11/30/20: NUMBER-CRUNCHING, NOT NEED, DEFINES TOWN’S PROPOSED MUNICIPAL SERVICE DISTRICTS: AN ANALYSIS OF MSDs AND THEIR CREATION, AND HOW WE BELIEVE SOUTHERN SHORES HAS ERRED.

Homeowners on Seventh Avenue were very vocal in public meetings about needing beach nourishment. If nourishment would benefit Seventh Avenue “to a demonstrably greater extent” than other other areas in town, then Seventh Avenue, arguably, should be an MSD.

Before establishing a municipal service district for a beach erosion-control project, a town’s governing board must determine that the proposed district is in need of the project “to a demonstrably greater extent” than other areas in the municipality.

North Carolina law permits MSDs to be created—and towns to levy an additional tax on properties within them that would otherwise be unconstitutional—because it assumes that the property owners in the MSDs benefit more from the projects (e.g., beach nourishment) or extra services provided by the municipality than other town property owners do.

The most common MSDs, according to the University of North Carolina School of Government, are established for downtown or urban area revitalization and are often referred to as business improvement districts or BIDs.    

You can see easily how the overhaul of a blighted section of a downtown area would directly benefit businesses located there.

But who benefits to a “demonstrably greater extent” from beach nourishment in a resort town where every property owner benefits from maintaining the beaches so that they continue to attract vacationers, who bring revenue to the town; enhance the value and desirability of all homes and properties; and offer exceptional recreational opportunities?

Who benefits to a “demonstrably greater extent” when everyone in town benefits and the beaches, themselves, are not privately owned?

The “demonstrably greater extent” standard for defining municipal service districts was established by North Carolina state law and is fundamental to the designation of such districts. You will find it presented in plain English in N.C. General Statutes sec. 160A-537(a).

We can say unequivocally that at no time during the Town Council meetings held in the six months before the June 16 beach nourishment public hearing was NCGS sec. 160A-537(a) referenced or the “demonstrably greater extent” standard mentioned.

At no time did Town Attorney Ben Gallop or any other attorney explain the standard and the process of creating MSDs to the Council or the general public.

Instead, the Town Council approved hiring DEC Associates, Inc., of Charlotte to work with Town staff to prepare “beach nourishment funding [financial] models,” based on the Town securing special obligation bonds, which would be financed in part by increased special taxes on property owners in newly designated MSDs.

In other words, the Town created proposed municipal service districts in order to start crunching numbers to figure out how much property owners’ real estate taxes would have to increase—and how many properties would have to be included in an MSD—if it approved a 2022 beach nourishment project.

The Town Council expressly authorized Interim Town Manager Wes Haskett to obtain the real-estate value assessments for all properties within Southern Shores in order to work with DEC Associates to calculate how much more tax MSD property owners would have to pay to meet expenses estimated for three possible beach nourishment projects.

Surely you remember the preliminary MSD maps and number-crunching prepared and circulated by the Town that showed three districts, defined solely by proximity to the oceanfront, and suggested tax rates, don’t you? If not, you can refresh your memories by looking at the meeting packet to the Council’s May 19 workshop meeting.

See “Beach Nourishment Funding Models”: Meeting-Packet_2020-05-19.pdf (southernshores-nc.gov)

Unfortunately, it is not possible to search Municipal Service Districts on the Town’s inadequate website and be directed to any useful information. You have to search Council meeting minutes and packets, or go through the archives of The Beacon, to glean the facts.

On April 15, we wrote in The Beacon that:

“The Town has preliminarily proposed three ‘municipal service districts’ to fund the [beach nourishment special-obligation bond] debt through varied tax increases—oceanfront property owners would pay the highest tax rate increase—but it has yet to prepare a report that demonstrates and justifies the proposed district boundaries. All it has done is provide financial data, not a coherent report.”

Town Councilman Matt Neal, who is a wiz with numbers and mathematical calculations, spearheaded this effort. Mr. Neal could, and did, tell property owners at the June public hearing how much additional tax they could expect to pay, based on the location of their property and the tax rate that had been preliminarily calculated.

We have a lot of respect for Mr. Neal’s intellectual abilities and his character. Indeed, we consider him a friend. But we disagreed with his—and the Council’s—modus operandi in this instance. We considered it slipshod and arbitary, if not invalid.

On May 19, we wrote to Councilman Neal that we seriously questioned “the legal justification of the districts that the Town has carved out from the ‘townwide’ tax base, as well as those it has omitted (i.e., the commercial area). They are based solely on proximity to the oceanfront, not on the ‘demonstrably greater extent’ standard.”

We concluded in our letter that: “[A]n analysis based on the statutory standard—not just on simple real-property tax-value number-crunching—is required before MSDs can be created.”

When the Town Council convenes tomorrow at 5:30 p.m. in the Pitts Center, it will have before it two proposed MSDs. They are MSD1, consisting of oceanfront and oceanside properties; and MSD2, which generally consists of properties on the west side of Ocean Boulevard.

As illustrations in the Dec. 1 meeting packet show, MSD2 may or may not include properties between Ocean Boulevard and Duck Road and those on the side streets in Seacrest Village east of Duck Road.

See the meeting packet: https://www.southernshores-nc.gov/wp-content/uploads/minutes-agendas-newsletters/Meeting-Packet_2020-12-01.pdf.

According to a report by Town Manager Cliff Ogburn in the packet, all that the Town Council has to do tomorrow  is consider the “size and makeup” of these two MSDs. The legal question of benefit is still not considered germane. It will be worked into a report after the Council decides which property owners it wants to tax.

BACKTRACKING TO CONFORM WITH N.C. LAW

The Town needs to generate $1,224,775 per year for the next five years to pay for what is estimated to be its portion of the estimated $16 million beach-nourishment project, according to Mr. Ogburn.

That assumes, he says, that Dare County will pay for 50 percent of the project’s costs from its beach nourishment fund, which is made up of monies from the county’s occupancy taxes (2 percent of the 6-percent levy); but that funding is “uncertain.”  Still.

It is still uncertain more than a year after County Manager/Attorney Bobby Outten spoke to the Town Council at length about the County’s funding capability, and The Beacon extensively covered what he said.  (See The Beacon, 11/8 and 11/9/19.)

“Current planning,” Mr. Ogburn writes, calls for a property tax to be levied through a town-wide tax, so that all property owners contribute to the project, with owners of properties in “one or more municipal service districts” paying a higher tax rate.

The increased taxes will be levied July 1, 2021.

The N.C. law on MSDs requires a town council to hold a public hearing on proposed new MSDs before it votes to adopt an ordinance defining them. (NCGS sec. 160A-537(b))

Before a public hearing can be held, the town council must prepare a report containing:

  1. A map of the proposed district, showing its proposed boundaries;
  2. A statement showing that the proposed district meets the “demonstrably greater extent” standard; and
  3. A plan for providing in the district one or more of the services listed in G.S. sec. 160A-536, among which is “beach erosion control and flood and hurricane protection works.”

We argued to Mr. Neal in our letter that this report should have preceded the June 19 public hearing, when a number of speakers addressed the preliminary MSDs and their possible tax rates, but to no avail. Again, we consider the statutory process to have been abused and the analysis done to have been arbitrary and results-oriented.

According to a hypothetical “Beach Nourishment MSD Creation” timeline drafted by Mr. Oburn, MSD property owners will be notified of proposed districts by the end of January, and a public hearing will be held on their designation in March.

State law requires this notice to be sent at least four weeks before the hearing date.

State law also permits property owners to request exclusion from the MSD at the hearing or to submit a written request of exclusion to the Town Council no later than five days after the hearing.

To be excluded, an owner must “state with particularity the reasons why the tract or parcel is not in need of the services . . . of the proposed [MSD] to a demonstrably greater extent than the remainder of the [town], and provide any other additional information the owner deems relevant.” NCGS sec. 160A-537(c1).

We know that an exclusion request is not likely to be granted by a town council that has already made up its collective mind, but this is the redress provided by the statute. There is no statutory right to appeal the Council’s denial of exclusion, but we are not prepared to say that legal action may not be possible subsequent to a denial. 

For the MSD ordinance to be adopted, a majority of the Town Council must approve it at two separate meetings.

Final adoption of the MSDs must be made in April, during the FY 2021-22 budget process, according to Mr. Ogburn’s timeline. The Town Manager notes that the “Dare County Tax Collector” has requested that the MSDs be established no later than May 4, the date of the Council’s May 2020 meeting.

Inasmuch as the timeline shows the Town proceeding “full steam ahead” with presumed votes of approval, and in accordance with the Tax Collector’s deadline, we view the whole process as a farce. If the Town Council truly cared about the application of the statutory standard and about what property owners think, it would have proceeded with a report and a hearing about MSDs immediately after the June 19 hearing. It is clearly just going through the motions here. 

We also wonder, will the notification to MSD property owners come at the same time as those on the oceanfront are being asked to grant perpetual and irrevocable easements to the Town for erosion control activities, which when described in draft form Oct. 6 were grossly overbroad and poorly defined?

A revision of the easement draft has not yet surfaced. Property owners should not have to make multiple trips to their lawyers to sort out what the Town of Southern Shores is doing to them.

FULL DISCLOSURE OF FINANCIAL INTEREST

Many of you know that I am a co-owner of oceanfront property. My siblings and I co-own two of the few remaining undeveloped oceanfront lots in Southern Shores, as well as an oceanfront beach box that we rent out each summer.

My parents arrived in Southern Shores in the 1960s and purchased property when it was plentiful and housing tastes were still very modest. Southern Shores became my family’s home away from home before it became my home now decades ago.

As I said above, North Carolina beaches are public beaches. More precisely, the dry-sand portion of the beaches is held in trust by the State of North Carolina for the public’s use and benefit. I cannot walk out to the beach in front of my family’s oceanfront cottage and tell members of a yoga class that has assembled there to get lost because they are trespassing. They are not. They have a right to use that beach.

And yet, Southern Shores proposes to tax me more for nourishing beaches that I do not own simply because I own land next to them. And the Town Council does not care what use I make, or do not make, of that land.

I will not make an argument today about why I do not think my family and I benefit “to a demonstrably greater extent” from beach nourishment than a property owner elsewhere in town, far removed from the oceanfront. I conclude not with a summation, but with a word about history.

Dare County first started talking about putting sand on its beaches in 1965, as I recall from press reports in the 1990s, but the real push began in 1991 when the county and the U.S. Army Corps of Engineers launched a study. Subsequently, however, federal money dropped out of the equation, and the N.C. General Assembly did not obligate the State to finance nourishment along its coastline of public beaches. Such projects became the responsibility of local governments, of town-county commitments.

I’m glossing over a lot of history here, most of it featuring the Town of Nags Head, which was the town in most need of beach nourishment.

Some of you may recall that, after gaining the General Assembly’s approval, the Dare County Board of Commissioners imposed in 2005 a 1 percent increase in the general sales tax to bolster funds for beach nourishment.

At the time, people still thought that the federal government would pay for 70 percent of a large-scale nourishment project from southern Kitty Hawk to South Nags Head, and that the state and county would kick in the remaining 30 percent. They opposed the so-called “sand tax.”

A local group known informally as the Beach Huggers gathered enough signatures on petitions to force a referendum on repealing the sand tax, which was to remain in place for eight years. Seventy percent of Dare County voters voted to repeal the tax in 2006.

Big mistake. Had the tax remained in force for its projected eight-year life and then been renewed for another eight years, it, in combination with the occupancy taxes dedicated to beach nourishment, might have paid for all of the projects on the Outer Banks’ public beaches.   

Instead, federal and state money (except grants) for beach nourishment disappeared, and now we have municipal service districts, a mechanism that enables towns to stick it to property owners who already pay increased taxes because of their properties’ location and arguably would derive no more benefit than a property owner elsewhere in town.

Ann G. Sjoerdsma, 11/30/20

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