by Tu-Uyen Tran, The Forum of Fargo-Moorhead (republished with permission from The Forum)
FARGO – Area voters already approved two sales taxes to help pay for the proposed Fargo-Moorhead flood diversion project and now property owners are being asked to vote on a special assessment.
Ballots were sent out earlier this month for the vote, which is unlike any taken here in recent years.
For one, the Cass County Joint Water Resource District, which is proposing the specials, said it doesn’t actually expect to levy any specials, which is a kind of property tax. Instead, it plans to use sales tax revenues to pay for the local share of the diversion.
For another, at $725 million, this would be the biggest special assessment the region has ever seen, said County Auditor Mike Montplaisir, who’s on the finance committee of the Fargo-Moorhead Flood Diversion Board of Authority.
And finally, the vote is unusual because property owners and local governments will vote, with the number of votes varying greatly among voters depending on how much of the $725 million they’re on the hook for.
Here’s a Q&A to help explain what’s going on.
What am I voting for?
Whether to allow the water resource district to levy a special assessment on properties benefiting from the diversion project.
The district hopes to raise $725 million as part of the $1.8 billion diversion project. There is a half-cent Fargo city sales tax and a half-cent Cass County sales tax dedicated to flood control. But it will take decades for both to raise the necessary funds and Diversion Authority officials want to build the diversion as soon as possible. So they’re raising cash now by selling bonds to investors, who will be repaid over time with the sales tax revenues.
Special assessments are only there to provide a guarantee to investors that they will be repaid, but the specials are not intended to be used for repayment, according to the water district.
I’m being special assessed, but I don’t have to pay it?
Not if sales tax revenue projections are accurate.
Over the two-decade life of the city and county sales taxes, Montplaisir said there should be about enough to pay off the $725 million bonds.
Montplaisir said the latest projection calls for the $26 million annual revenue of both sales taxes to grow 3 to 4 percent a year until they expire, the city tax in 2029 and the county tax in 2031.
This is somewhat conservative. The city sales tax has gone up about 5 percent a year, Montplaisir said, while the relatively new county sales tax has gone up 3.25 percent in the first full-year and 6.8 percent the second.
Then why not guarantee the bond payments with sales tax revenues?
Because doing that makes investors more nervous. And it takes a higher interest rate to make them willing to buy the bonds.
The district compares the special assessment to co-signing a loan.
Let’s say your college-aged son wants a car, but he doesn’t have much of a credit history. If the bank agrees to lend him money, it may charge a high interest rate to reflect the risk it’s taking with him.
Now, let’s say you tell your son you’re willing to co-sign if he pays for the car himself. What you’ve done is tell the bank that if your son can’t pay you will step in, which decreases the risk and allows the bank to lower the interest rate.
This is kind of how it works with the diversion bonds.
If the water district were to guarantee repayment with sales tax revenues, the interest rate has to be higher because there is greater uncertainty. Montplaisir said the economy could go into recession or lawmakers could change what is allowed to be taxed. If revenues are lower than expected, investors could be out of luck.
With special assessments, there is greater certainty of repayment. Specials are a liability against a property and owners who don’t pay risk losing the property, according to Montplaisir. In addition, a special assessment bond is also backed by the full faith and credit of the county. It means that if too many property owners decide to give up their property rather than pay, the county would raise property taxes or whatever is needed to make the payment.
Why is the amount to be raised $725 million when the local share of the project is supposed to be $450 million?
The $725 million includes the state’s share.
In principle, the federal government will pay $800 million of the $1.8 billion cost of building the diversion project, the state of North Dakota and local governments will pay $900 million and the state of Minnesota will pay $100 million.
The state of North Dakota would be responsible for half of the state-local share, or $450 million. So far, state lawmakers have committed just $175 million, leaving $275 million uncommitted. That $275 million plus the local share of $450 million totals $725 million.
So the $725 million is just in case.
Montplaisir stressed that the water district wouldn’t sell $725 million in bonds immediately. If it needed $200 million for the year, it would sell $200 million. If the state chipped in all $450 million, the water district would only have to sell $450 million.
This doesn’t take into account potential savings from the public-private partnership, or P3, a kind of funding method that makes more use of the private sector and is expected to reduce the cost of construction dramatically.
Why is the life of the bond 30 years when the sales taxes only last 20?
Annual payments are lower when stretched out over 30 years. This way, they match the $26 million or so available each year from sales tax revenues. That’s why people get 30-year home loans even when 15-year loans have lower interest rates.
What happens if there’s no federal funding?
The Diversion Authority does not plan to start construction of the diversion channel until it has federal funding. So far, the U.S. Army Corps of Engineers budget does not have a specific line item for the diversion. However, Sen. John Hoeven, R-N.D., has said that the corps has funding for discretionary projects and the way Congress wrote the funding bill requires the corps to give P3 projects, such as the diversion, greater priority.
What happens if there isn’t enough sales tax revenue?
The city of Fargo and Cass County may ask for an extension of the sales tax, Montplaisir said. They may have to even if there is enough revenue to repay the bonds. After the diversion is done, the city and county will have to find a way to fund maintenance.
How much of a voice do I have when two-thirds of the votes belong to local governments?
You have as much of a voice as your liability, according to water district officials.
Property owners are collectively liable for a third of the $725 million, so they get a third of the votes. Local governments are collectively liable for two-thirds, so they get two-thirds of the votes. Liability means how much you’re on the hook for if the sales tax revenue doesn’t pan out.
Water district officials decided to have property owners get less because the direct benefit of the diversion to a property owner is not as great as the indirect benefit. Mark Brodshaug, who chairs the water district, has said indirect benefits include having your workplace and health care facilities protected, and water and sewage systems that work.
It takes months to fix a house or building, but years to repair the economy of a city, he said.
Local governments are elected by residents, so they can still have a say by lobbying their elected officials.
Readers can reach Forum reporter Tu-Uyen Tran at (701) 241-5417