Thousands of Wichita homeowners, mainly those who bought new homes built between 2002 and 2011, could be paying more in special assessments than they should, according to a Wichita lawyer suing the city on behalf of a local couple.
The attorney, Austin Parker, contends the city of Wichita is deliberately collecting more money from property owners who pay special than it needs to pay off bonds that funded streets, sewers and other infrastructure improvements in what could be dozens of developments across town.
The issue, Parker says, stems from the city’s practice of refinancing more than $220 million in general obligation bonds, including some that funded the improvements, to lower interest rates and cut payback costs.
The city has reaped an estimated $60.2 million in savings from bond refinancing since 2009. A quarter to a third of that, $15 million to $20 million, is tied to bonds that benefited home developers, Parker says.
But property owners aren’t seeing any of the savings on their special assessment tax bills.
The city wouldn’t comment on the lawsuit. But a motion to dismiss the lawsuit, calls the foundation on which the lawsuit rests fatally flawed.
Parker says residents are being overtaxed.
“The city took advantage of falling interest rates to save quite a bit of money but no one’s special assessments were reduced to pass along these savings,” Parker told The Eagle in a recent interview.
He likened it to a bank lowering the interest rate on a home loan and pocketing the extra money instead of reducing a homeowner’s mortgage payment.
“The property owners continued to pay high special assessments even though the city did not need all of that money to pay off the bonds,” Parker said.
Parker is representing a Wichita couple, David and Leslie Snodgrass, who pay around $1,840 in specials a year associated with the 2,300-square-foot, five-bedroom home they built in 2003 in the Remington Place Addition, near 21st and Greenwich.
But he’s seeking class action status so other property owners who might be affected have a chance to collect any damages that might be awarded in the case.
Anyone who thinks they are affected can contact him through www.wichitaspecialassessmentlawsuit.com. Parker told The Eagle he’s not sure yet how much money is at stake.
The city responds
The city, in a recent email from its law department to The Eagle, would not comment on the lawsuit, saying “as in the past, the City is not in a position to comment on pending litigation matters.”
It would not answer questions about whether there is a plan or policy in place to pass any savings from the bond refinancing onto property owners paying specials.
It also turned down a request to let The Eagle interview someone from the city who could speak about it’s bond refinancing program but said in the email that the city “has been transparent in its actions.”
“The refinancing has been to the benefit of the general public to reduce the City’s debt financing costs,” the email said.
In addition to the city, the lawsuit names several current and former city council and city staff members, the city’s current and former bond counsel and Sedgwick County Treasurer Linda Kizzire, whose office collects tax payments. It was filed July 23 in Sedgwick County District Court.
The case was moved in August to federal court, where several requests to throw out the lawsuit are pending.
“Kansas statutes specifically provide for municipalities to refinance bonds but DO NOT require redistributing to property owners the money saved through refinancing,” a motion to dismiss filed Aug. 24 by Gilmore and Bell, the city’s bond counsel, says. “There is simply no legal duty to do what plaintiffs (the Snodgrasses) assert should have been done.”
“No discovery will repair the flaw. It will always be present.”
Parker, the couple’s lawyer, says bonds refinanced by the city impacts “all kinds of neighborhoods” in Wichita, but particularly new housing developments built after 2002, including Auburn Hills, Savanna and Remington Place.
Businesses and older neighborhoods that have projects funded through bonds during that time period may be included too, he said.
Parker said he doesn’t know how the city is using the savings and says refusing to return it to the taxpayers who paid it is unconstitutional. He pointed to a state law that prohibits spending tax dollars on things it wasn’t collected for.
More than 11,000 building permits for new homes were issued in the city of Wichita between 2002 and 2011, according to data from the Center for Real Estate at Wichita State University. A recent survey of home buyers and sellers shows people staying in their homes for 10 years on average, WSU professor of real estate Stan Longhofer said.
“It’s pretty widespread. It affects thousands of people,” Parker said.
City may be obligated
In Kansas, it is a common practice for cities to use bonds to pay for the streets and sewer and water lines in new housing developments. But elsewhere it’s rare.
Here, developers ask a city to front the cash for improvements. The city borrows the money through the bonds. Then the developers are responsible for making the special assessment payments until the lots in their developments are sold. After a lot is sold, payment responsibility shifts to the homeowners, who pay their share to the city either in lump sum or in annual installments — usually over 15 or 20 years — when they pay their property taxes.
When the special financing system Kansas uses works as intended, it generally keeps home prices down because developers don’t have to come up with the money upfront to pay for streets, sewers, flood control and other improvements and cities usually can borrow at lower interest rates than developers.
Most of the 20 cities in Sedgwick County use them, according to county tax system and economic development director Brent Shelton.
But in most other states, experts say, developers pay for the improvements needed to prepare a site for building themselves and then pass those costs onto homeowners in the price of the house or through the creation of special improvement districts that have their own taxing power.
The bonds mentioned in Parker’s lawsuit are general obligation bonds. That means the city pledges to use all of its revenue sources to make the payments, said Ken Kriz, former professor in WSU’s Hugo Wall School of Public Affairs and an expert in municipal financing.
If a development fails, he said, all of the city’s taxpayers are on the hook for the money.
When cities refinance bonds to pay less interest, residents tend to see the savings either through increased services — like more police officers on the streets — or lower tax bills, he said.
Kriz said he thinks if the primary source of cash for repaying the bonds at issue in Parker’s lawsuit came from special assessment taxes, then the city “may be legally in a position” to have to pass the savings reaped through refinancing onto home and property owners.
“Any kind of cost savings could arguable be refunded to those paying special assessments,” he said.
The city and the law firm that worked on the bond issues takes a different stance.
“In allowing for municipalities to refinance previously issued bonds, the Kansas Legislature not only has acknowledged economic conditions change, but also has allowed municipalities to take advantage of such to save money,” Gilmore and Bell’s motion to dismiss says.
It says that state law does not require cities that save money by refinancing the bonds to then “re-do special assessments or refund money to property owners.”
“Frankly, had the City done what plaintiffs claim should have been done, a valid argument could be made the City would not just have acted beyond any statutory authority but directly in opposition to it.”
Matt Stiles, program manager for the Public Policy and Management Center at Wichita State University, said he could “see the logic” in passing on the savings reaped through bond refinancing to taxpayers.
But refunding money could get “a little bit tricky” because “it may be a situation where you would have to re-engage in the entire process,” including reassessing taxes, he said.
Sedgwick County
One local government says it’s trying to figure out what passing on savings gained through refinancing special assessment debts might look like.
Three years ago, Sedgwick County refinanced $11 million in debt, including about $375,000 in special assessment debt, to take advantage of lower interest rates. The county’s chief financial officer, Lindsay Poe Rousseau, said the county “would like to pass” the savings along because “we would not want to overtax folks for a specific bond issue where we know we are paying less over time than we thought we were going to.”
“Kind of the root of the question now is: How does that look, and how does that get distributed?” Poe Rousseau said.
The county, she said, looks to its debt and special assessment policies, bond counsel and technical advisers for guidance.
So far the residents who pay specials haven’t seen a change in the amount due on their tax bills from the county’s debt refinancing, county spokeswoman Kate Flavin said by email.
“But they could at the end of their special assessment term,” she wrote.
Get the money back
Parker, the Wichita attorney, says the lawsuit is among the largest suits seeking class-action status filed against the city in the past 20 years. One of the last was filed by a group of 500 Wichita bar and clubs owners seeking the return of money the city overcharged them for liquor license fees in the late 1980s and early 1990s.
It took years of court battles, but ultimately they were awarded $1.5 million plus interest, according to The Eagle’s news archives and a 2001 Kansas Supreme Court ruling.
In addition to return of the excess special assessment taxes paid to the city, Parker also is asking the court to award his clients interest and other damages. He’ll get a percentage if the lawsuit is successful.
“The main reason the lawsuit was filed — the hope — is to get the money back to the people affected,” he said.
This story was originally published August 31, 2018 5:02 AM.