Community Development Districts

Abstract

Community Development Districts (CDDs) are multipurpose, independent special districts, which are empowered to finance and manage infrastructure services in Florida. Since their authorization through a state statute in 1980, the CDDs have grown across many counties in the state. This article presents exploratory research evaluating the role of CDDs in financing and managing infrastructure services. CDDs finance infrastructure through tax-free bonds, which are paid by property owners. The arrangement is beneficial for city/county governments since infrastructure is not financed through general obligation bonds. Managerially, however, CDDs pose accountability problems, since developers rather than residents control them during their initial stage of existence.

Keywords

special districts infrastructure finance infrastructure management community development

Introduction

Community Development Districts (CDDs) are multipurpose, independent special districts, empowered to finance and manage infrastructure services in new developments in Florida. Established under a Florida statute in 1980, the CDDs are authorized to issue tax-exempt bonds, typically secured by special assessments imposed on those who later buy property. The CDDs’ bonds (also called “dirt” bonds) pay for infrastructure costs, rather than general obligation bonds from the city/county governments or other traditional financing exacted from developers (e.g., impact fees). The bonds are aimed to fund common physical infrastructure services such as roads, water and sewage, lighting, public parks, and playgrounds, although CDDs have also financed amenities such as golf courses and tennis courts. Although CDDs bear resemblance to the more popular special-purpose “private” governments, such as Business Improvement Districts (BIDs), in having financial, administrative, and political autonomy from local governments, the CDDs are distinctive inasmuch as they are subject to sunshine laws and have been generally used for new developments.

CDDs have grown across more than half of the counties in Florida, especially during the past decade. The best known CDD is Celebration, a mixed-use community based on New Urbanism principles developed by a subsidiary of The Disney Corporation. The affluent suburb of Weston near Fort Lauderdale was developed originally as a CDD. The Villages in Central Florida, the largest retirement community in the country, comprises nearly a dozen CDDs. There are more than 575 active CDDs statewide that have issued more than $11 billion in municipal bonds to finance their infrastructure since the early 1980s (Sigo, 2010). Most CDDs are involved in new residential developments, although a few are also oriented toward commercial and industrial developments. Despite their long evolution over the past three decades, there is little scholarly literature on the role of CDDs. This article aims to narrow this gap by presenting exploratory research, evaluating the financial and managerial roles of CDDs in building infrastructure. The article is significant since the CDD experience in Florida could be germane to other states that have also considered similar institutional mechanisms for infrastructure purposes (e.g., Colorado, Georgia, Texas, and Tennessee).

In essence, the CDDs present innovative institutional opportunities for financing infrastructure development, but caveats need to be considered. Financially, CDDs are attractive for local governments since the CDD residents pay for the infrastructure; this reduces the financial burden on local governments to directly fund the infrastructure. At the same time, CDDs can also increase the property tax base of the local government. However, local governments need to be wary of the financial sustenance of CDDs. Many of the CDDs that were established to capitalize on the housing boom until 2005 began to default on their payments in the context of the post-2005 housing crisis. Managerially, CDDs face accountability issues similar to that of other special districts. CDDs are managed by private developers/landowners until they have a quorum of residents. Major decisions are made even before the establishment of a management board that is accountable to the residents.

The next section presents a literature review of CDDs in Florida in the broader context of special districts. Then, the evolution of CDDs in the state is outlined. The subsequent two sections deal with evaluating the financial and managerial aspects, respectively, of CDDs in developing infrastructure. The last section concludes with the implications of the CDD experience in Florida.

CDDs as Special Districts

CDDs are a category of special districts that are created through a state charter for the purpose of providing a limited number of infrastructure improvements. The Uniform Community Development District Act (Fla. Stat. Chapter 190) passed in 1980 enabled the formation of CDDs in Florida. Under the law, CDDs are independent multipurpose special districts and are “a solution to the state’s planning, management, and financing needs for delivery of capital infrastructure in order to service projected growth without overburdening other governments and their taxpayers” (§190.002 Fla. Stat., 1980). CDDs are entitled to issue tax-free bonds to fund capital infrastructure. The bonds are then repaid through special assessments or ad valorem taxes imposed on property owners. The infrastructure costs are thus borne by those in the new developments rather than by the municipality. CDDs could take a range of responsibilities for public improvements and community facilities (e.g., parks, recreational or cultural facilities, fire stations, schools, security facilities, etc.). The CDDs continue to manage these facilities after they are built. Thus, unlike other infrastructure entities that expire after construction, CDDs are perpetual inasmuch as they continue to exist for managing the public infrastructure (Porter, 2008). However, CDDs do not have authority for planning and zoning; they need to abide by the local government’s planning and zoning regulations.

CDDs are distinctive from other special districts in Florida: (a) Their establishment is initiated by developers or landowners rather than a general-purpose government, and (b) they are multipurpose, unlike most special districts that perform a singular function (Foster, 1997). The landowners or developers petition the local government to establish a CDD. The petition should include the name of the district, a description of the CDD’s external boundaries (and a map with existing utilities), a written consent from all landowners who own property within the district, initial designated board of supervisors, timetable and estimated costs for construction, designation of the future public and private uses of land for the area, and a statement of estimated regulatory costs (§190.005(a) Fla. Stat., 1980). CDDs that are smaller than 1,000 acres require approval through a city or county ordinance; those larger than 1,000 acres come under state purview and require approval through the rule of the Florida Land and Water Adjudicatory Commission. However, the establishing authority has little or no oversight once the CDDs are created, except that the CDDs are required to submit annual reports. The CDDs are independent since they are self-governed by a board of supervisors elected initially by landowners. Each landowner is entitled to cast one vote per acre of land owned in the CDD decisions. The governance is passed on to the property owners after 6 to 10 years, depending on the size of the CDD and the number of “qualified electors” (legal residents of the district registered to vote) in the district. Similar to other government entities, the CDD governance processes are subject to Florida’s sunshine laws.

CDDs are both similar to and distinct from other special districts such as the BIDs or Tax Increment Financing (TIF) districts. Similar to BIDs, CDDs have financial, administrative, and political autonomy from local governments. Whereas BIDs and TIFs are generally applied for improving existing commercial areas facing blight (Byrne, 2010; Mitchell, 2001; Stokes, 2007), CDDs are applied mainly to new developments. Most CDDs are new residential developments, although they are also applicable to new industrial and commercial developments. Whereas some BIDs and TIFs are subject to sunshine laws (especially those that are supported with state funding), all CDDs are subject to the sunshine laws (Morçöl & Zimmermann, 2008).

CDDs need to be evaluated in the broader context of proliferation of special districts (also called special purpose governments). Special districts have a long history in the United States. Such governments were traditionally established in the 1800s “to perform specific functions that the government felt obligated to support, such as toll roads and canal corporations” (Porter, Lin, Jakubiak, & Peiser, 1992, p. v). They proliferated as a result of federal government intervention in local service delivery. Many states adopted legislation pertaining to the creation of special districts. Indeed, there is a vast body of literature examining special districts in the United States (Bollens, 1957; Foster, 1997; Porter et al., 1992).

Two major themes could be identified in the literature on special districts. The first theme highlights the growth of special districts as borrowing machines that overcome state-imposed limits on taxes and debt and take the fiscal burden off of general-purpose governments (Axelrod, 1992; Bowler & Donovan, 2004; Carr, 2006; Leigland 1994; Marlow, 1995). In this theme, the districts are viewed favorably as means of financing infrastructure that benefit the major stakeholders (Orrick & Datch, 2008; Porter et al., 1992). State and local governments use the special governments to provide revenues for specific purposes. Foster (1997) identified two types of special districts: special taxing districts (with power to tax and levy special assessments) and public authorities (nontaxing entities that depend on user fees, grants, and private revenue bonds). MacManus (1982) argued that the special districts reduced the property tax differentials between cities and counties in the 1970s.

The second theme attributes the formation of special districts to nonfinancial factors, such as competitive political environments (Bourdeaux, 2005), state institutions, public entrepreneurs, and service demand (McCabe, 2000) and demographic characteristics such as population size, area, and urbanization (Frant, 1997). Debates rage about whether or not the special districts are representative of new public management principles of business-like management and efficiency (Berman & West, 2011; Bourdeaux, 2007; Chicoine & Walzer, 1985; Doig, 1983; Wollmann & Thurmaier, 2012). Literature in this theme is less sanguine than in the first as critics view the proliferation of special districts as “private” or “shadow” governments that have created metropolitan fragmentation with a confusing maze of overlapping functions (Deller, 1998; McKenzie, 1994; Stephens, 2008). Furthermore, in their analysis of infrastructure investments, Nunn and Schoedel (1997) found that general-purpose governments have been more dominant than special districts in capital expenditures.

The following analysis shows that the growth of CDDs in Florida could indeed be viewed from both thematic perspectives. CDDs are institutional mechanisms of borrowing money for infrastructure purposes, often supported as means to take the financial pressure off local general-purpose governments. In Foster’s (1997) terms, the CDDs are special taxing districts. At the same time, CDDs’ growth cannot be viewed simply as financing mechanisms. The saga of CDDs is more complex inasmuch as they evolved in response to growth management requirements and real estate market opportunities.

Evolution of CDDs in Florida

The origin of CDDs is closely linked with the rise of growth management policies in Florida in the 1960s following rapid population growth and haphazard housing developments. Florida’s population boomed from 2.77 million in 1950 to 15.98 million in 2000 (Nicholas & Chapin, 2007, p. 52), advancing from being the 20th ranked to become the 4th largest state (Hobbs & Stoops, 2002, p. 29). Residential developments grew rapidly, particularly in urban areas, to accommodate the population growth. The state government adopted a range of growth management policies since the late 1960s to stem the haphazard “growth machine” of housing. For example, the Florida Environmental Land and Water Management Act of 1972 was a centerpiece legislation to regulate large-scale developments—Developments of Regional Impact (DRI)—through local, regional, and state oversight. The Local Government Comprehensive Planning Act of 1975 (which required all county and city governments to prepare comprehensive plans) evolved into the landmark omnibus Growth Management Act (GMA; The Local Government Comprehensive Planning and Land Development Regulation Act, 1985), which mandated “concurrency requirements” (requirements for facilities and services to be available concurrent with new developments; Anthony, 2003; Caitlin, 1997; Chapin, Connerly, & Higgins, 2007; Powell, 2001). Specifically with respect to new developments, the New Communities Act (1975) aimed to encourage developers to form multipurpose districts in order to undertake large-scale developments that needed DRI clearance. The act, however, had little effect: No new districts were formed as the DRI approval process was prohibitively expensive. Subsequently, the more developer-friendly CDD legislation was adopted in 1980.

After the enactment of the CDD Act, CDDs grew feebly in a few counties in the state. The real impetus for CDDs came with the concurrency requirements mandated under the 1985 omnibus GMA and grew exponentially since the late 1990s in the face of the state’s strong housing market. Four significant phases of the evolution of CDDs could be identified. Figure 1 shows the number of CDDs formed each year from 1980 to 2010. During this period, 590 CDDs were established, out of which 12 CDDs were dissolved over the years. In the first phase, between 1980 and 1987, only eight CDDs were formed. The second phase between the 1987 and 1997 period marked a steady growth of new CDDs (averaging about seven) each year. Many of these CDDs were high-end, exclusive residential enclaves (with facilities such as golf resorts and tennis courts) in central and south Florida (Hillsborough, Collier, Broward counties), which attracted retirees from all over the country. The third phase between 1997 and 2006 was marked by an explosive growth in the number of CDDs (averaging about 42) formed each year, mainly propelled by the hot housing market in the late 1990s and early 2000s. During this phase, CDDs increased in the south Florida metropolitan areas (especially Miami-Dade County), where housing prices had increased exponentially. As the table inset in Figure 1 shows, 465 of the 590 CDDs (an overwhelming 80%) were formed in the 2000s. That is, although CDDs grew initially in the mid-1980s to meet concurrency requirements, the boom in CDDs has been mainly in response to the hot housing market in the state. The fourth phase since 2006 is marked by a significant decrease in the formation of new CDDs, mainly because of the nose-diving of the housing prices in the state. In 2009, only five new CDDs were formed. Many of the CDDs that were formed during the height of the housing market began to face financial problems in raising and servicing the bonds.

Figure 1.

Number of CDDs created annually, 1980-2010

Of the 67 counties in Florida, 37 have at least one CDD. The CDDs are largely urban, as the overwhelming majority (nearly 84%) of the counties where CDDs are located are metropolitan in nature (according to Office of Management and Budget’s 2003 definition). Small rural counties, however, also have significant CDD activities relative to their population size. For example, the Villages, a large retirement community (with more than 40,000 residents), comprises 12 CDDs, 10 of which are located in rural Sumter County. A large majority of CDDs are for residential development purposes or have a residential component; only a few CDDs are oriented solely toward commercial or industrial development purposes.

Figure 2 shows the geographical distribution of CDDs by county. As Figure 2 shows, CDDs are mainly concentrated in central Florida, where they have had a long history. The second largest concentration of CDDs is in south Florida, where CDDs emerged more recently. CDDs are distributed to a lesser extent in the north Florida counties. More than 90% of the CDDs are smaller than 1,000 acres in size, established through a local ordinance of the city or county. Two thirds of the CDDs were approved through a county ordinance, generally located in unincorporated areas, where infrastructure services (especially basic utilities such as water and sewer) were more deficient than in incorporated areas. In this, the CDDs fulfilled a crucial infrastructure need.

Figure 2.

Geographical distribution of CDDs by county, 2010

Table 1 summarizes the major functional characteristics of CDDs in the top six counties with the most number of CDDs. Since the table is based on data available for 87% of the CDDs (253 out of the total 290), it is likely to well represent the characteristics of CDDs in the six counties. These are metropolitan counties located on the Florida east and west coasts: Hillsborough, Miami-Dade, Lee, Pasco, Manatee, and St. Lucie. As Table 1 shows, more than 70% of the CDDs are residential and 25% are mixed use (with some combination of residential, commercial, and institutional uses); purely commercial CDDs (4%) and industrial CDDs (less than 1%) are much fewer. These CDDs cover more than 88,000 acres of land. The land size, however, varies widely, from nearly 9 acres to nearly 1,100 acres per CDD (not including CDDs set up under state ordinance). The average size of a CDD is 344 acres. The CDD size, on average, is small in Miami-Dade County (110 acres) as compared with those in Pasco County (544 acres). If the CDDs were to fully carry out their plans, they would construct nearly 202,000 housing units (including single-family, townhomes, and condominiums). Clearly, the CDDs comprise a substantial part of land development and housing construction in the six counties.

Table 1.

The Share of CDDs

	Share of CDDs by functional type (%)				Property development		Number of CDDs
County	Residential	Commercial	Mixed use	Industrial	Land area (acres)	Housing units	Sample size	Population size
Hillsborough	66	2	32	0	21,070	47,019	53	66
Miami–Dade	83	3	14	0	6,427	44,733	58	58
Lee	68	3	30	0	13,357	22,189	37	51
Pasco	73	3	24	0	19,588	37,227	37	39
St. Lucie	39	12	48	0	14,576	30,797	33	39
Manatee	91	3	3	3	13,026	19,834	35	37
All	71	4	25	0	88,043	201,799	253	290

Source. Authors’ calculations.

Note. CDD = Community Development District. Sample size refers to the number of CDDs in each county for which we could obtain data. Population size refers to the number of CDDs in each county according to the Florida Department of Community Affairs database.

Infrastructure Financing by CDDs

CDDs grew in the wake of Florida’s 1985 GMA that imposed concurrency requirements, which applied to “sanitary sewer, solid waste, drainage, potable water, parks and recreation, schools, and transportation facilities, including mass transit” (§163.3180 Fla. Stat, 1985). As models of public infrastructure financing, the CDDs have been innovative financing mechanisms from the governments’, developers’, and residents’ perspectives. From the state and local government perspectives, the CDDs filled the gap left by insufficient public funding for basic infrastructure requirements. Since Florida does not have a state income tax, the state depends heavily on sales taxes (which is inherently volatile) to pay for public facilities and services. To fulfill the concurrency requirements under GMA, the state was envisaged to provide 66% of the projected infrastructure costs ($53 billion) over the next 10 years, met in part by extending the sales tax to services (i.e., a services tax). However, the services tax was repealed in the face of stiff public opposition. Consequently, the state provided only 45% of the projected costs (Nicholas & Chapin, 2007, p. 65). The rest of the GMA requirements became an unfunded mandate on local governments (Ben-Zadok & Gale, 2001).

State constitutional limitations on ad valorem and optional taxes also limited the capacity of local governments to pay for the concurrency requirements (Pelham, 1992). The 1968 Florida Constitution limited county and municipal ad valorem taxes to 10 mills (1 mill = $1 tax per $1,000 of property value; Art.VII, §9(b) Fla. Const.). It also introduced the homestead exemption, which has since been increased through subsequent constitutional amendments (Art.VII, §6 Fla. Const.). Counties and municipalities may increase ad valorem taxes only through referendum, for not more than two years, with majority voter approval (§200.091 and §200.101 Fla. Stat. 2007).There are also referendum requirements for issuing general obligation bonds. The constitutional requirements were supplemented in 2007 with a statute stipulating a maximum “rolled-back” tax levy, which refers to “the amount of taxes which would have been levied in the prior year if the maximum millage rate had been applied, adjusted for growth in per capita Florida personal income” (§200.065(5a), Fla. Stat., 2007). The rollback reduced the millage rates across the state: Whereas 20 counties had millage rates of 9.0 or higher in 1999, there were only 2 such counties in 2009 (Florida Property Valuations and Tax Data, 1999, 2009).

In the face of the state’s constraints on raising taxes, local governments shifted the bulk of the financial burden to private developers in the form of impact fees and (new) special districts (Burge & Ihlanfeldt, 2007; Dubov, 2001; Nicholas & Chapin, 2007). Impact fees are “one time levies, predetermined by a formula adopted by a local governmental unit that are assessed on property developers during the construction permit approval process” (Burge & Ihlanfeldt, 2007, p. 284). Whereas the impact fees are for specific infrastructure services paid by developers as lump sum amounts, CDDs are for multiple infrastructure services and funded through tax-exempt bonds. The impact fees are transferred to property buyers upfront by adding to the development costs; however, in CDDs the infrastructure assessments are separate from the development costs (Porter, 2008). Florida counties experiencing rapid growth have actively adopted impact fees (Jeong, 2006), just as CDDs have also mainly grown in large metropolitan counties.

From a developer perspective, the CDD bonds became attractive since the tax exemption reduced project costs. Forming the CDD helped the developers market the infrastructure costs as municipal bonds to attract investors and get favorable interest rates. The bonds helped make housing prices in CDDs attractive in a volatile real estate market, as the infrastructure costs are not bundled into the housing prices—homeowners pay for the costs separately through special assessments. The security of repayment is high since the special assessments are “coequal with the lien of state, county, municipal, and school board taxes” (§190.021(9) Fla. Stat., 1980); the assessments are sent to homeowners as part of the property tax bill. This, however, has been an object of contention with the buyers, who are often unaware of what a CDD is and are taken aback when they realize that the county tax bills include the assessment fees. As a result, real estate agents in many counties are required to explicitly declare if a property is in a CDD and denote that the assessment fees are extra.

From a residents’ perspective, the infrastructure in the new developments are paid for by the new residents in the districts, rather than through general-purpose taxes on all residents (the “pay as you go” model). The CDD model eschews the traditional criticism that costs of new suburban developments are borne through taxes on existing residents. Figure 3 summarizes CDD financing between 1998 and 2007. The CDD revenues increased from $239 million in 1998 to $1.28 billion in 2007. CDD expenditures grew commensurately from $222 million to $1.24 billion. The bond debt amount, however, increased more dramatically from $666 million to $3.45 billion; the number of CDDs issuing debt bonds increased more than fourfold, from 78 to 356. CDDs raised nearly $7.0 billion in revenues and spent about $6.3 billion dollars between 1998 and 2007, issuing nearly $15.6 billion in debt amount. CDD financing has thus been a substantial investment for infrastructure. Indeed, in comparison with cities and counties that have experienced a decline in their share of municipal revenues, expenditures, and debt, CDDs have grown steadily during the 10-year period.

Figure 3.

CDD revenues, expenditures, and debt, 1998-2007

The CDDs have the authority to issue different types of tax-exempt bonds for financing infrastructure. The most frequently used are revenue bonds (§190.016(8) Fla. Stat., 1980) that are secured by special assessments, user charges, and/or fees. The CDDs may also issue general obligation bonds (§190.016(9) Fla. Stat., 1980) that are secured by ad valorem taxes to finance or refinance capital projects or to refund outstanding debt through voter referendum. Other types of borrowing mechanisms available to CDDs are special assessment bonds (§190.022 Fla. Stat., 1980), bond anticipation notes (§190.014 Fla. Stat., 1980), and negotiable notes or warrants (§190.015 Fla. Stat., 1980). The bulk of CDD expenditures between 1993 and 2003 was to service bond debts (40%) and to fund physical infrastructure (40%). About 12% was used for general government expenses (Chapin & Thomas, 2005, p. 30).

The CDDs have two types of revenue sources to repay the bond debts: nonlienable and lienable. Nonlienable revenues refer to fees, rentals, and charges (§190.035 Fla. Stat, 1980). The lienable revenues are ad valorem taxes and special assessments (prorated as per Chapter 170 of the Florida state statutes). CDDs are authorized to levy ad valorem taxes in addition to those levied by other local governments; the funds could be used to service the bonds as well as to provide for sinking funds (§190.021(1) Fla. Stat., 1980). Special assessments are assessed on the benefits received from land instead of property values. There are two types of special assessments: benefit assessments (to repay “bonds issued and related expenses to finance district facilities and projects”) and maintenance assessments (to “maintain and preserve the facilities and projects”; §190.021(2) and (3) Fla. Stat., 1980). Whereas benefit assessments are used to pay off capital debt, maintenance assessments are recurring expenses for infrastructure upkeep.

The CDD assessments appear on the property tax bill as non–ad valorem items and the amount is set by a board of supervisors every year. As an instance, the 2012 assessment for Lely CDD, a master-planned community located in Naples, was as follows: a flat maintenance assessment of $691.29 for all residential units and debt assessment ranging from $541.18 for multifamily units to $994.98 for single-family units (Lely CDD Minutes, August 17, 2011). Thus, the total amount of assessment paid by a homeowner would range from $1232.47 to $1686.27. The debt assessment portion reduces as the capital debt is paid off. The assessment is payable in no more than 30 yearly installments (§190.022 Fla. Stat., 1980). The bonds and special assessments constituted the bulk of CDD revenues (nearly 60% and 25%, respectively) between 1993 and 2003; user charges and ad valorem taxes were sparingly used (they were 4% and 1%, respectively, of the total revenues during the same period; Chapin & Thomas, 2005, p. 28).

In the face of Florida’s fiscal reality, where the state could not fund the concurrency requirements and the local government resources were strapped, the CDDs acted as borrowing machines in Leigland’s (1994) terms. The CDD financing has indeed been useful to fulfill the infrastructure needs in new developments in a state where population burgeoned in the late 20th century. The new residents bear the onus of the public infrastructure and facilities. As special districts, the CDDs have been entrepreneurial in bringing additional financial resources for infrastructure purposes (Porter et al., 1992). Local politicians generally support CDDs since the infrastructure is not paid out of the local government coffers, and the additional homes increase the property tax base. Pete Wahl, a former commissioner of Lake County and later affiliated with the Villages CDDs, explains,

Chapter 190 is perfect for Florida because it helps developers build a fantasy in the middle of nowhere. Sumter County could never have provided us with the services we needed. The nearest municipality was poor and miles away. Chapter 190 let us do it ourselves. . . . We’re a form of government and we can’t cease to exist. Our assessments are collected with county taxes and must be paid. It’s a guaranteed collection system. (Quoted in Blechman, 2008, p. 120)

Overdependence on the CDDs to fund infrastructure needs in new communities, however, may not be entirely prudent. Private developers and landowners will establish CDDs to the extent they are profitable. The downturn in the housing market negatively affected the CDDs’ ability to service their debts. As a CDD is developed, homeowners in the CDDs are liable to pay special assessments after they purchase the property. However, with the housing market collapse and fewer properties being sold, the developers had to foot the repayment gap because of unsold properties. Bond defaults increased in those CDDs that had constructed part of the development but had not sold enough housing units to service the bond debts. CDD defaults, which were unusual before 2007, have become quite pronounced since then. More than 100 CDD bonds amounting to nearly $2.8 billion issued between 2004 and 2008 were reported to be in default in 2009 (Schifrin, 2009). To pay the debts, CDDs have had to dip into their reserve funds, restructure the debts, or relinquish land (Sigo, 2010). The CDD defaults could negatively affect residents and the neighborhood quality. For example, out of the 115 CDDs in Tampa Bay, 28 had already defaulted and 25 were on the brink of default in 2009 (Thorner, 2009). The defaulting CDDs had not been able to sell homes in the face of the housing market downturn. Thorner (2009) argued that the defaults could “have serious ramifications for thousands of homeowners across Tampa Bay and accelerate the decline of already troubled Florida banks.” The CDD defaults could result in unfinished infrastructure facilities and nonfulfillment of essential maintenance tasks.

A CDD could be terminated under different circumstances. When a CDD defaults in its payments, the local government is not liable for a district’s debt. To ensure this, some counties (e.g., Miami–Dade) even require the petitioner to establish a special taxing district that will take over maintenance responsibilities in case the CDD is dissolved or fails to maintain the infrastructure facilities. A CDD could petition for voluntary dissolution when it has no outstanding financial obligations (§190.046(9) Fla. Stat., 1980). In such cases, the land ownership, operation, and maintenance of facilities, and other assets are transferred to other entities such as homeowner associations, nongovernmental entities, cities, and counties. The local general-purpose government could terminate a CDD for assuming a specific community development service; in such case, the local government also must assume the district’s debt. A circuit court judge can automatically dissolve a CDD if it has not obtained a development permit within five years of its formation (§190.046(7) Fla. Stat., 1980).

CDD Management

Despite the current financial woes of CDDs, CDD financing has been largely useful in funding infrastructure services. A persistent criticism of CDDs, however, is their management. The Orlando Sentinel published an award-winning series of reports titled “Government Inc.: You Move In. They Cash In” in 2000 that was critical of the management practices of CDDs. Much of the criticisms stems from the CDD governance structure that is more favorably oriented to private developers than the residents. Since governance of the CDDs is initially dominated by developers, the structure creates accountability issues with the residents.

In theory as well as practice, the CDDs are “private” governments governed by developers and their nominees, and few resident voices (McKenzie, 1994). For the initial six years, a CDD is governed by a five-member board of supervisors elected by the district’s landowners (who are also the developers). The landowners have one vote per acre of land in electing the board (§190.006, Fla. Stat., 1980). After six years, “qualified electors” (legal residents of the district registered to vote) can elect the board members whose terms expire only if the CDD reaches a minimum threshold of such electors (250 electors in CDDs that are smaller than 5,000 acres and 500 electors in CDDs that are larger than 5,000 acres). The decision-making powers of the CDDs are thus concentrated in the hands of the developers rather than the potential residents during at least the first six years. Most of the major infrastructure development and financial decisions are made during this formative period and the residents who buy later need to live with the decisions already made. There is little, if any, democratic accountability in the decisions made by the developers until the residents themselves are elected to the board of supervisors. The CDDs, in effect, are private or shadow governments controlled by the developers (Axelrod, 1992; McKenzie, 1994).

Whereas the core function of the new districts under the 1975 New Communities Act was to provide basic infrastructure such as water, sewer, drainage, and roads, the 1980 CDD Act broadened the scope of CDDs to provide public improvements and community facilities (e.g., parks, recreational/cultural facilities, fire stations, schools, security facilities, etc.). On one hand, the broader scope enabled the CDDs to provide infrastructure services that complied with the GMA of 1985. CDDs generally provide at least one basic infrastructure (e.g., water supply, sewer and wastewater systems, surface water management/storm water management systems, drainage systems, irrigation water systems, district roads, bridges and culverts, streetlights, and sidewalks.) On the other hand, CDDs also began to make the developments as exclusive enclaves with additional public amenities that are arguably luxurious. Public amenities within CDDs range from recreational facilities such as parks, golf courses, clubhouses, pools, tennis courts, playgrounds, and walking and biking trails; to enhanced landscapes with fancy entry features, security gates, and water fountains; to parking structures and traffic control devices such as speed bumps and internal street signage. Leusner and Holton (2000) portray the CDDs as “islands of luxury”:

Magnificent landscaping that spares argue no palm trees. Security gates. Recreation centers that sometimes have pools with waterfalls, health-club-like workout facilities and professionally surfaced Har-Tru tennis courts. . . . Many of the developments—particularly in golf-crazed Central and Southwest Florida—have a championship course. A handful have golf courses built or bought with CDD bonds. (p. A1)

Although the upscale developments with luxurious public amenities are not inherently problematic, critics argue that the CDDs’ tax-exempt bonds should not be used for developing such private exclusive enclaves. Such high-end developments should be built without the tax subsidy. Moreover, as per Internal Revenue Service (IRS) regulations, infrastructure funded with tax-exempt funds should not be exclusive and should be accessible to the public. Indeed, CDDs need to give public accessibility to the infrastructure; however, “CDD amenities are typically buried deep in huge developments or behind security gates with signs that discourage outsiders” (Leusner & Holton, 2000, p. A1). In reference to Celebration, which was developed as a CDD, McBride (2005, p. 109) observes that it “is not terribly different from other developments in this country known as ‘gated communities,’ except the fact that it does not have a guarded gate around it to provide increased ‘security.’” Highlighting the use of CDDs, Doris Goldstein (2005), an attorney who provides legal services to New Urbanist developers, indicates,

One of the controversies concerning the use of CDDs is the tension between private and public. Conventional developers have used CDDs to fund elaborate recreational facilities that they have tried to reserve to residents’ use, and gated streets that discourage, if not prohibit, outside traffic. The United States Internal Revenue Service has called this an improper use of the tax-exempt bonds that financed the facilities. (p. 22)

The close-knit relationship between the private developers and the CDD managers has been another object of contention. Foglesong (2003) outlines the close relationship between Celebration Co. (a subsidiary of The Disney Corporation) and the management of the Celebration community, which comprises two major CDDs: the Celebration CDD (comprising residential areas) and the Enterprise CDD (comprising commercial areas). He argues that the “CDD protects the managerial prerogatives against residents and regulators alike” (p. 164). In a similar account of Disney’s overt control on Celebration, McBride (2005, p. 105) argues, “Celebration will never be a democracy.”

The close relationship between the developer and CDD tends to mask some of the accountability requirements that the public agencies otherwise are required to have. Sargent and Campbell (2000) portray how developers sold property back to CDDs at inflated prices: The developer of the Villages sold property valued at $1.1 million by Sumter County back to the Village Center CDD for $31 million. The Board of Supervisors of the CDD were employees of or affiliates of the developer (Gary Morse and his company, The Villages of Lake-Sumter Inc.) as late as 2009 (17 years after the CDD was established). Blechman (2008) further provides an account of how the developer and the elderly community in the Villages deeply influence the broader politics of Sumter County.

The close relationship between the developer and the CDDs has been a major issue underlying a recent IRS audit of the Village Center CDD. The IRS questioned the tax exempt status of the CDD’s Recreational Revenue bonds worth more than $64 million issued in 2003. The bond was used to purchase property (including two golf courses and a few guardhouses) from the developer, the fair market value of which was only $7.5 million. The IRS further contended that the public infrastructure funded with tax-exempt funds were not accessible to the public: Gates and manned guardhouses limited access to public roads inside the CDD to residents only; the general public could also not access the golf courses. In a scathing report, the IRS maintained that the Village Center CDD did not qualify as a political subdivision as per IRS regulations, highlighting also its close connection with the developer:

What is the “District” in terms of the issuance of tax-exempt bonds? It’s really nothing more than a five member governing board populated with Developer employees or related parties that have a history of approving an unlimited amount of tax-exempt bonds to purchase assets from the Developer in transactions that in the real world would never pass scrutiny as arms length transactions. This doesn’t sound like an entity that the Service wants to be considered a valid issuer of “tax-exempt bonds.”

All community development districts go through an initial period of “government by developer” where until property is sold and sufficient residents move in (qualified electors) the landowners control the district. The District in this case was designed to perpetuate this “government by developer” phase indefinitely. (Servadio, 2009, p. 6)

The IRS recommended that the CDD redeem its bonds (totaling nearly $355 million) and pay a tax of $2.8 million as a part of the settlement agreement. If not accepted, the audit would be extended to include six more bond issues of the Village Center CDD and two bond issues by the related Sumter Landing CDD. The Village Center CDD did not accept the agreement; hence, the IRS expanded the audit. In its defense, the Village Center CDD (2011) made a “Request for Technical Advice,” essentially claiming that the CDD qualified as a political subdivision under IRS rules. An agreement is still pending as of this date of writing.

Clearly, there are theoretical and practical issues with CDD management. In this, CDDs share some of the larger political and social criticisms made of special taxing districts in general. In his critique of the growth of Common-Interest Developments (which include homeowner associations, condominiums, cooperatives, etc.), McKenzie (1994) argues that the Common-Interest Developments “compete with cities for the affluent, siphoning off their tax dollars, their expertise and participation, and their sense of identification with a community” (p. 23). Similar arguments could be extended to CDDs too—CDDs are likely to attract the wealthier residents to provide their own facilities, creating exclusive enclaves (Griffith, 2007, p. 973). CDDs are further susceptible to accountability problems, if a close-knit relationship exists between the developer and the CDD board of supervisors.

Conclusion

Florida’s experience with CDDs is worth exploring, since a few other states—especially Georgia and Tennessee—have attempted to emulate the CDD model. With fast growth in population, these states face infrastructure predicaments. At the same time, states and local governments are hard-pressed to fund the infrastructure. As the Florida experience shows, the CDDs have indeed been innovative financial mechanisms from government, developer, and resident perspectives. The CDDs became expedient in the face of concurrency requirements of the GMA. The concurrency requirements could not have been met in the face of fiscal reality of the state, where both the state and the local governments did not have the adequate financial means to fund infrastructure in new communities. Local government officials find the CDDs attractive as the infrastructure costs do not need to be met from their coffers. In the context of Florida’s growth machine, the new construction also implied an additional property tax base for the local governments. Private developers have an incentive to form CDDs since these special districts enable them to issue tax-exempt bonds. The bonds free the developers from putting up their own funds upfront to meet the infrastructure costs. CDDs grew in the face of the housing boom in the state since the late 1990s. As independent special districts, CDDs enjoy administrative, political, and financial autonomy from local governments (except that they do not have planning and zoning powers). From a resident perspective, local taxes need not be raised for funding infrastructure in the new communities, as the bonds are repaid through special assessments on property owners in the CDDs.

Although CDDs are useful institutional mechanisms for finance, overdependence on them could be problematic. As the Florida experience shows, CDDs declined since 2006 because of the downturn in the housing market. To form CDDs, the developers needed to have the incentive of market profits from the infrastructure projects. With the disappearance of such an incentive, the formation of new CDDs slowed in the state. Many of the CDDs formed during the market peak also began to face financial problems. CDD defaults on bond repayments increased since 2007, especially where the CDDs had not been able to sell homes because of the market downturn. Arguably, the default could be prevented if CDD rules were to prevent developers from drawing on the bond money too much ahead of home sales (Thorner, 2009). The CDD tax exemption could also be applied toward funding only certain basic infrastructure (i.e., roads, sewer, and water), whereas other enhanced amenities (e.g., golf courses, clubhouses, guard gates) are taxed.

Developers using the CDD mechanism have the advantage of charging special assessments on infrastructure facilities separately. In other words, between two similarly priced houses in a CDD and a non-CDD, the house in a CDD is likely to cost more because of the added special assessments. Since the CDD mechanism is not well known, buyers may not be aware at the time of purchase; anecdotal newspaper reports indicate that buyers are surprised when they realize that their property tax bills include CDD special assessments besides the ad valorem taxes. The CDD Act stipulates realtors to explicitly declare if a property is located in a CDD, so that the buyer is aware at the time of purchase. However, CDDs could be asked to do more: for instance, declare the annual assessments as an additional lump sum to the house costs, so that buyers can compare a CDD and a non-CDD property on an even scale. With CDDs becoming more popular, realtors and prospective buyers should also be educated about the special requirements of CDDs.

Addressing other management issues that have arisen over the years could also strengthen the use of CDDs in other contexts. The board of supervisors is elected by the developers for the initial period of 6 or 10 years, depending on the size of the CDD. The initial management control by the developers implies that the developer can make decisions without any accountability to the residents. In a few cases, the developers control the CDDs even after the initial stipulated period is over. The close-knit relationship between the developers and the CDDs could result in the loss of arm’s-length transactions required in the issue of bonds and the investments with such bonds. Newspaper reports as well as IRS audits of CDDs in Florida have highlighted such close-knit ties between the developers and CDDs. Unfortunately, the CDD Act in Florida is not explicit on the consequences when such close-knit ties exist. The CDD Act should prescribe a strict deadline beyond which the developers should not be able to elect their nominees as supervisors.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article:

This research has been partially supported through the Kauffman Doctoral Student Assistantship and the Doctoral Evidence Acquisition Fellowship given to the first author by the Eugenio Pino Entrepreneurship Center and the University Graduate School at Florida International University, respectively.

Bios

Gina Scutelnicu, PhD, is an assistant professor in the Department of Public Policy and Administration at Jackson State University. Her research interests include special districts, public infrastructure financing, and urban economic development. She has published in the Journal of Budgeting, Accounting and Financial Management.

Sukumar Ganapati, PhD, is an associate professor in the Department of Public Administration at Florida International University. His research interests include housing, community development, and information technology applications. His publications have appeared in several urban studies journals, including Journal of American Planning Association, Journal of Planning Education and Research, and International Journal of Urban and Regional Research.

References

Anthony

(2003). The effects of Florida’s Growth Management Act on housing affordability. Journal of the American Planning Association, 69, 282-295.

Axelrod

(1992). Shadow government: The hidden world of public authorities—and how they control $1 trillion of your money. New York, NY: John Wiley.

Ben-Zadok

Gale

D. E.

(2001). Innovation and reform, intentional inaction, and tactical breakdown: The implementation record of the Florida concurrency policy. Urban Affairs Review, 36, 836-871.

Berman

E. M.

West

J. P.

(2011). Public values in special districts: A survey of managerial commitment. Public Administration Review, 72, 43-54. doi:10.1111/j.1540-6210.2011.02477.x

Blechman

A. D.

(2008). Leisureville: Adventures in America’s retirement utopias. New York, NY: Grove/Atlantic.

Bollens

J. C.

(1957). Special district governments in the United States. Berkeley: The University of California Press.

Bourdeaux

(2005). A question of genesis: An analysis of the determinants of public authorities. Journal of Public Administration Research and Theory, 15, 441-462.

Bourdeaux

(2007). Reexamining the claim of public authority efficacy. Administration & Society, 39, 77-106.

Bowler

Donovan

(2004). Evolution in state governance structures: Unintended consequences of state tax and expenditure limitations. Political Research Quarterly, 59, 189-196.

10.

Burge

G. S.

Ihlanfeldt

K. R.

(2007). Documenting the rise of impact fees in Florida. In Chapin

Connerly

Higgins

(Eds.), Growth management in Florida: Planning for paradise (pp. 283-304). London, England: Ashgate.

11.

Byrne

P. F.

(2010). Does tax increment financing deliver on its promise of jobs? The impact of tax increment financing on municipal employment growth. Economic Development Quarterly, 24, 13-22.

12.

Caitlin

R. A.

(1997). Land use planning, environmental protection, and growth management: The Florida experience. Chelsea, MI: Ann Arbor Press.

13.

Carr

J. B.

(2006). Local government autonomy and state reliance on special district governments: A reassessment. Political Research Quarterly, 59, 481-492.

14.

Chapin

Connerly

Higgins

(Eds.). (2007). Growth management in Florida: Planning for paradise. London, England: Ashgate.

15.

Chapin

Thomas

(2005). Investigating the community development district (CDD) model of infrastructure financing (FSU DURP Working Paper). Retrieved from http://www.coss.fsu.edu/durp/sites/coss.fsu.edu.durp/files/WPS_07-04_Chapin.pdf

16.

Chicoine

D. L.

Walzer

(1985). Government structure and local public finance. Boston, MA: Oelgeschlager.

17.

Deller

S. C.

(1998). Local government structure, devolution, and privatization. Review of Agricultural Economics, 20, 135-154.

18.

Doig

J. W.

(1983). “If I see a murderous fellow sharpening a knife cleverly . . .”: The Wilsonian dichotomy and the public authority tradition. Public Administration Review, 43, 292-304.

19.

Dubov

(2001). Circumventing the Florida constitution: Property taxes and special assessments, today’s illusory distinction. Stetson Law Review, 30, 1469-1508.

20.

Florida Department of Community Affairs. (2010). Official list of special districts online. Retrieved from http://dca.deo.myflorida.com/fhcd/sdip/OfficialListdeo/

21.

Florida Environmental Land Study Management Committee. (1973). Environmental land management: Final report to the legislature. Tallahassee: State of Florida. Retrieved from http://www.dca.state.fl.us/fdcp/dcp/publications/Files/ELMSI.pdf

22.

Foglesong

R. E.

(2003). Married to the mouse: Walt Disney World and Orlando. New Haven, CT: Yale University Press.

23.

Foster

K. A.

(1997). The political economy of special-purpose government. Washington, DC: Georgetown University Press.

24.

Frant

(1997). Reconsidering the determinants of public authority use. Journal of Public Administration Research and Theory, 7, 571-590.

25.

Goldstein

(2005). New towns, private governments. In Scott

(Ed.), A guidebook to new urbanism in Florida 2005 (pp. 21-22). Stuart: Congress for New Urbanism Florida. Retrieved from http://www.newtownlaw.com/articles.htm

26.

Griffith

J. C.

(2007). Special tax districts to finance residential infrastructure. The Urban Lawyer, 39, 959-982.

27.

Hobbs

Stoops

(2002). Demographic trends in the 20th century (U.S. Census Bureau, Census 2000 Special Reports, Series CENSR-4). Washington, DC: Government Printing Office. Retrieved from http://www.census.gov/prod/2002pubs/censr-4.pdf

28.

Jeong

M.-G.

(2006). Local choices for development impact fees. Urban Affairs Review, 41, 338-357.

29.

Leigland

(1994). Public authorities and the determinants of their use by state and local governments. Journal of Public Administration Research and Theory, 4, 521-544.

30.

Leusner

Holton

(2000, October 18). Islands of luxury: Master-planned communities use tax-free bonds to enhance their exclusivity, privacy and amenities. Orlando Sentinel, p. A1. Retrieved from http://articles.orlandosentinel.com/2000-10-18/news/0010180466_1_community-development-districts-augustine-port-st

31.

MacManus

S. A.

(1982). Special districts: A common solution to political pressures stemming from city-county fiscal inequalities. Journal of Urban Affairs, 4(2), 1-10.

32.

Marlow

(1995). The influence of special districts governments on public spending and debt. Applied Economics, 27, 569-573.

33.

McBride

K. D.

(2005). Collective dreams: Political imagination and community. University Park: Pennsylvania State University Press.

34.

McCabe

C. B.

(2000). Special-district formation among the states. State and Local Government Review, 32, 121-131.

35.

McKenzie

(1994). Privatopia: Homeowner associations and the rise of residential private government. New Haven, CT: Yale University Press.

36.

Mitchell

(2001). Business Improvement Districts and the “new” revitalization of downtown. Economic Development Quarterly, 15, 115-123.

37.

Morçöl

Zimmermann

(2008). Metropolitan governance and Business Improvement Districts. In Morçöl

Hoyt

Meek

J. W.

Zimmermann

(Eds.), Business Improvement Districts: Research, theories, and controversies (pp. 27-50). Boca Raton, FL: CRC Press.

38.

Nicholas

Chapin

(2007). The fiscal theory and reality of growth management in Florida. In Chapin

Connerly

Higgins

(Eds.), Growth management in Florida: Planning for paradise (pp. 51-66). London, England: Ashgate.

39.

Nunn

Schoedel

(1997). Special districts, city governments and infrastructure spending in 105 US metropolitan areas. Journal of Urban Affairs, 19, 59-72.

40.

Orrick

J. R.

Datch

D. M.

(2008). Special district financing for infrastructure—Sharing the credit with local government. Journal of Taxation and Regulation of Financial Institutions, 21(6), 33-46.

41.

Pelham

T. G.

(1992). Adequate public facilities requirements: Reflections on Florida’s concurrency system for managing growth. Florida State University Law Review, 19, 974-1053.

42.

Porter

D. R.

(2008). Managing growth in America’s communities (2nd ed.). Washington, DC: Island Press.

43.

Porter

D. R.

Lin

B. C.

Jakubiak

Peiser

R. B.

(1992). Special districts: A useful technique for financing infrastructure (2nd ed.). Washington, DC: Urban Land Institute.

44.

Powell

D. L.

(2001). Growth management: Florida’s past as prologue for the future. Florida State University Law Review, 28, 519-543.

45.

Sargent

Campbell

(2000, October 15). Top dollar for plain old stuff. Orlando Sentinel. Retrieved from http://articles.orlandosentinel.com/2000-10-15/news/0010150114_1_county-property-appraiser-sumter-retention-ponds

46.

Schifrin

(2009, October 5). Potemkin villages. Forbes Magazine. Retrieved from http://www.forbes.com/forbes/2009/1005/outfront-housing-goldman-prager-potemkin-villages.html

47.

Servadio

(2009, May 4). Letter to Charles Smith, Village Center Community Development District. Retrieved from http://www.ccfj.net/CDDVillagesIRSletter.pdf

48.

Sigo

(2010). Community Development Districts: Dirt bonds drying up in Florida; more CDD defaults likely, report says. Bond Buyer, 371, 1.

49.

Stephens

G. R.

(2008). Special district governments. In Rabin

Wachhaus

T. A.

(Eds.), Encyclopedia of public administration and public policy (2nd ed., pp. 1788-1794). New York, NY: Taylor & Francis.

50.

Stokes

R. J.

(2007). Business Improvement Districts and small business advocacy: The case of San Diego’s citywide BID program. Economic Development Quarterly, 21, 278-291.

51.

Thorner

(2009, December 6). CDD defaults may be disaster for a swath of homeowners. St. Petersburgh Times. Retrieved from http://www.tampabay.com/news/business/realestate/cdd-defaults-may-be-disaster-for-a-swath-of-homeowners/1056605

52.

Village Center Community Development District. (2011). Request for technical advice TEB 7221. Retrieved from http://districtgov.org/images/IRSupdates/20110614%20-%20IRS%20Update.pdf

53.

Wollmann

Thurmaier

(2012). Reforming local government institutions and the new public management in Europe and in the US. In Mossberger

Clarke

John

(Eds.), Oxford handbook of urban politics (pp. 179-209). Oxford, England: Oxford University Press.