Assessing our Future

The concept of a special assessment contains little dark secrets that city officials like to keep to themselves. The ability to assess the cost of maintenance — a questionable concept at best — is the only thing allowing many cities to avoid facing their true reality. Elected officials and the public need to understand assessments, their legal and practical implications, and the dramatic shift that is likely to happen as more taxpayers resist paying them.

Last Friday, I received a couple of boisterous reactions by email to the Baxter assessment story I linked to. These guys were livid, and I suspect many others will be as I discuss it more fully here today. I too often forget that people don’t know this stuff. I’ve been immersed in it for years and have, as a mostly powerless bystander, become numb to it. Thanks for the reminder — this will be eye opening for many.

As we’ve discussed at Strong Towns for years, almost all of America’s cities are financially insolvent. They have far, far more liabilities than they have revenue that they can tap into to pay for those commitments. This is the result of 60 years of the Suburban Experiment, a development pattern that creates (for a while) the illusion of wealth by allowing cities to exchange near term cash benefits associated with new growth for long term liabilities associated with infrastructure maintenance. We’re now in the long term and, financially, everything is breaking down.

City managers and other public officials that argue with me on that last paragraph (and there are getting to be fewer and fewer that do) almost universally depend on one funding mechanism as the key to remaining solvent: the special assessment.

For many cities, the special assessment is a magic money machine. The idea is simple. The city does a project. The costs of that project are assessed (charged) to the property owners that benefit from the project. To make things go smoothly, the city generously finances the project at reasonable terms and collects the money “painlessly” in the same way that property taxes are collected.

If it were only this simple.

Anyone who listened last week to the health care testimony at the U.S. Supreme Court knows that a big deal was made over the government’s ability to tax versus the government’s ability to collect money in other ways. Among other things, the 5th Amendment to the Constitution states that individuals may not:

…be deprived of life, liberty, or property, without due process of law…

The 14th Amendment ensured that states (and by extension, cities) would be bound by these same provisions. At the time it was adopted, the Obama administration argued to us — the masses — that the health care impact fee was not a tax, but to the court last week they insisted that it was. Why? Because the government has the authority to tax citizens but it can’t take your property (money) by other means without due process (nor can they delegate that authority to others, aka: insurance companies). This is not a small nuance; it is the basis of our government.

What if the government decided that you should pay an extra $20,000 in taxes this year. Not anyone else, just you. That would be illegal, a violation of your rights to equal treatment under the law and due process. Now, if the government decided to tax every family an extra $20,000 in taxes this year, they may have a revolt, but the tax would not single out any one person (or specific individuals) and would thus be legal. There is a lot of legal nuance here and attorneys can and will argue over this for as long as we are a country, but in a broad sense, the government can’t take your money unless they tax you or go through a process that affords you the right to appeal (like a fine you can argue in court or, in this case, a special assessment).

So special assessments are not taxes. It is a charge in exchange for a benefit. I’m going to go back and quote the 5th Amendment again.

…nor shall private property be taken for public use, without just compensation.

Here’s how this applies: If the city takes your money to build a street — not through taxing everyone but through a special assessment on you — you have to receive “just” compensation. Is your compensation that you get to drive on the street? No, everyone has that right since it is a public street. So what is your compensation?

It is the value that is added to your property from the improvement. That is it. Period. End of discussion.

Let’s put some real numbers on this. Your property is worth $200,000. The city goes out and improves the street in front of your house. The cost is $14,000 per property. After the project, your property is now worth $205,000. What is the maximum your special assessment can be?

The answer: $5,000. That is the amount that your property increased in value due to the project.

But the cost was $14,000 per property. Who pays the rest? That is where the general taxpayer comes in. If the project is for the public good, then tax everyone to pay for it. If the project benefits just you and a few others, that benefit will be reflected in the increased value of your property and can be captured through the special assessment process.

I actually find that Wikipedia (bless their souls) do an awesome job of explaining this. Fromtheir entry for special assessment (my emphasis added):

The property tax most citizens are aware of is known as an ad valorem tax. This tax is used to fund general or day-to-day government operations. An ad valorem tax is commonly levied on both real and personal property. A property tax is based upon a property’s market value. The ad valorem tax levy is based upon a “millage rate” which never varies from parcel to parcel. The foundation principles for ad valorem taxes are that each property is valued according to its market value (equity) and that each property is taxed based upon a single millage rate that applies to everyone (uniformity).

Special assessment levies are not ad valorem property taxes even though they may be collected on a property tax bill. A special assessment is based strictly upon the concepts of “need” and “benefit.” Special assessments require a finding that the public improvement is “needed” for a reason consistent with the law which permits the special assessment and that each property specially assessed receives a unique, measurable and direct benefitfrom the public improvement that was needed. The basic idea is, if government funds make a property more valuable, the government has the right to get money back from a property owner. This contrasts significantly with the ad valorem tax which is extracted to fund government operations that are designed to benefit all citizens.

If I could underline “measurable” twice, I would.

There are some of you that see the clear problem at this point, but for those that don’t, let me point it out to you. You live on a paved road. You are refinancing your home and get an appraisal that says it is worth $200,000. The road in front of your house is in rough shape and the city needs to fix it, which they do in the weeks after your appraisal. The cost they want to assess you is $14,000. In light of the assessment, the bank requests a new appraisal. You had a paved road with cracks and potholes before and now you have a smooth, paved road. How much is your house worth?

Very likely, it is still going to be worth $200,000. If you had gone from a gravel road to a paved road, maybe you would have seen an increase in value. Maybe, but the form that appraisers use and the comparables they review don’t get into the quality of the pavement. There is an inherent assumption that, since a property fronts a paved road and since the property owner pays taxes, that road is going to be maintained. It is a rare case that a simple maintenance project is going increase the value of a property.

Let me give you another example to drive this point home and show you that roads and streets are the least of our problems. Look at that water pipe buried in the ground. The one you’ve been paying a water bill for decades supposedly to maintain. Let’s say the city knows that pipe is old and needs to be replaced before it becomes a costly maintenance burden and so they dig it up and put in a new pipe. How much more is your property worth now that it gets water from a shiny new pipe instead of an old, worn out pipe? Pretend you were out of the country for the six months that this happened and arrived home without knowing. Would you notice a difference? It is really hard to argue that something adds value when it is imperceptible.

Now the city managers, engineers and finance directors are all hopping mad at me. Let me ask their question for them: If there are four homes on a cul-de-sac and the city has to go in and fix the street, replace the sidewalk, replace the sewer pipe and the water pipe, and the cost is $400,000, who, Mr. Marohn, are you suggesting pays for that? Nobody is using that infrastructure except for those four homes. Shouldn’t they each pay $100,000? Isn’t that fair since they are the only property owners that benefit?

My answer is simple: It is public infrastructure, taken over by the city for maintenance through a public process, and it is now the city’s to maintain at full cost of that maintenance, minus any increase in property value the project might create. If the city did not think this infrastructure served a public purpose, it should not have taken it over and assumed the maintenance liability.

Now that is very inconvenient — in fact it is devastating — to the wishes of city officials. As we’ve demonstrated many times, the amount they are collecting through property taxes and fees pays only a tiny fraction of the cost of maintaining this infrastructure. The rest they assume they can make up through government transfer payments, taking on debt and through special assessments. If they can’t — and they really can’t, if they are challenged — it destroys their budget and the gig is up.

I’ve found that there is an art to assessing improvements that keeps this all from turning too ugly for a city. Let me again go back to the Wikipedia entry for special assessments:

Among the unique characteristics of the special assessment is one that makes a special assessment particularly onerous for ordinary citizens. A special assessment levy enjoys a legal benefit known as a “presumption of validity.” This means that it is much harder and usually, much more difficult to appeal than the ad valorem property tax most citizens are familiar with. This happens because it is difficult for the ordinary citizen to recognize that an error in the special assessment procedure or methodology has occurred and the resources a taxpayer must use to fight a special assessment levy are more expansive and costly than resources to fight an improper ad valorem tax on their real estate.

If your real estate taxes are messed up, you go to a hearing with some proof of that and there is a board that, while not always accommodating, will typically hear reasoned arguments. If your special assessment is messed up, you have to go court. Not only that, before you go to court you have to file proper objections with the city indicating that you are contesting the assessment. This all has to be done within certain time frames or your right to appeal is lost.

To fight your assessment, you will need to hire an attorney and an appraiser willing to testify in court. This is going to cost you between $6,000 and $10,000. Let’s say that your assessment is $14,000 — are you going to pay $10,000 in hopes of getting a verdict, at the district court level, that is 100% in your favor and that the city — with more resources and more to lose — won’t appeal to higher levels? Not likely.

So there is an incentive for the city’s approach to become devious. Keep the assessment low enough to where it is more expensive to fight it than to simply pay it. Make the project complicated — don’t simply fix the infrastructure but improve it in some marginal way, like a wider shoulder or something — so that more expertise is needed to ascertain what is going on. Make the assessment process as prefunctory and opaque as legally permissible to avoid the opportunity for substantive objection. Of course, since this is all being done for the “greater good”, the deviousness is justified as what is needed to “get things done”. At least that is what we tell ourselves.

I’ve seen poor, uneducated people living in trailer houses assessed more than their home was worth. I’ve seen well-heeled property owners negotiate their own “insider” terms of assessment. I’ve seen citizens forced, through the assessment process, to pay for improvements that actually devalue their property and their neighborhood. The end of our video, Conversation with an Engineer, lays out this irony of ironies.

In recent years when property values were rising and the real estate market was liquid, the special assessment process ran into few objections. If the assessment was too high, people could sell their property, typically make a lot of money, and buy something else. Progress was not worth fighting over since all seemed to be benefiting. Today is a much different story. Add to rising property taxes to falling home values and a frozen housing market, and I anticipate there will be some aggressive resistance to the special assessment process.

And when that happens, even the smug city officials that believe they have everything under control, that they need not be concerned with the public return on investment, that special assessments are the perfect tool for routine maintenance — even they will need to acknowledge that we’ve long passed the time when we need to start building strong towns.

Charles Marohn

About Charles Marohn

Charles L. Marohn, Jr. PE AICP is the President of Strong Towns, a Minnesota-based 501(c)3 non-profit organization. He is a Professional Engineer (PE) licensed in the State of Minnesota and a member of the American Institute of Certified Planners (AICP). He has a Bachelor's degree in Civil Engineering from the University of Minnesota's Institute of Technology and a Masters in Urban and Regional Planning from the University of Minnesota's Humphrey Institute. Strong Towns supports a model of growth that allows America's cities, towns and neighborhoods to become financially strong and resilient.

11 thoughts on “Assessing our Future

  1. David Levinsondavid levinson

    Nice article, but you neglect one major point. If the repair is needed and not made the infrastructure crumbles and ceases to be useful. A house without functioning water service will see its value diminshed. A house on a road deteriorated to gravel will see a loss. So the baseline is not the improvement with, it is the loss without the maintenance.

    1. Charles MarohnCharles Marohn Post author

      I see your logic — albeit a form of municipal extortion (pay or else we let your sewer system fail) — but I don't believe that is how the law is written or judges have applied it. I could be wrong. Maybe a legal mind could weigh on in this one.

  2. Matt SteeleMatt

    As a homeowner in Minneapolis, I am thankful for this post for two reasons:

    First, I think the initial assumption invalidates the state legislature's sales tax it levies solely upon Minneapolis. It is not just, and possibly not legal, for the state to levy an ad valorem tax on only a portion of the state. I could see it *possibly* being legal if the value to the municipality is at least equal to the tax (and I doubt it), AND the lower entity is unable to levy such a tax on their own. So of course this is not the case, since Minneapolis could levy a tax to support the stadium but the charter would require a referendum and it would obviously fail.

    Second, maybe citizens can band together to fight assessments. $300 for each square of sidewalk you replace in front of my house? I'd like to know how much value they think that sidewalk provides me. If anything,my property value benefits much more from the condition of sidewalks between my house and the bus stop, grocery store, etc that are in front of *other peoples* homes much more than my property value benefits from the 10 squares on my lot.

  3. Faith

    I think David makes an important point: the value goes down without infrastructure maintenance but infrastructure improvements – whether public or private – do not add to a home's appraisal value.

    I'll use my sewer as an example. It backed up in February. Turns out, the sewer has been collapsing for some time. We likely have had septic field in our front yard for at least 5-10 years long before buying the house. So our front yard was dug up from house to curb and our sewer pipe was replaced and lined at a cost of $10,000. Is our house worth $10,000 more? No. But we can flush the toilet and wash clothes again.

    The assessment formulas would work better if we actually valued well-maintained infrastructure. Unfortunately, we do not. Chuck makes a good point that public assessments for maintenance are likely to see pushback. Property owners have trouble justifying maintenance costs when they see little return on their property value – although that transcends the public and private realms. I think that’s why the previous owners of my house never dealt with the sewer problems. Although our sewer collapse was inconvenient, it would have been much worse had the City let the sewer main line collapse.

    Perhaps property taxes are a “fairer” way of paying for infrastructure improvements than assessments that are based on linear feet?

  4. Charles MarohnCharles Marohn Post author

    On the extortion point above….

    What if the city came to you and said, we know your property is currently worth $200,000, but if we don't maintain this bridge down the street, you won't be able to get here and your home will only be worth $50,000. We're going to assess you $150,000 for this bridge.

    Then they come back the next day and do the same thing with the water tower, the sewage treatment plant, etc….

    I don't think the logic works in this direction. You can't be assessed based on an assumption that you will lose value without the project. Where would that end? How would a proportional amount be justified? After all, you would lose nearly all of your property value if the city ceased all maintenance; are you therefore able to be assessed for all of the maintenance cost up to your property value?

    My article here is not trying to touch on what is fair — Faith, I appreciate your example and your feeling of civic duty pay for what you use — but I'm talking about the powers that a city actually has. I believe you pay both property taxes and monthly user fees and that, since the improvements are now public, those are the mechanisms available to the city for covering their costs. Assessments only work when there is an increase in value, which makes them nearly useless for ongoing maintenance.

    The assessment process should not be an extortion racket, although it is too often used that way.

    1. Charles MarohnCharles Marohn Post author

      Sure, assessments are most often used for new improvements. For example, if you are extending sewer and water service, that is typically financed with a direct assessment. There you have provided something that increases property values. That is what special assessments are for.

      Many cities got themselves into trouble recently by agreeing to bond and then "assess" properties within a new development. The property owner (a developer) was to pa the city upon the sale of each lot. This was a way for the city to have growth and the developer to not have to handle the financing. When the market went south and the developer went away, the city still has the lots with the assessments due, but now little chance that anyone will pay them.

  5. Brendon SlotterbackBrendon

    Chuck – I think I spy what you think a solution to this problem might be, although you don't spell it out in your post, but do seem to get to it in the comments: raise property taxes on everyone to fund maintenance or raise "user fees" on everyone. If not, what is your solution(s) to funding the maintenance of critical infrastructure? I don't disagree with this approach, I'd just like to see you spell it out.

    Also, your characterization of city officials as "devious" leaves something to be desired. Do homeowners have no responsibility to understand that the few thousand dollars they pay in property taxes every year might not cover all the sewer, water, road, park, police and fire infrastructure that serves their property? If you think they don't, perhaps the lifecycle costs of infrastructure need to be made plain upon purchase of a property. A "truth in infrastructure costs" form should be sent to all property owners each year that spells out projected maintenance costs next to the amount your property is contributing in taxes.

    1. Charles MarohnCharles Marohn Post author

      Well, the solution is a change in our living pattern that accounts for the entire cost of growth. As I point out in our Curbside Chat presentation, we can raise taxes and we can cut services, but we can never do enough of those to make up for the fact that we lose money on nearly every public transaction we do promoting the Suburban Experiment. If you are looking for a quick answer, we need a new development pattern.

      That's not a easy answer, I know, and to get there is going to take a lot of work. Using the assessment process illegally — because it is a cash cow and the power is skewed away from citizens and towards the municipality — is just one way we are putting off facing reality and, in the process, making the ultimate problem much worse. Raising user fees and property taxes would be more honest (not to mention legal) and would prompt some real conversation about the true value of that new suburban subdivision, strip mall or parking lot.

      If you read my post, you'll see that I said that the special assessment process creates an incentive for cities to be devious. I then went on to explain that and provide some examples that I have personally witnessed. It is a misstatement of my post to say that I characterize city officials as devious. I don't. Even when they misuse the special assessment process, they are trying to do the greater good and get things done (it is a path of least resistance when compared to higher taxes, higher fees and a change in land use patterns).

      Do homeowners have a responsibility to understand that the paltry amount they pay in property tax bears no proportion to the immense liability for infrastructure maintenance their property creates? Sure they do, but that assumes that the information is out there to learn. Besides what we are doing at Strong Towns, I don't see it. It is certainly not part of any local government effort to inform citizens. Quite the opposite, city officials routinely sell new growth and new projects to the public as a magic bullet that will keep taxes down and solve the city's financial ills. That's the Ponzi scheme part of all of this, and while it is also not a plot in some devious mind, the mechanism itself is devious because it allows us to avoid reality today in exchange for a worse problem tomorrow.

      I don't think we can solve these problems with another form to fill out at a closing. The only way we solve this is to acknowledge that the financial underpinnings of the Suburban Experiment are flawed and we need to transition to a new approach that is not financially fragile.

      1. Brendon SlotterbackBrendon Slotterback

        I appreciate the detailed response Chuck. I agree with you that we need a new development pattern, but as you say, that's a long conversation, and probably is particularly tricky for built-up or older communities. They have to grapple with maintenance issues now, and might not be able to wait for that "new development pattern" to emerge.

        I think my comment is also in reaction to your first paragraph, in which you say that charging property owners for maintenance is "a questionable concept at best". I disagree that asking property owners to pay for maintenance of infrastructure they use is a questionable concept. I actually think in some cases shielding people from these costs is detrimental and leads to a sense that infrastructure is free, and worse that we're entitled to it no matter what.

        Perhaps the current system for funding maintenance is broken (and, as you state, a Ponzi scheme). In many ways it probably is. And perhaps property taxes are a better way to fund infrastructure, although you note at the end of the piece that rising property taxes and assessments may lead to "aggressive resistance".

        I'm interested in how we build strong communities without encountering "aggressive resistance" when we start talking about funding liabilities. Communities have already taken over infrastructure, with the (oftentimes incorrect) assumption that they could continue to fund their maintenance. I can think of a few options they have besides assessments: 1) keep up the Ponzi scheme of new growth paying for old infrastructure (doesn't seem advisable) 2) raise property taxes (or other taxes) on everyone to fund maintenance (see aggressive resistance) 3) selectively or arbitrarily de-pave and de-pipe (in other words, crumble, which many are already doing) or some combination. What am I missing?

        Please note that I don't at all disagree with your overall message about development patterns and how we approach medium- and long-term planning, but I guess I'm discouraged by the tone of the article, which I see as pitting property owners against "smug" city officials and asking city officials to abandon a tool they have for repairing infrastructure (which the public demands) without giving them a near-term solution.

        1. Charles MarohnCharles Marohn Post author

          Thanks Brendon. I appreciate your reply.

          I don't actually say that "charging" residents for maintenance is a questionable concept — it is absolutely necessary — but I do say that "assessing" residents for maintenance is questionable. A special assessment is a specific process and my labeling it "questionable" is due to the fact that cities do it illegally.

          That's a big thrust of my article here; for the most part, it is illegal to assess maintenance. Cities do it because they can get by with it. I suspect cities will have a more difficult time getting by with it post-housing bubble.

          I think I should be clear that I don't think there is a solution here. This is a problem without solutions, only rational and irrational responses. The only thing I would respectfully suggest you may be missing stems from your observation that strategies to deal with maintenance are "particularly tricky for built-up or older communities."

          I think the assumption there — and I don't mean to read too far into this comment, so please correct me — is that these built up and older areas are static. I don't think they can be. They need to continue to grow, mature and significantly increase their value over time. We're not used to that in our current development approach, where all new growth is either on the periphery or redevelopment of an abandoned or derelict site. We need to take this further.

          Here's two pieces I wrote about this a while back:

          In addition to this maturing — combining investments in maintenance with adding value to existing neighborhoods — I do think our conversation is going to have to include abandonment of parts of the system, devolution of other parts (paved surface to gravel, for example) and privatization of yet others. That combined with rising property taxes will make this a difficult transition, no doubt.

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