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Learning from California:
The Mello-Roos Act and Chapter 40T
by John Andrews, MCHC

What does California have to teach us about how to fund infrastructure needs through special assessment districts?


In 1982, California towns and cities found themselves in financial crisis due to the enactment of Proposition 13 – a measure similar to that of Proposition 2 1/2 in Massachusetts. The Legislature decided to enact a new taxation mechanism known as Mello-Roos (named after its key legislative sponsors). This law has been pointed to as an model by proponents of the related Chapter 40T legislation currently before the Legislature. In this article, we will compare Mello-Roos to Chapter 40T and ask what we can learn from the California experience.

The Mello-Roos Act permits landowners, upon receiving approval from a local government agency, to form a community facilities district (CFD), to levy a special tax, and to authorize bonds secured by the special tax. Mello-Roos assessments are included on property tax bills. The Mello- Roos Act has been used to finance over $3.5 billion worth of infrastructure in California communities to date. It has become one of the primary funding sources for constructing schools, roads, sewer and water systems, and other public facilities.

The California State Treasurer describes Mello-Roos in this way: “In essence, landowner-approved Mello-Roos financing permits landowners to borrow against the value and tax capacity of their land through the tax-exempt market to pay for the infrastructure needed to serve development.” [1]


Some of the differences between Mello-Roos and Chapter 40T need to be understood to draw appropriate conclusions from California’s experience. In many ways, Chapter 40T has fewer financial and consumer safeguards than California’s Mello-Roos law, and would leave Massachusetts vulnerable to a wider range of unintended consequences.

• California’s Proposition 13 limits local property taxes to 1% of assessed value. Mello-Roos taxes typically add about 0.7% to this. In Massachusetts, property tax are already higher than in California, averaging about 1.5% of assessed value according to the Massachusetts Department of Revenue [5]. Thus any additional assessments under Chapter 40T will push the total property tax burden for Massachusetts residents significantly higher than those experienced in California.

• In addition, Mello-Roos allows voters to approve a maximum tax rate at the time the district is formed. Each year, the local city council sets the tax rate for the coming year, which must not exceed the maximum tax rate approved by voters. Chapter 40T does not give local government a role in setting such assessments and does not provide for a limit on the tax rate.

• California requires a two-thirds vote of approval by persons residing in the district. Chapter 40T foregoes such votes in favor of decisions made by a landowner who owns 80% of the acreage.

• California allows bonds to be issued to construct public schools and libraries. Chapter 40T does not allow this as a purpose.


In general, Mello-Roos has been successful in funding new infrastructure and funding schools. California seems committed to making it work in the long run. However, some problems have been noted, and they should be considered as Massachusetts considers similar legislation.

• Questions of fairness to taxpayers. Mello-Roos creates a complicated tax landscape in which public facilities used by all taxpayers are being funded by assessments on a subset of taxpayers. Identical houses on the same street can have quite different total tax burdens. Those paying the higher taxes often complain that the tax burden is not being equally distributed. Mello-Roos can thus produce “horizontal inequity” in tax policies. [4]

• Questions of priority in taxation. Once a Mello-Roos district is established for one purpose, it consumes a portion of the tolerable tax-burden. Shanske [4] comments that Mello-Roos taxes “represent a crowding out of other possible taxes.” This may effectively block later municipal attempts to raise revenues for new, higher-priority public purposes. A community that does not do careful long-range planning for the purposes and the magnitude of Mello-Roos assessments may find itself unable to fund its developing priorities. Under Chapter 40T, this problem is worsened by the developer-controlled nature of the district in which projects favored by the prudential committee would in effect receive priority over projects selected by the townwide voter-controlled government.

• Self-funded districts tend to vote against townwide expenditures, making it difficult for municipalities to fund their townwide needs. Voters in the Mello-Roos district are already paying for their own needs through Mello-Roos and tend to reject additional assessments that require them to contribute to townwide projects. In Massachusetts, this conflict is likely to arise in the context of Proposition 2 1/2 overrides, especially when the Chapter 40T prudential committee has pushed assessments to the tolerable limit. [2]

• Loss of real estate value due to increased taxation. Studies have shown that the selling price of a home is decreased by the imposition of a Mello-Roos tax[3]. Economists say that “taxes are capitalized”. The extent of the loss depends upon the magnitude of the Mello-Roos tax and the subjective assessment of homebuyers as they shop for housing in districts with and without Mello-Roos taxes. In some ways, this is a market mechanism that finds its own equilibrium. However, persons who already own homes in a newly formed district will see their homes lose value. If they sell their homes soon after the district is formed, they suffer a loss without enjoying the benefits of the facilities that may be funded by the assessments.

• Risk of default is created by a declining real estate market. According to the California State Treasurer “The debt service supporting Mello-Roos
bonds issued in undeveloped areas is dependent upon the successful development of real estate; consequently, these bonds are vulnerable to several development-related risks. In the event of slow market absorption, for instance, developers have to hold newly developed properties for longer than anticipated. To the extent that developers become financially overextended, the payment of debt service on
outstanding Mello-Roos bonds may be threatened.” [1]

• Consumer protection for homebuyers. It is commonly reported that prospective homebuyers often do not realize the burden that Mello-Roos will impose on their finances. Developers realize increased profits by not discounting the selling price enough to compensate for the Mello-Roos burden. California added requirements for disclosure to try to address this problem.

• Consumer protection for bond buyers. The California State Treasurer noted that “because of the dynamics of real estate development, the credit worthiness of individual [Mello-Roos districts] can change rather dramatically over the course of a year. Yet it is very difficult for potential investors in Mello-Roos bonds to obtain the information needed to make informed decisions on a ease-by-case basis.” [1]


Special assessment districts could be viewed a logical response to revenue shortfalls created by tax-cap laws such as Proposition 13 in California and Proposition 2 1/2 in Massachusetts. California has used such districts to provide a revenue stream for public infrastructure such as schools, roads, and sewer systems. Despite the problems, California seems to view Mello-Roos as an essential tool for municipal finance.

In contrast to Mello-Roos, Chapter 40T appears to be targeted more toward empowering for-profit ventures in which self-interested developers pursue their own profit using the powers of government. The bonds issued by Chapter 40T solve a cash flow problem for developers who would otherwise have to find their own capital to build roads or other development-related infrastructure. Chapter 40T seems to be oblivious to the fact that some development pursued by private interests is problematic, wasteful, risky, and counter to the public interest. With this perspective, assertion of public process or oversight appears as a threat to the successful issuance and payback of the bonds. Thus Chapter 40T has been written to exclude the public interest safeguards needed to ensure that the power to tax is exercised in the public interest and with appropriate approval of those paying the taxes.

History shows that the power to tax is not something that Massachusetts citizens have been willing to surrender to unaccountable authorities. “Taxation without representation” was a rallying cry in the revolt against colonial rule. More recently, the enactment of Proposition 2 1/2 clearly suggests a belief that tax increases should seek an explicit vote of acceptance from those being taxed. Chapter 40T, if enacted, would be a striking retreat from the principal of taxpayer consent.

Chapter 40T is lacking many protections afforded by Mello-Roos, such as the mandatory cap on assessments, the requirement for 2/3 voter approval, the annual setting of the assessments by a municipal body, and disclosure requirements. In addition, it takes away other democratic rights enjoyed by citizens of municipalities in Massachusetts. It goes far beyond what is required to provide a new funding mechanism for public interest projects.

Unlike Mello-Roos, Chapter 40T allows a single vote by a municipal board to create a new “body politic” controlled by an unelected developer-selected panel whose vote is thereafter substituted for certain required votes of the registered voters of the district. Nowhere else in Massachusetts law is such a fundamental change in governmental structure achievable by a single vote of a single board. Elsewhere changes to governing structures and the rights of voters are not permitted without an overlapping set of approvals.

Proponents of Chapter 40T argue that it can enable good and necessary development that could not otherwise be funded, and this is true. But it can also enable destructive and unnecessary development which will create costly problems for municipalities and result in permanent environmental degradation. Many Massachusetts communities are already struggling with the impacts of overdevelopment and with property tax burdens are many feel are too high. Chapter 40T makes their problems worse by replacing public tax priorities with the tax priorities of a private for-profit developer that may not even reside in the community. It imposes assessments on top of other property tax burdens. As written, Chapter 40T is likely to make it even more difficult for communities to guide growth and development and to ensure that townwide needs are met.

A properly written law to promote Mello-Roos style assessment districts could be a useful tool for Massachusetts communities. The question with Chapter 40T is the risk that it will allow the power of taxation to be hijacked by well-connected development interests to the detriment of local fiscal planning and the democratic process. Until such concerns are addressed, Massachusetts may be well advised to employ other options for funding its true infrastructure needs.


[1] “Recommended Changes to the Mello-Roos Act of 1982 – Report to the Governor and Legislature”, Kathleen Brown, California State Treasurer, March 1991

[2] Staff Analysis of AB 3747 (Quackenbush), Senate Committee on Education, California State Legislature, 1 June 1944

[3] Do, A. Quang, and Sirmans, C.F., “Residential Property Tax Capitalization: Discount Rate Evidence from California”, National Tax Journal, Vol. 47, No. 2, June 1994

[4] Shanske, Darien, “Public Tax Dollars for Private Suburban Development: A First Report on a National Phenomenon”, Virginia Tax Review, Winter 2007

[5] Massachusetts Department of Revenue, Division of Local Services, Data Bank Reports, Proposition 2 1/2, 2006 (http://www.mass.gov/dor)


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