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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?
3
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