3.3.7.1 Assessment Bonds

Local governmental entities issue assessment bonds to pay for public infrastructure that confers a special benefit upon real property and are payable from assessments imposed on the real property. Assessments are imposed through the formation of an assessment district and constitute a lien upon the assessed property. Should a property owner fail to pay an assessment, the local governmental entity may (and will typically be required to) foreclose upon the real property to collect the assessment. Because assessment districts must be formed before assessment bonds may be issued, the process for issuing assessment bonds often takes 6 months or more.

PRINCIPAL USES – Assessment bond proceeds may be used for a variety of public works or improvements, typically streets, parks, water infrastructure, and sewer infrastructure. Assessments (but not the proceeds of bonds) may also be used to finance specified maintenance and services.

PRINCIPAL USERS – Many local governments use assessment districts and assessment bonds to finance public infrastructure facilities.

LEGAL AUTHORITY – The vast majority of assessment bonds are issued under the Improvement Bond Act of 1915 (California Streets and Highways Code Section 8500 et seq.), referred to as the “1915 Act.” 1915 Act bonds are most often secured by assessments imposed under either the Improvement Bond Act of 1911 (California Streets and Highways Code Section 5000 et seq.), referred to as the “1911 Act,” or the Municipal Improvement Act of 1913 (California Streets and Highways Code Section 10000 et seq.), referred to as the “1913 Act.” Article XIIID of the California Constitution (added by Proposition 218) and the Proposition 218 Omnibus Implementation Act (Government Code Section 53750 et seq.) outline the legal framework for conducting assessment proceedings. See Section 1.4.7, Assessments.

APPROVAL PROCESS – Although there are slight variations between the provisions of the 1913 Act and the 1911 Act with respect to formation proceedings, the following sequence applies generally to both types of assessment districts:

The local government entity forms an assessment district by adopting a resolution stating its intention to form an assessment district, specifying the proposed improvements, the boundaries of the district, and the intent to levy an assessment, and providing for the issuance of bonds. The issuer then records the map of the proposed boundaries of the assessment district and a report prepared by an assessment engineer that describes the special benefit of the improvement to be financed by the assessment. If the engineer’s report is preliminarily approved by the issuer, a public hearing date is set and noticed, and ballots are delivered to the property owners. If, following the hearing, there is no majority protest, the local government entity moves forward with the assessment ballot proceedings. In accordance with California Constitution Article XIIID, ballots are weighted according to the proportional financial obligation of the affected parcel. If a majority of the ballots, as weighted, is in favor of imposing the assessments and forming the assessment district, the public agency may then approve the engineer’s report and impose the assessments. An assessment diagram and notice of assessment is then recorded against the property subject to the assessment.

Once the assessment district is formed and the assessment proceedings are completed, the public agency may approve the bonds and the financing documents by resolution adopted by its governing board.

STRUCTURE AND DOCUMENTATION – Bonds are issued in a principal amount equal to the full cost of unpaid assessment on the property. Generally, the bonds are issued as fixed rate bonds to avoid fluctuations in the assessments due by property owners in each year. The structure of 1915 Act bonds is very rigid and set by statute, including interest payment dates of March 2 and September 2 in each year, and matures only on September 2, a term of not greater than 39 years, and a redemption premium of not less than 3%. The 1915 Act also outlines specific provisions for the redemption of bonds in connection with prepayments of the assessments by property owners. Typically, bonds are structured with a reserve fund because any assessment delinquencies will result in a shortfall in amounts available to pay debt service.

OTHER CONSIDERATIONS

Special Benefit. An assessment may only be imposed if there is a “special benefit” to the property that is over and above the benefits conferred upon the general public at large. General enhancement of property value, by itself, does not constitute a special benefit. Any assessment must be proportional to the benefit actually received by a parcel and the assessment may not exceed the proportional benefit. As an example, property within a community may be assessed to finance a roadway that services more than one community, but the assessment must be limited to the community’s share of the benefit received. This may make it difficult to finance capital improvements in full from assessments. As interpreted by the California Supreme Court, “a special benefit must affect the assessed property in a way that is particular and distinct from its effect on other parcels and that real property in general and the public at large do not share.”72

Standard of Review for Legal Challenge. Since the passage of Proposition 218, the validity of assessments has become a constitutional question, subject to an independent judgment standard of review by the courts. The burden is on the public agency imposing the assessment to prove that the assessment was imposed in accordance with Proposition 218.73

POST CLOSING ADMINISTRATION AND OVERSIGHT – The assessment engineer or the local agency’s engineer must set the assessment levy annually in the amount of the unpaid assessment plus an annual administrative add on equal to the costs of administering the assessment district. Typically, the assessment is collected with the property taxes by the county and disbursed by the county together with other property tax collections. The local government entity must keep careful records of the amounts allocable to any assessment district and must not comingle amounts. Some counties include assessment districts in a Teeter Plan, which results in the local government entity receiving 100% of the assessments in each year regardless of whether the assessments are paid by the property owners. The local government entity must be aware of whether the county employs the Teeter Plan and, if so, whether it applies to assessment districts. If the county does not apply the Teeter Plan to assessment districts, the local government entity will be responsible for conducting foreclosure proceedings in accordance with the foreclosure covenant in the bond documents, typically within a certain period after the tax installments are due. See Section 3.3.5, Teeter Bonds.