Amendment One

A constitutional amendment approved last November by the narrowest of margins — and voted down in many parts of Western North Carolina — brings the promise of new economic development. But if things don’t go as planned, taxpayers who didn’t have a say in a project to begin with could end up being stuck with the bill.

Amendment One, as it is generally known, enables local governments in North Carolina to finance infrastructure improvements that will benefit private developers without first gaining voter approval. The idea is that the affected communities would benefit from the jobs the new development would create and the increased tax revenues it would generate. But a portion of those new revenues would be earmarked for paying off the debt — leading some to wonder who would pay for the additional services (such as schools, police and fire protection) needed as a result of the development. And if the projected revenues didn’t materialize, taxpayers could be saddled with the bond debt for decades. What’s more, in a worst-case scenario, the state has the legal right to step in and unilaterally levy additional taxes to ensure the debt gets paid.

The amendment, which was endorsed by the N.C. Association of Realtors, the N.C. Economic Developers Association, the N.C. League of Municipalities and the N.C. Association of County Commissioners, among other groups, became part of the state constitution on Nov. 23, 2004, after gaining a roughly 51 percent majority at the polls. It establishes a new system of “project-development financing” (known in other states as “tax-increment financing”). But at this writing, it remains unclear what this will mean for WNC communities and residents.

And though no applications have yet been filed, state guidelines have been created and local governments and other interested parties have begun considering what specific projects they might pursue.

Asheville, for example, is eyeing the Broadway Street corridor and the French Broad riverfront as potential areas for tax-increment financing, reports Planning and Development Director Scott Shuford. And Buncombe County Commissioner David Gantt calls the riverfront an obvious target.

Some, however, remain concerned about the process as a whole, particularly the lack of public input and the potential repercussions for taxpayers.

Everybody’s doing it

North Carolina is a Johnny-come-lately to this kind of financing — the 49th state to enact such a law (Arizona is the lone remaining holdout). The idea had failed twice before at the ballot box (in 1982 and 1993) before gaining statewide approval. And it failed again in Western North Carolina, coming up short locally in Buncombe, Haywood, Henderson, Madison and other WNC counties.

The legislation was designed to help local governments create incentives packages to attract jobs and capital investment on a project-specific basis. Suppose, for example, a manufacturer or commercial developer proposes a project that would bring jobs to the community, but the site in question lacks the needed infrastructure. The developer agrees to go ahead with the project if the government provides the necessary roads, sewer, water or gas lines.

Enter Amendment One.

A city, county or other governmental authority can designate a precisely defined district, determine what infrastructure improvements are needed and what they will cost, and then calculate how much the proposed development would boost the value of the property within the district. On that basis, the local government can then apply to the state for permission to sell special bonds to finance the needed infrastructure, pledging the projected increase in tax revenues to pay off the debt. Any additional new tax revenues coming from the district could be used for general purposes.

“Let’s say it’s an extension of a quarter-mile of sewer and costs $100,000 to do,” says Shuford. “The city or county doesn’t want to dig into their fund balance to pay for that — and may not be able to — but the plant going in on this property would be sufficient in size to generate a stream of tax revenue that would be in excess of what would be needed to provide the $100,000.”

The new tool is not necessarily limited to to nuts-and-bolts infrastructure for industry, he notes. In the Broadway corridor, for example, “You might apply Amendment One … [for] a wider sidewalk, a streetscaping proposal, a greenway along the creek.

“And so those are things that would help spur redevelopment of city property — and in fact new development of property along Broadway.”

Under state rules, an Amendment One project cannot account for more than 5 percent of the land within the jurisdiction of the governmental unit issuing the bonds. “So that’s a good safeguard,” says Shuford, “because it’s not something you’d want to look at over an entire jurisdiction.”

In some cases, however, property owners within the district could see their tax valuation rise as a result of the infrastructure project. Questions also remain as to how small, local governments would handle the debt load until the increased tax revenues kicked in.

To vote or not to vote?

Local governments in North Carolina already had several options for project financing, explains Jim Baker, assistant director of debt management with the state treasurer’s office. General-obligation bonds are backed by the “full faith and credit” of the issuing government (including its ability to levy taxes to pay its bills). That makes those bonds safer for investors — and thus cheaper for governments, because they tend to pay a lower interest rate. But it also means they have to get voter approval before pledging that “full faith.”

The referendum process is time-consuming, however, and it comes with no guarantee of success; this can pose problems for developers. Other financing options include revenue bonds (which pledge a particular revenue stream, such as water or sewer payments, to service the debt) and certificates of participation (a kind of installment contract that’s paid using other income, such as utility taxes). Neither of these requires voter approval.

All of these options, however, do require the approval of the Local Government Commission, which has handled all bond sales for public entities since the 1930s. Amendment One, says Baker, simply adds another financing tool. And once an Amendment One project is approved, additional local revenues (such as the beer-and-wine tax, which is shared with the state) may be added to the pledge — again, without taxpayer approval.

“Amendment One, because it’s so site-specific, for all practical purposes is not appropriate for folks … as a voting type of decision,” argues Shuford. The amendment, he maintains, “addresses needed capital-improvement investments more effectively than a general-obligation bond vote that requires considerable lead time for the vote to be held and for which the outcome is uncertain.”

In that respect, he notes, this kind of financing is similar to revenue bonds. Still, there appears to be at least one key difference: The money to repay the debt is based on projections about development that hasn’t happened yet, rather than on a fairly predictable revenue stream (such as city residents’ water and sewer payments).

Others, meanwhile, maintain that removing voters from the equation is simply the wrong way to go. “I think big projects should be approved [by voters],” comments UNCA economics professor Pam Nickless. “And I don’t care if all other 49 states do [tax-increment financing].” Amendment One, she notes, would have allowed “the malling of downtown Asheville” in 1981, when voters vetoed a proposal to build a mall covering much of the central business district.

What’s more, says Nickless, “There really is a lot of research” indicating that the kind of economic incentives envisioned in Amendment One are “way down on the corporate [priorities] list.” According to Nickless, education and transportation loom much larger in corporate decision-making.

But despite the lack of a public vote on Amendment One projects, local governments are required to give public notice when applying to the Local Government Commission for approval. A public hearing must also be held before the governmental unit formally commits to the project.

Some, however, worry about the consequences of tying up future tax revenues to pay off the bond debt.

“Some of the real losers would be our schools, police and fire departments,” Leicester resident Peggy Bennett told the Buncombe County Board of Commissioners, testifying on behalf of the local advocacy group Citizens for Change in December. Those essential services, she fears, may be shortchanged if all (or even a sizeable portion) of the increased tax revenues from a local project-development district is dedicated to debt repayment (which could take up to 30 years). “No matter that most of the developments would increase attendance in our schools and put additional strains on our police and fire departments,” said Bennett. “They would all share in the overload but not in additional revenue.” For this and other reasons, Citizens for Change urged Buncombe County to simply refuse to use the new financing mechanism.

What are the safeguards?

Amendment One supporters point to the safeguards built into the legislation. To gain the Local Government Commission’s approval, an application must satisfy a number of criteria. Newly recruited manufacturers, for example, must undergo a review that looks at past compliance with environmental laws. And those newly created jobs must pay workers at least 10 percent more than the state’s average wage for manufacturing jobs. (The rules are different for manufacturers already in the area and seeking to expand.)

In addition, a property considered for such financing must meet one or more of the following criteria: blighted or inappropriately developed areas; areas appropriate for rehabilitation or conservation activities; areas appropriate for the economic development of the community. But some might question how much protection these criteria really provide. Asked about this, Baker acknowledged, “That’s a catchall general enough [that] I can’t imagine anything that wouldn’t fit,” because anything you do can be for economic development.

What’s more, in order to approve a project, the commission must find (among other things) that the bond issue is “necessary” to secure significant new economic development, that the proposed debt is “adequate and not excessive” for the specified purpose, that the project is “feasible,” and that it would not be likely to occur without the public infrastructure support. The commission must also determine that the governmental unit’s “debt management procedures and policies are good, or that reasonable assurances have been given that its debt will … be managed in strict compliance with the law.”

“It’s not quite as easy as what some other states have done,” says Shuford. “I’m confident it’s one of the strictest [of such laws]. The fact that we even have the Local Government Commission involved in it is by itself a real restrictive aspect of it. You know, that type of oversight doesn’t typically occur in other states. … [They] don’t spend a lot of time as a watchdog to ensure that sound decisions are made, and we have that here.”

But what happens if — after all the planning, scrutiny and approval — the new district’s private development component doesn’t generate the tax revenue necessary to meet the debt obligation?

“You’re going to have to have the public eat the cost,” admits Shuford.

Or, there’s the specter of default.

“That’s the last thing the local governmental entity wants,” stresses Baker. And in fact, under the Local Government Commission’s supervision, there have been no such defaults, he notes. “In terms of overall debt, we’re probably the shining example. We are unique in that responsibility. … Because of that, North Carolina is known as the Good Paper State.” This, in turn, has saved the governmental units money through lower interest rates for borrowing.

But it remains to be seen whether Amendment One projects will share that sterling record. And if a local governmental unit were unable to repay an Amendment One debt, the Local Government Commission could step in and impose a refinancing arrangement, adjust the debt, or even “take over the operation of the city and impose enough tax to pay the debt,” concedes Baker — once again, without voter involvement.

Shuford, however, expresses confidence in the safeguards built into the application-and-approval process. “The Local Government Commission [is a] very fiscally accountable group. … They don’t go into anything that is risky. They have to approve any of the Amendment One projects or districts, and I think they’re going to be pretty discerning in how they approach anything that comes forward.”

Shuford also feels the enabling legislation has built in the lessons learned from other states. Meanwhile, he emphasizes, the law finally removes an obstacle Tar Heel municipalities have long faced.

“It’s funny to have people come here from other states doing projects. … They say, well, in Tennessee they were able to do this for us; in Texas they were able to do this. And we just have [had] to say we don’t have that ability to help you out, even though it’s clear that if your project happens, the city’s going to reap a specific benefit that can be pretty clearly defined,” Shuford says. “I think [Amendment One] is a very big step forward for North Carolina, and I’m glad to see that it’s got a lot of the safeguards in there to keep us from making mistakes.”