Choosing Between Districts: Assessment or Mello-Roos

Elected officials faced with taxing new residents to pay for roads and other public works usually have two choices--they can create either an assessment district or a Mello-Roos district.

Both allow raw land to be used as collateral for bonds that are sold to investors. The proceeds are then used to pay for public facilities.

But there are significant differences that most residents never hear about--distinctions that can dramatically affect both the types of facilities built and the size of each homeowner’s tax bill.

Mello-Roos districts, authorized by a 1982 state law, allow bond proceeds to be spent on a wide array of projects that provide general-type benefits. Mello-Roos also authorizes taxation formulas that allow owners to be taxed higher than adjoining holders of undeveloped land.

Assessment districts, used in California since 1911, allow bond proceeds to be spent only for a purpose that provides specific, or “special” benefit. Assessment districts levy equal assessments on property owners--regardless of whether the land is developed.

Following are the more detailed differences:

* Tax rates for developed and undeveloped land must be the same for an assessment district. Under Mello-Roos, officials can charge owners of raw land one rate, and a higher rate for homeowners and businesses.

* Assessment districts are locked into a flat, annual taxation rate. But in a Mello-Roos district taxes can increase yearly, to a ceiling that is based on the property’s assessed value. “With Mello-Roos, you only know that you’re exposed to a tax that could go up,” said William C. Stookey, co-founder of the Anaheim-based Willdan engineering and consulting firm. “I have suggested to cities it’s (often) preferable to do the (conventional) assessment district.”

* The special taxes levied in an assessment district must be used for a very specific purpose that provides the property owners a “special” benefit, such as construction of a street. The Irvine Co. took this approach for construction of Newport Coast Drive, a new connector between Coast Highway and Irvine, parallel to MacArthur Boulevard. Mello-Roos proceeds can be used for projects that are of more general benefit, such as new jails, hospitals and fire stations.

* Start-up costs for an assessment district can be high because a more detailed analysis of project benefits to property owners is required, says Orange County Public Finance Officer Eileen T. Walsh. But Stookey and others say the overall costs of administering a Mello-Roos district are higher than those of an assessment district because the Mello-Roos tax formulas are so flexible and require extensive, yearly calculations.