Probate & Property Magazine
Using Special Assessments as a Tool for Smart Growth
By R. Lisle Baker
R. Lisle Baker is a professor of law at Suffolk University Law School in Boston, Massachusetts. This article is based on Using Special Assessments as a Tool for Smart Growth: Louisville’s New Metro Government as Potential Example, 45 Brandeis L.J. 1 (2006).
During the last few decades, local governments have turned to a variety of “smart growth” financing tools to respond to the costs of suburban sprawl and to reshape underused urban cores. These tools include charges for water and sewer extensions, revenue bonds financed by tax increments on nearby property, and impact fees for roadway improvements. An additional technique is a “special” assessment of all or a portion of the cost of a public expenditure on real property that is benefited by the expenditure. Properly used, special assessments help outlying properties pay for public investments that provide special benefits to such properties, ranging from new streets and sidewalks to parks and open space. Special assessments also may help redevelop interior areas by financing new or upgraded infrastructure, such as transit stations, that can help attract business and draw members of the community back downtown.
This article focuses on the general law of special assessments with applications and examples in three states and in three relatively unusual contexts: a public golf course in Massachusetts, land conservation in California, and the construction of a new transit station in Washington, D.C. How these projects worked, however, requires a basic understanding of the legal principles of special assessments, as well as what costs can be covered.
General Background on Special Assessments
Special assessments, as they are known in most states, are a revenue device by which a local government or governmental entity can recover a portion of the cost (and sometimes its maintenance) of a public improvement that benefits certain real property above and beyond the benefit to the public in general. “[S]pecial assessments or special taxes proceed upon the theory that, when a local improvement enhances the value of neighboring property, that property should pay for the improvement.” Ill. Cent. R.R. Co. v. City of Decatur, 147 U.S. 190, 198 (1893). Special assessments are distinguished from property taxes, which are levied each year to raise revenue regardless of direct benefit. “[S]trictly speaking, a special assessment is not a tax at all, but a benefit to specific real property financed through the use of public credit.” Solvang Mun. Improvement Dist. v. Bd. of Supervisors, 169 Cal. Rptr. 391, 396 (Ct. App. 1980). Special assessments can be arranged to allow payment over time, like annual property taxes, and are sometimes added to the property tax bill as a means of collection. Unlike a tax on real property, a special assessment is ordinarily not classified or treated as a deductible expense for federal income tax purposes but instead constitutes an adjustment to the tax cost basis of the property assessed. Code § 164(c)(1).
Special assessments are an old idea, but their availability as a municipal financing mechanism is sometimes overlooked; in recent years, however, cities in suburban areas have tended to derive an increasing amount of revenue from this source. Tax Foundation, Inc., Special Assessments and Service Charges in Municipal Finance, Gov’t Fin. Brief No. 20, 7–10 (Aug. 1970).
Basic Principles of Special Assessments
To understand special assessments, it is important to keep in mind three basic principles, each of which this article will examine in turn. First, the property assessed must receive a special benefit from the public expenditure. Second, the property owner should be assessed for the special benefit and not the general benefit for which the public at large should pay with general tax revenues. Third, the special assessment needs to be fairly allocated or apportioned among benefited properties.
The Property Assessed Must Receive a Special Benefit from the Public Expenditure
The basic function of a special assessment is to partially offset the cost to a municipality for public improvements or other expenditures by assessing owners whose properties receive a benefit specific to those properties. Because a special assessment involves a monetary payment, in a constitutional sense there is a taking of property (money) for which just compensation in the form of the benefit is provided. Village of Norwood v. Baker, 172 U.S. 269, 279 (1898) (special assessment in substantial excess of the special benefits received is a taking of private property without just compensation). A special benefit is found to exist when the public improvement “increase[s] the value of the land, relieve[s] it from a burden, or make[s] it especially adapted to a purpose which enhances its value.” Henderson Cotton Mills v. Trigg, 227 S.W. 577 (Ky. Ct. App. 1921) (sewer assessment valid because it relieved landowner from the burden of flooding). To determine the value of a special benefit, a municipality may exercise broad discretionary power and consider both the increase in market value of the land from the improvement and also benefits that cannot be measured in dollar value. 14 Eugene McQuillin, The Law of Municipal Corporations
The Benefit Assessed Should Be Specific to the Property Assessed
The benefit assessed should be specific to the property assessed and not a benefit that is general to the community. For example, an Owensboro, Kentucky, assessment for street cleaning and dust removal was held to confer no special benefit on the class of properties assessed. See City of Owensboro v. Sweeney, 111 S.W. 364, 365 (Ky. Ct. App. 1908). In the same way, an annual charge for fire protection service was invalid as a special assessment because no benefit was conferred as might have been the case for large water mains and fire hydrants. Barber v. Comm’r of Revenue, 674 S.W.2d 18, 21 (Ky. Ct. App. 1984). In South Dakota, a special assessment for a convention center was held invalid because the benefit conferred by the improvement was not local but general to the community. Ruel v. Rapid City, 167 N.W.2d 541, 545–46 (S.D. 1969).
A public expenditure that ordinarily confers a general benefit, however, such as garbage disposal, can be partially funded through a special assessment when the particular circumstances allow for an apparent special benefit not available elsewhere. Charlotte County v. Fiske, 350 So. 2d 578, 580 (Fla. Dist. Ct. App. 1977) (finding it appropriate to levy a special assessment against residential property receiving garbage disposal service even though the community at large enjoyed a cleaner, garbage-free environment).
The Special Assessment Must Be Fairly Allocated or Apportioned Among Specially Benefited Properties
An assessment must be allocated on a fair basis that reflects the respective benefits that each property may receive as a result of the improvement. It is up to the local legislative body to equitably determine this apportionment according to the ratio of the assessed property’s assessed value, front footage, square footage, or some combination to the properties as a whole. In determining the benefits received, the apportionment also can include “graduation for different classes of property based on the nature and extent of the benefits received, and other factors affecting the benefits received.” Ky. Rev. Stat. Ann. § 91A.210. Generally, once the assessing body makes a determination about the nature and the amount of the benefit that an improvement will confer, the assessment will not be overturned for nonproportionality that is not obvious from the record or judicially noticed facts. Kansas City S. Ry. Co. v. Road Improvement Dist. No. 3, 266 U.S. 379, 386 (1924) (indicating relief appropriate “only where the legislative determination is palpably arbitrary” or there is “unreasonable discrimination in fixing the benefits which the several parcels will receive”).
Costs Recoverable with Special Assessments
What costs of an improvement are available to be assessed? In general, special assessments are related to capital expenditures for public improvements like sewers and roads. In California, some assessments to help finance maintenance are permitted because they are necessary to maintain the permanent public improvement such as operating expenses for streetlights. Howard Jarvis Taxpayers Ass’n v. City of Riverside, 86 Cal. Rptr. 2d 592, 597–98 (Ct. App. 1999). This principle has also been used to support assessments for park maintenance, which “may operate to renew and preserve the special benefit attributable to the improvement.” Knox v. City of Orland, 841 P.2d 144, 152 ( Cal. 1992). In addition, special assessments have been used in other ways. For example, in Kentucky an assessment may be used to recover planning, design, and financing costs, as well as other aspects relating to the improvement. Ky. Rev. Stat. Ann. § 91A.210(9). Note, however, that the assessment cannot exceed the level of the benefit conferred. See Village of Norwood v. Baker, supra.
Some Advantages of Special Assessments over General Property Taxes
One advantage of special assessments over general property taxes is that special assessments are not subject to the constitutional requirements of equality and uniformity under state and federal constitutions. Thus, local governments may be able to levy non-uniform assessments over a geographical area and distinguish among specific types of property such as allocating benefits by zones, Conrad v. Lexington-Fayette Urban County Gov’t, 659 S.W.2d 190, 196 (Ky. 1983); degree of benefit, Collins v. Holyoke, 15 N.E. 908, 916 (Mass. 1888); or distance away, Bitter v. City of Lincoln, 85 N.W.2d 302, 307 (Neb. 1957). Although a special assessment can distinguish among classes of property such as improved or unimproved or commercial versus residential, it must be similarly spread across all members of the class on which it is levied. Vail v. City of Bandon, 630 P.2d 1339, 1343 (Or. Ct. App. 1981). This ability to distinguish among areas within a larger area, or even among benefited properties within the same area, as illustrated by the California open space and D.C. transit examples below, may help enable officials to levy special assessments as a means of responding both to new growth and to some of the problems facing older areas left behind. Such special assessments are especially useful when new property taxes may not be feasible politically or legally.
Although many nonprofit institutions are exempt under general taxation statutes, these exemptions do not necessarily carry over to special assessments. See President of Williams Coll. v. Inhabitants of Town of Williamstown, 106 N.E. 687, 688 ( Mass. 1914). Some statutes, however, allow for local choice regarding whether certain property otherwise subject to an applicable special assessment should be exempt. For example, Florida allows municipalities to exempt property used for a religious or educational facility and used for a governmentally subsidized housing development for the elderly or disabled. Fla. Stat. Ann. § 170.201(2).
Possible Uses of Special Assessments to Help Fund Public Recreation, Open Space, and Urban Redevelopment
Public Recreation: Newton, Massachusetts
Some jurisdictions have long allowed special assessments for parks. Briggs v. Whitney, 34 N.E. 179, 180 ( Mass. 1893). One of the foundational special assessment cases in the U.S. Supreme Court validated a special assessment imposed on the entire District of Columbia to help pay for Washington’s Rock Creek Park. Wilson v. Lambert, 168 U.S. 611, 614–15, 618 (1898).
In Newton, Massachusetts, a special assessment (or “betterment assessment,” as it is called in Massachusetts) was levied in 1983 to help raise funds from supportive abutters so the city could acquire a defunct private golf course for public recreation. R. Lisle Baker, The Acquisition and Limited Development of the Newton Golf Course: A Retrospective by a Local Public Official, in Negotiated Development and Open Space Preservation: A Case Study of Neighborhood Purchase and Ultimate City Acquisition Involving Partial Development, Betterment Assessments and Federal Tax Benefits 3 (Lincoln Inst. of Land Policy 1984).
The city of Newton purchased the course from a neighborhood group that had acquired it at a mortgage foreclosure sale. Ultimately, the revenue generated by the special assessment on the abutting landowners raised more than $200,000 to help with Newton’s financing of the $710,000 in city funds needed to buy the golf course land. Baker, supra, at 13–14. (See Figure 1 on page 53.) Part of the funding needed to make the project viable involved the neighborhood group’s selling a portion of the original course and its clubhouse on the property’s edges for limited development as townhouse condominiums, such portion also being subject to the special assessment. Id. at 13. As a result, 51 abutting lots, including 16 lots created out of the parcels set aside for townhouse condominium development, were assessed $4,000 per parcel, payable over up to 20 years, with interest at 5% on the outstanding balance, so that the largest payment would be $395: $200 of principal and $195 of tax deductible interest. (See Figure 1 on page 53. Boston’s lots to the east were outside Newton’s jurisdiction.)
As discussed above, one of the threshold issues is whether a special benefit is conferred by a public expenditure. More particularly, in Massachusetts one measure of benefit was the amount that a “particular public improvement add[s] to the fair market value of the property, as between a willing seller and a willing buyer, with reference to all the uses to which it is reasonably adapted and for which it is plainly available” to prospective as well as current owners. Driscoll v. Inhabitants of Northbridge, 96 N.E. 59, 61 ( Mass. 1911). An enhancement in market value, however, was not the only factor in determining benefits. In this case, rather than constructing a new golf course in a different location or permitting redevelopment of the land for a different use, the existing course was preserved. Consequently, part of the special benefit was that the course would no longer be subject to a risk of development. In other words, properties abutting the course could be saved from prospective value loss and assured of continued visual access to well-maintained open space, a benefit itself. See Soncoff v. City of Inkster, 177 N.W.2d 243, 245 (Mich. Ct. App. 1970) (improvement in appearance of highway constitutes specific benefit to neighboring property owners). Because protecting the land from development constituted a special benefit, a special assessment was appropriate.
The city of Newton also was confronted with the issue of how to allocate and apportion the assessment fairly. The golf course benefit had limited relation to frontage, area, or property value of the abutting lots, but the lots were similar in size and had visual access to the course (including the subdivided condominium lots). Therefore, the simplest solution was to use a uniform measure of assessment of $4,000 per abutting lot. Baker, supra, at 17. Also, a uniform assessment on each abutting lot was important for purposes of securing the consent of a significant majority of the abutting owners because it helped to foster the feeling that everyone involved was being treated equally. That consent was not legally required but was politically important for such a novel use of the betterment assessment tool. Id. It was also helpful that Massachusetts precedent indicated that an assessment would be upheld as long as the assessment was rational and reasonable and did not operate unjustly as to an individual landowner. Butler v. City of Worcester, 112 Mass. 541, 557 (1873).
In the Newton case, the most appropriate assessment district consisted of the direct abutters whose views from their properties would be protected by the preservation of the course. Because the course sat in a natural bowl, it was overlooked by rim properties. If the land to be preserved were more widely visible, the district might have been made appropriately larger. Moreover, if it had been a park or conservation land to which the public could have general access, rather than a public golf course with limited access, even more remote properties would benefit. This situation has been the experience elsewhere, as discussed below.
In many cases, a special assessment is available because the benefited property owners request the assessment to help secure and finance an improvement for which the public-at-large is not willing or able to pay. Special assessments can help prevent the “free-rider” problem when some property owners receive the benefit of an improvement for which they do not pay. With a special assessment, everyone contributes. This fact makes it easier to get property owners to participate in the special assessment. In the case of the Newton golf course, a petition was prepared and circulated among the affected property owners. When a strong majority agreed, it became politically feasible for the Board of Aldermen to vote for the special assessment. In some states, affected property owners need to be directly involved. For instance, in California, a vote of a weighted majority of taxpayers may prevent an assessment. Cal. Const. art. XIIIA, § 4. Conversely, in Kentucky, although advance notice is required, assessments can be imposed without formal taxpayer consent. Ky. Rev. Stat. Ann. §§ 91A.200–290.
In the end, the golf course was saved from development and the city of Newton was able to preserve it as public recreational land. (See Figure 2 on page 53.) The course continues to operate successfully under the management of a volunteer Newton Commonwealth Golf Foundation appointed by the mayor and confirmed by the Board of Aldermen. The Foundation, in turn, licenses the course operation to a professional golf management firm. All revenues received are reinvested in the course, except that several days a year are set aside for community benefit events and approximately $50,000 each year is distributed to the city, half to be used for conservation and the other half to be used for recreation citywide.
Open Space Conservation: Santa Clara County, California
Special assessments have also been used to preserve open space. In California, the Santa Clara County Open Space Authority (OSA) was created by the Santa Clara County Open Space Authority Act in 1993 to preserve open space within the county “to counter the continuing and serious conversion of these lands to urban uses, to preserve the quality of life in the county, and to encourage agricultural activities.” Cal. Pub. Res. Code § 35101. The Act did not provide funds for the acquisition of open space but authorized the OSA to levy special assessments under the Streets and Highways Code. Id. § 35173. Throughout the next few years, a 1994 OSA special assessment district raised $4 million per year through an annual assessment of $12 per single-family home (with other properties assessed on a benefit point system). Silicon Valley Taxpayers Ass’n v. Santa Clara County Open Space Authority, 30 Cal. Rptr. 3d 853, 880 (Ct. App. 2005). The OSA was able to acquire 8,500 acres of open space, parkland, and water-source areas. Shilts Consultants, Inc., Santa Clara County Open Space Authority Open Space Preservation District Engineer’s Report Fiscal Year 2002 – 2003, at 1–3 (2001) (an attachment to brief of OSA in a pending case before the California Supreme Court, Case No. H027759). The OSA also allocated 20% of its net proceeds of capital funds to participating jurisdictions for acquisition and development of eligible open space such as rehabilitation and environmental restoration; creation of trails, signs, or benches; and conversion of abandoned or surplus lands into lands consistent with open space. See Santa Clara County Open Space Authority, Urban Open Space and 20% Funding, www.openspaceauthority.org/20_percent/urban_open_space.htm (last visited Nov. 7, 2007). This initial assessment was upheld against taxpayer challenge. Silicon Valley Taxpayers Ass’n, supra, at 857 (citing its own unpublished opinion in Coleman v. Santa Clara County Open Space Authority, No. H014730 (Cal. Ct. App. Oct. 20, 1997)). The OSA levied a subsequent annual assessment, which apportioned the special benefit through the district using the single-family residence contributing $20 as a multiplier for different property types. That assessment also was challenged but was upheld by the intermediate appellate court. Id.
Urban Redevelopment: District of Columbia Metrorail Station
In addition to parks and open spaces, special assessments can be helpful in developing urban infrastructure. To help pay for a new Metrorail station on New York Avenue in Washington, D.C., the District government enacted a special assessment to be apportioned among landowners around the proposed station. D.C. Code § 47-882 et seq. The assessment was anticipated to generate about $25 million of the $84 million needed to pay for the new Metrorail station. Rick Rybeck, Using Value Capture to Finance Infrastructure and Encourage Compact Development, 8 Pub. Works Mgmt. & Pol’y 249, 254 (Apr. 2004). The theory behind the assessment was that landowners within the special assessment area would benefit from the new Metrorail station because property values would increase as the property near a mass transit station would be more attractive to tenants.
As previously mentioned, although special assessments are not subject to the same uniformity requirements as regular taxes, they must still benefit the assessed properties within a district and be apportioned among them. In the case of the District of Columbia transit station, the special assessment was levied against properties located within 2,500 feet of the entrances to the New York Avenue Metrorail station and applied only to commercial properties with land area over 10,000 square feet and not otherwise exempt from real property taxes. D.C. Code § 47-883.
In the realm of shaping metropolitan growth, whether to save open space or help finance redevelopment, special assessments can offer some unique opportunities not available with other financing techniques. Special assessments are especially useful when the general benefit to the public may be insufficient to warrant the expenditure solely from general revenues. In such cases, the additional funds raised from a special assessment can justify matching general fund revenue. Special assessments also can overcome some of the problems of relying on private contributions from benefited property owners because of the “free rider” problem. Unlike impact fees, which are designed to partially fund the costs imposed on a community at large by new land development, special assessments are explicitly tied to the benefit conferred on the property owner assessed, not the cost imposed on the public. This may make it easier for a local legislative body to approve these special assessments.A special assessment is not a cure for all fiscal ills. It is a growth management tool that can make the difference in whether a worthwhile public capital improvement (such as securing new park land at the fringe or inducing new development in the urban core) is undertaken at all. It is important to prevent special assessments from undoing the social compact that general property taxation provides. Yet, when some important resources are at risk or need help, asking those who are most benefited by them to help pay the bill can leverage complementary public and private investment, to the benefit of not only the affected property owners but also the region as a whole. If local governments are to succeed in managing their growth, they will need all the fiscal tools at their disposal to help shape their region’s future in a positive way. The special assessment can be one such tool.