Florida CDDs:
A Preliminary Look at
Financial and Accountability
Characteristics
Sarah Ayers
Florida State University
MBA Student and Collins Institute Intern
February 19, 2013
Purposes of this Presentation
• What are Community Development
Districts (CDDs)?
• How financially viable are they?
• How accountable are they?
2
CDDs:
• Play a key role in providing public
services
• Important growth management tool
• Lack public awareness
• Entangled in housing market drop
3
Benefits:
• Reduce the burden on general-purpose
government for managing population and
infrastructure growth
• Meet local needs that may otherwise go under
the radar of general-purpose government
• Municipal bonds are low-risk and tax-free
• They’re efficient, as direct beneficiaries pay to
retire the debt
4
Possible Risks:
• Dependent upon the real estate market
• Building plans may be abandoned middevelopment (like any development)
• Over-projections on revenue can lead to
default and financial emergency conditions
• Subjected to fragmented and possibly
ineffective state oversight
5
CDD Characteristics:
•
•
•
•
575 in Florida
$6.5 billion in outstanding bonds exist
Operate under FL Statute 190
Formed by 2 methods: Governor and Cabinet may
adopt a rule (for districts 1,000 acres or more) and
ordinance (under 1,000 acres)
• Financial powers include: issuing bonds, levying
property taxes and non ad valorem special
assessments, and charging user fees
6
CDD Characteristics:
• Designed to operate within existing city
or county
• Required to undergo annual independent
audits, and submit annual financial
reports to state
• 7 different arms of the state possess roles
of oversight
7
Establishment and Property Values:
• Has been a correlation between CDD
establishment and property values
100
90
Number Established
80
70
60
50
40
30
20
10
0
Year Created
(Eger and Vosanek)
8
CDDs and Property Values:
• As values rise, so do builders’
revenue projections
• Strong market makes CDDs safer
investments
• In strong market lots and homes
more likely to sell
9
CDDs and Property Values:
• Conversely, when the market weakens:
–Lots and homes less likely to sell
–Incomplete communities more likely to
be abandoned
Revenue projections decrease
• Same as any development
10
Research Design:
• Assessed findings of securities expert Richard
Lehmann
• Compared his findings to district audits, state
lists, and federal database
• Used state criteria of financial emergency status,
financial emergency conditions, and deteriorating
financial conditions.
• Interviewed state experts
• Included previous findings of Eger and Vosanek
11
Financial Conditions:
• Florida law recognizes:
–Financial emergency conditions exist
when any of the criteria are met
–Financial emergency status exists when
state assistance is needed
–Deteriorating financial conditions
Going concern noted by audit CPA
12
State Oversight:
•
•
•
•
•
•
Report to state annually
CPA notes financial conditions
No uniform methodology
Art, not science
Communicate with targeted district
Evaluate districts’ plans to emerge from
distress
13
Research Sources:
• Chief Inspector General has annual list of
entities in financial emergency status
• The Joint Legislative Auditing Committee has
list of Entities with Financial Emergency
Conditions
• The Auditor General has individual audits,
containing CPA opinions
• EMMA database contains default filings
• State media reports
14
Illustration of Different Standards:
• Over 1/3 of CDDs meet at least one indicator of
financial distress
• At least 220 CDDs have met at least one financial
emergency conditions within the last 3 years
• 234 CDDs are currently on the JLAC’s list of Entities
with Financial Emergency Conditions
• 7 CDDs are listed by the Chief Inspector General as
meeting emergency status
15
Financial Trends:
• Financial distress stems mostly from the fallen
real estate market
• As of 2011, the distressed districts with highest
frequency of net negative assets were
established during 2003-2006 period (table 1)
• JLAC notifications for financial emergency
conditions and emergency status peaked
between 2008 and 2011.
16
Assets & Liabilities by Year of
Establishment:
Table 1: 2011 data
1,400,000,000
1,200,000,000
1,000,000,000
800,000,000
Assets
Liabilities
600,000,000
400,000,000
200,000,000
0
1986 1988 1989 1990 1991 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2011
17
Effects of Financial Distress:
• When developers fail to fully build out a
community, property values and amenities are
threatened for the existing homeowners
• State law makes financial assistance an option
for distressed districts, but state experts
confirm that there is no assistance available
• Effects of CDD finances reach beyond the
state: Investors are nationwide, and municipal
bonds are subject to MSRB rules
18
Financial Findings Summary:
• At least 1/3 have financial
irregularities—placed on various lists
• The problems are tied to housing
market
• Most problematic CDDs established
during real estate boom
19
Financial Findings Summary:
• The determination of financial
distress is heavily nuanced and
confusing
• Reaction to problems not uniform or
clear
20
Accountability: Oversight
• 7 different state parties involved
• Despite this number, oversight may possibly
be ineffective
• CDDs’ independence precludes any single
agency or person from completely
overseeing districts
21
Accountability:
Roles of State Institutions
• The Department of Financial Services
collects Annual Financial Reports and
financial audits
• The Auditor General collects annual
financial audits
• DEO provides technical assistance and
can initiate legal proceedings
22
Accountability:
Roles of State Institutions
• The Joint Legislative Auditing Committee
maintains “List of Governmental Entities that
have Met a Financial Emergency Condition”
• Inspector General maintains list of public
entities deemed financial emergency status
• Bankruptcy courts issue rulings where the
developer has filed for bankruptcy
23
Accountability:
Roles of State Institutions
• The Florida Land & Water Adjudicatory
Commission has authority in granting or
denying CDD petitions
24
Accountability: Reporting
• The state lacks meaningful methods to compel
compliance, such as monetary penalties
• CDDs are required to proactively report to the
state when financial difficulties arise
• There has been a downturn in reporting
compliance since 2005-2006
• Local state official confirms that irregular
reporting is often a precursor to or sign of
financial problems
25
Accountability: Summary
• Too many parties involved in
oversight
• Oversight is fragmented and possibly
ineffective
• CDD independence contributes to
possibly ineffective oversight
26
Legal and Legislative Issues:
• Bankruptcy courts issuing inconsistent
rulings
• Foreclosure process slow
27
Remaining Questions:
• Will CDDs recover with the housing
market?
• Is there a need for clearer standards of
financial distress?
• Should state and local oversight be
clarified?
28
Q&A
29