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The bankruptcy of developer district governments in Colorado

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Title:
The bankruptcy of developer district governments in Colorado structural defects or a downside of growth?
Creator:
Beckett, Julia A
Publication Date:
Language:
English
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xv, 300 leaves : illustrations ; 29 cm

Thesis/Dissertation Information

Degree:
Doctorate ( Doctor of Philosophy)
Degree Grantor:
University of Colorado Denver
Degree Divisions:
School of Public Affairs, CU Denver
Degree Disciplines:
Public administration

Subjects

Subjects / Keywords:
Municipal bankruptcy -- Colorado ( lcsh )
Municipal bankruptcy ( fast )
Colorado ( fast )
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bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )

Notes

Bibliography:
Includes bibliographical references (leaves 292-300).
General Note:
School of Public Affairs
Statement of Responsibility:
by Julia A. Beckett.

Record Information

Source Institution:
|University of Colorado Denver
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Auraria Library
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All applicable rights reserved by the source institution and holding location.
Resource Identifier:
35327700 ( OCLC )
ocm35327700
Classification:
LD1190.P86 1995d .B43 ( lcc )

Full Text
THE BANKRUPTCY OF DEVELOPER DISTRICT
GOVERNMENTS IN COLORADO:
STRUCTURAL DEFECTS OR A DOWNSIDE OF GROWTH?
by
Julia A. Beckett
B.A., Washington University in St. Louis, 1980
J.D., Washington University in St. Louis, 1984
M.P.A., University of Colorado at Denver, 1992
A dissertation submitted to the
University of Colorado at Denver
in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
Public Administration
1995



1995, by Julia A. Beckett
All rights reserved.


This Thesis for the Doctor of Philosophy
degree by
Julia Beckett
has been approved for the
Graduate School of Public Affairs
Date
Allan Wallis


Beckett, Julia (Ph.D., Public Administration)
The Bankruptcy of Developer District Governments in Colorado: Structural
Defects or a Downside of Growth?
Dissertation Directed by Professor Robert W. Gage
ABSTRACT
Local governments are expected to be fiscally sound and one
municipal bankruptcy is uncommon. There were fifteen developer district
bankruptcies in the State of Colorado from 1987 to 1992. These
developer districts were formed to aid real estate development and
growth. This cluster of municipal bankruptcies raises issues of whether
the economy of the 1980s or the state government structure were the
causes.
Theory posits that developer districts governments are formed in
response to citizen demands for services and that the state that
authorizes local governments will exert controls to ensure responsible
governance. Bankruptcy theory expects states to take actions to
alleviate municipal fiscal emergencies.
Analysis of developer district bankruptcies included systemic
consideration of the districts' formation, operations and fiscal crises.
Qualitative methods used were: documentary analysis, statutory review
and individual interviews. Documentary analysis compared a national
sample of states' developer district statutes to Colorado's statutes.
This research found inherent structural flaws in the formation
process that permitted developer districts to be formed without proof of
need and without representation by the public they were expected to
serve. These start-up governments were formed to attract residents, and
they depended on real estate growth to repay their debt. Once districts
iv


were formed, electoral and state controls failed to limit the amount of
debt. Fiscal problems arose when districts exhausted reserve funds to
repay the debts while refusing to increase taxes.
When competition and the extended real estate recession depressed
growth, developer districts had severe financial emergencies.
Bankruptcy was a remedy to reorganize, not obliterate, their bond debts.
Bankruptcy reduced the amount repaid to bondholders through a
negotiation settlement. Neither Colorado nor other states participated
in local governments' bankruptcy reorganizations.
This research demonstrated that bankruptcies were managerial
decisions to remedy a preexisting crisis. However, the system flaws
that allowed these developer districts to overextend debt continues.
This study demonstrates the need for a formation process that considers
the public to be served by these districts. Finally, there remains the
need for centralized state review and appropriate controls over these
start-up governments.
This abstract accurately represents the content of the candidat^e^
thesis. I recommend its publication.
Signed
v


ACKNOWLEDGEMENTS
I appreciate the valuable information, assistance, advice and
support I received from numerous individuals during this dissertation
endeavor. First, I wish to thank my committee chair, Bob Gage for his
steadfast guidance and support. The rest of the dissertation committee
members provided constructive and thoughtful advice; they are: Lloyd
Burton, Peggy Cuciti, Allan Wallis, and Steve Ruddick.
I received valuable assistance from Sam Mamet, John Johnson and
the other experts listed in Appendix B. There were numerous individuals
that helped me track down public documents. They include: the
librarians at Auroria, the librarian for the Colorado legislature, the
Colorado Department of Education librarian,.the clerks at the Bankruptcy
Court, and the staff at the Colorado Department of Local Affairs.
There are other members of the Graduate School of Public Affairs
that deserve recognition: Franklin James, Peter DeLeon, Marshall Kaplan,
and Susan Perez. Fellow doctoral students that deserve thanks include:
Steve Bissel, Martha Campbell, Roger Carver, Ken Cotton, Bob Haddock and
Terri Schwartz.
Friends and family deserve special recognition. They include:
Charlotte Redden, Ken Switzer, Connie Johnson, Pug Edmonds, Mark Levin,
Bob Silber, Bob Beckett, and Muriel Beckett.
For their patience, tolerance, and support, I owe special thanks
to my husband, Keith Gatti, and our sons, Jacob and Andrew Gatti. This
work is dedicated to them.


CONTENTS
Page
Figures........................................................xiv
Tables.......................................................... xv
CHAPTER
1. INTRODUCING THE PROBLEM OF BANKRUPT
COLORADO DEVELOPER DISTRICTS ................................ 1
An Emerging Scandal i....................................1
Financial Problems in the 1980s 1
Framing the Problem ...................................... 3
Special District Governments ............................. 4
Local Government and Growth .............................. 6
Develppment Overview ................................. 6
Infrastructure ..................................... 7
Colorado Developer District Scheme and State Control . 8
Bankruptcy and Accountability ............................ 9
Local Government Financial
Emergencies ......................................... 10
Bond Defaults ....................................... 11
Municipal Bankruptcy Filings ........................ 12
Developer District Bankruptcies ..................... 17
Purpose of Research...................................... 19
Knowledge Gap ....................................... 19
Research Approach to the Problem .................... 20
Limitations of Research ............................. 21
Structure of the Dissertation............................ 21
2. LITERATURE REVIEW .......................................... 23
Special District Governments ............................ 23
vi x


Governmental Structure and Controls
26
Regulation of Governments ............................... 27
Public-Private Continuum ............................ 30
Public Choice Theory ................................ 32
Privatization ....................................... 33
Land Use Policy.......................................... 34
Government Finance ...................................... 37
Statutory Controls .................................. 37
Long Term Debt....................................... 37
Financial Emergencies and Bankruptcy ................ 39
Summary.................................................. 41
3. RESEARCH DESIGN.............................................. 42
Model of State Control
Over Local Governments ................................ 42
Hypotheses............................................... 48
Structural Flaws................................... 48
Centralization and Decentralization ................. 49
Market-based Controls ............................... 50
Research Plan ........................................... 51
Evaluation Research ................................. 52
Assumptions and Limitations ......................... 54
Research Design Elements .... ........................... 56
State Controls....................................... 56
Developer District Cases ............................ 57
Economic Context .................................... 63
Expert Interviews ................................... 63
National Comparisons ................................ 64
Summary.................................................. 65
viii


4. COLORADO DEVELOPER DISTRICTS .................................. 66
Origins and Evolution of Developer Districts ............ 67
Historical Origins .................................. 67
Legislative History ................................. 67
Legislative Policy .................................. 71
Developer District Formation ............................ 73
Forming the Developer District ...................... 73
Local Planning Controls ............................. 76
Providing Infrastructure ............................ 78
Local Governments' Risks and Interests .............. 78
Developers' Risks and Interests ..................... 80
Transferring Risks to Developer Districts .... 81
Checkpoints ........................................ 82
Growing Ambitions: The Douglas County Case .............. 84
The Region........................................... 84
The County and Land Use ............................. 85
Impact of Developer Districts ....................... 88
Developer District Operations ........................... 92
Statutory Powers .................................. 93
Service Plan Provisions ............................. 94
Governance........................................... 96
Developer District Start Up:
The Case of Castle Pines North
Metropolitan District ............................. 97
General Financing Provisions 103
Related Districts ...................................... 106
Developer District Types ........................... 107
Analysis of Related Districts ...................... 112
State Controls System....................................114
Structural Flaws in the System ......................... 115
IX


Recommendations for Change ......................... 119
Conclusion...............................................123
5. THE STATE'S ROLE: TROUBLED ECONOMY AND
TROUBLED DISTRICTS ...................................... 125
Economic and Market Context ....................... 126
State Economy .......................................127
Government Retrenchment ........................128
Local Governments and Property
Tax Revenues.......................................129
Real Estate Market...................................135
Developer District Financial Problems .................. 137
Budget Problems and Options ........................ 141
Desertion by Developers ....................... 144
Avoiding Bankruptcy ................................ 148
Economic Checkpoints:
Consumer Market for Bonds and Real Estate................150
Control By Money Markets ........................... 151
Bond Purchasers .....................................153
Real Estate Market...................................155
Home buyers .........................................155
State Controls of
Developer Districts ................................... 158
State Administrative Control and Records ........... 158
Administrative Role .................................160
Information Gathering .............................. 161
Legislative Response ................................... 162
Insufficient Controls .................................. 167
Conclusion...............................................169
6. DEVELOPER DISTRICT BANKRUPTCY PROCESS .................... 172
Overview.................................................172
Case of Castle Pines North Bankruptcy .................. 173
x


Early Indications of Problems .......................173
Filing Bankruptcy .................................. 175
Adversarial Positions .............................. 177
State Court Relief ..................................180
Outside Pressures and Influences ................... 181
Resolution: File Bankruptcy Again .................. 184
Bankruptcy: Remedy to Budget Crises .................... 186
Beginning Point .................................... 186
Unique Litigation .................................. 187
Stakeholders ....................................... 188
Proceedings of a Municipal Bankruptcy Case ............. 192
Prior Negotiations...................................192
Begin the Bankruptcy Case ...........................193
Objections...........................................194
Creditors' Committee ............................... 196
Negotiations.........................................198
Creditors' Leverage and Relief ..................... 199
Court Control of the Case ...........................200
Reorganization Plans ............................... 202
Approval Process ................................... 206
Colorado Municipal Bankruptcy Experience ............... 208
Common Problems .................................... 208
State Control .......................................210
Bankruptcy Policy .................................. 211
Recommendations for Change ............................. 213
Conclusion...............................................217
7. DEVELOPER DISTRICTS: COMPARISON
ACROSS THE STATES............................................220
Overview.................................................220
Nationwide Comparison .................................. 220
xi


Statutory Factors and Risk for Bankruptcy...............226
Sample States ..................................... 226
Multiple Service Providers ........................ 228
Ability to Issue General
Obligation Debt ................................22 9
Population Requirements ........................... 231
Formation Process ................................. 231
Financial Controls ................................ 232
Bankruptcy Filing Authorization ................... 234
Developer District Cases .............................. 234
Texas MUD Problems ;................................235
Nebraska SID Cases..................................237
Florida Developer Districts ....................... 237
Montana Interlocal Guarantees ..................... 239
Crisis Controls and Fiscal Emergencies ................ 242
Active State Intervention ......................... 242
Local Autonomy......................................245
Federally Imposed Controls ........................ 246
Information Deficit ................................... 248
Revised Control Model . ............................249
Conclusion .............................................253
8. CONCLUSION .................................................255
Situational and Structural Problems ................... 255
Hypotheses Tested ..................................... 256
Structural Flaws .................................. 256
Centralization and Decentralization ............... 259
Market-based Controls ............................. 263
Bankruptcy: Image and Reality ......................... 265
State Responsibility....................................268
Accountability .................................... 268
xii


Control Model
269
Addressing Structural Weaknesses ................... 272
System of Delivery.................................2 73
Increased Controls ................................. 274
Policy Problems .................................... 277
National Implications .................................. 277
Common Scenario .................................... 277
Debt and Taxes.......................................279
Final Thoughts.......................................280
APPENDIX
A. COLORADO DEVELOPER DISTRICT BANKRUPTCY
CASES FOR PERIOD 1980-1992 282
B. EXPERTS INTERVIEWED ....................................... 286
C. NATIONAL DATA ON LOCAL GOVERNMENTS,
SPECIAL DISTRICTS, BANKRUPTCIES AND
BOND DEFAULTS, BY STATE ....................................288
D. STATE STATUTES .............................................290
E. SPECIAL DISTRICT BANKRUPTCIES IN THE 1970s 291
BIBLIOGRAPHY ..................................................... 292
xiii


FIGURES
Figure
i.i Total United States Municipal Bankruptcy Filings 13
1.2 Total Local Government Bankruptcy Filings by State, Years 1970-1992 15
1.3 Colorado Developer District Bankruptcies 1987-1992, By County 18
2.1 External Controls of Special Districts 31
3.1 Influences on Developer Districts 43
3.2 Temporal Model of State-Local Control 46
3.3 Units of Local Government by County 59
4.1 Existing Developer Districts, Colorado and Douglas County . 68
4.2 Population Growth for Colorado 87
4.3 Douglas County Government Revenues with Developer District Bond Payments 91
4.4 Castle Pines North Expenditures, 1984 to 1987 100
5.1 Special District Net Income By Year 13 0
5.2 Colorado Construction Jobs 136
5.3 Colorado Construction Job Growth 136
5.4 Denver Metropolitan Area Total Foreclosures By County 138
5.5 Metro. County Comparison of Foreclosures to Single Family Residences 139
5.6 Denver Region Foreclosures and Building Permits 140
7.1 Special Districts Compared to Cities, Counties and Townships 223
7.2 1992 Government Census Categories of Special Districts 225
7.3 Summary of Statutory Factors 227
7.4 State-Developer District Control Model 252
xiv


TABLES
Table
1.1 Ten States with Greatest Number
of Special Districts ..................................... 5
1.2 Municipal Bond Defaults, Estimated for Period
1980 to 1991, for Bonds Issued After 1980 .......... 12
4.1 Douglas County Bankrupt District Total
Bond Debts............................................... 90
5.1 Changes in Residential Assessment Rates
As a Percentage of Actual Value..........................132
7.1 Nationwide Ranking of Municipal Bond Defaults ............ 222
xv


CHAPTER 1
INTRODUCING THE PROBLEM OF
BANKRUPT COLORADO DEVELOPER DISTRICTS
An Emerging Scandal
The repeated occurrence of local governments filing bankruptcy-
in Colorado captured the attention of the media in 1990 and developed
into a scandal. The type of governments filing for bankruptcy, in
fifteen of the seventeen cases between 1987 and 1992, were special
district governments formed to aid real estate development; they are
developer districts. These developer district bankruptcies made
compelling news stories by pitting property owners against
bondholders, while naming the developers as "the bad guys." The
scandal had all the features of a morality play: threats of
homeowners being taxed out of their homes; bondholders losing their
life savings through what used to be a safe investment--municipal
bonds; developers getting rich and slipping away without
responsibility; and state government was not fixing the mess.
Financial Problems in the 1980s
Understanding the types of problems presented by developer
district bankruptcies begins with reference to financial scandals
that rocked the economy at the end of the 1980s. The decade brought
federal deregulation of the savings and loan industry and the
reduction of federal regulation of the securities markets. The 1980s
may rival the 1920s in its high flying optimism and resulting crashes
in the financial markets. The economic impact of sensational scams,


frauds, and government payouts on insured guarantees will be sorted
out for years (Boster, 1991).
Many of these high finance scandals involved real estate
development. The brokerage business, the banking business and the
savings and loan industry in the finance markets affect developer
districts. These businesses have national, regional, state and local
influence. The numerous financial problems in these industries had
drastic effects in Colorado.
A brief' national inventory of financial and real estate
scandals of nature that affected Colorado in the 1980s was described
by Conner (1992). It began with the Savings and Loan 500 billion
dollar collapse, with Silverado Savings and Loan being "Colorado's
most infamous S & L". As a result of federal guarantees on the
deposits of the insolvent savings and loans, the Resolution Trust
Corporation was formed as receiver for the failed thrifts, with
duties including managing or liquidating the assets. The Resolution
Trust Company's Denver office formed Operation Western Storm in 1991,
but it could not locate seven billion dollars worth of assets of the
failed thrifts.
Connor's inventory of scandals (1992) continued by listing real
estate developments that went sour, including large and prominent
development plans sponsored by Kenneth Good, William Walters, Allan
Reiver, M.D.C., and Richmond Homes. When these developments
faltered, the developers filed bankruptcy or left the state.
Securities market abuses by Michael Milken, Solomon Brothers and
Drexel Burnham Lambert in unrated commercial bonds (junk bonds) also
had their negative influence on Colorado and its economy. Legal
investigations of questionable practices led to the closure of seven
penny stock brokerages in Denver, including Blinder Robinson and Co.
2


V
Fourteen Colorado industrial banks were closed in 1987 by state
regulators, leaving 9000 depositors without access to their money for
months.
And there were the bankrupt developer district governments,
which extended these financial troubles directly into government's
ability to function. The ability of developer district governments
to function effectively and manage their finances was questioned.
Thus, in the 1980s, the financial climate went from optimistic growth
to scandals that extended into government coffers.
Framing the Problem
A developer district is a type of specialized local government
that is formed to provide infrastructure needed for real estate
development. The bankruptcies of developer districts can be seen as
a problem within the government system and in the economic system.
It can be a problem of government enabling growth where there are
both public sector and private sector issues, but the focus here is
on the public sector.
There is a lack of information about how developer districts
are controlled by state governments during a fiscal crisis, and the
information about state control of the formation and operations of
these government units is not current. This research fills this gap
by investigating and explaining factors involved in the Colorado
developer district bankruptcies during the period of 1985 to 1992.
The state controls during the formation of these developer districts
and the problems in the real estate markets are examined for
correlation. The process of developer districts resolving debts
through bankruptcy is described, and the state's role in this process
is analyzed. Traditional models that assume state control and
3


supervision of subsidiary governments are challenged by this
research. This research adds to the field of public administration
knowledge by analyzing Colorado developer district bankruptcies for
both local and national implications.
Developer district bankruptcies involve numerous questions of
management, structure, and government controls. There are three
general areas concerning developer districts that need to be
discussed to frame the problem: the use of special districts, land
use and growth, and bankruptcy as a government financial emergency.
These are discussed in the following sections.
Special District Governments
Special districts are local governments that provide one or
more services to a geographic area that can overlap both cities and
counties (Department of Commerce, 1992). Special districts are
special purpose governments whose formation and powers are defined by
state laws, not federal laws (Bollens, 1957). In contrast, cities
and counties are general purpose local governments that provide a
wide array of government services; their powers are also defined by
state constitutions and statutes (Wright, 1988) .
Like other local governments, the structures and types of
special districts varies by state according to the type of service
provided, enabling legislation, taxing powers, and purposes of these
districts. Although special districts exist in every state in the
nation, and most provide one type of service (Department of Commerce,
1992), not every state has developer districts.
In 1992, out of 84,955 local governments nationwide, there were
31,555 special districts (Department of Commerce, 1992). Ten states
4


have a combined total of 16,313 special districts, or 52% of the
national total (Table 1.1).
Table 1.1
Ten States with Greatest Number of Special Districts
State_______________________No. of Special Districts
Illinois 2920
California 2797
Texas 2266
Pennsylvania 2006
Kansas 1482
Missouri 1386
Colorado 1252
Washington 1157
Nebraska 1047
There are a number of types of special districts, but the government
census does not track all the purposes for which special districts
are formed, and it does not recognize the term "developer district".
Both the raw numbers and the percentage growth of special
districts have increased more than other types of government between
1957 and 1992 (Department of Commerce, 1992). These increasing
numbers suggest that special districts are useful due to such
characteristics as ease in formation, their flexibility in services
provided, and their ability to localize payments for services (Pack,
1992; Porter, Lin, & Peisor, 1987).
On the national level, special district governments have drawn
criticism for their rapidly growing numbers, for their lack of
accountability both to the state and residents, and for causing
inefficiency and fragmentation of government services. These
problems are called the "special district problem" (Advisory Council
on Intergovernmental Relations (ACIR), 1964) In the federal
system, it is assumed that the state that authorizes a local
5


government also controls that government, although intergovernmental
relations theory shows that it is more complicated than that (Wright,
1988). Thus, the special district problem is seen as a state
problem. The theoretical and legal strand that expects states to
control local government activity because local governments are
creatures of the state has recently been challenged in the literature
(e.g., Zimmerman, 1983). However, the dominant theory expects state
control, particularly when a local government has financial problems
(ACIR), 1973; 1985).
Local Government and Growth
Growth is considered essential for the economy, and governments
encourage growth, especially growth based on real estate development.
An explanation of how developer districts fit within the context of
real estate development and state growth policies is useful. One
Colorado state policy that encourages real estate development is the
use of developer district governments to finance and provide
infrastructures. Developer districts localize costs and allow
specialized governments to respond to needs for services.
Development Overview
Land development is the process of turning rural or "raw" land
into housing subdivisions and commercial space (Clawson, 1971) Land
development, called the "growth machine", is considered essential for
economic well' being of a region and it is considered an essential
purpose for local governments (Logan & Molotch, 1987). Land
development is also considered a private endeavor subject to
regulation by state and local governments (Rabinowitz, 1988). It is
common to have decentralized state structures for land use and
6


planning that rely on city and county governments for control
(Florestano & Marando, 1981) Developer districts are inextricably
tied into land use, development and growth.
Development factors include processes and entities. Before any
dirt is moved, there are numerous steps needed in the development
process, including planning, financing, and government approval.
Initially, an owner of a block of property promotes the development
plan and subdivides the property: this is the developer. The
developer often only divides the property and sells parcels to the
builders, who will construct the houses and commercial properties.
Developer districts are formed to provide and finance infrastructure.
There are financiers and lenders for the developers, builders, and
home buyers. There are local governments with zoning and land use
regulations. The end users, the home buyers or commercial lessees,
appear very late in the process.
Infrastructure
Building subdivisions and new houses requires infrastructure--
roads, sewers and water lines--which must be addressed when
developers present subdivision plans for local government approval
(Rabinowitz, 1988; Snyder & Stegman, 1986). Local governments can
impose exactions which include fees to generate revenue for
infrastructure or requirements to provide infrastructure associated
with development (Alterman, 1988). Infrastructure must be provided
in advance of or contemporaneously with the construction (Snyder &
Stegman, 1986). Alternative ways to finance infrastructure that were
being explored during the 1970s and 1980s included user fees and
special district structures (Snyder & Stegman, 1986).
7


Development related infrastructure and services can be provided
directly by the private developer. They can be accomplished by local
governments through funding mechanisms like special assessments, or
they can be accomplished through establishment of government
entities, including special districts (Snyder & Stegman, 1986) .
Special districts were used to finance and provide infrastructure for
real estate developments as early as 1954 (Bollens, 1957). Colorado
requires that certain services be provided before development can
proceed (e.g., water), but service provision is left to local
governments and developers (Sterling, Ankele & Norton, 1991) The
use of developer districts to provide infrastructure has increased in
importance during recent years.
Colorado Developer District Scheme and State Control
Developer districts are special district governments formed to
aid real estate development by providing infrastructure associated
with real estate development. This is the general design or scheme
of Colorado developer districts: property owners form a special
district government to provide the infrastructure needed for real
estate development and sales. Infrastructure provided by these
independent governments includes at least two of the following:
streets, street signs, water mains, sanitary sewer mains, water
treatment plants, sewer treatment plants, parks and golf courses, and
landscaping. The financing plan for a developer district is to
borrow money for the entire costs of infrastructure through issuing
tax-exempt general obligation bonds, which are repaid through annual
property taxes over a twenty year period. The district's founders
assume development of houses or commercial space will cause property
8


values to rise, and the increased tax revenues from this development
will be sufficient to pay back the bonds.
This scheme did not work as planned. There were numerous
defaults on debts; between May 1989 and December 1991, 14 Colorado
developer districts filed municipal bankruptcy cases to reorganize
their debts. Each case involved millions of dollars worth of bonded
indebtedness.
The relationship between state government, developers and
developer districts is rarely questioned when development is
successful. But what happens if the development does not go as
planned, and fewer houses are built than expected? Who bears the
risks for failures? The concentration of developer district
bankruptcies in Colorado raises a number of questions about
government structures and controls, including whether other states
have similar systems.
The failure of the real estate market to grow was identified as
a major factor in causing the developer district bankruptcies in
Colorado (Sterling et al., 1991). Development has risks. Public and
private actors seek to limit their risks, but common expectations are
that the risks are not supposed to include government defaulting on
its obligations or filing bankruptcy.
Bankruptcy and Accountability
Filing bankruptcy is admitting financial failure. There used
to be a great stigma attached to being bankrupt. This dishonor is
reflected in the definitions of the word bankrupt: "reduced to the
state of financial ruin", "destitute", "exhausted of valuable,
qualities", or "utter failure" (Webster, 1986, p. 129).
9


Governments, as responsible actors in the public arena and as
guardians of the public trust, are not supposed to be destitute.
Governments that reach the point of a fiscal crisis, such as
defaulting on debts or filing bankruptcy, are uncommon (ACIR, 1973;
1985). Governments are expected to have checks, balances, and
systems in place to protect the public good, including reasonable
budget and spending practices. The phrase "bankrupt government"
causes alarm; the very threat of bankruptcy aided New York City in
the 1970s in getting federal loans to avert bankruptcy (Axelrod,
1992), but New York City was an exception. In the federal system, it
is expected that local governments that have financial problems will
be supervised and aided by their state government (ACIR, 1973; 1985).
But what really happens when a local government goes bankrupt? Do
state governments step in? Are there systemic problems that make
bankruptcies of certain types of local governments--developer
districts--more likely?
Local Government Financial Emergencies
A government's failure to pay debts, a bond default, or a
bankruptcy filing are all considered financial emergencies (ACIR,
1973). A default occurs if bonds are not paid when due (Miller,
1992). Bankruptcy means the local government filed for
reorganization of its debts under the federal bankruptcy laws. One
ACIR study summarized the causes of local government financial
emergencies as poor management practices of spending more than
receipts, failing to respond to fewer receipts than expected, or
imposition of unexpected expenses, such as court judgments (ACIR,
1985, pp. 16-17) Structural weakness or lack of state control were
not analyzed.
10


Bond Defaults
Municipal bond default data are not widely available (Lamb &
Rappaport, 1987) and they were not systematically collected before
1985 (Kinney, 1992) Availability of data on bond defaults often
depends on whether bonds are rated for credit worthiness. More
information is available on defaults of rated bonds because it is
routinely provided in reports such as Moody's Investor Services.
Records of unrated bond defaults are less well known, and the data
collected by the Public Securities Association are disputed by rating
services and investment bankers based on definitions of "a default"
and the "incidence of default". Investment bankers, such as Nuveen
and Kinney, stress the analysis of material defaults, which are
defined as defaults where payments were missed and the investors did
not receive principal and interest owed to them (Kinney, 1992;
Nuveen, 1991).
During the period of 1980-1991, no general purpose government
--city, county or state--defaulted on unrated debt according to
Kinney (1992), but special purpose unrated bonds issued by these
governments were subject to defaults. In general, unrated bonds had
higher default rates per issue. Smaller dollar amounts are involved
with unrated debt issues than with rated bonds. Total national
municipal bond defaults are summarized in Table 1.2.
The frequency of defaults by special districts on non-rated
debt is notable, even using the lower "material default" data. When
ranked by type of issuer, special districts ranked third, behind
industrial development bonds and health care bonds (Kinney, 1992;
Nuveen, 1991). Geographically, the defaults on non-rated defaults
were dispersed with 43 states having at least one material bond
11


default, but they were not indexed by type of issuer (Kinney, 1992).
Kinney reported the seven states that did not have a bond default
during the 1980s were Alaska, Connecticut, Hawaii, Idaho, New
Hampshire, Rhode Island, and Vermont. So defaults on non-rated
municipal bonds were not uncommon events.
Table 1.2
Municipal Bond Material Defaults,
Estimated For Period 1980 to 1991
For Bonds Issued After 1980
NON-RATED ISSUES RATED ISSUES
TOTAL NUMBER 24,603 69,656
DEFAULT NUMBER 522 53
RATIO 2.12% 0.08%

AMOUNT (Millions) 155,310.1 1,239,075.3
DEFAULT AMOUNT (Millions) 2,992.9 3,359.1
RATIO 1.93% 0.27%
both numbers issued and amount issued (Kinney, 1992).
Municipal Bankruptcy Filinas
Filing bankruptcy is an uncommon event for all local
governments (ACIR, 1985) Between 1938 and 1977 there were 368
municipal bankruptcy filings nationwide, and between 1978 and 1992
there were 109 filings nationwide (Figure 1.1). The greatest number
of bankruptcies occurred between 1938 and 1947, when 312 filings
occurred. These municipal bankruptcies can be considered part of the
recovery from the Great Depression.
12


Figure 1.1
110-
TOTAL UNITED STATES
MUNICIPAL BANKRUPTCY FILINGS
H
U)
100--
90-
80-
Q
W
H
In
CO
w
w
<
o
In
O
w
m
x
D
2
50-
40- -
30-
20- -

...................... i"i i i i i i i i r ..........................
38 39 40 41 42 43 44 45 44 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 <6 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92
YEARS 1938 TO 1992


The Great Depression lasted from the 1929 until 1942, when the
war mobilization resulted in economic recovery. However, the ability
of governments to reorganize their debts was an important incident
for the economic recovery. There are numerous reasons for municipal
bankruptcies occurring from 1938 to 1947. First, before legislation
was enacted in 1933, no state or federal authority existed for a
local government to file bankruptcy and there were doubts that
governments could declare bankruptcy (McConnel & Picker, 1993). The
first test case found the 1936 law allowing municipal bankruptcy
filings to be unconstitutional (Ashton v. Cameron County District.
1936) The law was amended in 1937, and the test case deciding law
was constitutional occurred in 1938 (United States v. Bekins. 1938)
However, the 1937 act only allowed filing cases for a brief period
which terminated in 1942. Another important case, Faitoute Iron &
Steel Co. v. Asburv Park, decided in 1942 that states could compel
unwilling creditors to join a reorganization plan (McConnel & Picker,
1993). Therefore, the law was unsettled and there was a brief window
of opportunity to file cases, and the result was a single year high
of 101 bankruptcy filings in 1941 (ACIR, 1973).
The aftermath of the Great Depression explains the first peak
in the number of government bankruptcies, but there were also were
numerous bankruptcies during the past decade. The incidence of
municipal bankruptcies have been increasing since 1978, and this
alarming trend dramatically escalated since 1988. Bankruptcy court
statistics of all reported local government bankruptcies show there
were 34 cases filed from 1978 to 1987, and 52 between 1988 and 1992
(Administrative Office of the Courts, 1970-1992)(Figure 1.2).
14


Figure 1.2
Total Local Government Bankruptcy Filings
by State, Years 1970 1992
YEAR TOTAL LOCATION
92 17 MI WA CT CT
91 18 AL CA CT TN
90 7 CA CO OK UT
89 7 FL IN MT NE
88 3 SC TN WV
87 10 MS TX AK AK
86 7 KY NE NE NE
85 3 CA MO OK
84 4 AZ KY MO NE
83 3 CA NE NJ
82 4 CA OK PA TN
81 0
80 0
79 1 MS
78 2 CO MS
77 1 CO
76 2 CO OK
75 0
74 2 FL IN
73 0
72 1 AZ
71 2 NC TX
70 0
94 TOTAL
WV WV NE NE NE TX TX
PA WA TX TX NE NE CO
NE NE NE
OK TX TX
NE NE NE NE NE NE
NE NE NE
TX TX CO CO CO CO
CO CO CO CO CO CO CO
Administrative Office of the United States Courts. For Fiscal Years
June, 1970 through June, 1991. For 1992, statistics were available
only for the twelve month period ending September 30.
The locations were not concentrated by region or state. A local
government filed bankruptcy in least 23 of 50 states during the
period of 1970 to 1992. The trend demonstrates that municipal
bankruptcies are no longer rare and isolated incidents.
Information on governments filing bankruptcy is inconsistent
and illusive. The U.S. Courts collect annual bankruptcy statistics
on business and personal bankruptcy filings, and they report the
number of filings under each code section by judicial district. But
the court's data on government bankruptcies are limited to footnotes
reporting the number of Chapter 9 cases filed in judicial districts.
15


The court data are collected by fiscal year which limits comparisons
to calendar year data. Problems of under-reporting or miscounting,
and using fiscal reporting years results in bad data. The National
Federation of Municipal Analysts counted 85 municipal bankruptcies
between 1981 and 1991, and their data does not jibe with the courts.
Data in two other sources that have analyzed municipal bankruptcies,
(ACIR, 1985; Cohen, 1989), also disagree with the Court reports. The
alternative of searching through court dockets is not feasible
because cases are filed by name of the debtor and searches requires
knowing the date of filing or the name of the debtor filing a case.
Evaluations based on the number of bankrupt governments
compared to the total number of local governments on an annual basis
suggest bankruptcy filings may be a small problem, but the trend over
the last decade shows increasing numbers of bankruptcies. In
addition, there is an emerging pattern of special districts filing
bankruptcy. Between 1972 and 1984, ten of the twenty-one government
bankruptcy filings were from special district governments associated
with real estate developments; five of these were in Colorado and
they were associated with the same developer (ACIR, 1985, p. 13) .
The concentration of special district bankruptcies was not a
small problem between 1980 and 1992; out of 85 municipal bankruptcies
filed between. 1980 and 1992, eight were from cities, villages and
towns, four were from school districts, and 63 were from special
districts (Spiotto, 1993). Other studies have commented on the
occurrence of municipal bankruptcy filings by special districts, but
none has provided a systematic analysis of this phenomenon (ACIR,
1985; Cohen, 1989).
16


Developer District Bankruptcies
Five Colorado developer districts filed for bankruptcy in 1977
(ACIR, 1985). Seventeen Colorado local governments, including
fifteen developer districts, one water and sewer special districts,
and one local improvement districts, filed bankruptcy between 1987
and 1992. Twelve of these developer districts filed bankruptcy
during a twenty-four month period in 1989-1991 (Appendix A). In
1992, there were 1972 local governments in Colorado and 245 were
developer district governments. Five percent of these Colorado
developer districts had filed bankruptcy.
Nine of these fifteen bankrupt developer districts were
concentrated in the metropolitan Denver and Colorado Springs regions;
the rest were in mountain resort areas (Figure 1.3). Asserted causal
factors affecting the Colorado developer district bankruptcies are:
failure of the developer, increased foreclosures, the over-building
of the real estate market, and the Colorado recession in the mid-
1980s (Sterling et al., 1991). Shortcomings in state control systems
for developer districts were not included as causes of these
bankruptcies. A systematic analysis of the formation of the
districts, their operations and the state control system has not been
conducted.
Little research has been conducted on either governments
defaulting on bond or governments filing bankruptcy. Analyses of
government bankruptcies have not systematically considered the issue
of weaknesses in state controls of developer districts structures,
nor considered the relationship of these districts facilitating
growth to bankruptcy. Are these Colorado developer district
bankruptcies indicative of a problem that has larger, more widespread
implications regarding state and local government financing services?
17


Figure 1.3
Colorado Developer District Bankruptcies
1987-1992, by County
18
of Jtnuwy I.


Purpose of Research
Knowledge Gap
The relationship between local government financial emergencies
and the purpose of developer districts providing infrastructure for
real estate development has not been studied in depth. Developer
districts are subdivisions of the state, and states are expected to
provide control over the actions of their subsidiary governments,
especially in fiscal concerns. There are expectations that
government controls are in place to protect against financial
problems like bankruptcy. But what are they? Controls are expected
at the state and local levels once a financial crisis arises. What
happened in Colorado to address these problems?
Developer district bankruptcies have not been considered as a
problem in a system of state controls. Discussions of the special
district problem have not been extended to financial emergencies or
bankruptcies. This research intends to examine these connections and
to fill this gap by addressing the following three hypotheses.
Hypothesis I: If multiple bankruptcies of developer district
governments in one state result from downturns in the real estate
market, then these bankruptcies are likely to be the result of flaws
in the structure of this type of government. Hypothesis II: If a
state has a decentralized structure for formation of developer
districts and decentralized control of debt issuance by developer
districts, then multiple financial emergencies of developer districts
are more likely to occur. Hypothesis III: If a local government has
unlimited ability to issue general obligation bonds to finance
infrastructure in locations without any current population, and if
ability to repay bonds relies on potential growth, then the
19


conditions imposed by the private bond markets at the time debt is
issued are a part of the system of controls for this type of
government.
Other reasons for this research are reflected in recent
literature which has suggested that developer districts are a good
way to finance infrastructure, without reference to the occurrence of
bankruptcy and the attendant potential for financial disaster (Pack,
1992; Porter, Lin, & Peisor, 1987). Comparing Colorado controls to
other states with numerous special districts is also needed to
address whether this is an isolated problem or one with national
implications. This is undertaken in this research.
Research Approach to the Problem
This research analyzes the problem of Colorado developer
district bankruptcies as an issue of state control over local
governments. The focus is initially on the Colorado case, however
implications of this case may be relevant to other states. Therefore
considerations in the research design include both an examination of
common state control factors in a sample of states and the national
implications of developer district bankruptcy problems.
Chapter Three explains in detail how this study used evaluation
methodology, including case studies, to address the issues
surrounding these multiple governmental financial failures. Primary
consideration is given to government structure and controls in
Colorado through content analysis of statutes, service plans,
budgets, audits and other required filings. Analysis of court
documents and secondary sources also provided insight. Semi-
structured interviews were used to augment the documentary research.
Colorado controls of subsidiary developer district governments were
20


examined for three time periods: the period of formation; the period
of operations, and period of bankruptcy.
To provide a context for national implications, the state
controls and structures of selected states with numerous special
districts or noted developer district bankruptcies were evaluated.
Comparisons of key factors in Colorado developer district controls to
other states demonstrates implications of controls in other states.
Limitations of Research
Although the problem of bankrupt developer districts can be
viewed as a market problem, or one of a combined system of government
and markets, the emphasis here is on government structure and
operational controls. Interesting questions concerning the
interactions in the state and federal systems also can not be
addressed in detail. Furthermore, this research used a one-shot
evaluation of a system or process that leads to a problem and, thus,
has its own limitations in being able to pinpoint cause and effect.
Structure of the Dissertation
The introduction of the factual and theoretical setting for the
problem of developer district bankruptcies in the context of state
controls has been presented in Chapter 1. Relevant literature is
reviewed in Chapter 2. The hypotheses tested, and details of the
research design and methodology are presented in Chapter 3.
The findings are discussed in the following chapters. Chapter
4 examines the formative stages of developer districts, which include
the historical authorization of special districts in Colorado, the
direct state formation process, and the state control structure.
Chapter 5 discusses the operational controls of developer districts
21


in the context of the Colorado state economy during the 1980s, and
examines the statutory changes and the implied controls of developer
districts from the real estate and securities markets.
Discussion of the bankruptcy proceedings and state controls of
developer districts during these financial emergencies occurs in
Chapter 6. Chapter 7 compares key factors in Colorado's statutory
controls of developer districts to a sample of other states'
developer district statutory controls. Chapter 8 contains the
conclusions.
22


CHAPTER 2
LITERATURE REVIEW
This chapter considers the literature that is most useful in
analyzing developer district bankruptcies within the context of state
controls over subsidiary governments. Special district analyses are
considered first, and then government structures are discussed.
Regulation of government is considered next, including theories of
public choice and privatization. Finally, policy areas of land use
policy, government finance and bankruptcy policy are discussed. No
studies were located that examined developer district bankruptcies in
depth, or considered whether a concentration of local government
bankruptcies in one state was related to state control of local
governments.
Special District Governments
The literature on special district governments tends to be
descriptive. The leading work on the role of special district
governments is by John Bollens, who wrote in 1957 that special
districts were "the new dark continent of American politics" (p. 1) .
The five types of districts Bollens categorized are: metropolitan
districts, urban fringe districts, coterminous districts, rural
districts, school districts, and dependent districts and authorities.
Bollens recognized the use of special districts to provide
infrastructure for new residential development. He called these
urban fringe districts rather than developer districts because these
special district governments occurred adjacent to, but outside of,
the boundaries of an existing city. Explanations for the use of
23


urban fringe districts included: they were a transitional government
to provide services until the area had sufficient population and need
for incorporation or annexation; county governments were incapable of
providing services; and the cities were unwilling to provide services
outside their boundaries (Bollens, 1957, pp. 93-115). Thus urban
fringe districts were developer districts that provided services that
established local governments could not, or would not provide.
The numerous types of special districts have led to problems in
analyses of these governments. Problems include the multitude of
definitions, aggregation of special districts with public authorities
(Duisin, 1985; Mitchell, 1992), and census data collection methods
(Leighland, 1990). To add to the confusion of definitions, areas
classified for zoning that have no governmental powers are also
called special districts (Babcock & Larsen, 1990).
Census data provides numerical summaries of special districts
by type for each state. The Census Bureau also abstracts special
district powers and functions for each state because of the variety
of district types (Department of Commerce, 1992). The large
population of districts and the variety of services are considered
drawbacks in social science research, rather than assets. Because
of the variety of special districts, they are often deliberately
excluded from research on local governments (e.g., ACIR, 1993a).
Studies supporting special districts present economic or
managerial justifications. Special districts are called efficient
providers of public goods (Bish & Ostrom, 1973; Hawkins, 1976) .
Their flexibility in service provision, structure, and adaptability
over time is considered a plus (Cape, Graves & Michaels, 1969) .
Special districts are considered responsive to the service needs of a
particular community (ACIR, 1987; Bollens, 1986), and they provide
24


needed fiscal flexibility to avoid constitutional or statutory debt
limits placed on cities (Chicoine & Walzer, 1985). For these
reasons, the studies supporting special districts favorably compare
their operations to businesses.
Critics of special districts note a lack of public
participation and knowledge, fragmentation of government services and
responsibilities, and problems of accountability (ACIR, 1964; Cody,
1984; Colorado Legislative Council, 1984; Perrenod, 1984; Smith,
1974; Thrombley, 1959). Special districts are also criticized for
their use to exclude individuals based on race or income (Burns,
1994). Critics seek ways to eliminate special districts (Clawson,
1971), or reduce their autonomy by increasing centralized regulatory
powers (Cody, 1984), or both (ACIR, 1964; Bollens 1957). Special
districts were recently criticized because they serve private
interest rather than the public good (Burns, 1994) .
Most studies that discuss development and developer districts
either uncritically recognize their use (ACIR, 1965; Pack, 1992;
Snyder & Stegman, 1986), or encourage their use for development
(Porter, Lin, & Peiser, 1987). Other studies are cursory or out of
date (Benedetti & Dauer, 1980; Thrombley, 1959). Two studies with a
land use planning emphasis advocated stronger centralized structures
(Clawson, 1971; Cody, 1984), but failed to analyze the political and
fiscal possibility of curtailing use of developer districts. In
1959, one study criticized the political and fiscal reasons for
forming these districts to aid developers (Thrombley). Other studies
note that developers initiate and dominate the creation of special
districts to further their goals, rather than work within the current
system (Bollens, 1957; Bowen, 1984; Burns, 1994; Perronod, 1986; &
Porter, 1986).
25


Although special district governments were recognized as having
more municipal bankruptcies (ACIR, 1985), a thorough analysis of the
causes of these bankruptcies has not been conducted. One study
concerning the fiscal troubles of two developer districts concluded
that district management was responsible for the problems (Perronod,
1984). Sometimes financial problems of development and developer
districts are linked to market conditions; normally troubled real
estate markets are cited as causes for developer district
bankruptcies (Cohen, 1991; Spiotto, 1993), but these articles are
cursory.
The dominant theory about special districts' role as subsidiary
governments is that their powers and authority comes from the state
(ACIR, 1965). This is a direct application of Dillon's rule
concerning how states delegate and withdraw responsibility to
subsidiary governments and this rule is discussed below. This
dominant theory emphasizes hierarchical structure, and assumes that
the subsidiary governments are controlled by the states. A more
recent analysis of controls over special district governments
provided by Leighland considered a taxonomy of internal and external
controls (1992).
In general, studies of special districts have not made any
connections between the specialized type of government, the private
interests involved, the state controls, and the incidence of
bankruptcies in developer districts.
Governmental Structure and Controls
Governmental structure can be seen as a policy choice of the
state government (Dye, 1990) Metaphors of marble cakes (Grodzins,
1966), picket fences (Sanford, 1967), and partnerships are used to
26


describe how different levels of government interact, often from the
standpoint of federal-state relations (Elazar 1966; Wright, 1988).
Others use competition between governments (Dye, 1990) or politics of
decision making (Nice, 1987) to explain intergovernmental relations.
Policy subsystems (Sabatier, 1991) and system loops (Kisler & Ostrom,
1981) are used to describe the structural relationships in
intergovernmental policy making.
Developer districts, like other governments, obtain their
authority and existence from laws. State and local government
organization structure is found in constitutions, in laws, and in
traditions. This legal origin of powers is the basis for the often
cited Dillon's rule which posits that since local governments are
creatures created by state government, they possess only those powers
specifically delegated by the state. Dillon's rule was expressed in
a legal decision in 1863, and it has often been cited as the
"traditional view" that local governments, being creatures of state
governments, are subject to uniform and substantial state control
(Wright, 1988). Dillon's rule is often cited as basis for the
proposition that the relationship between states and local
governments is hierarchical, centralized and clearly defined by the
state.
Theories of local autonomy are often based on the inherent
power of local self government, expressed in 1871 as the Cooley
doctrine; this doctrine is the basis of many home-rule powers of
cities and counties (ACIR, 1993b). Under theories of local self
government, the government is primarily responsible to the local
citizens and derives its authority from the citizens. Therefore,
under the Cooley doctrine and related doctrines, local governments
have autonomy in all issues except those of statewide interest.
27


Statutes and constitutions define the structure of state and
local governments. Thus, the amount of control a state has over local
governments is often tied to legal interpretations. Dillon's rule
and the Cooley doctrine are two extreme views of the relationship
between state and local governments founded upon the legal basis of
authority for local governments. Legal views of the state and local
government power relationship can be divided into four general types:
hierarchical, centralized, monopolized and local self-government
(ACIR, 1993b).
Numerous judicial doctrines affect state and local relations,
as well as allocate the distribution of powers and controls (ACIR,
1993b). These doctrines include: judicial protection of municipal
property rights, the delegation doctrine that blocks broad grants of
state legislative power to localities, the public purpose doctrine
that restrains state and local government powers to tax and spend,
and the doctrine of inherent right to local self government. Other
legal provisions are state constitutional prohibitions on special
local laws that affect only one jurisdiction, or express
constitutional limits on the power to tax and incur debt(ACIR,
1993b). "Ripper clauses" are examples of constitutional provisions
that prohibit imposition of state-created organizations over the
power of municipalities without accountability to the people of those
jurisdictions (ACIR, 1993b). The cumulative effect of these legal
origins and judicial doctrines is one other consideration in
analyzing how states control or regulate developer districts.
Regulation of Governments
Government regulation theories typically focus on how
governments control the markets and the private sector. For
28


instance, the regulatory capture theory posits that businesses
control the regulatory process (Wilson, 1980). Regulatory capture
theory begins by examining government regulatory structure. The
discussion below considers a number of mechanisms of governments
controlling subsidiary governments.
Theories of governments regulating subsidiary governments
includes regulatory federalism (Wright, 1988), Dillon's rule
(Gosling, 1992), statutory delegation, and discretionary authority
(Zimmermann, 1983). The types of controls over subsidiary
governments enumerated in regulatory federalism theory are direct
orders such as mandates, crosscutting requirements which tie funding
to requirements in a horizontal manner, crossover sanctions which
penalize funding in one area if requirements in another area are not
met, and partial preemption of substantive areas from state control
(Wright, 1988). These federal regulatory controls over subsidiary
governments occur in limited subject areas, where uniformity or
national policy is considered paramount.
State control of local governments can be compared to the
regulatory federalism type of controls, but the relationship between
the state and the local government may or may not have the autonomy
or sovereign demarcations of the federal system. Analyses of states'
delegating authority to local governments typically only consider
cities and counties and exclude special districts (ACIR, 1993a;
Zimmerman, 1983). One national study analyzed the amount of state
control and local autonomy under the four categories of structural,
functional, fiscal, and personnel authority (Zimmermann, 1981). This
study found that the greatest number of state controls over city and
county governments occurred in the structural and fiscal areas.
29


Most discussions of intergovernmental relations and state
controls focus on cities or counties as the local government units.
One study that considered state systems of controls over special
districts discussed controls that were external to the special
district itself (Leighland, 1992). Leighland included express state
statutory controls, implied state controls, and controls from outside
forces as part of the external control system. This system of
express and implied state and outside controls is summarized in
Figure 2.1. No studies were located that applied this taxonomy to
the operations of developer districts in general, or in the instance
of a fiscal emergency.
Public-Private Continuum
Some theorists emphasize the importance of responsiveness of
local governments to their constituents and make comparisons to
private businesses. Some comparisons of government and business are
based on assertions that all organizations are public to some degree,
and thus differences are only a matter degree (Bozeman, 1987).
Another theoretical framework analyzes the structure of public and
private organizations as part of a complex continuum with government
and private enterprises at the extremes, and with a variety of hybrid
organizations between the two (Dahl & Lindbloom, 1953; Lan & Rainey,
1992) .
Measuring "publicness" is one way to consider if the
organization is a private, hybrid, or government organization. This
"publicness" is determined and defined by measuring the interests,
access, and agency of the organization (Benn & Gaus, 1983; Nutt &
Backoff, 1993) Hybrid organizations occur somewhere in the middle
30


Figure 2.1
EXTERNAL CONTROLS OF SPECIAL DISTRICTS
I. CONTROL FORMATION OF SPECIAL DISTRICT GOVERNMENTS
A. Formal Government
1. Legislative Authorization
2. Enabling Legislation
B. Procedural
1. Petition by Landowner
2. Vote
3. Centralized Agency Approval
4. Local Government Approval
5. Court Review
C. Financial
1. Insurance or Bonding Requirements
2. Debt Limitations
D. Non-Government
1. Formal Terms and Conditions on Bonds and Notes
2. Markets
3. Consumer Preferences
II. INFLUENCE OVER EXISTING SPECIAL DISTRICTS
A. Informal
1. Pressure Outside
2. Pressure Government
3. Monitoring activities
B. Formal
1. Audit & Accounting Requirements
2. Reports
3. Limit Debt Issue
4. Regulate Operating Procedures
III. DIRECT CONTROLS
A. Budget Approval
B. Debt Issue Approval
C. Staffing Decisions
D. Other Decisions
IV. INFLUENCING GOVERNANCE
A. Board Representation
B. Appointment Power
C. Removal of a Board Member
D. Legal Responsibility of the Board
31


of the public-private continuum. These hybrids include quasi-
governmental entities (McQuillen, 1987, chap. 3a; Walsh, 1978),
twilight organizations (Mosher, 1991; Seidman, 1980),and special
districts (Chicoine & Walzer, 1985). Forming hybrid organizations is
a common practice.
The tradition of forming hybrid organizations is one of
"empowering organizations.outside the regular bureaucracy to perform
public tasks or to manage public property" (Walsh, 1978). Special
districts are often considered quasi-governmental entities or hybrid
organizations with both government and private characteristics and
powers (Mosher, 1991; Seidman, 1980) The ability to form
organizations, including these hybrids, is dependent on state
enabling legislation that often defines their powers, including the
ability to issue debt.
Axelrod (1993) characterizes these hybrids as shadow
governments which get little public notice until a financial crisis
occurs. Hybrid governments have been criticized for lacking normal
controls of general purpose governments (ACIR, 1964; Axelrod, 1993),
and for being more prone to corruption (Henriques, 1986). The hybrid
nature of developer districts has been criticized as unresponsive to
state and to the public (ACIR 1964), but the hybrid nature of
developer districts has not been analyzed as a structural defect that
may make them more at risk for financial crises.
Public Choice Theory
One theory that considers governments as responsive entities is
public choice theory. It posits that economic controls of the
markets affect government services. Justification for devolution of
responsibilities, forming hybrids or special district governments is
32


often based on public choice theories. Public choice theory states
that governments provide services and special districts are formed in
response to citizen demands for services.
Public choice economic theories of government services rely on
metaphors of competition (Tiebout, 1955), aggregate or collective
decision making (Buchanan & Tullock, 1962), or sophisticated voting
(Olsen, 1965). Bish and Ostrom extended public choice theory to the
organization of special districts to provide services by saying that
citizens form these governments to receive services (1973, chap. 3).
They viewed the numerous small governments providing specialized
services as efficient and responsive to citizen preference.
The relationship of the "public" receiving the services and the
public that chose the type of government services is not always
clear. Bish and Ostrom posit that individuals act on imperfect
information based on individual self-interest (1973), but the
application of public choice theories to developer districts can be a
stretch. Developers are often corporations (Rabinowitz, 1988), so
those "choosing" government services and acting in "self-interest"
are the corporate land owners, who are the developers of the
districts (ACIR, 1968). One study found that developers structure
the developer districts to avoid costs to them and instead pass them
all along to the "beneficiaries," the home buyers (Snyder & Stegman,
1986, p. 99).
Privatization
Provision of and production of services are used to distinguish
between public and private goods in economic terms. Often the
public-private distinctions center around issues of provision and
production, and these issues are often discussed in the terms of
33


privatization. Privatization is a functional approach to government
services. Ostrom, Tiebout, and Warren (1961) argue that distinctions
between production and provision of public goods are needed, and that
a large general purpose government are not the best approach to
accomplish functions. They argue that smaller providers or private
providers are more efficient.
Privatization theory concerns removing government from the
production and delivery of services, and it is based on ideological
and fiscal strategies to reduce government (Ott, Hyde & Shafritz,
1991, pp. 109-110). Basic assumptions are that governments are
inefficient, ineffective and unresponsive in provision of services.
A corollary assumption is businesses are efficient, effective and
responsive (Jennings, 1991).
The aspect of privatization literature that considers the
dividing line between public and private is most relevant to the
analysis of developer districts. Although there are assertions that
government can create markets through privatization (Jennings, 1991),
the point that businesses may prefer government to provide services
that the market could provide has seldom been considered. The
installation of much infrastructure can just as easily be considered
part of the responsibility of developers as a government. Rosell
describes this reversal of responsibility and calls the process
"publicization" (1993). But the normative distinction of whether
government should provide services that development could pay for has
not been developed.
Land Use Policy
Land use policy literature analyzes and debates relationships
between state and general local governments' powers, and the controls
34


exerted by each. The relationships between developer districts and
land use have not been as clearly defined. Development and growth
are the foundations of land use policies (Altshuler & Gomez-Ibanez,
1993), and often the call is for better organization and control of
growth. There is another strain of land use literature that
discusses the capture of governments by the development interests and
calls this system a "growth machine" (Logan & Molotch, 1987) This
theory is based on the political economy of place.
Some of the land use literature concerns what level of
government should control growth. Government development policies
and controls are concentrated at the local government level because
states have "de facto" delegated this authority (Florestano &
Marando, 1981, p. 117), and because the historical indirect and
defused approaches of the federal government constitute a "non-
policy" (Murphy & Rehfuss, 1976). States provide the enabling
structure for. local governments to plan and control development and
growth; these laws also allow fragmented approaches to control
growth. The use of developer districts was criticized for
fragmenting land use policies and increasing costs of
services(Clawson, 1971).
Critics of growth call it suburban sprawl and say it causes
social ills (Peterson, 1981). Sprawl is caused by the lack of state
controls (Florestano & Marando, 1981), the lack of a regional
approach (Altshuler, 1994), or the lack of a federal land use policy
(Murphy & Rehfuss, 1976). Growth and sprawl increase the costs of
government services (Clawson, 1971), and critics recommend a more
centralized method of land use determination. Political
fragmentation and unruly growth are given as reasons for government
control rather than fiscal concerns.
35


Local government policies encourage growth, but they expect
growth to pay its own way. Many local interests encourage
development because they will financially benefit from growth (Logan
& Molotch, 1987). This is where developer districts, and the
bankruptcy of developer districts may add to the debate about land
use policies. Local governments traditionally required developers to
provide parks, roads and other infrastructure (Altshuler & Gomez-
Ibanez, 1993). These traditional requirements provided for the area
within the new development, and not for the entire community. These
requirements,. or exactions, are a way to shift the costs of
infrastructure from the public at large to the purchasers of the
newly developed property (Kirlin & Kirlin, 1983). Special districts
are cited as an established method of transferring costs of growth to
those who will benefit from it (Matzer, 1983; Snyder & Stegman,
1986). No analyses of fiscal risks of this devolution to developer
districts were located in the literature.
The current perception is that many of the requirements, or
exactions, are used to benefit the larger community, meaning they are
used to address revenue shortages (Alterman, 1988). Altshuler and
Gomez-Ibanez consider the growing reliance on exactions to be an
epochal change in land use policy indicating a retrenchment from the
policy of "growth is good" (1993, pp. 123-128).
Structural speculators are described as those that encourage
governments to support growth (Logan & Molotch, 1987). Analyses of
problems associated with speculating on growth, such as recessions
and government financial problems, were considered for the 19th
century (Monkkonen, 1984), and up to the great depression (Hillhouse,
1984), but there are no recent critical analysis of the possibility
bankruptcy and recession from unrealized growth. One analysis
36


contends that government financial problems are less likely now from
speculation on growth (Logan & Molotch, 1987, p. 86). Though the
speculative nature of development is recognized, local governments
bankruptcy implications from speculation is not considered.
Government Finance
Statutory Controls
Fiscal stress and cutback budgeting are an integral part of
recent budgeting literature (Caiden, 1990) Local government budget
deficits are a type of fiscal stress that is prohibited through
controls in state constitutions and statutes. Many states prohibit
deficits for both state and local government (Gosling, 1991). In
effect, the budget deficit policy of states is: prohibit deficits and
they will not occur.
Although deficits are prohibited, debt financing is both
common (Miller, 1992), and increasing (Axelrod, 1995). There are
numerous state controls of local government budgets, including debt
limitations, budget practice requirements, and referenda provisions
(ACIR, 1993a). Local governments have sought numerous ways around
debt limitations such as running deficits, accounting maneuvers
(Rubin, 1982), using exactions (Alterman, 1988), and devolution to
other governments (Florestano & Marando, 1981) Devolution results
in forming developer districts or other hybrid organizations.
Long Term Debt
Hybrid organizations, including developer districts, typically
use municipal bonds to finance their operations. Therefore,
considerations of public finance theory regarding long term debt are
useful in analyzing developer district bankruptcy issues. Public
37


finance theory supports the use of developer districts and using
bonds, including the principle that beneficiaries should pay for
government services received (Musgrave & Musgrave, 1988).
These public finance theories differentiate acceptable revenue
sources by type of services provided, and bonds are considered
acceptable for infrastructure finance but not operational expenses
(Musgrave & Musgrave, 1988). States are considered responsible for
controlling local government debts (ACXR, 1985), but the method used
typically limits the amount of debt that can be issued or the amount
of taxes that can be collected. The actual terms and conditions of a
local government's debts are contractual obligations between the
government and the lender (Lamb & Rappaport, 1987) Lenders can be a
bank or similar business in the private sector, or the lenders can be
dispersed through the sale of bonds.
Borrowing by governments with payback over a period of years is
accomplished through the issuance of municipal bonds. Underwriting
municipal bond issues is a complex business, with minimal state or
federal regulation (Lamb & Rappaport, 1987). Bonds are issued with
terms and conditions that can control municipal behavior and affect
the operations of a government (Lamb & Rappaport, 1987; Miller,
1992). In effect, borrowing by a local government has a number of
private contractual controls, based on the underwriting process or
the conditions of issuing the loan or the bonds. The risk of default
is a concern of lenders during underwriting, and bankruptcy is one
type of default (Miller, 1992). Contractual provisions called credit
enhancements are ways to guarantee the debts and make payment more
secure (Lamb & Rappaport, 1987).
Studies normally consider rated bonds, and there have been some
studies that considered how bond ratings affect one single
38


government's operations after the bonds have been issued. Falling
bond ratings affect the fiscal operations of a government (Rubin,
1982) and intergovernmental aid from the state or federal source can
improve a falling bond rating (Burchell, Carr, Florida, & Nemeth,
1984) .
A recent empirical study of reducing risks and improving credit
worthiness in the municipal bonds market summarized research on rated
bonds (Reid, 1990). It found that "credit ratings reflect risk but
only imperfectly," and that the "most important determinants of
credit ratings appear to be outside of the direct control of local
governments" (Reid, 1990, p. 66). Reid's analysis of two other ways
to address risks, obtaining insurance and public credit enhancements,
found these to have mixed results, with insurance providing more cost
savings to the government in securing bond issuance (1990, pp. 67-
68). No studies were located that considered contractual bond
conditions as exerting control over government operations either
generally, or in the specific context of local government
bankruptcies and financial crises.
Financial Emergencies and Bankruptcy
Financial emergencies for local governments include structural
deficits (Rubin, 1982), defaulting on debts (Cohen, 1989; Monkkonen,
1984), and filing bankruptcy (ACIR, 1985). The one comprehensive
analysis of municipal debts was completed in 1936 (Hillhouse).
Information on defaults is limited because, historically, little data
are collected and reported (ACIR 1985; Cohen, 1989; Monkkonen, 1984),
and because the bondholder or defaulter may hide defaults because of
market concerns (Monkkonen, 1984, p. 128). Two studies found that
the historical incidence of municipal bond defaults is closely
39


related to local business cycles of boom and bust (Cohen, 1989;
Monkkonen, 1984).
Without state or federal regulation or reporting requirements,
there are gaps in the public information available about municipal
bonds, rated and non-rated. Other problems with bond default data
are: many municipal bond issues are often non-rated issues; they are
underwritten by numerous local or regional firms; many issues are
privately placed; and data are not centrally collected. Data
collection began in the 1980s by either trade groups or by watch-dog
organizations.. These data have a number of problems. It is
incomplete and is not widely reported (Kenny, 1992, Nuveen, 1991).
Data are presented in a subjective manner.
Bankruptcy theory is normally considered from the standpoint of
private entities, and the legal developments from private
bankruptcies are adapted to form government bankruptcy theory
(American Jurisprudence. 1962, 9B §§ 2683-2719). Empirical research
has played almost no role in the development of bankruptcy policy
(Sullivan, Warren & Westbrook, 1987). Traditional bankruptcy
policies are equity based, including allowing a debtor to get a
"fresh start," and treating classes of creditors equally in dividing
the limited assets (King, 1979; White & Nimmer, 1992).
Literature on government bankruptcies is scarce. Practice
oriented literature focuses on legal process (e.g., Sterling, Ankele
& Norton, 1991; 1992), and on money market considerations (Cohen,
1989; Faria, 1991; Spiotto, 1993) Descriptive histories of the
development of the bankruptcy laws focus on general local governments
and deliberately exclude consideration of special districts because
they are seen as inconsequential (McConnell & Picker, 1993) Without
providing empirical support, two reasons are given to deter local
40


governments from filing bankruptcy: damage to reputation, and
difficulty in obtaining future financing (Faria, 1991). Case studies
of threatened bankruptcies, such as New York City, capture most of
the attention (ACIR, 1985; Axelrod, 1992; Lamb & Rappaport, 1987).
Two studies looked at the general phenomena of local government
bankruptcies (ACIR, 1973; 1985). Only one study examined cases
involving special district bankruptcies (ACIR, 1985) It concluded
local government bankruptcies were not a major concern because few
cities or counties were involved; it found most filings were by
special district governments. Three causes of local government
bankruptcies were: financial failure of the real estate developer,
changes in intergovernmental relations (e.g., California proposition
13), and poor financial management and planning (ACIR, 1985, pp. 16-
17). Whether state controls over developer district governments were
a factor in these financial emergencies was not evaluated, although
more control by the state over local government was given as a
recommendation to avert these financial emergencies (ACIR, 1973;
1985) .
Summary
Special districts have been considered in numerous contexts
in the literature, but no studies were located that looked at the
issue of whether structural deficiencies in state controls,
legislation, or agency oversight contributed to the financial
problems of developer districts. No studies were located that
considered the process involved in local government bankruptcies. No
analyses were located that made comparisons across states concerning
the powers and controls of developer district governments and their
risk of fiscal emergencies. This research begins to fill these gaps.
41


CHAPTER 3
RESEARCH DESIGN
Colorado state controls over developer districts and factors
causing the financial crisis of bankruptcy are the focus of this
analysis. This chapter first addresses the contradictory models of
state controls and presents a temporal model that incorporates major
elements of state control theory to provide a context for this study.
Then the three hypotheses tested in this study are presented. The
last section explains the evaluation methodology used.
Model of State Control Over Local Governments
There are three factors that influence the operations of local
governments, and developer districts in particular (Figure 3.1). One
factor concerns responsiveness to the public, and this is designated
political or voter/resident controls. The second factor is the area
of economic or market based controls. The third factor contains the
state regulations and controls. These state controls are considered
most important and are the focus of this research design.
The models of state government control presented in Chapter Two
provide contrasting descriptions of state controls over local, or
subordinate, governments. Dillon's rule pronounces that states are
the source of all local government powers and what the state gives it
can take away. This limited and clearly defined doctrine of local
government powers conflicts with the Cooley doctrine of autonomous
local governments. Neither model fits well with models that consider
specific contexts where states exert controls over local governments
42


Figure 3.1
Influences on Developer Districts
43


(e.g., Leighland, 1992; Zimmerman, 1981). Only Leighland's outline
of outside control factors begins to consider time and context
related factors (1992). Leighland describes a variety of external
controls over special district governments, including state controls,
however, he does not examine causal factors.
The incongruities and contradictions in prior models of state
control over local governments present problems in analysis of state
controls over developer districts. However, when a time frame is
superimposed to coordinate these models of state control over local
governments, and to show that the control relationship changes over
time, then explanation found in the literature have greater
explanatory power and fewer inconsistencies.
The temporal model, diagrammed in Figure 3.2, considers three
distinct periods for analysis of state controls over developer
districts. The time periods are: the formative phase, the
operational phase and the crisis phase. The relationship between
these first two phases is sequential, and the crisis phase is an
aberrant occurrence that tautologically must occur within the
operational phase.
The relationships between the state and subsidiary governments,
and the amount of control exercised by each, depends upon the phase
that they are in. The distinct phases of formation and operations
denote differing balances of state control and local autonomy. This
temporal model primarily considers the types of state controls over
developer districts, but it also depicts how market based and voter/
resident controls may affect this relationship.
The formative phase is where the universe of powers, duties,
finances, jurisdiction, and structure of developer district
governments are defined and controlled by the state. The state's
44


power eclipses that of the local government, and this reflects the
model of Dillon's rule where all powers and responsibilities of local
governments are defined and controlled by the state.
State and local governments relations are defined in statutes,
in case law and in custom. Mechanisms that transfer state powers to
the developer district are found in statutes that describe enabling
processes and local government duties. External influences over
individual developer district's powers, duties, and financing at the
formative phases include groups of stakeholders such as promoters,
developers, area residents, and finance markets. The relationships
between the state, developer districts and groups develop over time
and become custom.
More inclusive state control continues during the transition
between the formative and operational phases. The transition into
the recognized structure of developer districts, or political
subdivisions, is presented in Figure 3.2 by diamond shaped paths that
denote the process of moving from a proposed to an operational local
government. The state's control gives way to an independent local
government during the operational phase.
The second phase is the operational phase, where subsidiary
governments are nearly autonomous from the state; this reflects
Cooley's doctrine (ACIR, 1993a) and Zimmerman's control factors
(1981). The more detached relationship between the state and local
governments is depicted by the two slightly overlapping circles in
Figure 3.2. The areas of state controls during the operations phase
are fewer and less intrusive, as denoted by the small elliptical
section.
45


Figure 3.2
Temporal Model of State-Local Control
FORMATIVE PHASE

46


During the operational phase, the state expects responsible
autonomous operations from developer districts. Market and
voter/resident controls also affect the operations of the developer
district and its relationship with the state. These interest groups
may contain some of the same individuals as during the formative
phase, but they have different relationships. For example, the new
residents of the developed area become voters who can exert control.
The relationships between local governments, developers and the
markets may also become defined by formal contractual relationships.
During the operational phase the relationship between the state
and local government is cooperative, with limited "interference" or
direct state supervision of the developer districts. State controls
are applied across-the-board to subsidiary governments of the same
type, and the controls deal with statewide concerns such as voting
process, annual reports, and limits on debts and taxes. State
statutes provide special district governments powers to coordinate
services or even to consolidate two local governments into one.
The aberrant occurrence of a local government fiscal crisis,
such as developer district bankruptcy, is the crisis phase. Here,
the fiscal troubles of a subsidiary government are severe enough to
justify state involvement in managing the operations of the local
government to resolve the crisis (ACIR, 1985). This expansive
exercise of state control in managing what was previously an
autonomous government is justified as a proper use of state control.
This crisis phase model applies Dillon's rule--since local
governments are creatures of state governments, the state should go
in and resolve the fiscal crisis (ACIR, 1985). This is depicted at
the bottom of Figure 3.2 by the state government sphere of influence
almost entirely eclipsing the local government sphere. This state
47


involvement in local government's administration lasts only until
proper fiscal control is restored. Because this phase is temporary,
it is shown as a smaller loop within the operation phase.
Hypotheses
This research was designed to recognize the time and context
factors which influence state controls of local governments. The
objective to explain the phenomenon of numerous developer district
bankruptcies as a problem in the state control structure was the
starting point in developing the three hypotheses.
Structural Flaws
Hypothesis I: If multiple bankruptcies of developer district
governments in one state result from downturns in the real estate
market, then these bankruptcies are likely to be the result of flaws
in the structure of this type of government.
The first hypothesis recognizes that developer districts are
subsidiary governments, and that often weaknesses in government
programs are not apparent when those programs are planned. These
flaws in the plans or in the underlying statutory structure may not
be apparent until some intervening cause occurs to reveal the flaw.
The first hypothesis recognizes that developer districts are
designed and planned to provide multiple services for the
infrastructure necessary to enable real estate development. Because
this is the purpose of developer districts, statutory formation
procedures should take into consideration changes in the real estate
markets. There is a multiple step statutory process of evaluation
and review for forming these districts. The underlying rationale for
asserting that there is a failure in the statutory structure of these
48


developer districts is that this pattern of numerous failures of one
type of government in one state could be chance, or it could be the
result of some unknown, unanticipated, or ignored defects.
The stated purpose of developer districts to provide services
for real estate development is present from the initial planning of
the district early in the formative phase. It is during the review
process that concerns for growth should be evaluated. This
hypothesis considers whether there has been systemic failure, or
problems in government planning and review, or problems of
implementation, or problems of inadequate controls.
Centralization and Decentralization
Hypothesis II: If a state has a decentralized structure for
the formation of developer districts and decentralized control of
debt issuance by developer districts, then multiple financial
emergencies of developer districts are more likely to occur.
The issues of centralization and decentralization are often
raised concerning government provision of services. Some critics of
special districts and developer districts have suggested that
centralization is a better way to control local government actions
(Clawson, 1971). In contrast, the decentralized formation structure
was recommended by both Bollens (1957) and by ACIR (1965) as an
effective mechanism. This hypothesis addresses this normative
prescription.
The models of intergovernmental controls also reflect
centralization and decentralization issues. As noted above, Dillon's
rule posits a. centralized control of subsidiary governments, and
Cooley's doctrine reflects autonomous operations and decentralized
power.
49


An additional area of concern is debt authorization. Control
mechanisms for debt may include centralized review of debt issuance
or centralized statutory controls limiting authority to issue debt.
From the initial review of the facts, it does not appear that
Colorado developer districts had many constraints over their ability
to issue debt. Therefore, issues of centralization and
decentralization are important to a consideration of issues of
government finance and debt.
Market-based Controls
Hypothesis III: If a local government has unlimited ability to
issue general obligation bonds to finance infrastructure in locations
without any current population, and if ability to repay bonds relies
on potential growth, then the conditions imposed by the private bond
markets at the time debt is issued are a part of the system of
controls for this type of government.
This hypothesis focuses on customs that have developed and
whether some of the relationships that occur outside of the statutory
scheme are part of the control structure of the state. The developer
district scheme is to build infrastructure to attract a population.
This hypothesis addresses whether the manner in which developer
districts are used to provide infrastructure is a state policy. It
also weighs whether the market or outside controls can be considered
a part of the state control system.
Developer districts are formed to address a need. These
governments borrow large amounts of money through bond issuance to
provide the infrastructure necessary to carry out their services
plans. These municipal bonds have become the debt subject to dispute
during bankruptcy. This situation is inconsistent with the public
50


perception of municipal debt as a secure investment. Since the
actions of lenders often influenced the terms of municipal debts,
they may also have had some constraining influence on the district's
ability to borrow. If there is a control relationship between
lenders and developer districts that is known, then the state
acceptance of this type of control may be inferred.
Research Plan
This research investigates the problem of Colorado developer
district bankruptcies as an issue of state control over local
governments using qualitative methodology of documentary analysis and
case study. This research considers policy areas of state and local
controls, local government budgets and land use policy. The focus is
first on the case of Colorado and its developer districts, and then
by extension to the national implications from the Colorado
experience. In this thesis, the definition of "state controls" is
extended to include not only specific statutory requirements, but
also the system of direct and implied controls developed by custom.
Direct controls occur from statutes and regulations and are more
easily discerned. Implied controls develop from custom and from
application of explicit statutes. As such, they are more difficult
to discern, although patterns of implied controls can be detected.
The evaluation methodology used includes historical,
comparative and case study analyses of developer districts and state
controls. Three major parts of the research design are: analysis of
individual districts, analysis of the Colorado controls and
structure, and comparison of Colorado controls to other states.
Factors for evaluation of bankrupt developer districts and state
controls are addressed below.
51


Evaluation Research
"Evaluation research is the systematic application of social
research procedures for assessing the conceptualization, design,
implementation, and utility of social intervention programs" (Rossi &
Freeman, 1989, p.18). There are a variety of evaluation designs,
including comparisons of planned to actual performance, comparisons
of before and after data, and monitoring implementation or service
delivery (Rossi & Freeman, 1989; Hatry, Winnie & Fisk, 1981) .
Evaluation studies are a problem oriented approach that have been
advocated in the field of intergovernmental management (Marando &
Florestano, 1990) and they are suggested for local governments
(Hatry, Winnie & Fisk, 1981).
A developer district is not a singular agency program;
instead, it is a government entity formed to provide a number of
services. However, there are parallels to how agency programs provide
a defined service. The area of inquiry in this research focuses on
the design and use of an institutional form to provide services and
how those services were provided. The analysis also considers the
control relationships when one type of government is defined, formed
and operated within the authority and jurisdiction of a supervisory
government.
This control relationship between states and developer
districts was considered using systematic evaluation methods during
the formation or planning phase, the operations phase, and the fiscal
crisis of bankruptcy. This evaluation required using historical
analysis of sources to determine the purpose of these districts, made
possible through evaluation of service plans and annual filings. In
addition, analysis of bankruptcy case files provided contemporaneous
52


explanation of the development of a problem that accelerated into a
fiscal crisis.
The definition of developer districts as governments that are
formed to provide services to a defined area, has similarities to
that of an individual government program. Their purposes are clearly-
stated and more limited than city or county governments. Using
evaluation research is appropriate to discern intergovernmental
relations and intergovernmental management considerations, as well as
internal operations government. Since this evaluation involved an
intergovernmental relationship, the definition of evaluation research
included "the delivery of a specific service, or the working of a
selected unit, agency, or government organization regardless of the
level" (Marando & Florestano, 1993, p. 307).
Evaluation methodology employs several research techniques,
including research on documents, survey techniques, and experimental
designs. The techniques used here included unobtrusive research
through documentary analysis of statutes, required filings and court
documents. In addition, expert interviews were conducted. The
strengths of evaluation methodology using a systematic, empirically
based design are in explaining phenomena, analyzing relationships,
and addressing actual problems. It has high validity (Babbie, 1989,
chaps. 10-12). Evaluation methodology has some limitations, such as
less precision in generalization to large populations (Babbie, 1989,
p. 285), but the universe of Colorado developer districts is not
large.
Reliability in an evaluation design can be enhanced by using
public records and secondary sources not assembled specifically for
the research, and by including triangulation of research elements.
In this study, reliability was addressed by using public records in
53


the initial data collection from a variety of government sources:
statutes, statutory histories, budgets, court pleadings and audits.
Other data sources such as census data, and real estate records were
analyzed to provide broader perspective on the economic picture. In
addition, using data from both bankrupt and non-bankrupt developer
districts and making comparisons within and between these classes
provided balance. Finally, expert interviews were conducted to aid
in triangulation, and to provide greater explanatory depth.
Findings from individual developer district bankruptcy cases
yielded information that is generalizable to other state and local
governments, particularly in the area of changing revenues and
response to economic conditions. Analyzing strengths and weaknesses
in Colorado developer districts and state controls led to
identification of risk factors that were compared to other states.
Bankruptcy is an extreme case of fiscal distress that governments
want to avoid, and the comparison of Colorado structural factors to
those in other state governments provides a basis of comparison of
national risks.
Assumptions and Limitations
Developer district bankruptcies have a broad range of causes
and a broad range of theoretical considerations. This section
presents some of the assumptions and limitations of the research
design which simplified research efforts by narrowing the focus to
the state system of intergovernmental controls.
Evaluation of state controls over a subsidiary government
requires analysis of different levels of government. One specific
unit is the developer district. The developer districts are
geographically located within cities or counties that have some
54


authority over the formation of these districts. For ease of
analysis and discussion, counties were the general purpose local
governments analyzed. At the third level is the state; the state
could be considered as a monolith, or as a number of component
entities. Rather than considering the state as a monolith, three
units of the state were considered: the administrative agencies, the
legislature and the governor's office.
The land use planning elements of local governments and
attendant infrastructure requirements associated with development are
not comprehensively evaluated. These requirements are assumed to be
the same among local governments.
The primary intergovernmental relationship examined is between
Colorado and developer district governments. The role between
district and counties is considered, but it is assumed that it is
defined by state statutes. An additional limiting factor is only one
county will be evaluated concerning developer district bankruptcies
in that jurisdiction. The fact that the federal government provides
a forum in the bankruptcy court is assumed to have little influence
on the state and local relationship. Units of federal government and
their relationship to developer districts are examined peripherally.
The general economy and market conditions for the region are
considered to be similar for the counties and for the developer
districts within them. Two private markets, the real estate and the
bond markets, also affect developer district governments, and these
will be discussed in relation to financial conditions for developer
districts and state controls. One assumption is that the real estate
market conditions for the properties located within any one developer
district are not significantly different from other properties in
55


that district. This research assumes the private market conditions
for bonds and lending were comparable for the different developer
districts. The specific bond negotiations and underwriting processes
were not investigated.
The national comparison data were limited to the enabling
statutes regarding the formation of multiple service provider special
districts. Analysis of state constitutions, and other statutory
provisions outside the specific chapters on special districts were
not examined.
Research Design Elements
There are a number of research design elements concerning both
state controls and the operations of individual developer districts.
The research design elements of this study included analysis of
statutes and legislative history to determine the context of state
controls. The sample and the cohort group developer districts were
evaluated based on statutory and situational factors. In addition, an
analysis of the economic environment for the state for the time frame
was also conducted. Details of these elements follow.
State Controls
Investigation of the context and content of state controls over
developer districts was conducted in the following manner. First,
Colorado statutes enabling special districts, statutes defining
special district powers, other local government statutes and
constitutional provisions were analyzed. In addition,
contemporaneous reports of the legislature considering special
district issues were analyzed for materials about intent and purpose
of statutory controls, or lack of statutory controls. Finally, the
56


statutory history for special district provisions that were amended
during the time frame of 1990-1993 was evaluated to determine what
changes in controls were made in response to the bankruptcies.
The state statutory policies regarding developer districts were
analyzed for three distinct phases: the formation requirements, and
operational requirements, and response to bankruptcies of these
governments. Explicit controls were found in the state statutory
superstructure: the constitution, statutes, statutory amendments, and
regulations. Part of the state's regulation and controls are
delegated to other established local governments through statutes,
especially during the formation process. These inter-local relations
will be considered under the state control portion of this research.
Analyses of state control structures included direct policy
decisions through review of statutes, rules and proposed controls.
Proposed statutes, and legislative reports were considered to see
what types of controls were not adopted. Since the state laws
concerning special districts are relatively static with few
substantive changes since the 1950s (Cody, 1984), the analysis
concentrated on 1981 forward, when there were attempts to adopt more
state controls.
Evaluation of proposed and rejected controls helps explain the
structure of controls that are now in place. The operations of the
developer districts and state reports provides more insight on how
the controls were exercised. Interviews with the experts also helps
round out a view of the changing relationships.
Developer District Cases
In addition to the state controls, analysis of the developer
districts' formation and operations was made on a sample of bankrupt
57


and non-bankrupt developer districts. The sampling methods, factors
considered and data analyzed are discussed below.
Sample. The judgmental sample of developer district cases was
determined primarily by the location of the districts. Figure 3.3
shows the number of local governments by county for Colorado and it
outlines the Denver Metropolitan area. Out of a total 245 developer
districts statewide, 47% are in the Denver Metropolitan area, which
includes the counties of Adams, Arapahoe, Boulder, Douglas, and
Jefferson, and the City and County of Denver (Division of Local
Government, 1993). Figure 1.3 indicated the location of the fifteen
bankrupt Colorado developer districts between 1987 and 1992. The
initial screening indicated nine bankrupt districts occurred in
counties in the Denver and Colorado Springs Metropolitan areas.
Adams, Arapahoe, Douglas, and El Paso counties had bankrupt developer
districts, but five bankrupt developer districts occurred in Douglas
County. The rest of the bankrupt districts were in the mountain
resort areas in Mesa, Mineral, Summit and Park counties.
Douglas County was analyzed intensively because it had the most
bankrupt districts. Douglas County also had a total of 60 developer
districts formed between 1980 and 1990 which allowed for cohort
comparisons between bankrupt and non-bankrupt districts. However, to
determine factors relevant to bankruptcy, data was gathered from all
bankrupt developer districts on location, date formed, date
bankruptcy was filed, and duration of the litigation (Appendix A).
A non-random judgmental design was used for a sampling frame
because one state and one type local government were evaluated.
Random sampling is rarely used in discussing factors involving
evaluation of factors of control between levels of government. In
addition, a non-random design is suggested because the size of the
58


Figure 3.3
Note, the Denver metropolitan area is outlined in bold.


universe of developer districts is small; there are 245 developer
districts in Colorado (Division of Local Government, 1993). Random
sampling was not a luxury available here because of limits on data
availability, time, and finances. Judgmental sampling has been
criticized for lacking generalizability, but the emphasis here is on
explaining both relationships between governments and unusual
occurrences, so a judgmental sample is appropriate and justified
(Babbie, 1989, chap. 10).
Factors. Analyses of developer districts, both bankrupt and
not, was based on the factors which are listed below. These factors
were developed for this study primarily through the literature review
and through the factual context. The bankruptcy of these developer
districts can be written as the multivariate function:
Y = f(P,St,Tf,Td,S,L,M,D,A,F,G,0), where
Y measures the bankruptcy of the developer districts
P measures the process for forming the districts
St measures the statutory structure
Tf measures the date the districts were formed
Td measures the date when development began
S measures the size of the district
L measures the location, whether urban, suburban or rural
M measures the market condition for real estate
D measures the developer
A measures the management of the district
F measures the relationship of bond payments and taxes
G measures the projected growth compared to sales of
houses
O measures the other factors.
Some of these factors are relevant to all the districts, such
as state statutes and the real estate market. Some factors are
relevant for groups of districts, but most are individualized.
Because of this, greater effort was placed in reviewing factors
similar for all bankrupt and the sample of non-bankrupt districts to
facilitate generalizations of the findings.
District Formation and Operations Data. The district cases
were developed and analyzed through documentary sources of state
60


required informational filings, court records and state archival
materials. Systematic evaluation of these documentary sources
provided data about individual districts, and evidence of a pattern
of behavior for both the state and developer districts. Systematic
collection and analyses of data from these sources provides reliable
and valid information with which to make generalizations about
government structure and controls.
There are numerous mandatory filings for developer districts
that are maintained at the State Department of Local Affairs,
Division of Local Government, Denver, Colorado. These files were
analyzed for the bankrupt districts and for the sample comparison
districts. Documents are maintained in the individual files for each
district. Those considered here are:
service plans, or statement of purpose
annual budgets and budget resolutions
annual statement of taxes, including mill rates
annual audits
certification of election
organizational documentation, including court decrees
orders for inclusion of territory (boundary changes)
certificates of intergovernmental contracts.
Bankruptcy Court Cases and Data. For the bankrupt districts,
rich data sources are the Bankruptcy Court records, which are listed
by date and document type in the docket, and maintained in the
pleadings files. Pleadings for active cases, and for cases that have
been closed for less than two years are retained at the Clerk's
office for the District of Colorado; other records are placed in
archival storage. During December, 1993, records for the cases that
were present at the Clerk of Court's office were evaluated. Both the
docket and pleadings were evaluated for fourteen of the seventeen
cases for the following data:
date case filed
objections to the case filed
creditors' motions for relief
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date reorganization plan was submitted to creditors for
vote
date plan was approved
date case was dismissed.
The contents of each file varied according to where the case
was in the process and how contentious the parties were. A more
detailed analysis of the contents of reorganization plans and
pleading documents was conducted in cases where there were objections
to the filing of the case, or where there were motions for relief.
Motions and briefs in support of these motions were reviewed, as well
as court decisions.
In addition, all published opinions concerning Chapter 9
Municipal Bankruptcy cases were reviewed because there are so few
reported decisions under Chapter 9 of the Bankruptcy Code (11 U.S.C.
§§ 901 et seq.). On a national level, twenty-eight published
decisions relating to local government bankruptcies were reviewed; of
the ten that concerned developer districts, seven opinions were from
Colorado developer districts cases.
Other Data Sources. The following serialized official reports
were evaluated: the Colorado Economic Forecasts for 1990-1992,
published by the Colorado State Economist; the annual tax data for
1980 through 1992 contained in the Report to the Legislature of the
Division of Local Taxes; and the Compendiums of Special Districts for
years 1989 and 1990. Another source was the 1992 Master Plan for
Douglas County. Finally, reports of County Clerks of the Denver
metropolitan counties were reviewed for data concerning foreclosure
filings for the years 1980 through 1991.
Information about developer districts was collected from the
news media. In particular, newspaper articles from the period 1990
to 1992 relating to developer districts were collected and reviewed
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from both national and local papers (Wall Street Journal. Rocky
Mountain News, and the Denver Post).
Economic Context
The initial screening of developer districts, particularly the
dates the districts were established between 1980 and 1985, set the
context for evaluating the economic context for Colorado governments
in the Denver metropolitan area. Contextual data on housing and
economic markets was considered for the state, Douglas County and the
Denver Region for the decade of the 1980s. Economic and contextual
data was collected mainly from government sources, including census
data, state economic reports, tax assessment reports, and newspaper
reports. Particular attention was placed on recessions and financial
difficulties in the real estate sector of the Colorado economy.
Expert Interviews
The final source of information was expert interviews. Expert
interviews were conducted because information about the phenomenon of
multiple failures of developer districts might not be captured or
represented by documentary sources. Interviews of twenty individuals
knowledgeable about Colorado governments and developer districts were
conducted during June, 1994, after preliminary documentary data was
collected (Appendix B).
The sample of experts for these interviews was obtained in a
non-random method using a snowball sample frame. The experts
included state and local administrators, state and local elected
officials, bond financiers, attorneys, and lobbyists. Expert
interviews were conducted with a semi-structured format, and almost
all were conducted in person. In six cases, when the expert could
63


not schedule a meeting, interviews were conducted over the telephone.
Governmental controls, causes of the developer district bankruptcies
and suggestions for improvements were emphasized in the interviews.
National Comparisons
The national implications of Colorado bankrupt developer
districts were examined through a judgmental sample of states. The
judgmental sample was obtained by screening the Census of Government
data for states with high numbers of special districts, high numbers
of special districts with multiple services provision and with
special districts that had property taxing authority. Another list
was compiled of states that had had multiple local government
bankruptcies in the period of 1970 to 1992. The third list contained
states that had reported bankruptcy cases regarding developer
districts, and the last data source was secondary analyses of
bankrupt developer districts. A summary of the data from these
sources is contained in Appendix C.
From these sources a sample was obtained of the following
states: California, Connecticut, Florida, Illinois, Kansas, Missouri,
Montana, Nebraska, Pennsylvania, and Texas. The state statutes
concerning multiple service special districts were evaluated first to
determine if these states had developer districts. The statutes were
then examined to consider how the formation processes and operational
controls compared to those in Colorado (Appendix D).
The emphasis in the comparisons was similarity or dissimilarity
in control structures, as well as incidence of bankrupt districts.
The following defining factors of Colorado developer districts that
were based on enabling statutes were considered
multiple services provisions
unlimited ability to issue general obligation debt
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property taxing authority
formation process of petition, review and vote
no population required for formation
loose definitions of qualified electors.
In addition to the statutory analysis, examination of cases and
secondary sources for descriptions of cases similar to Colorado were
conducted to consider similarities, and to look for instances of
alternate control structures. Two alternative control structures
were evaluated.
Summary
This chapter presented the hypotheses tested using evaluation
methodology to address the relation of state controls and bankrupt
developer districts. A temporal model was used to conceptualize the
findings relating to state controls. The emphasis is on explaining
the formation, operations and bankruptcy crisis in Colorado developer
districts. The comparison to other states for similar control
structures was also presented. The following four chapters describe
the Colorado control structure and district formation, the developer
district operations, the municipal bankruptcy proceedings, and the
comparison of Colorado statutory controls to other states.
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CHAPTER 4
COLORADO DEVELOPER DISTRICTS
This chapter begins the evaluation of the causes of developer
district bankruptcies in Colorado by analyzing the state statutory
control structure and the formation process. Developer districts
governments are formed under state law to provide services to the
residents of a defined geographic area. The state is expected to
provide guidance and control of its subsidiary governments to ensure
fiscal responsibility, and the state has the greatest ability to
control the subsidiary governments during the formative stage, but
Colorado's system is decentralized, diffused, and weak. This chapter
focuses on whether the existing state controls were insufficient or
ineffectual, and whether the state control structure contributed to
the cluster of developer district bankruptcies.
Developer districts enable growth by providing essential
infrastructure for real estate developments and, in the Colorado
system, this purpose is emphasized over accountability to either the
state or residents. The defining elements for a developer district
are that the property owners form this special district government to
provide the infrastructure needed for real estate development and
sales, and that the district borrows money through public debt such
as bonds to finance the funding and installation of infrastructure.
This chapter considers the statutory history and development of
the detached state policy towards developer districts. The formation
process is described, and then the case of one county and one
developer district demonstrate the formation process and the effect
66


of state controls during the transition into an operating district.
The analysis of the explicit state controls of developer districts
concludes this chapter.
Origins and Evolution of Developer Districts
Historical Origins
Special districts have been used for urban services in Colorado
since the 1930s (Barrett, 1991). Urban services are: water supply,
sanitary sewers, roads, traffic controls, and fire protection.
Developer districts are urban multiple service districts both in
definition and function. The Metropolitan District Act of 1947 was
the first legislation that allowed multiple provision of urban
services through special districts in Colorado. Developer districts,
which are metropolitan service districts, have been in use in
Colorado at least since 1948. Two developer districts formed in
Jefferson County in 1948 still operate today.
The number of all Colorado special districts, including
developer districts, was relatively small until the 1970s, but it
exploded in the 1980s. In 1952, there were 249 special districts; in
1992, there were 875. The growth in districts is graphically
demonstrated in Figure 4.1. In 1980, there were 85 developer
districts in the state, and there were 235 in 1992 (Colorado; 1980-
1993). With the increasing numbers of districts came increasing
amounts of debt.
Legislative History
Historically, legislative studies and proposed legislation
regarding urban special districts focused on their accountability to
voters and their accountability to the state (Colorado, 1970; 1984).
67


Figure 4.1


Allegations of lack of control and accountability surfaced again and
again; proposals for legislative action on these topics occurred in
1955, 1965, 1970, 1975, 1981, 1985, 1991, and 1992. Often, there
were great time lags between raising issues and responsive
legislative action'.
When the legislature first studied special districts in 1955,
there were no centralized record keeping requirements, and the
administration was unsure of the number of urban service special
districts--it estimated 291. The areas criticized by the legislative
subcommittee included lax financial procedures, conflicts in taxing
provisions, multiple and redundant laws, lack of a clear or uniform
method for special district formation, absence of consistent voting
standards, and the lack of methods for consolidation or cooperation
between governments (Colorado, 1984, pp. 14-15) .
No action was taken on the 1955 recommendations until 1965 when
uniform accounting and auditing requirements were passed for all
local governments. Recommendations for the comprehensive formation
review by other local governments were also established in the 1965
Special District Control Act. Another 1965 act was the Special
District Exclusion Act that eliminated double taxation and
overlapping services between local governments. These 1965 actions
were a result of the comprehensive 1964-1966 Governor's Local Affairs
Study Commission (Colorado, 1984, pp. 16-18).
The 1965 Control Act required a uniform process for
establishing special districts, with a number of checkpoints within
the process including review of service plans by the county
commissioners, a referendum by property owners, and court review.
This process reflected recommendations made by the 1955 Legislative
Committee Report, by Bollens (1957), and by the 1964 ACIR report on
69


special district problems. One item lacking in the 1965 legislation
was enforcement teeth--it did not include any sanctions.
Other key legislation in 1965 included the Colorado Local
Government Audit Law (Colorado Revised Statutes (C.R.S.) §§ 29-1-101
et seg.). All local governments were required to conduct annual
audits under this law, unless exempted based on low levels of
revenues or expenditures. This law specified the contents and format
of these audits, and required submission to the state auditor for
analysis. The auditor has the duty to review the reports for
statutory compliance, to notify the local government if there is a
deficiency, and to notify the attorney general if there appears to be
a violation of state law.
Special district legislative changes have been made
incrementally since 1946. One committee review criticized this
"piece-meal approach" and decried the contradictory and confusing
laws (Colorado,.1970, p. xiv). The 1969-1970 Legislative Committee
Two Year Study made recommendations to strengthen special district
enabling and control legislation in the areas of recodification,
authority for consolidation and dissolution, and special district
election reform (Colorado, 1970) Actions on these recommendations
also occurred in increments. In 1970, statutes were passed allowing
dissolution and consolidation of special districts. Voting was
addressed in 1973 when uniform election laws relating to special
districts passed (Colorado, 1984, pp. 18-19). Bills proposing
recodification were introduced and defeated in 1971 and 1973. The
legislature appointed another interim committee to study special
district legislation in 1975. The recommended bill included more
powers to municipalities and counties to control special district
70


formation, and this bill died in committee during the 1976 session
(Colorado, 1984) .
Finally in 1981, recodification was successful. The Special
District Control Act was included in Article 1 Title 32 of the
Colorado Revised Statutes. That law, in its amended form, is in
effect now. The existing law provides for strong independent special
districts with powers nearly as extensive as cities and counties.
The law provides for detailed formation provisions, but provides very
little state control or requirements once the district is approved.
Legislation to reduce district powers was proposed again in
1984. The local government interim committee recommended legislation
for the 1985 session, including bills proposing district
consolidations, election reform, and county-formed dependent special
districts. The most interesting provision in the proposed House Bill
1395 would have imposed a moratorium on the formation of independent
special districts, and instead would have required county controlled
dependent special districts. None of these proposals were adopted.
Legislative Policy
From 1947 to present, a recurrent theme in legislative studies
and proposed legislation addressed problems of urban service
districts by reducing their autonomy and increasing their
accountability. These reform attempts met solid resistance.
Statutory proposals to increase the controls and accountability of
special district governments were aimed at duties of the district
towards the population they served. A state policy of minimal
centralized control' can be deduced from this history and pattern of
rejecting reforms. Colorado's policy endorses strong independent
71


local governments with minimal state control, and developer districts
were just one type of autonomous local governments.
Some statutory reform attempts were based on a philosophy of
organization of government and provision of services, as indicated in
the 1970 legislative committee report.
[T]he unique combination of services apparently
authorized by the Metropolitan District Act [of 1947]
would appear to include almost all of the functions of a
municipality; but, such a district would not be subject
to the same constitutional and statutory limitation and
responsibilities. Of course, if this were retained, many
areas might elect to form such districts rather than
incorporating as a city or town. The Committee believes
that general purpose government should be developed
within the traditional framework of cities, towns and
counties only.
(p. xvi). This committee strongly favored giving power to the
visible and traditional city and county governments. The legislature
rejected the recommended changes to reduce the expansive service
provisions and the autonomy of developer districts.
One can also infer the policy of the state legislature from the
numerous unsuccessful attempts at limiting the powers of special
districts. That policy of the state legislature accepted giving wide
latitude to forming and operating special districts to provide
services.
Forming developer districts to provide services for real estate
development is one recognized legislative purpose. A 1984
legislative committee report on special districts said:
Special districts are established for one purpose:
to provide services to citizens of Colorado. They are
statutorily created legal devices which offer an easy
method of providing a function or service desired by the
people they serve. In the past, they may have offered
the only method (because of constitutional or statutory
restrictions) by which certain services could be
obtained. Furthermore, they have served as a convenient
and some argue a necessary vehicle by which a developer
of rural, suburban, and mountain subdivisions can finance
necessary municipal type services. In some cases, they
have been the best method of providing services. Special
72


districts have played a critical role in the development
of our state and its transition from a primarily rural to
a diversified, urban economy.
(Colorado, 1984, pp. 27-28; emphasis added).
The state policy, from both legislative intent and the
legislative history, is summarized by saying that developer districts
are recognized as a start-up local government. The emphasis of
developer districts is in providing services that will foster growth
and attract residents, rather than emphasizing responsiveness to the
state or public. This emphasis and modeling on service provisions to
attract growth led to structural deficiencies that contributed to the
developer district bankruptcies.
Developer District Formation
The legislative history and legislative purpose clearly support
the use of developer districts to provide services for urbanizing
Colorado. The current Colorado system of controls of developer
district governments emphasizes a good start through a detailed
formation provisions, and the system has dispersed and diluted
controls once local governments are established. The enabling laws
for Colorado special districts have a detailed decentralized process
of approval by counties and cites, court review, and citizen
referendum before the government is formed. This process is described
below.
Forming the Developer District
Formation requirements for developer districts, found in the
Colorado Special District Control Act, contain a multi-step process
including steps of local government approval, court review, and
taxpayer referendum (C.R.S. § 32-1-201 et seq.). This statute also
73


defines purposes and powers of developer districts and other special
districts. The statutory system contains a number of checkpoints, or
controls, that are decentralized, and this system reflects the
perspective that government services are provided in response to
demands of taxpayers.
The first step for forming a developer district is the
submission of a petition to the reviewing local government; the
petition must be signed by all property owners or at least 200 voters
in the proposed district. Developers establish the purposes,
services, and financing of the developer district through a proposed
service plan, and they submit the proposed plan with the petition to
the county or municipality where the district will be located.
Notice of this proposed developer district government is sent to
adjacent property owners and adjacent municipal governments.
Developer districts are required to provide at least two and
up to nine of the following services: fire protection, mosquito
control, parks and recreation, safety protection, sanitation, street
improvement, television relay and transmission, transportation, and
water (C.R.S. § 32-1-103). These categories of services are general,
with few specifically defined in the statutes. For Colorado special
districts formed after 1981, the types and extent of services must be
defined in the service plans. The service plan must include:
a description of facilities to be constructed
a statement of need for services, including whether other
governments are able to provide the services
a preliminary engineering survey of improvements
a map of the district's boundaries
valuation for assessments
estimates of population served
estimates of costs for organization and operation
including: engineering, legal and professional
services
financing costs including proposed debt and interest
rates
proposed intergovernmental agreements for service.
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The second step requires the county commissioners to hold a
public hearing on the proposed service plan and take action within
twenty days of the hearing. Action can include approval,
disapproval, or conditional approval. A detailed explanation of
reasons must be given for disapproval or a conditional approval
(C.R.S. § 32-1-204). The rejection or modification of the service
plan must be based on at least one of the following statutory (C.R.S.
§ 32-1-203) specified reasons:
there is insufficient existing or projected need for
proposed services
existing services in the area are adequate for present or
projected need
adequate service is or will be available through other
existing municipal corporations
the proposed services are not economical or sufficient for the
area
the area of the district does not or will not have the
financial ability to discharge the proposed debts
the proposed facilities and services are not compatible with
standards of adjacent municipalities
the proposal is not in substantial compliance with the county
master plan adopted under section 30-28-108, C.R.S.
or the service plan does not comply with long range water
quality management plans for the region under section
32-1-203, C.R.S.
Once county approval is given, the petition for organization is
submitted to the District Court for review. The contents of the
petition are specified to include the name of the district, the type
of services and a description of the facilities or services to be
provided, an estimate of costs, a general description of boundaries,
a request for organization of the special district, and a copy of the
resolution of approval from the county (C.R.S. § 32-1-301). Notice
is given and a hearing is held to allow any property owner to
petition to exclude its property from the developer district (C.R.S.
§ 32-1-206).
Then the court sets an election for qualified electors to vote
on the establishment of a district government and elect a five member
75


governing board. To be a board member, the candidate must be a
qualified elector. The requirements for a qualified elector are
either: a 25-day residence in the area to be included in the
district, being registered to vote in the state and owner or spouse
of owner of taxable real property in the area to be included in the
district, or being contractually obligated to pay property taxes
under a contract to purchase real property in the district area
(C.R.S. § 32-1-103(5)). After a successful organizational election,
the Court enters an order declaring the special district organized
and that the special district is a "quasi-municipal corporation and a
political subdivision of the State of Colorado with all the powers
thereof" (C.R.S. § 32-1-305) .
Local Planning Controls
Organizing a developer district requires the promotion of this
government by the property owners seeking the services. The primary
point of supervisory government control is during the local
government review of the development plans for land use (zoning)
approval, since the decisions concerning needed infrastructure are
made during this stage. In the process of gaining land use approval
from the county, the developer must also provide an infrastructure
plan to the county.
The statutory structure places great emphasis on decentralized
review and taxpayer promotion for forming developer districts.
Cooperation with other local government service providers is stressed
in the statutory requirements. The organizational process of forming
developer districts is intertwined with local land use and zoning
approval processes that are controlled by the general local
government that must review the developer district service plan for
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sufficiency and feasibility. An objective review is difficult
because the local government (city or county) reviewing the plans has
conflicting interests.
Land use planning in Colorado is decentralized; it involves a
system of discretionary local controls through a variety of enabling
laws. The state defers almost total control of land use to the local
level. Land use and land control authority is reserved to cities and
counties to exercise as they desire. It is a system of uncoordinated
decision making by cities and counties.
Counties and cities have a duty to prepare and adopt
comprehensive master plans, but there are no statutory deadlines for
enacting these documents (C.R.S.S 30-28-101 et seq.; & § 31-23-201 et
seq.). Since 1972, counties have been required to adopt subdivision
regulations, but it is optional for cities. The Local Government
Land Use Control Enabling Act of 1974 gives broad powers to cities
and counties to plan and regulate land use, but the act has no
prescribed procedures. There are also other enabling laws granting
authority such as zoning (C.R.S. § 30-28-113, & § 31-23-301 et seq.)
and planned use developments (C.R.S. § 24-67-101 et seq.).
It is through this power of land use controls and zoning that
counties and cities can exert the most influence in the formation of
developer districts. Quite simply, the developers are faced with the
mandate of providing the infrastructure or their land use plan will
not be approved. Developers must address the provision of required
infrastructure services, such as water, roads and sewers before they
can get approval of their development plans. The developer promotes
these subdivision plans and service plans to the supervising local
government; it is not an objective process. It is a sales pitch
presented for the benefit of the promoter. Thus, the service plans
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presented to the reviewing local government are optimistic; they
rarely refer to any downside.
The county's interests can either be for the current resident
taxpayers or a long term interest expanding to future taxpayers, but
normally the time frame does not extend to the long term. The
immediate and near future are the periods considered, and
intergenerational equity is absent from the calculus. The ultimate
beneficiaries of these infrastructure services are not identifiable
at the time the development plan is proposed, nor at the time the
developer district is proposed. To attract these residents
development must occur, but the question of who pays for
infrastructure presents conflict of interests as discussed below.
Providing Infrastructure
The provider of the infrastructure can be the developer, a
taxing district of the local government, or a specialized government
entitythe developer district. There is little likelihood that
cities or counties will provide even part of the infrastructure
costs. Even utilities, such as the phone companies or electric
companies, have eliminated providing part of the basic costs for
placement of lines to new developments and have expected developers
to provide the basic infrastructure (Snyder & Stegman, 1986).
Numerous factors, especially public sentiment and local government
budget constraints, prescribe that development must pay its own way,
and this applies particularly to infrastructure.
Local Governments' Risks and Interests
Although local governments encourage development because it is
seen as essential to economic growth, the risks are many. Land
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development is a speculative venture, not just for the private
developers but for governments, too. Unlike other industries, the
product of improved land is not fungible and the capital is not
easily transferred to another use. The capital involved is
stationary because improvements attach to the land.
The use of developer districts allows existing local
governments to avoid risks associated with development while still
enjoying the benefits. The county has the ability to review and
approve the development plans, and the county has the ability to
receive possession of the infrastructure once completed. Yet the
county avoids the risks and responsibilities of financing the
infrastructure. These risks are administrative, budgetary and
political, and the risks are clearer and more immediate than the
benefits.
The costs of development to a county are many. Risks include
budget risks of paying for the infrastructure, the political risks of
seeking a bond issue or tax increase for the infrastructure, and the
administrative risk of either monitoring contracting or provision of
the infrastructure. These risks occur well in advance of any
construction and they certainly precede any benefits.
The benefits of the new development such as an increased tax
base, greater commerce, or more jobs are not as easily quantified or
as certain as the risks. These benefits are available to the county
if a developer district structure is used instead of county managed
infrastructure installation. These benefits are more remote than the
costs. The county behaves to avoid risks, and if the projections for
growth prove too optimistic, then the county avoids liability. The
consequences to the county if a developer district within its
79


boundaries declared bankruptcy were not as clear, and this
possibility was not anticipated.
Using a developer district format also allows turnkey
construction for the county. In a turnkey construction plan, another
entity, either private or government, does the construction and
financing, and then assigns the infrastructure asset over the county
for ownership and maintenance. Thus, the infrastructure is installed
without the county paying for it.
Developers' Risks and Interests
The immediate benefits of development districts are to the
advantage of the owners of the property who want to defer these
costs. Building homes and selling the improved property requires
infrastructure for essentials such as roads, water and sewer.
Although it could be expected that developers pay for the
infrastructure associated with development, there are also arguments
about whether the infrastructure is a public or private good.
The developer financing the infrastructure as a business
expense is a possibility, but it has drawbacks. One is the developer
must pay for the expenses either through current funds themselves or
by financing them. Either of these two options ties up capital and
apportions the risk to the developer, who is liable for the expenses
or debt obligations. In addition, to recoup the expenses of the
infrastructure, the initial costs of the houses must be increased and
that can make the project less competitive in the real estate market.
So, for the reasons of the developer's balance sheet, potential
liabilities, and for marketability, the developer's interest is in
not funding the infrastructure. However, the developer wants to
maintain control of the infrastructure placement.
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Transferring Risks to Developer District
The developer district is one independent government entity
that can provide and finance the infrastructure associated with
subdivisions while providing for some of the concerns of the county
and developer. Forming a developer district provides for the
transfer of risks of development from both the county and developer,
while both can maintain some control of the process. The risk is
transferred to a constituency that is yet to be formed--the future
owners of the subdivided property. A principal advantage of
developer districts for the existing local governments is that they
do not have to fund improvements, instead, the property benefitted by
the new infrastructure is obligated for the services. But the local
government can retain control of the type of services through the
organization process of the developer district.
The developer district is advantageous to the developer because
the developer can define the scope of the operations and then control
the start up of the district government. Then, during the initial
years, the developer continues to control the actions of this
government by the conditions present in the service plan, as well as
through control of the elected government of the district. Developer
districts allow tax exempt financing for developers, and the debt
does not show up on their balance sheet. In addition to the control
of a government, a key advantage of a developer district is that the
developer avoids legal responsibility for the debts.
Checkpoints
The Colorado statutory formation structure for developer
districts has three distinct checkpoints during the process: the
local general government review and approval, the court review, and
81


the landholder referendum. Controlling government powers and actions
are two purposes of this statutory scheme of overlapping reviews and
public choice. The effectiveness of these controls is illusory in
practice because neither the statutory structure nor formation
process provides strong independent evaluation or curtailment of
conflicts of interests.
The local government review is intended to provide cooperation
between governments and to limit the number of governments providing
services (ACIR, 19S4). Under Colorado statutes there are specific
provisions for the reviewing county government to reject or amend the
service plans (C.R.S. §32-1-201). A pro-growth county policy, self
interest, or lack of expertise all restrict the amount of control a
county will exercise in reviewing these developer district service
plans. This is illustrated in the Douglas County case discussed
below.
The limitations of county review are part of the intractable
nature of policy formulation in predicting future events, but the
possible risks associated with the future events are inadequately
provided for in the process. Statutory provisions clearly provide
authority for a county to refuse or require modification of a service
plan for reasons based on financial ability to repay debt or on
forecasts of growing populations needing services, but there is no
requirement that the reviewing county independently research the
assumptions for reliability or undertake any other analysis.
However, there is no indication that a centralized review process
might produce better controls.
The court review has two very limited purposes: to allow
exclusion from the district, and to provide a due process review.
Unlike a lawsuit where the court can inquire into equitable
82


questions, the court's role in reviewing the proposed developer
district government is limited to checking that the required
statutory steps are followed. There is no inquiry into whether the
proposed services are equitable or feasible: that was the point of
the county approval. There is rarely opposition to the plan, since
that should occur at the earlier stage.
The other checkpoint in the statutory scheme is the citizen
involvement provisions. This is the weakest link in the scheme. A
group of landholders must request the proposed government, and the
proposed government is subject to a public election. There are no
population requirements at all to form this government because of the
alternative of unanimous consent of landholders. These landholders
do not have to be individuals; the major landholders can be a
corporation if some small future interest in their property is under
contract to people eligible to be qualified electors. To be entitled
to vote all that is required is the most relaxed definition of
ownership: a "future interest" defined as a contractual obligation
that includes some liability for some portion of real estate taxes,
but no particular dollar amount nor substantial percentage of
ownership is required. An obligation to pay one penny in tax in the
future, whether it is paid or not, is sufficient under this
"ownership" definition. Therefore, ownership is not dispersed. It
is common for five individuals to get together to vote for the
district, with four of the individuals being two couples, or having
four of the five individuals being employees of the developer.
The voting provisions for developer districts are certainly not
subject to the normal competition and information exchange assumed in
elections when only interested parties are serving as qualified
electors. The statutory provisions that allow dissenters to opt out
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of the district by petitioning to be excluded from the district
during the court hearing removes negative votes. Without dispersed
ownership, or dissent, the organizing elections are uncontested.
In 20 official district files reviewed, all were approved by
unanimous vote. The number of electors ranged from 5 to 11, but 5
electors was the typical number. Elections were not held at any
recognized standard polling place. These formative elections for
districts occurred in the developer's, or its attorney's, office.
Although these provisions appear to be a conflict of interest, the
rules for conflicts are relaxed for these types of governments
(Sterling et al., 1992).
Throughout the formation process the intended statutory
checkpoints serve neither to control the private interests in forming
the developer district nor to control the conflicting interests of
the counties. These statutory controls lacked an objective basis for
forming a government. The assumption of cautious conservative
behavior by governments because of political pressures does not occur
in the formation of developer districts. Developer districts are a
high risk start-up government, with the initial and largest benefits
for the developer. Although the developer district has the form of a
government, it is an illusion. It is merely a holographic
government, with no public substance behind it.
Growing Ambitions: The Douglas County Case
The Region
Predictions and projections were for great growth in Colorado's
population and its fortunes in the early 1980s. Communities were
planning to harness the revenues and prestige that came with growth
that had begun in the 1970s. Providing the residences and commercial
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space needed for this growth was a challenge for developers and local
governments alike. With increased housing construction came
increased need for infrastructure services.
The conventional approach of providing urban services in
Colorado through a developer district government was increasingly-
employed during the 1980s. The number of developer districts in
Colorado grew from 122 in 1982, to 235 in 1992. The Denver
metropolitan area including the City and County of Denver and the
counties of Adams, Arapahoe, Boulder, Douglas and Jefferson, had
steady population growth in the 1970s. In 1990, the Denver
metropolitan counties had 47% of the developer districts in the state
(Dept, of Local Affairs, 1993), and they had 56% of the population
(Colorado, Dept, of Health, 1992). The case that follows describes
the growth in Douglas County which is on the southern edge of the
metropolitan area, and how this growth affected a county that had
been rural with mostly dry land ranching prior to 1980.
The County and Land Use
Douglas County was poised for growth. It was strategically
placed on the interstate, the 1-25 corridor, between Denver and
Colorado Springs. It was adjacent to the growing southeast portion
of the Denver region, where numerous office parks were attracting
businesses. The Douglas County policy was definitely pro-growth and
pro-development in the late 1970s and early 1980s. The growth policy
was not part of a master plan, but it was a cumulative policy that
evolved as each large development was proposed and approved. A
master plan for a comprehensive county land use and zoning policy was
not adopted until 1986, but by then the problems spawned by prior
aggressive growth policies were about to hatch.
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