Special assessments, another form of benefits-based financing of public facilities, are levies on property owners for the increased property values attributable to a public improve-ment. For example, a city-funded street widening project increases the market value for commercial property along the improvement. (More traffic means more business, which increases the locational value of the property.) Some local governments use assessments to partially finance the installation of water and sewer lines and the construction of recreational facilities and off-street parking. Heaviest use of these levies is made by local governments west of the Mississippi River, especially those in Pacific Coast states.
Special assessments differ from other benefits-based levies, including impact fees, in that the maximum assessment is the increase in property value created by the improve-ment, regardless of the extent to which beneficiaries use the facility.
In the past twenty years, states have introduced variations on special assessments as a way to shift the financing of infrastructure to those benefiting from the improvements. For example, Texas authorizes cities to establish municipal management districts (MMDs) that
blend the financing mechanisms of special assessments with the governance structure of tax increment financing districts. MMDs may use a combination of special assessments and impact fees on those properties that benefit from improvements in the district. Additional dedicated property taxes may be levied by the district’s governing board.
A special assessment may be applied to each property owner as a pro rata share of the cost of the project. An assessment equal to the increase in each property’s value eliminates any windfalls that these property owners would otherwise have received at other taxpayers’
expense. And by shifting part of the cost of public improvements to property owners who benefit from increased property values, special assessments promote horizontal equity.
Rarely do special assessments recover the full cost of a project. Essentially, they cap-ture the private benefits from an improvement financed in part by general revenues. But in so doing, they promote intrajurisdictional equity and also lower developers’ financing costs by giving developers access to tax-exempt debt backed by the assessments.
Authorization and implementation
Unlike impact fees, special assessments are levied under the taxing powers granted to local governments in state law. Every state grants municipalities the authority to levy assessments, and most extend the same authority to counties and, less frequently, to independent special districts such as utility districts.12
Projects financed by special assessments may be initiated by property owners (includ-ing developers) or by the local government. At a developer’s request, the local gov-ernment creates a special assessment district to obtain tax-exempt financing for public improvements in the district.13 Enabling legislation specifies the general procedures that local governments must follow to levy an assessment, the method for allocating the costs of the project, and the terms of payment for property owners affected by the project.
While impact fees are generally collected before the facility is constructed, state laws usually prohibit collection of special assessments until the project is completed, at which point property owners have the option of paying their assessments in installments over a number of years, usually at very favorable interest rates. When financing a project with assessments, a local government must finance the construction phase with general reve-nues and then reimburse itself as special assessments are collected. When impact fees are used, beneficiary financing is up front, which places less of a drain on the local govern-ment’s general revenues.
Once a feasibility study has been completed for the proposed project, a public hear-ing is held to determine property owners’ level of support for it. Durhear-ing this period, an assessment roll is prepared identifying the affected properties and their owners and esti-mating each property’s assessment. Property owners are notified of their assessments and given an opportunity to contest them at a public hearing. The final step is certification of the assessment roll by local government policy makers and the issuance of assessment certificates to property owners.
Allocation of costs
The aspect of special assessments that property owners contest most often is the allo-cation of construction costs. State law usually specifies the basis for allocating a proj-ect’s cost among property owners, which is almost always according to the number of feet fronting the improvement (i.e., a front-foot basis). Although by law the maximum assessment can equal the increase in value attributable to a public improvement, local governments rarely levy assessments at this level. Moreover, an appraisal study may reveal that the project’s benefits are not uniformly distributed, in which case each property
assessment must be adjusted to reflect any differences. Costs may also be allocated on a per acre or per lot basis, especially for water and sewer installations. In some cases, a zone method may be used whereby properties closest to the improvement bear a greater portion of the cost.
Administratively, assessments are costly, particularly for improvements in residential areas, where the increases in property value are less apparent, or for projects that involve a large number of property owners. Local governments are advised to use special assess-ments only when they can gain some economies of scale by spreading administrative costs among several projects.
Conclusion
Local governments should make greater use of service charges because such charges provide an equitable source of revenue (those using the service pay in proportion to the benefits they receive) and promote efficiency by discouraging wasteful use of govern-ment services. Charging for a service reduces the demand for it: the greater the price change, the greater the effect on service use. And charges to users slow the growth of local budgets by ensuring that decisions are based not on interdepartmental budgetary politics but on the relationship of service level to demand. The greatest benefit from service charges comes with regular adjustments in prices that reflect the cost of serving various types of consumers. Service charges also improve local government productivity by increasing managers’ awareness of the cost of services.
A barrier to the increased use of service charges is the political imbalance between the negligible benefits to taxpayers from a new charge and the noticeable cost to users of the service; consequently, elected lawmakers may find it politically difficult to support the imposition of a visible service charge if there are no significant benefits from a reduction in taxes.
Local governments should adopt a policy statement on service charges and fees. Such a statement should assign responsibility for annually reviewing rates as part of the budget process; specify the frequency with which a cost-of-services study will be undertaken;
and provide guidelines on the types of services that will be priced at less than full cost, the level of subsidy provided, and the collection of current and delinquent charges, including the amount of deposit required from new customers.
When the cost of serving different groups of users varies, charges should be strati-fied to approximate the average cost of serving each group. A flat-rate pricing structure is the simplest to design, but it has the least effect on efficiency because users have no incentive to ration their use of the service. Moreover, it is less equitable because those using less of the service subsidize those using more. Alternative pricing structures that more efficiently and equitably allocate costs include a variable rate structure, peak- period pricing, and classification of users.
For services providing only private benefits, such as utility services, full-cost pricing (with possibly a return on investment) is appropriate. Partial-cost pricing is appropriate for services with some spillover benefits to the community or services for which local governments want to encourage demand.
A sensitive issue in the costing of services is the allocation of the indirect costs of support services, such as those associated with the manager’s office or accounting. An equitable basis should be found for allocating these costs to all activities, including those for which charges are not collected.
Development charges and fees, such as impact fees, provide an equitable alternative for financing public improvements required by new development. The critical stage in
the process of adopting an impact fee is documenting the cost of capital improvements needed to serve new residents.
The principal objection to fees and charges for new development is that they will increase the cost of housing in the community. Although in the long term, fees are cap-italized into lower prices for undeveloped land, in the short term builders bear the fee’s cost on their existing inventory of property. To reduce this burden, local governments should phase in the fee over a two- or three-year period, giving developers and builders an opportunity to adjust their bid prices for raw land to compensate for the fee.
Special assessments and their more recent adaptations such as MMDs offer a benefits- based strategy for recouping at least part of the costs of public improvements. Successful use requires that affected property owners be involved early in the process. The local government may want to survey owners about their attitudes toward a proposed project and their willingness to pay an assessment for part of its cost. Because special assess-ments are costly to administer, there should be a sufficient volume of projects capable of being financed in part by assessments to provide some economies of scale in their administration.
Notes
1 Robert J. Kleine and John Shannon, “Characteristics of a Balanced and Moderate State-Local Revenue System,” in Reforming State Tax Systems, ed. Steven D. Gold (Denver, Colo.: National Conference of State Legislatures, 1986), 33–34.
2 U.S. Bureau of the Census, State & Local Government Finance, Historical Data: 2002, Table 2, census.gov/
govs/estimate/historical_data_2002.html, and State
& Local Government Finance, Historical Data: 2007, Table 2, census.gov/govs/estimate/historical_
data_2007.html.
3 Deborah A. Carroll and Terri Johnson, “Examining Small Town Revenues: To What Extent Are They Diversified?” Public Administration Review 70 (March/April 2010): 223–235.
4 Bernd Huber and Marco Runkel, “Tax Competition, Excludable Public Goods, and User Charges,”
International Tax and Public Finance 16 (2009): 321–336.
5 Michael Cooper, “An Incinerator Becomes Harrisburg’s Money Pit,” New York Times, May 10, 2010, nytimes.com/2010/05/21/us/21harrisburg .html?_r=0 (accessed April 14, 2013).
6 Yu-Che Chen and Kurt Thurmaier, “Advancing E-Government: Financing Challenges and
Opportunities,” Public Administration Review 68 (May/June 2008): 537–548.
7 Congressional Budget Office, Using Pricing to Reduce Traffic Congestion (Washington, D.C., March 2009), cbo.gov/sites/default/files/cbofiles/ftpdocs/97xx/
doc9750/03-11-congestionpricing.pdf.
8 Michael A. Pagano, Funding and Investing in Infrastructure (Washington, D.C.: Urban Institute, December 2011).
9 Kyland Howard, “Determining Appropriate User Fees,”
ICMA MIS Report 19, no. 9 (September 1987): 9.
10 Lawrence W. Libby and Carmen Carrion,
“Development Impact Fees,” CDFS-1558-04 (Columbus: Ohio State University Extension Service, 2004), ohioline.osu.edu/cd-fact/1558.
11 Jennifer S. Evans-Cowley and Larry L. Lawhon,
“The Effects of Impact Fees on the Price of Housing and Land: A Literature Review,” Journal of Planning Literature 17 (February 2003): 351–359.
12 Thomas P. Snyder and Michael A. Stegman, Paying for Growth: Using Development Fees to Finance Infrastructure (Washington, D.C.: Urban Land Institute, 1987), 35.
13 Ibid., 66.
1. If a university raises graduate tuition by $50 per semester hour and the number of hours in which graduate students enroll then declines dramatically, the demand for graduate education is said to be _____________ (elastic or inelastic). Express this relationship mathematically.
2. A facility charge recovers mostly what kind of cost? A volume charge recovers mostly what kind of cost? What is meant by indirect costs? Which type of charge—facility or volume—will include indirect costs?
3. Which of the following pricing strategies best approximates the marginal cost of a service?
Provide a justification for each answer.
a. $18.20/thirty days for residential solid-waste service, or variable rate by container size
b. Water rates that combine a facility charge, or wastewater rates based on 98 percent of volume charge during wintertime usage
c. Airport parking fees based only on length of stay, or parking fees based on length of stay by proximity of lot to terminal
d. Tuition rates that are the same for fall, spring, and summer, or tuition rates that are higher for fall and spring than for summer
4. Which of the following services should recover full cost? Why? Which of these should use block-rate or peak-period pricing or some combination? Why? For which services is partial cost pricing justified?
a. Public library
b. On-demand genealogy research services offered by public library c. Public transportation (bus and rail)
d. Public swimming pool
e. Public water park with wave pool and slides f. Senior citizens center
g. Space for senior citizens to exhibit and sell arts, crafts, and antiques h. Toll bridge
i. Mosquito spraying to control West Nile virus j. Public housing
k. Disaster shelter
l. Large item (refrigerators, sofas) disposal in landfill m. Household hazardous-waste disposal
5. The parking office at a major university has proposed a range of double-digit increases in parking fees for each type of parking permit for the next academic year. The price of a parking permit is on a per semester or per year basis and varies depending on (1) proximity of the parking lot to campus buildings, (2) whether the parking space is reserved, and (3) type of user (employees, commuting students, resident students).
a. What are the various pricing strategies that governments use for divisible goods and services, and what are the pros and cons of each?
b. What type of pricing strategy is used by this university for its parking services? What are its pros and cons?
c. Identify three goals of parking services at a university and discuss how prices can be used to encourage each goal.
REVIEW QUESTIONS
129