, and construction laws, but exempt from many of them as the 40T prudential committee. It would have to rule on what is legitimate public infrastructure deserving public tax-free bonding, and be on both sides of the issue.

It’s basically unworkable for a body to preside over both a public government and a private development board, being on both ends of a relationship where one side is self-appointed to maximize profit and the other is popularly elected to protect the town. With such an arrangement, municipal oversight would be impossible; we’d be making the public council an advocate for a private development project. This arrangement aggravates the blurring of the public and private powers and responsibilities already threatened by the 40T concept and highlights how fundamentally problematic the whole idea of private-interest 40T municipal governments really is.

Looking for alternatives:

In sum, 40T is rife with possibilities for private self-dealing, misguided decision-making by budget-strapped officials, overburdening of unsuspecting homebuyers with debt they don’t understand, and another debt instrument that will be sold into the arcane world of speculative investment. We can’t anticipate all the legal and financial implications and risks of this new world of private governments issuing public debt. But–how many debt crises do we need before we learn that "creative financing" is not a solution?

Proponents say that 40T is not an experiment, that there are over 400 Special Assessment Districts in Massachusetts. But they are actual governmental entities, not created of, by and for private developers, and have public purposes like water, sewer, and similar common services. (Proponents also refer to “Improvement District” laws in the 1870’s; that’s hardly useful for today’s thinking, since government structure and capacity at that time was very different, and there were probably many unincorporated areas where such an entity didn’t compete with a well-established government.) There are also various types of assessment districts in other states; indeed, they have proliferated and are the bane of homeowners, who find themselves paying thousands of dollars yearly (or monthly) to an assortment of districts, in an inefficient balkanized patchwork of zones premised, ironically, on each owners’ desire to contribute least to the common good.

Elected, accountable public officials must remain in control of betterment-type assessments because they are a tax increase on a specific group of residents, and equity is an issue.

Public officials must remain in control of tax-exempt funding, and of tax-exempt revenue-producing public facilities, because the loss of revenue shifts the tax burden to other citizens.

And elected, accountable public officials must remain in control of public infrastructure, to be sure it fairly supports the greatest number of public needs and not just the profits of a particular developer, and to prevent harmful environmental impacts on the municipality and the region. The principles of public-sector integrity without privatization, fair playing field for all private developers, tax protection for private property owners, and adherence to community plans and environmental protections should be part of that planning.

Instead of giving bonding, taxing and police power to private developers, let’s re-consider other remedies to the specific problem of municipal infrastructure funding. There are already many ways to fund locally targeted infrastructure funding:
  • Betterment districts have been traditionally used for this purpose; specific revisions might solve the problems 40T addresses regarding bond caps and length of payoff terms, and to distinguish these property-backed bonds from GO bonds for bond-cap and credit-rating purposes.
  • MassDevelopment could already be the bond issuer for most of the 40T projects, and could be enabled to fund infrastructure improvements and to own/operate them, as it was enabled to do for NorthPoint and Devens, respectively, with assessment collection by towns.
  • Industrial Development Finance Agencies (IDFA) could accomplish all the 40T goals of funding legitimate public infrastructure with tax-exempt revenue bonds that don’t use town bonding capacity or affect bond ratings; and the infrastructure would remain in true public control. Proponents of 40T protest that a failure would still “look bad” for the town. The fact is that a failure of a 40T project will still “look bad” for the town that approved it – and for the state legislators who enabled it. Ultimately, elected officials are still the ones voters and taxpayers hold accountable. It is best for the all our officials to realize that and do their due diligence.
  • New development impact fees are proposed as part of the Comprehensive Planning Act II, which would be equitably levied on all developers, apply to multiple public services required by new development, and encourage regional planning.
  • Ch. 40Q (District Improvement Financing), or tax-increment financing, is available, but that simply diverts the projects property taxes to its own site, depriving schools and other public services.
  • I-Cubed does the same, but diverting state income taxes from the project, with municipal property tax as a back-up.
But better yet, let’s step back and re-frame the problem. Our governments must take responsibility for providing public services, with full public protections, accountability and transparency. If we can’t afford everything we need, we have to either democratically decide priorities – or figure out where the money is going. (For example: The decline of the corporate share of the national and state tax burden by two-thirds since the 1950’s, and the shift of that burden to individuals through various taxes, is a major underlying cause of the taxpayer revolt, and the financing shell game is merely a distraction from solving that problem.)

Residents of our municipalities have only a limited capacity for taxation, and whether it is used up by "taxes" or "assessments" or "fees," the end results are the same: resistance to funding for needed public services, and delinquency in payments.

Understanding accountability:

The most compelling points on this issue were made by the members of this very Committee, at a hearing on January 31, 2008, as reported by the State House News:

"…. members of the Committee on Bonding, Capital Expenditures and State Assets demanded to know why they decided against factoring in the debt of quasi-public agencies such as Massport, the MBTA and the Massachusetts Turnpike Authority, public agencies that largely rely on non-tax revenue streams.

Citing a recent audit report faulting the MBTA for losing $55 million because of risky loans, Sen. Mark Montigny, co-chair of the committee, warned the Patrick administration’s top two budget officials that failing to account for these agencies’ debts is a recipe for political disaster.

"I don’t want to defend that," Montigny (D-New Bedford) said to Secretary of Administration and Finance Leslie Kirwan and undersecretary Jay Gonzalez during a morning hearing. "I want all of it controlled and done through the government. If you don’t have control over that, I can’t answer the question of affordability. The question is: What’s the real bill?"

According to the right-leaning think tank Pioneer Institute, whose executive director Steve Poftak testified at the hearing, Massachusetts owes $12,550 per capita, when debt from capital expenditures, quasi-public agencies and unfunded liabilities are combined.

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."

Other lawmakers echoed Montigny’s concern.

Rep. Elizabeth Poirier (R-North Attleboro) said she has "had a lot of dealing with quasi-public agencies" and agreed they should be under tighter supervision. "All taxpayer money should be under the control of our government," she said.

Similarly, Rep. John Scibak (D-South Hadley) said "I think that they should all be subjected to the scrutiny."

Gonzalez said that even though the state would likely be asked to intervene if an independent agency were to falter, "We can’t plan as if it’s going to happen." …..

Let’s plan as if it’s going to happen, because it will. Let’s plan how to get our public responsibilities back into accountable government hands, rather than continuing to pretend we can spin them off indefinitely to quasis and other hybrids like 40T Districts. The money for public goods always comes from the people, regardless of the shell games, and the people will look to you, our elected officials, when the games are over.

END
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