Monday, Sep 13, 2010

Development authorities need a look in recession

No one knows how the commonwealth’s dire $4.5 billion budget shortfall dilemma will be resolved, but it is likely that the General Assembly will again shift a significant portion of the state’s budgetary woes to local governments, effectively forcing them to raise local taxes to pay for education, public safety and social services. This year’s budget crisis is emblematic of the constant dilemma whereby the needs of citizens far exceed the ability of their local governing bodies to finance and pay for these needs.

In an era of unpredictable revenue cycles, localities have explored alternative financing arrangements to cope with anticipated revenue shortfalls and growing infrastructure demands. Fortunately, Virginia permits local governments to utilize a myriad of public-private partnership tools to finance local government services, including community development authorities.

Locally, CDAs have previously been discussed in the context of transportation infrastructure improvements associated with development on U.S. 29 North, including Hollymead Town Center, Albemarle Place and North Pointe. Given tough economic times, Charlottesville-area governments should again give serious consideration to the use of CDAs to help alleviate their budget difficulties and assist with major transportation projects and revitalization initiatives.

CDAs, first authorized by the General Assembly in 1993, exist as special taxing districts created by local governments to independently issue tax-exempt bonds. These bonds finance public infrastructure improvements associated with new development. In recent years, the use of CDAs has proliferated across the commonwealth and, to date, nearly 30 CDAs have been authorized by local governments. CDA bonds have helped to finance a broad range of infrastructure, including transportation improvements, public water/sanitary sewer lines, storm water management, parking, landscaping and more.

CDA bonds are typically repaid over a 20- or 30-year term solely from revenue generated from properties within the district, including special property taxes, special assessments and/or incremental tax revenues. The value of CDA properties is presumably enhanced by new development and infrastructure improvements. Where properly used, CDAs not only provide a way to shift certain capital infrastructure costs to the private sector, but also may ultimately free up needed local revenue and debt capacity to pay for other critical services and personnel.

While some localities may be receptive to the idea of creating a CDA, others may be skeptical. Certainly, the real estate industry is vulnerable to cyclical downturns, and CDAs are not the answer in all instances. Local governments may be concerned about financial forecasts, citizen opposition, a developer’s capitalization or the project’s consistency with the jurisdiction’s land use plans.

For most jurisdictions, concerns about the potential for default on bond payments are paramount, and, even where the risk of default is low, many localities remain concerned about how authorizing CDA debt will be perceived by credit rating agencies and how it may indirectly impact their debt capacity. These concerns, while valid, can best be addressed jointly by the governing body and developer through proper financial due diligence, the crafting of well-written authorization agreements, proper notice to bond holders, governmental control and prudent fiscal policies.

The establishment of a new bond-issuing authority through a successful CDA only comes as the result of careful, deliberative negotiations between private individuals and local government. In such a rapidly evolving area of the law, forging a mutually beneficial partnership between the developer and the locality, developing a transparent process with citizens and crafting tight ordinances and agreements are critical. Moreover, it is imperative to have an experienced, well-capitalized developer with a strong project in a strategic location that guarantees a reasonable return on investment and an acceptable level of assurance to the participating jurisdiction.

Regardless of the outcome of the commonwealth’s 2010 budgetary mess, local governments in the Charlottesville area would be wise to explore innovative financing alternatives as a part of their overall financial and public services strategy. Existing CDAs across the commonwealth have shown that they can provide faster delivery of key capital projects than traditional financing arrangements and can have a positive impact on a jurisdiction’s taxable real estate values. Wise leadership, strategic partnerships and strong projects that deliver public services and new economic development would be an asset in any budget year.