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Florida CDDs: A Preliminary Look at Financial and Accountability Characteristics Sarah Ayers Florida State University MBA Student and Collins Institute.

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Presentation on theme: "Florida CDDs: A Preliminary Look at Financial and Accountability Characteristics Sarah Ayers Florida State University MBA Student and Collins Institute."— Presentation transcript:

1 Florida CDDs: A Preliminary Look at Financial and Accountability Characteristics Sarah Ayers Florida State University MBA Student and Collins Institute Intern February 19, 2013

2 Purposes of this Presentation What are Community Development Districts (CDDs)? How financially viable are they? How accountable are they? 2

3 CDDs: Play a key role in providing public services Important growth management tool Lack public awareness Entangled in housing market drop 3

4 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

5 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 5

6 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

7 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

8 Establishment and Property Values: Has been a correlation between CDD establishment and property values 8

9 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

10 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

11 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

12 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

13 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

14 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

15 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

16 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 period (table 1) JLAC notifications for financial emergency conditions and emergency status peaked between 2008 and

17 Assets & Liabilities by Year of Establishment: 17

18 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

19 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

20 Financial Findings Summary: The determination of financial distress is heavily nuanced and confusing Reaction to problems not uniform or clear 20

21 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

22 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

23 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

24 Accountability: Roles of State Institutions The Florida Land & Water Adjudicatory Commission has authority in granting or denying CDD petitions 24

25 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 Local state official confirms that irregular reporting is often a precursor to or sign of financial problems 25

26 Accountability: Summary Too many parties involved in oversight Oversight is fragmented and possibly ineffective CDD independence contributes to possibly ineffective oversight 26

27 Legal and Legislative Issues: Bankruptcy courts issuing inconsistent rulings Foreclosure process slow 27

28 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

29 Q&A 29


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