Podcast Summary: Upzoned – "How a Popular Development Practice Backfires on Homeowners"

Release Date: February 26, 2025
Host: Strong Towns (Abby Newsham)
Guest: Edward Erfert, Director of Community Action for Strong Towns

Introduction

In this episode of Upzoned, Abby Newsham engages in a comprehensive discussion with Edward Erfert, the Director of Community Action for Strong Towns. The conversation delves into the pitfalls of a prevalent development practice known as metro districts, highlighting a troubling case in Castle Rock, Colorado, where a neighborhood faces an overwhelming debt burden.

Understanding Metro Districts

Edward Erfert provides an insightful explanation of metro districts, a common financing tool in Colorado used by developers to fund infrastructure projects within new developments. These districts allow developers to issue bonds or loans to cover the costs of roads, water lines, parks, and other capital expenses. Homeowners subsequently repay these debts through increased property taxes.

"[Edward, 08:48] 'These districts allow developers to essentially issue bonds or loans to pay for infrastructure with the expectations that homeowners that buy the houses will gradually pay off those loans through an increase of their property taxes.'"

Metro districts are initially controlled by developers, granting them significant influence over financial decisions long after the development phase has concluded. This model is often likened to a "built to the finished state" approach, where all amenities are provided upfront, minimizing municipal oversight during the development phase.

Case Study: Castle Rock, Colorado

The focal point of the episode is an article by Olivia Young for CBS News, detailing the financial crisis in The Meadows, a neighborhood in Castle Rock. Established in the late 1980s, The Meadows is grappling with a staggering $434 million debt, a consequence of unpaid interest accumulating over decades.

"[Abby, 05:29] 'If it makes you feel better, I'll take credit for it.'"

Edward outlines how this debt spiraled from an initial $70 million principal due to unpaid interest, a common issue in long-term debt servicing where interest can dramatically inflate the original loan amount.

"[Edward, 20:04] 'If they're collecting $14 million a year in property tax on their current millage just for this, they have 434 million in debt.'"

Financial Implications and Maintenance Challenges

The debt burden poses significant challenges for homeowners and the municipality. As the debt accrues, the money earmarked for debt repayment ceases to cover the principal, let alone any required maintenance or infrastructure repairs. This predicament mirrors larger municipal issues where cities face similar dilemmas in managing legacy debts.

Edward emphasizes the riskiness of this financial model, noting state-imposed caps on property tax increases that limit the ability to generate additional revenue to address mounting debts.

"[Edward, 22:11] 'When we do the millage rates in Colorado, this special taxing district, this metro district tax is in the formula and it restricts how much Castle Rock could increase their millage every year.'"

This financial strain not only hampers debt repayment but also restricts the city's capacity to fund other essential services or future infrastructure projects.

Developer Influence and Governance Issues

A critical issue highlighted is the prolonged control developers maintain over metro districts. Initially, developers dominate the governance boards, often leaving residents with minimal representation or influence over financial decisions. This lack of oversight can lead to mismanagement and obscure financial practices detrimental to homeowners.

"[Edward, 24:58] 'When homeowners associations and maintenance groups and special taxing districts go out and sign the contracts, many of these contracts... are doubling and tripling because nobody had linked it to a map or looking at some of the contracting they were overpaying.'"

Moreover, as developers exit the board, often due to shifting priorities or financial interests elsewhere, the responsibility for managing these debts falls onto residents who may lack the expertise or resources to effectively oversee such complex financial obligations.

Systemic Concerns and Broader Implications

Edward introduces the concept of the Growth Ponzi Scheme, where communities continuously defer debt repayment, relying on future generations to bear the financial burden. This analogy underscores the unsustainable nature of such development practices, posing long-term risks to both individual homeowners and broader municipal finances.

"[Edward, 34:02] 'This is really... the pattern of development that I'm seeing all across North America. It's the way we fund it. Strong Towns calls this the growth Ponzi scheme.'"

The episode underscores the need for systemic change in how infrastructure is financed and managed within new developments. Transparent financial practices, increased homeowner representation, and sustainable debt management strategies are imperative to prevent similar crises in other communities.

Conclusion

The episode of Upzoned provides a critical examination of metro districts, using Castle Rock’s financial woes as a cautionary tale. Edward Erfert articulates the complexities and inherent risks of current development financing models, urging for greater transparency and sustainable practices to safeguard homeowners and municipalities alike.

As communities continue to expand and develop, the insights shared in this episode highlight the urgent need for re-evaluating established financing mechanisms to ensure long-term viability and equity for all stakeholders involved.

Notable Quotes

• Edward Erfert [08:48]: "These districts allow developers to essentially issue bonds or loans to pay for infrastructure with the expectations that homeowners that buy the houses will gradually pay off those loans through an increase of their property taxes."

• Abby [05:29]: "If it makes you feel better, I'll take credit for it."

• Edward Erfert [20:04]: "If they're collecting $14 million a year in property tax on their current millage just for this, they have 434 million in debt."

• Edward Erfert [22:11]: "When we do the millage rates in Colorado, this special taxing district, this metro district tax is in the formula and it restricts how much Castle Rock could increase their millage every year."

• Edward Erfert [24:58]: "When homeowners associations and maintenance groups and special taxing districts go out and sign the contracts, many of these contracts... are doubling and tripling because nobody had linked it to a map or looking at some of the contracting they were overpaying."

• Edward Erfert [34:02]: "This is really... the pattern of development that I'm seeing all across North America. It's the way we fund it. Strong Towns calls this the growth Ponzi scheme."

This episode serves as an essential resource for homeowners, urban planners, and policymakers, shedding light on the intricate financial dynamics of modern development practices and their far-reaching consequences.