Blowing in from the West: California's Disclosure Guidelines for Land-Based Securities
Shea, Stephen, Government Finance Review
Guidelines assist public officials in developing disclosure documents that fulfill their requirements under the law and minimize their exposure to fraud liabilities.
Each year the Government Finance Officers Association bestows its prestigious Award for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical, documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1997 winning entry in the training and technical guides subcategory of the Capital Financing and Debt Administration category.
The California Debt and Investment Advisory Commission (CDIAC) devotes a significant amount of its staff resources to educational services, producing reports, and presenting seminars on topical issues in public finance for the benefit of local agencies in California. In 1996, CDIAC produced the document Disclosure Guidelines for Land-Based Securities which addresses the application of SEC Rule 15c2-12 to land-based securities (i.e., bonds issued to finance infrastructure in real estate development projects). This document has become an indispensable reference guide for government agency staff and industry professionals active in this colorful sector of California's public debt market.
Land-based financing emerged as a principal form of public borrowing in California following the voter approval of Proposition 13 in 1978 (though the state's key assessment laws date from the early part of the century). The dramatic reductions in local property tax revenues resulting from this measure, coupled with the constraints on new taxes and general obligation bonds it imposed, presented local governments with the challenge of finding new ways to finance capital projects, particularly in developing areas. (These fiscal constraints were compounded by reductions in federal aid to local governments, which began in the late 1970s following years of steady growth.) In 1982, the California Legislature enacted the Mello-Roos Act (named after sponsors Senator Henry Mello and Assemblyman Mike Roos) to provide local agencies with a more flexible revenue source capable of financing regional facilities not suitable for assessment financing. Since 1983, California local agencies have issued nearly $7 billion of Mello-Roos bonds. Most largescale development projects in California finance necessary public infrastructure through some combination of Mello-Roos and assessment bonds along with developer fees and private funds.
Development Paying Its Own Way
If land-based financing were strictly a California phenomenon, it probably would not be of national interest. But in evidence of the old adage that "public finance blows in from the west," many growing states are, like California, coming to rely more on land-based financing to address the infrastructure demands of growth; states such as Nevada, Arizona, Colorado, Texas, Florida, and more recently, Maryland and Virginia. North, south, east, and west, the politics of growth tend to dictate that new development "pay its own way." Communities are reluctant to subsidize growth with their tax dollars.
The statutory framework of land-based financing of course varies from state to state, but typically the process begins with a local agency forming a financing district that is coterminous with a proposed development project. The agency then issues bonds to finance any combination of localized improvements such as streets, sewers, and water connections, and regional facilities such as schools, freeway interchanges, and parks. The bonds are secured by liens on specified parcels of real property within the district and are neither a general obligation of the municipal issuer nor a personal debt of property owners. As development proceeds, the developer sells completed residential and commercial structures to new owners, who assume responsibility for the tax liens until the bonds are paid off. …