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F I S C A L I M P A C T R E P O R T

SPONSOR Ortiz Y Pino

DATE TYPED 3/17/05

HB

SHORT TITLE Neighborhood Improvement District

SB 307/aSFC/aSJC/aSFL#1

ANALYST Hadwiger

APPROPRIATION

(in $000s)

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Office of the Attorney General (AG)

State Auditor (SA)

Department of Finance and Administration (DFA)

SUMMARY

Synopsis of SFl #1 Amendments

Senate floor amendment one would narrow the range of transportation-related projects that could

be funded through the districts; eliminate language in the original bill that allowed developers to

create a district after filing a final plat and substitute language that would prohibit creation of a

district if one person owns more than 20% of the residential parcels in the district and if the

property has not been platted for at least ten years and if residences have not been constructed on

over 70% of the residential parcels in the district. SFl #1 amendment would also exclude non-

residential properties from the districts and require that assessments against a parcel in the dis-

trict not exceed the estimated benefit to the parcel. SF amendment number two would require

signatures of 60% (rather than a majority) of the owners of taxable property in a proposed district

to petition the city council to initiate creation of a district.

Synopsis of SJC Amendment

The Senate Judiciary Committee amendment effectively deletes the Senate Finance Committee

Amendment and inserts a new section whereby the ordinance creating a neighborhood improve-

ment district would not become effective until approved in an election by a majority of the voters

Senate Bill 307/aSFC/aSJC/aSFL#1 -- Page 2

in the district voting on the question. The election would be held in conjunction with the next

regular municipal election or, if sooner, in conjunction with a special municipal election for an-

other purpose. If approved, the ordinance creating the district would remain in effect for six

years and may be extended for successive six-year periods if approved again by a majority of the

voters in the district. The amendment specifies city council review of the district five years after

the election and, if the council determines the district should not terminate, it would set continua-

tion of the district for election.

Synopsis of SFC Amendment

The Senate Finance Committee Amendment would require 60% or more of the owners of taxable

parcels of real property within a proposed district to petition the Council to create of a neighbor-

hood improvement district. It would also allow property owners to void an ordinance creating a

neighborhood improvement district, if, within 90 day of adoption of the ordinance, a majority of

the owners sign a petition in opposition to creation of the district.

Synopsis of Original Bill

Senate Bill 307 would allow for creation of neighborhood improvement districts (hereafter “dis-

trict”) that would operate as follows:

1.

A municipal governing body (council) would adopt an ordinance specifying the proce-

dures, conditions and standards to be used to create the district including:

a.

Acceptable purposes for a district

b.

Time frames for submitting petitions, feasibility studies, public hearings, and final

decision.

c.

Information required for a petition proposing a district

d.

Standards and procedures for determining the district boundaries

e.

Additional factors to be addressed in a study of the proposed district.

2.

Among other provisions, the city council would also:

a.

Specify the responsibilities of a management committee of the district

b.

Be authorized to allow creation of a district by a land developer who has filed a

final plat, provided that, upon sale of 50 percent of the lots, the management

committee would be appointed.

c.

Potentially function in lieu of the management committee to manage the district

d.

Provide for valuation increment financing and provide for expenditure of reve-

nues there from.

3.

Creation of a district:

a.

The majority of property owners within a proposed district (exclusive of govern-

ment property) could petition the city council to create the district following a

specified format.

b.

After receipt of the petition, the mayor would prepare a study of the proposed dis-

trict and present same to the city council.

c.

The city council would hold a public hearing, notifying affected property owners

of the hearing and providing an opportunity for each interested person to testify at

the hearing.

d.

The city council would adopt an ordinance creating or rejecting the district. If re-

jected, another petition for creation of the district could not be submitted for 12

months.

e.

The ordinance creating the district would specify improvements to be provided by

Senate Bill 307/aSFC/aSJC/aSFL#1 -- Page 3

the district, cost of the improvements, description of real property included in the

district, assessment method to be used to finance the improvements, the amount of

the initial assessment to be imposed upon each real property owner and estimate

of assessments for the subsequent four tax years, description of how the district

will be managed by a management committee (method of appointment, terms of

members, etc.), and a description of methods to be used to account for district

costs and revenues.

f.

The ordinance may provide for valuation increment funding or the district

g.

A management committee would be created to operate the district and file regular

reports to the city council. The management committee would be appointed pur-

suant to the enabling ordinance, with one member of the committee representing

the mayor and the remainder being property owners in the district.

4.

HB307 includes additional provisions specifying annual assessments on property owners,

creation of a special account, management of the money, enforcement of assessments,

regular district reviews, and deposit of the district funds in the “short term investment

fund” of the state treasury.

Significant Issues

According to the Department of Finance and Administration (DFA), SB307 offers a new ap-

proach for downtown and neighborhood redevelopment in New Mexico. A neighborhood im-

provement district is a specific geographic boundary formed by a group of property owners

working together to bring about needed capital improvements within that boundary. Improve-

ments ranging from litter removal and sidewalks to street lights and landscaping are then paid for

by the benefiting property owners using the NID process administered by the municipality.

States who have authorized creation of NIDs include Florida, Idaho, Missouri, Ohio, Oregon,

Pennsylvania, Washington, and Wyoming.

The Office of the Attorney General (AG) offered the following comments on SB307:

New Mexico state law already provides for improvement districts within cities (NMSA

Section 3-33-1 et seq.). See also the Business Improvement District Act, NMSA Section

3-63-1 et seq.; and the Greater Municipal Parking Law, NMSA Section 3-51-1 et seq.

This bill appears to duplicate many of the procedures and purposes already existing in

state law for the creation of special improvement districts.

This bill would allow for the assessment and funding of temporary or transient projects

such as signs, banners, decorations, public events and concerts. The New Mexico Su-

preme Court stated in Waltom v. City of Portales, 42 N.M. 433, 81 P.2d 58 (1938) that

“special assessments are quasi taxes and are laid to enable the discharge of some of the

functions of government. The power to impose them is related to the taxing power.” It

may be difficult for a city council to justify assessments for banners, concerts, decora-

tions and public events as “functions of government.”

The Supreme Court also ruled in Bowdich v. City of Albuquerque, 76 N.M. 511, 416 P.2d

523 (1966) that “the only limitations on the exercise of the power of special assessment

are that the improvements must be public and must confer special benefits on the prop-

erty assessed. Irish v. Hahn, 208 Cal. 339, 281 P. 385. And with the cost to be borne by

each tract not to exceed the estimated benefits thereto. Teutsch v. City of Santa Fe, su-

Senate Bill 307/aSFC/aSJC/aSFL#1 -- Page 4

pra.” It also may be difficult to define the nature of the special benefits inuring to all par-

cels of property within the neighborhood district for temporary improvements or transient

events.

The bill allows for the location of an improvement on private property within the district

“if it directly and primarily benefits a public right of way or public easement.” Depending

on the nature of the improvements on private property, this determination will have to be

made in view of the constitutional prohibition against donating public funds in aid of pri-

vate persons. See Article IX Section 14. It also might be difficult for a city council to

calculate and justify the benefit to all taxable real property within the district for im-

provements on private property.

The bill provides for continuing annual assessments on property within the district and

periodic “neighborhood improvement fees.” Presumably the city council will have to de-

termine the benefit to the property assessed each year before imposing those fees, espe-

cially with regard to temporary or transient “improvements.” The bill also authorizes a

“charge” for a reserve fund for emergency expenditures. The city council will also have

to justify and define the benefits to real property within the district for that charge and

how that charge relates to the proposed improvements.

Unlike other improvement district laws, this bill does not provide for objection, protest

and appeal procedures for real property owners. See for example NMSA Section 3-33-22.

There may be certain due process issues raised by omitting those procedures. The bill

would only allow landowners to appear at the hearing held to determine the creation of

the district, and to “present views” on its creation.

The Senate Judiciary Committee amendment provides additional protections to property owners

by requiring their approval prior to making the ordinance effective. One concern that arose in

debate over this provision in HB602 was that business owners whose properties are in the pro-

posed district but who do not reside there would be excluded from the election.

FISCAL IMPLICATIONS

The State Auditor noted that there would be additional costs for annual audits of the districts to

comply with the Audit Act.

ADMINISTRATIVE IMPLICATIONS

DFA indicates that SB307 contains several features that enhance its administrative utility. First,

an NID can be established and an assessment imposed without a city-wide election. Second,

since the city issues general obligation bonds, the public improvements can be financed at lower

interest rates. Third, the city oversees the formation of each NID and approves the plans and

specifications of each project and, as such, may group two or more NID projects together into

one bond issue to further reduce the costs. Fourth, SB307 allows for the financing of a broad

range of public improvements without a requirement that the area to be improved suffer from

blight. SB307 creates a nonprofit management committee, with one member representing the

mayor and other real property owners or district residents, to administer district improvements,

recommend annual assessments, and file annual fiscal reports.

The AG noted that the bill would require a coordinated effort between the county treasurer, city

Senate Bill 307/aSFC/aSJC/aSFL#1 -- Page 5

council, district management committee, county assessor, and property tax division of the Taxa-

tion and Revenue Department in order to implement its various assessments and fees.

OTHER SUBSTANTIVE ISSUES

According to DFA, a municipality, when seeking to improve its neighborhoods, can choose to

use existing financing and administrative tools already authorized by the State of New Mexico,

such as a business improvement district, or the tax increment financing (TIF) powers provided

through the Metropolitan Redevelopment Code. According to analysis of Missouri’s NID law,

property owners under a TIF pay nothing for public improvements, but they are ultimately re-

sponsible to bondholders if the tax revenue generated by the improvements is insufficient to

make the payments. The municipality, on the other hand, has no financial responsibility to the

bondholders, but along with the other affected taxing jurisdictions, “pays” for improvements by

foregoing a portion of the increased tax revenue until the bonds are paid off. Thus, TIF is appro-

priate when development is not likely to take place without the incentive that TIF offers, and

where it is not financially feasible for the property owners to pay for the desired improvements.

TECHNICAL ISSUES

The Auditor identified the following technical issues:

Subsection A of Section 9, states “For a district with a management committee, the commit-

tee shall be responsible for the operation of a district, including the commencement, acquisi-

tion, construction or maintenance of district improvements. The members of the manage-

ment committee shall be appointed pursuant to the provisions of the enabling ordinance

and the ordinance creating the district; provided, however, that one member shall be ap-

pointed by and represent the mayor and the remaining members shall be real property owners

or residents of the district.” It is unclear who “appoints” the management committee

pursuant to the enabling ordinance. Is it the council. This is an important point in de-

termining whether the nonprofit corporation is a component unit of the municipality per

GASB 14. This point should be clarified.

The management committee shall be a nonprofit corporation pursuant to the Nonprofit

Corporation Act per Subsection 4 of Section 9. Subsection D of Section 9 allows a “council”

to manage a district. Does a district managed by the municipal council have to be incorpo-

rated as a nonprofit corporation also. Can the reader assume that a neighborhood improve-

ment districts managed by the council is not a nonprofit corporation; and therefore not a

separate legal entity from the municipality. The answer to that question is important in de-

termining how the district should appear in the municipal audited financial statements. This

point should be clarified in the proposed statute.

Per GASB Statement No. 6 paragraph 8, it is not uncommon for local governments to finance

special assessment district improvements entirely with the proceeds of general obligation

debt and to levy special assessments against benefiting property owners to provide some of

the resources needed to repay that debt. In contrast, SB 307 creates nonprofit corporations

that are component units (separate legal entities from the local government) for these

neighborhood improvement districts, and does not address how they will finance the pro-

posed projects. Will the nonprofit corporation have to borrow the money. The interest rate

available to such nonprofit corporations for loans will exceed the interest rate available to the

Senate Bill 307/aSFC/aSJC/aSFL#1 -- Page 6

local government.

ALTERNATIVES

The AG suggested consideration could be given to amending existing special improvement dis-

trict laws to expand the purposes for which those districts may be established. Consideration

should also be given to restricting improvements to those of a permanent nature, in order to

avoid legal issues regarding benefits inuring to all real property within a district if the improve-

ments are temporary or transient.

DH/yr:lg