Transportation special assessment districts
Transportation special assessment (also referred to as “benefit,” “local improvement,” or “infrastructure financing”) districts are property-value capture mechanisms that raise additional revenue for public transit projects by levying property owner's mandatory fees or taxes, called assessments. Special districts for transportation purposes are designed so that those who benefit from the geographic proximity of a new or improved transit facility will help pay for them. This policy is based on the rationale that a property owner in a special district disproportionately benefits from a public transit improvement such that his/her property will appreciate due to publicly created value.
Local governments commonly use special assessment districts to finance capital costs of transit construction and ongoing operating costs. The enabling legal framework must specify formal boundaries, purposes and services, assessment methods, and fee amounts for each property. Methods used to determine property assessments include street front footage, zones, acreage, estimated increased values, or distance factors.
In the United States, states' legal requirements may support or limit special assessment district formation. In most cases, legally forming a transportation special assessment district requires the majority of affected private property owners to agree to voluntarily pay an assessment fee, in addition to their property taxes, to fund a proposed improvement.
- Goal: Increase the funding available for government capital projects
- Goal: Increase the funds available to develop, operate and maintain airplane transportation
- Goal: Increase the funds available to develop, operate and maintain automobile roads
- Goal: Increase the funds available to develop, operate and maintain local bicycle system service
- Goal: Increase the funds available to develop, operate and maintain urban bus service
- Goal: Increase the funds available to develop, operate and maintain urban rail service
- Goal: Increase the funds available to develop, operate and maintain distance passenger rail service
- Goal: Increase the amount of private investment
A metropolitan area approves a plan to build a new public transit line in an under-served transit area that has become economically distressed. The public funds are scarce so the transit agency responsible for the project seeks additional resources to finance the full development cost. The agency considers various value capture mechanisms to complement state and federal funds, and share the idea of a special assessment district with the public. Upon meeting, property owners vote for the special assessment district. If there's majority support, a preliminary study outlining the project details is conducted, and the local council votes to approve or reject the special assessment district formation. Once approved, each property within the special district is assessed a fee. Property owners are given the option to appeal the fee. If an appeal is upheld, the fee is reassessed. Once a fee is agreed upon, the project receives the additional revenues that’s needed to fund the transit development. The new public transit line eventually results in appreciated property values and greater investment in the neighborhood, benefiting those who paid special assessments to fund its development.
Since the early 2000s, the city of Seattle discussed ideas about bringing a streetcar to the South Lake Union (SLU) neighborhood due to its proximity to the existing streetcar line, which operates between Seattle's Downtown and the neighboring SLU neighborhood. Seattle’s Department of Transportation (DOT) took the lead in planning and developing the SLU Streetcar. DOT officials advocated that a special assessment district was critical to fund the project because Seattle did not have a stream of money dedicated to large capital transit projects.
In 2005, a special assessment district (locally called local improvement district) around the South Lake Union Streetcar project was approved by voters. 98 percent of the property owners within the district boundary agreed to finance the streetcar line though the special assessment district. To finance the project, the city of Seattle issued bonds that would be repaid using the assessment payments from property owners. Property owners were given the option to pay the fee up front or to pay the assessment over an 18-year period with a 4.4% interest rate. With a final price tag of $53 million, the special assessment value mechanism captured 47% of the total project cost. The project was completed in 2007. The streetcar has had a positive impact on the SLU neighborhood. Within four blocks of the streetcar, over 3 million square feet of office space and 6,000 housing units have been built since 2005. Also, the value of land sales in the SLU urban center increased from approximately $200 a square foot in 2005 to $250 in 2011. It should be noted that the reasons for increasing land values in SLU were likely due to other public investments in the neighborhood as well, such as Lake Union Park.
Tradeoffs of implementing this policy may include:
- Special assessment districts may place a large financial burden on those with a low ability to pay the mandatory fee.
- If anticipated growth doesn't materialize, existing property owners may bear heavy assessment burdens.
- Special assessment districts often lack transparency and accountability. As quasi-governmental entities, special districts tend to have less public oversight. The consequence of less public oversight may be less public and democratic decision-making processes guiding significant financial and neighborhood decisions.
- The use of special districts can lead to multiple governing agencies serving the same population. The functional overlap may reduce the efficiency of government service provision.
- Special assessment districts may be viewed as inequitable policy for current property owners. Special districts impose costs on property owners within the district but do not require their neighbors outside the boundary or future generation residents to pay assessment fees when they also benefit from a neighborhood improvement.
If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:
- Is there insufficient funding available within local government budgets for the public transit project without value capture strategies being enforced?
- Is there strong community support for the transportation project within the specific vicinity of the proposed improvement?
- Do the majority of property owners in the special district geographic boundary support the formation of a special assessment district?
- Is it financially feasible to impose a special assessment within the special district's boundaries without forcing businesses to close or imposing other financial hardships?
- Special assessment districts typically rely on the future urban growth and need a strong real estate market to thrive. Are there strong real estate market conditions in the area? Are property values high in the area?
- Does local law allow for the creation of a special assessment district? In the U.S., e.g., state laws have varying conditions required for the creation of such districts.
Assuming that a jurisdiction has decided to adopt the policy, the following questions will need to be answered when determining how to implement this policy:
- What are the boundaries of the special assessment district?
- Factors determining how large the special assessment area should be include the degree to which different areas are likely to benefit from the project and the overall costs that are required to be financed. E.g., in a costly suburban, park-and-ride rail line extension project that will require substantial special assessment financing across a relatively moderate density-area, it may be prudent to draw wider boundaries within several miles of each transit stop. In comparison, for a lesser costly initiative such as a streetcar project in a high-density area, a five-block radius may be sufficient.
- What type of public transit facilities and services will be provided within the the special assessment district?
- Special assessment districts for transit can be used to fund transit construction, related infrastructure improvements, and/or the cost of operations and maintenance.
- What type of assessment method are you using to calculate the benefit provided to property owners in a special district?
- Several different methods may be used to establish a basis for property assessments within a special assessment district. These include the following: (a) street front footage, a method of allocating costs based on the amount of frontage occupied by a lot adjacent to the transportation project; (b) benefits assessed or increased values, a method which allocates assessments according to the the estimated value of benefits or increases in property values to be received; (c) zones, which allocates costs based on the proximity of a property to the amenity; (d) acreage, a method that allocates costs based on the size of the land parcel in the district; or (e) distance factor, which determines charges by using a scaling factor that relates the distance from the transportation project.
- How will the proceeds be used (e.g. to pay for a bond)?
- Generally, special assessments are either (a) applied directly towards funding the construction of the transportation improvement, using the "pay as you go" method or (b) deposited into a special fund administered by the governmental entity issuing municipal bonds and used to pay back the city's debt from the initial borrowing that paid for the transit project, the "pay as you use" method to  Municipal bonds issued on behalf of special assessment districts are typically special revenue bonds, secured by the special assessments, but not supported by the full faith and credit of the governmental agency.
- How will the special assessments be collected (e.g. the same manner as ad valorem property taxes)?
- Special assessments are normally collected in the same manner as ad valorem property taxes, as a separate line item on the property tax bill and subject to the same penalties in case of delinquency or failure to pay as provided for ad valorem property taxes. Another collection procedure may be adopted if the governing body of a local government prefers.
- How will you prioritize the lien of special assessments?
- Special assessments generally retain a coequal lien with ad valorem property tax liens or are subordinate only to municipal or other property tax liens.
- Has adoption of: Limited - The number of jurisdictions using the policy is limited in adoption to areas with state enabling legislation and local support for special assessment district formation. E.g. In the United States, 10 transit agencies out of 55 surveyed by the federal government in 2010 reported using special assessment districts for transportation purposes.
- For area type(s): Urban, Suburban, Rural - Special assessment districts are appropriate transportation financing mechanisms for all types of jurisdictions. E.g. in urban and suburban areas, special assessments can be used to finance all types transportation network improvements such as light rail, bus rapid transit, bicycle lanes, airports and roads. In rural locations, where fiscal capacity is more limited, special assessment districts have been found to help finance road maintenance and improvements.
- For issue type(s): Efficiency, Equity, Finance, Infrastructure - The use of special assessments to apportion cost of a transportation infrastructure improvement among its more direct beneficiaries can enhance economic efficiency in an equitable way, in the sense that beneficiaries of a project's value creation carry a greater burden for funding the project.
- Notable entities who have implemented or adopted this policy include:
- District of Columbia (Washington, D.C., and Washington Metropolitan Area Transit Authority) - Provided $25 million towards the Washington Metro New York Avenue station on Washington Metro's heavy rail Red Line.
- County of Fairfax (Fairfax County, VA, and Metropolitan Washington Airports Authority) - Raised $400 million through a special assessment district for phase I of Washington Metro Dulles Corridor Extension of the existing Metro rail system. An additional special assessment district is in place to contribute approximately $330 million of phase II capital construction costs.
- City of Seattle (Department of Transportation) - Provided approximately $25 million for Seattle's South Lake Union Streetcar line project using revenue from a local improvement district that surrounds the line by about four blocks. The city issued bonds for the project, which will be repaid using the streams of payments from the property owners.
- County of King (King County, WA Metro) - Provided approximately $20 million towards Seattle's Downtown Transit Tunnel project through the establishment of a benefit assessment district.
- County of Los Angeles (Los Angeles, CA Metro) - Provided $130 million towards Los Angeles Metro Red Line project for its Segment 1, consisting of 5 underground heavy rail stations in downtown Los Angeles. Metro formed two special assessment districts to pay for a portion of the construction costs in Segment 1.
- Advocates - Mass Transportation Assumption: Revenues raised by a special assessment district would be allocated to fund mass transit options.
- Associations - Building and Construction and Associations - Real Estate. Assumption: Developers and construction workers may support transportation special assessment districts, because the value capture mechanism covers part of the development costs. Also, they may recognize the role that transportation improvements can play in supporting future growth.
- Constituent Groups - Commuters Assumption: Revenues raised will improve the quality of the transportation network resulting in a better user experience.
- Constituent Groups - Homeowners and Constituent Groups - Commercial Property Owners. Assumption: Property owners in the district may support a special assessment district, because their property value will increase after the development occurs.
- Electeds - Local Legislators. Assumption: Elected officials may see it as a way to raise money for a transportation project painlessly, without having to appropriate money from general revenues or rely on funding from central or higher level government with strings attached. A special assessment district can also raise the property tax without raising the property tax rate, which largely avoids local and legal limits on local tax increases.
- Government Agencies - Transit Authorities Assumption: Revenues raised through a special assessment district could be allocated to improving transit infrastructure.
- Government Agencies - Transportation Assumption: Revenues raised through by a special assessment district could be allocated to improving transportation infrastructure.
- Labor Unions - Construction Workers Assumption: A steady stream of revenue for infrastructure construction and maintenance would produce jobs for this group.
- Constituent Groups - Low-Income Residents Assumption: Low-Income Residents within the district may oppose a transportation special assessment district because they may very possibly experience financial burdens by having to pay additional fees on top of their ad valorem property taxes.
- Constituent Groups - Renters Assumption: Renters within the district may oppose a special assessment district for transportation purposes, because they may very possibly face higher rents.
- Constituent Groups - Local Businesses Assumption: Local businesses that are not included in or are not close to the district may oppose special assessment districts, because they may very possibly face higher rents.
- Government Agencies - Departments of Taxation Assumption: Taxation agencies collecting tax other than property tax may oppose a special assessment district. They can barely benefit from a property-tax-focused project. Yet they may need to pay back the shortfalls if the incremental property tax revenue cannot cover the costs of capital projects in the later years.
- Special Districts: A Useful Technique for Financing Infrastructure. Porter, D., Lin, B. and Peiser, R. (1992). Urban Land Institute. This book evaluates the use and usefulness of special districts for funding facility improvements, including transportation.
- Innovation in Public Transport Finance. Shishir, Mathur. (2014). Ashgate Publishing Company. This book analyzes various value capture strategies as a mechanism to fund new transit infrastructure, including special assessment districts in depth.
- Capturing the Value of Transit. Reconnecting America's Center for Transit-Oriented Development (November 2008). The report investigates different types of value-capture revenue policies to finance specific transportation projects.
- Value Capture for Transportation Finance: Technical Research Report. Lari, A., D. Levinson, Z. Zhao, and M. Iacono. Center for Transportation Studies. http://www.cts.umn.edu/Publications/ResearchReports/pdfdownload.pl?id=1184. (June 2009). The report reviews different types of value-capture opportunities and strategies, including assessment districts.
- Financing Transit Systems Through Value Capture. Smith, J., and T. Gihring. (July 2006). Volume 65, Issue 3: American Journal of Economics and Sociology. The journal demonstrates that the positive effects of transit access are confirmed, and argues that transit/land-use research moves from hypothesis testing and toward the practical applications of value capture.
- Special Assessment District's Ability to Fund Transit: Lessons from Project-Level Analysis. Mathur, Shishir. (2014). Volume 2417, DOI 10.3141/2417-11: Transportation Research Record, Journal of the Transportation Research Board. The paper examines four transit projects funded by using special assessment districts across the United States, examining the revenue yield and stability and focuses on the actions taken by public agencies to enhance them.
- Public Transportation: Federal Role in Value Capture Strategies for Transit is Limited, but Additional Guidance Could Help Clarify Policies (2010). United States Government Accountability Office. U.S. GAO explores alternative strategies to help fund transit systems, analyzing value capture strategies like special assessment districts and evaluating case studies of transportation special assessment districts in the U.S.
- Using Special Assessments to Fund Transit Investments (October 24, 2012). MacCleery, Rachel and Peterson, Casey. Urban Land Institute. This article describes what special assessment districts for transit are and examples of where they have been used in the U.S.
- Financing Options for an Expanded Seattle Streetcar System and Network (April 2007). University of Washington Urban Form Lab Washington State Transportation Center. This study sought to guide decisions regarding the financing of a network of streetcar lines in and near Downtown Seattle.
- Impact Fees and Housing Affordability: A Guide for Practitioners. Bowles, Liza and Nelson. (June 2008). Chapter 2: Capital Facility and Infrastructure Financing Options. The guidebook reviews different types of ways to raise revenues for public facilities, including a comprehensive overview of special assessment districts.
- ]. U.S. Government Accountability Office. July 2010.
- Victoria Transit Policy Institute. Smith, Jeffery and Gihring, Thomas. February 27, 2017.
- Reconnecting America's Center for Transit-Oriented Development. November 2008.
- Center for Transportation Studies.
- Mathur, Shishir. 2014.
- Mathur, Shishir.
- American Public Transportation Association. August 2015.
- City of Seattle's Office of Economic Development. July 2012.
- Transportation for America.
- Orrick, John and Datch, Demetrios
- Zhao, Zhirong Jerry and Larson, Kerstin.
- Value capture
- Tax increment financing
- Revenue bond financing
- User fee financing
- Vehicle fuel taxes
- Property Tax