Opponents detail concerns about proposed legislation

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Opponents of SB 510 pointed to a white paper on the legislation that was prepared by attorney Tim Hutchinson. The following are some of the comments made by Hutchinson in the white paper:

A Suburban Improvement District (“SID”) is a governmental body. Even so, it is not a municipality and does not have the ability to tax its citizens. Importantly, a SID is not supposed to operate as a city. rather, it is a statutorily created mechanism for borrowing funds at a low rate of interest for the construction of improvements.

The Assessment of Benefit (AOB) is just that – the amount of benefit the property owner receives from the construction of the planned improvements. While a SID cannot tax the property owners, the SID can collect the benefit received by the property owners.

The SID can also assess interest against the benefit received in an amount equal to the interest being paid on bonds or the maximum interest allowed by law. The whole justification behind a SID is that property owners can pay back the benefit received from the improvements over a period of time.

Once the AOB is established, it is placed on the county tax rolls and acts as a lien against the property. The AOB can be levied against on an annual basis.

Each year, commissioners determine what percentage of the assessed benefits will be levied and used to pay off the bonds. Once the bonds have been paid off, there are usually remaining benefits to be levied against because the value of the improved SID property exceeds the costs of the improvements. As such, the SID can still collect against the AOB for operations and maintenance of the improvements until the AOB has been extinguished. Once it is extinguished, there can be no more levying against the AOB because the benefit has been paid back and any further levying would be a tax, which is not permitted by law.

SIDs throughout Arkansas have been levying against the assessed benefit and interest since the 1960s and ‘70s. When they start to extinguish the assessment of benefit, they re-assess the benefit by hiring another appraiser who again appraises the same lot and the same improvements, but comes up with a higher assessed benefit (thereby extending the life of the SID).

Even after reassessing the benefits received, SIDs are struggling financially because they are attempting to provide all the services that a city provides, something that was never intended under the law. As such, SIDs continue to come up with ways to increase revenue. Understandably, SID property owners have recently said enough is enough. Several have filed suit as they have paid off the benefits their property received and, as such, do not want to keep paying for paid-off improvements.

These property owners have asked if they could just pay off the current AOB and be done with it. However, HISID, in particular, has refused as the continued collection of the AOB is the SID’s only funding source. As such, property owners are left with a debt that creates a first lien on their property and have no means of paying off the debt to obtain free and clear title. Sen. Ballinger’s bill not only wants to legitimize the SID’s practices, but wants to give them the power to make the situation worse.

SB 510 says that a SID can charge up to 10 percent interest and it prevents a property owner from paying off the AOB to avoid the 10 percent interest. It does not clarify if that interest can be compounded. Since HISID is currently levying only 6 percent of the AOB, it means that the property owners’ debt obligation will increase each year (a higher amount of interest accrues than the amount of principal reduced). Under Senator Ballinger’s bill, the AOB will not be reduced each year but will, instead, be increased each year.

Under SB 510, a SID could, by levying 6 percent of the AOB and assessing a 10 percent interest, almost double the debt owed by property owners in just 10 years and triple the debt within 20 years. One option the landowner has to stop the negative effects of compound interest would be to pay off the assessed benefit. SB 510, however, prohibits a property owner from paying off more than the specific amount levied for that year. While this scheme is good for the SID because it ensures a perpetual revenue source, it does so at the expense of the property owner who is perpetually in debt to the SID.