TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
LIST OF BOXES
This chapter presents the legal and political risk category, risks that are broadly defined as those associated with the legal/regulatory framework and with the political environment that may directly limit the ability of local governments and/or other project stakeholders to successfully use value capture techniques for project funding or financing. The most common risk types in this category include: (1) legal feasibility and legislative risks; and (2) political climate and feasibility risks.
Legal feasibility and legislative risks refer to the risk that legislative bodies enact changes to the statutory or regulatory framework in a way that adversely impacts either the ability of a local government to use a particular value capture technique, or the ability of a project to generate the economic development expected. These changes may apply to specific value capture technique-related statutes, as well as to regulations that influence economic development, land use, and/or real estate development. Some general examples of risks in this category include:
The City of Phoenix started using impact fees in the 1980s. At that time, impact fees were established in mostly undeveloped areas with fast development expectations. According to the City of Phoenix, impact fees generated over $34 million in revenues in fiscal year 2019-2020 (32).
In Arizona, impact fees must be used exclusively to fund projects that serve new development. The law explicitly prohibits the use of impact fee revenues to pay operations and maintenance, rehabilitation, environmental, or other non-capital expenditures.10 Additionally, impact fees must comply with numerous common law precedents or court cases, so credit must be provided for developer facility dedications or contributions, and offsets must be provided for future homeowner or business contributions to growth-related infrastructure (via water rates, sales taxes, property taxes, etc.) (33). Moreover, Arizona requires the development of 10-year horizon impact fee plans, annual impact fee reports, and a biennial audit of the impact fee reports. Consequently, the City of Phoenix has to spend a significant amount of resources and coordination efforts across City departments to fulfill the obligations mandated by the State of Arizona.
Historically, these legal requirements have been changing and growing, generating legal risks that, if materialized, could reduce City of Phoenix’s capacity for complying with State of Arizona legal requirements, and consequently, the impossibility of using this value capture technique. In order to mitigate this risk, the City of Phoenix has consolidated impact fee areas (where defensible), streamlined processes, and changed various aspects of the program to reduce the administrative burdens on the development community and meet increasing State of Arizona requirements (33).
On the other hand, the possibility of impact fees being reduced or eliminated due to new statutory restrictions has limited the City of Phoenix’s ability to use impact fee revenues as collateral to issue bonds. To mitigate this risk, the City of Phoenix has used property tax revenues as collateral to issue bonds and pay debt using impact fees. Similarly, the City of Phoenix has partnered with local entities such as community facility districts that have real property taxing power so they can use future property tax revenues to secure low-interest-rate financing and pay debt using impact fees (33).
The Texas Legislature first enacted TRZs in 2007. Legislation has evolved, and changes have been introduced as a response to first implementers and their experiences with technical issues. TRZs are a value capture technique falling in the TIF category that allows a city or county to designate an area around a project as an impact zone to capture some or all of the increments in local property and sales tax revenues resulting from the growth in the zone’s tax base. That incremental tax revenue is used to support funding and financing of the project (34).
County TRZs mainly provide partial funding and sometimes local matching dollars for projects in smaller communities, where the participation of the county with funding is often critical to make a project come to fruition. Between 2009 and 2020, several counties established TRZs, with four of those remaining active in 2020 (35). However, after creating the zone, State and county officials realized that counties would not be able to pledge its future revenue as collateral to secure debt to fund a project. The reason for this was that while Texas counties are explicitly allowed by the Texas Transportation Code to create TRZs, their ability to use tax increment revenue as collateral for a loan or to issue bonds has been limited.11 Several Texas Attorney General opinions issued between 2010 and 2015 made it clear that use of county TRZ revenue as debt collateral could be constitutionally challenged (34). More specifically, the Attorney General opinions say that a county may be prevented by the Constitution’s equal and uniform provision from pledging tax increment revenue from an area to repay debt issued for a project aimed at developing or redeveloping such area.12 A proposal for a constitutional amendment to address this issue was put forward to Texas voters in 2011 but was defeated (34). However, a new constitutional amendment proposal (Proposition 2) was put to a vote and approved on November 2, 2021.13 The amendment explicitly authorizes counties to issue bonds or notes for transportation improvements in underdeveloped areas backed by property taxes, addressing the issue that was preventing counties from effectively using TRZs.
In other words, the ambiguity in the original legal framework governing Texas County TRZs led several counties to pursue the creation of a TRZ to fund transportation improvements, which led to the realization late in the process that they would not be able to use it as a funding source. Situations like this may result in delays and uncertainty in a project’s funding strategy, as local officials scramble to find alternative funding sources. In such cases, where the legal framework for a new value capture technique is unclear or ambiguous, the risk can be mitigated by conducting a thorough independent legal feasibility assessment and approaching potential lenders that may have already assessed the new law.
Local governments and transit agencies across the U.S. have been using naming rights for transit stations and rest areas generating moderate sums of funds to pay for transportation projects. This value capture technique entails selling the rights to name an infrastructure facility to a private entity (1). However, local governments and transit agencies may incur reputational issues and legal risks if this technique is not properly used.
Reputational issues may arise from selling naming rights to a company involved in controversial topics or legal disputes, a situation that could potentially damage the image and reputation of the local government or transit agency. For instance, in Portland, Oregon, the Greater Portland Metro faced controversy over ads on its buses promoting a ballot initiative for legalizing the use of recreational marijuana (36).
Besides local government ordinances and internal local government transportation or transit agency policies, several Federal regulations restrict the use of naming rights; for example, the Highway Beautification Act of 1965 or the Fourteenth Amendment of the U.S. Constitution. In Los Angeles, the Los Angeles Metro canceled plans to sell station and other naming rights due to potential legal risks for not complying with its own policies against companies with “fraudulent, unethical, or prejudicial behavior” (37).
Potential mitigation strategies in cases like these include conducting a thorough legal feasibility study before using this funding mechanism and background checks of the companies interested in acquiring the naming rights to avoid controversy and reputation issues.
Local political climate and political feasibility risks are those that may impact the ability of a local government to use a value capture technique, or the ability of a project to generate the economic development expected, as a result of temporary events or permanent changes in political climate. They also include changes in public support/opposition to a project or to the value capture technique proposed as a result of insufficient public awareness. These risks may include:
Tax incremental districts (TIDs) are a funding technique under which a fee is charged on property owners within a designated district whose properties are direct beneficiaries of a transportation improvement (1). In general, the implementation of TIDs may face resistance from landowners and developers because it is a new tax. Moreover, real property owners within the district may argue that their neighbors outside the district or future residents are not asked to pay the fee although they are benefiting from the improvements. This can be translated as a lack of support.
The Dulles Metrorail Corridor Project is a 23-mile extension of the Metro system in the Washington, DC region. The project is being implemented in two phases by the Metropolitan Washington Airports Authority (MWAA). Phase 1 comprises 11.7 miles of rail and five stations, linking large employment centers to downtown Washington, DC. Phase 2 extends the system 11.4 miles further and adds six stations, including a station at the Dulles International Airport. Operational since July 2014, Phase 1 has been transferred to the Washington Metropolitan Area Transit Authority. The estimated cost for the two phases of the project is $5.7 billion, funded through a combination of tolls, commercial tax districts, and Federal and State grants. Value capture techniques have been used by local governments (Fairfax and Loudoun counties) to fund approximately 20 percent of this cost. This example focuses on the contribution from Fairfax County through the first of two TIDs, the Phase 1 TID (1).
To establish a TID, the Commonwealth of Virginia requires that at least 51 percent of the commercial and industrial real property owners (measured in area or real property assessed value) make a formal petition to initiate the process (33). In Phase 1 of the Dulles Corridor Metrorail Project, this challenge was overcome with the help of a group of developers who supported the idea of contributing to fund the project by means of a TID. The group was named Landowners Economic Alliance for the Dulles Extension of Rail (LEADER). This group carried out an outreach campaign to gather support from other property owners required to formulate the TID petition of Fairfax County (33).
A mitigation strategy for the risk of not having enough landowner support to create a TID in a case like this is to conduct effective outreach to property owners and other potential project beneficiaries. This process allows identifying champions in the developer/landowner community to generate awareness of the project’s value generation benefits among other property owners and gain their support.
As noted in the earlier example dealing with Texas TRZs, in 2011, voters defeated a measure to amend the Texas constitution to allow counties to pledge tax increment revenue from an area to repay debt issued for a project aimed at developing or redeveloping such area, including a transportation project. Almost 10 years later, on November 2, 2021, a similar constitutional amendment explicitly authorizing counties to issue bonds or notes backed by property taxes for a transportation project was voted and approved. The amendment was backed by Texas county officials and advocacy groups, which generated a significant amount of support among legislators and the printed media, and eventually the electorate.14 While the measure failed in 2011, preventing counties from considering TRZs for transportation funding, the outreach efforts spearheaded by local officials in the 2021 election paid off. As a result, Texas counties will be able to consider TRZs as a tool for transportation funding.
The risk mitigation measure that Texas counties could have used for this example in 2011 is exactly what they implemented in 2021, an effective outreach campaign for State policymakers and the public.
10 AZ Rev Stat § 9-463.05 (1996 through 1st Reg Sess 50th Legis)
11 Texas Transportation Code Sections 222.105–111
12 The Texas Attorney General cites article VIII, section l(a) of the Texas Constitution. See letter from Texas Attorney General Ken Paxton to El Paso Representative Joseph C. Pickett dated February 26, 2015: https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/op/2015/kp0004.pdf
13 See election results and proposition text here: https://ballotpedia.org/Texas_Proposition_2,_Authorize_Counties_to_Issue_Infrastructure_Bonds_in_Blighted_Areas_Amendment_(2021)
14 Find a summary of groups opposing and supporting the amendment here: https://ballotpedia.org/Texas_Proposition_2,_Authorize_Counties_to_Issue_Infrastructure_Bonds_in_Blighted_Areas_Amendment_(2021)
