by Adam C. Parker
Adam Parker is a law clerk at the North Carolina Court of Appeals. He was formerly a summer law clerk with the UNC School of Government. Adam graduated from the UNC MPA Program in 2010 and UNC Law in 2013.
In 2012, Jeff Hughes and I published a paper that compared PACE and the culture of special assessments in three states: North Carolina, Georgia and Florida. Several items have occurred that are relevant to PACE and special assessments in North Carolina, which are updated in a revised version of the paper found here. For a brief summary of the paper, please also see Matt Harris’s blog post here.
This post summarizes the major changes to both the authority of the underlying financing instrument behind PACE in North Carolina, the special assessment, as well as some items of interest that have occurred nationally which affect PACE, particularly in the residential setting.
Brief Background of PACE and Special Assessments
Property Assessed Clean Energy (PACE) is a form of financing renewable and energy efficiency improvements. PACE uses a long-standing public finance tool, the special assessment, to provide property owners with these improvements, which typically take the form of a photovoltaic panel or other energy efficiency improvements. At its core, a special assessment imposes a “charge” or “tax” on a property for a specific public benefit that is provided to the property. Traditionally, special assessments were levied for limited purposes in North Carolina, such as streets, sidewalks, and similar purposes. North Carolina authorized a new form of special assessment, called the Critical Infrastructure Special Assessment, which is broader and scope and also allows local governments to issue assessment-backed debt. Renewable energy improvements are one of these broader purposes allowed by the newer form of special assessment. For a previous blog post that expounds further on the background of special assessments, see my previous blog post at the Community and Economic Development in North Carolina blog here.
Extension of Critical Infrastructure Special Assessment Authority
North Carolina originally authorized special assessment backed debt for a limited period, to expire on July 1, 2013 (for a comprehensive summary of this authority, see Kara Millonzi’s Local Finance Bulletin here). This authority was extended by Senate Bill 2013, which was passed by the General Assembly in 2013. SB103 extended the deadline until July 1, 2015 (the legislation may be found here). The legislation also added clarifying language for property owners who own land with another person, using a fractional approach.
First Use of North Carolina’s Critical Infrastructure Special Assessment Authority
Prior to the initial expiration of the special assessment for critical infrastructure authority, the Town of Hillsborough entered into an authorization agreement to create a special assessment district via a resolution on May 16th, 2013 (the enabling resolution is here). This was the first and only successful local government to use critical infrastructure special assessment authority, although Mooresville filed and withdrew an application from the state’s debt approval body, the Local Government Commission (for a brief article about the extension of the financing instrument and the Waterstone special assessment district in Hillsborough, click here).
Ninth Circuit’s Ruling on FHFA Purchasing Policy
A long-standing debate between advocates of PACE and the Federal Housing Financing Agency (“FHFA”) was seemingly won by the FHFA in the Ninth Circuit in March, 2013. At issue was whether or not the FHFA had followed the proper administrative law requirements for notice and comment before the FHFA issued its decision to stop Fannie Mae and Freddie Mac from funding mortgages that were subject to PACE assessments. The Ninth Circuit ruled that the FHFA did not have to adopt new rules, as its decision to order Fannie Mae and Freddie Mac from purchasing mortgages that are “too risky” is an appropriate action for the FHFA to take to protect those institutions. This was viewed as a large blow to residential PACE programs, although many do not see it as having a large effect on commercial PACE. For the full Ninth Circuit opinion, click here. For a helpful Bond Buyer article summarizing the ruling and reactions to it, click here (subscription required).
Florida CDD Ruled not a “Political Subdivision,” Loses Tax Exempt Status
Lastly, one of the central purposes of the paper was to catalog and compare the various differences between three states to show how much variance there is in how special assessments are used and the implications that the different features of special assessments have for PACE’s viability in states of similar types.
Florida uses Community Development Districts (CDDs) that issue special assessment backed debt much more frequently than North Carolina, for example. One major news item that occurred in June was an IRS ruling against declaring a Florida CDD a “political subdivision,” which also negated the typical tax-free status of bonds issued by political subdivisions. An excellent summary of the IRS ruling can be found here. This IRS decision may have a significant effect on many similarly situated organizations across the country that rely on special assessment backed debt if applied elsewhere.