Florida CDDs: A Preliminary Look at

Financial and Accountability Characteristics

Sarah AyersFlorida State University

MBA Student and Collins Institute InternFebruary 19, 2013

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Purposes of this Presentation

• What are Community Development Districts (CDDs)?• How financially viable are they?• How accountable are they?

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CDDs:

• Play a key role in providing public services• Important growth management tool• Lack public awareness• Entangled in housing market drop

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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

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Possible Risks:

• Dependent upon the real estate market• Building plans may be abandoned mid-

development (like any development)• Over-projections on revenue can lead to

default and financial emergency conditions• Subjected to fragmented and possibly

ineffective state oversight

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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

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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

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Establishment and Property Values:

• Has been a correlation between CDD establishment and property values

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0

10

20

30

40

50

60

70

80

90

100

Year Created(Eger and Vosanek)

Num

ber

Est

ablis

hed

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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

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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

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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

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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

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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

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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

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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

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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.

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Assets & Liabilities by Year of Establishment:

1986 1988 1989 1990 1991 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20110

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

Table 1: 2011 data

AssetsLiabilities

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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

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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

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Financial Findings Summary:

• The determination of financial distress is heavily nuanced and confusing• Reaction to problems not uniform or

clear

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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

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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

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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

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Accountability: Roles of State Institutions

• The Florida Land & Water Adjudicatory Commission has authority in granting or denying CDD petitions

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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

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Accountability: Summary

• Too many parties involved in oversight• Oversight is fragmented and possibly

ineffective• CDD independence contributes to

possibly ineffective oversight

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Legal and Legislative Issues:

• Bankruptcy courts issuing inconsistent rulings

• Foreclosure process slow

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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?

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Q&A