BRADENTON, Fla. — The  Florida auditor general’s office called for the Legislature to consider placing limits on how much debt a community development district can issue and to improve oversight for CDD issuance.

The recommendations are part of a report reviewing audits, governmental entities and special districts, including those that have met Florida’s definition as being in a financial emergency.

As of June 30, there were 40 governmental entities that qualified as being in a financial emergency across the state, including seven CDDs, the governor’s chief inspector general Melinda Miguel told the 11-member Joint Legislative Auditing Committee on Monday.

Since the collapse of the housing market, more than 168 CDDs have defaulted on $5.1 billion, according to Richard Lehmann, publisher of Distressed Debt Securities Newsletter and the website.

Florida has 1,618 active special districts. Of those, 578 are community development districts with bonding powers in Florida’s 67 counties. Several conditions can exist for determining a local government or district is in a financial emergency, including failure to pay short-term loans or make long-term debt service payments due to a lack of funds and a fund-balance deficit.

The auditing committee reviewed a report on the Local Government Financial Reporting System by the auditor general’s office that said there is a “potential need” to address CDD bond issuance. The report, based on research completed earlier this year, also said that additional disclosure requirements for prospective property owners in a district may be needed.

Florida CDDs are used primarily by developers to finance, operate and maintain improvements in new communities. They include roads, sidewalks, landscaping and recreational facilities. The districts have “broad authority” to finance, acquire, construct, operate and maintain public improvements, the auditor’s report said.

Financing is typically done through tax-exempt revenue bond issuance secured by payments from the developer until the property is sold and owners pay back the debt through property tax assessments.

Florida law authorizes CDDs to issue general obligation or revenue bonds though the issuance of GOs is limited to 35% of the assessed value of the taxable property in the district. No limit is placed on the amount of revenue bonds that CDDs can sell, the report noted.

“Likely due to the recent housing market crisis, many CDDs are facing a financial crisis due to a lack of sufficient funds to make debt-service payments on bonds or to pay obligations within 90 days,” the report said. “Many developers have filed for bankruptcy protection.”

Florida does not have a bond review process, the auditor general noted.

The agency found that the Texas Commission on Environmental Quality must approve most applications for bond issues, which includes evaluating the district’s economic feasibility. There are also limits on the amount of CDD-type bonds that can be issued at one time, and that may be “a major factor in low default rates in Texas,” the Florida auditor general report said.

“Without an oversight entity approving and, when deemed prudent, limiting the amount of revenue bonds that CDDs are able to issue, there is limited assurance as to the feasibility of repayment to the bondholders,” according to the report.

The auditor general’s recommendations are good “but don’t address the fundamental flaws in the CDD enabling legislation,” said Lehmann, who is based in Florida. “Until they do, they won’t sell any new CDD debt in this state.”

In a review of other local government audits and bond issuance procedures, the auditor general found that some strengthening may be necessary in the process governing the sale of debt because some “local governments did not always document the conditions favoring the method of sale for bond issues or use an independent financial advisor.” Recommendations by the auditor could lead individual lawmakers or other committees to prepare bills for the upcoming legislative session.

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