September 1, 2005
To: Board of Commissioners
From: Bob Muller, Mayor
Re: Financing a local beach restoration project.
Last December the Town was presented with a model of a locally funded beach restoration project prepared by Coastal Science and Engineering (CS&E) of Morehead City. The report outlined a project that would place sand on Nags Head’s eroding beaches approximating the amount of sand CS&E calculated is lost every 10 years. The purpose of this memo is to assess the cost of such a project, give the Board of Commissioners an idea of how the costs might be borne, and approximate what type of contribution will be required from the Town’s property owners.
I started with a series of assumptions about the projects cost. These assumptions are:
1. Total cost $ 23,500,000[1]
2. Financing term 5 years[2]
3. Interest rate 4%[3]
4. A contribution from Dare County of 35% of the project cost or $1,776,498 per year for 5 years[4]
5. A contribution from Nags Head revenue sources of the remaining 65% or $3,299,211 per year for 5 years
6. A contribution from all Nags Head taxpayers of one half (50%) of the Town’s share or $1,649,605 per year for 5 years[5]
7. A contribution from the most directly affected property owners of one half (50%) of the Town’s share or $1,649,605 per year for 5 years
8. The most directly affected property owners include 3 groups[6]
a. Ocean front property owners in the project area (Zone 1a)
b. Non Ocean front property owners east of Hwy 12 and Hwy 1243 (Zone 1b)
c. Property owners west of Hwy 12 and east of Hwy 158 and property owners west of Hwy 1243 (Zone 2)
9. The share of the costs paid by the directly affected property owners are split:[7], [8]
a. Zone 1a paying 75% or $1,237,204 per year
b. Zone 1b paying 10% or $164,961 per year
c. Zone 2 paying 15% or $247,441 per year
Table 1 shows the results of this analysis. Using the assumption listed above it would require an ad valorem tax increase of $0.056 to fund the town wide portion of the annual costs and an average contribution per lot of $1,608.85 in Zone 1, $385.42 in Zone 2 and $176.74 in Zone 3.
There are several methods to assess the costs paid by the directly affected property owners. These include: by property value and property size, per property regardless of size or value, linear feet of beach or road footage. I chose simply to show the average cost per parcel and not address what method should be used to assess individual property owners.
This model assumes that the Town would borrow the money, most likely from the federal government, and then repay the loan over a period of years. This is the model used by Emerald Isle for a similar project. The assumption of this amount of debt would generally require a referendum. The finance working group of the ad hoc Dare County Beach Nourishment Committee asserted that Dare County had the legal authority to establish the cost assessment zones described above. If Nags Head does not have that authority we must have it granted to us by the legislature. This issue is beyond the scope of this memo and will require additional research.
This memo is not a proposal. It is a model of what the annual cost of the CS&E draft plan would be and how those costs might be borne. There are a variety of distribution formulas that could be constructed, each with a different equity concept and each resulting in a different distribution of costs. I do not assert that the model presented here is the best model for Nags Head. It is based primarily on the work of the finance working group of the Dare County ad hoc Beach Nourishment Committee. Rather than assume a set of values I chose their model. If the Board of Commissioners decides to pursue a locally funded project we will review a variety of distribution models before making a decision.
CS&E described the following milestones if the Town were to pursue a locally funded beach restoration project.
• Town review and adoption of the plan
• Initiate engineering and permitting
• Establish a funding plan
• Hold a funding referendum
• Continue engineering, permitting, and environmental coordination
– Updated beach condition surveys
– Additional borrow area investigations
– Additional environmental studies
– Finalize design
• Obtain construction easements
• Obtain permits
– Prepare plans, specifications and construction documents
– Receive bids from contractors
– Revise final plans to match bids and funds available
• Construct project
• Post project monitoring and maintenance[9]
This memo builds on the work CS&E has done for the town. We know what a 10 year shoreline restoration plan would require in terms of sand. We know we have the sand. This memo outlines how it could be paid for. The next step is for the Board of Commissioners to determine if we want to proceed with a project similar to the draft plan.
2
[1]ENDNOTES
From Draft Beach Restoration Plan for a Locally Sponsored Project at Nags Head, Coastal Science and Engineering, December 2004, page 22 cost for Middle Scenario
[2] If the project provides an average of 10 years of protection it is prudent to finance the project for a shorter term than the life of the project. I chose one half the life of the project; other financing lengths could be used that would reduce or increase the annual cost
[3] Estimated based on interest rates for similar projects
[4] Dare County has implemented an occupancy tax with the funds dedicated to shoreline management. The finance working group of the Dare County ad hoc Beach Nourishment Committee estimates this tax would yield an average of $3 million per year. This cost structure would require a contribution of about 30% of the estimated total revenue from this tax for the estimated 10 year project life.
[5] There is no specific reason for a 50%-50% split between the entire town and the most directly affected property owners. I used this ratio because it seemed like a fair number to me and because it requires all property owners to contribute, with those receiving the most benefit contributing the most. There are other models that could be used. On one extreme all the costs could be distributed based on property value, which is no assessment for affected property owners. This would assume the distribution of property values would serve to fairly distribute the cost. On the other hand, all the costs could be assessed on the affected property owners with the contention that they receive the benefit. I do not accept either premise and choose a model in the middle.
[6] This set of benefiting property owners are similar to the set of benefiting property owners identified by the finance working group of the Dare County ad hoc Beach Nourishment Committee. Zones 1a and 1b comprise all the property owners on the beach side of the Hwy 12 and Hwy 1243 in the project area. Property owners who own ocean front property are treated as one group (Zone 1a) while those without direct beach access (Zone 1b) are assessed at a lesser rate. Since Zone 1b is much smaller in area, number of parcels and value than Zone 1a or Zone 2 it contributes a lesser dollar amount than the other zones despite the fact that the model assessment per lot is higher than the assessment for Zone 2. See note 7.
The finance working group of the Dare County ad hoc Beach Nourishment Committee included ocean front property owners outside the project area in Zone 1b. This was done to capture benefiting properties between the 2 sections of the proposed federally funded shoreline restoration project. Since the CS&E project is continuous no such group exists for this model.
[7] This distribution of costs is similar to the distribution proposed by the finance working group of the Dare County ad hoc Beach Nourishment Committee. It reflects both the relative values of the 3 groups and the number of parcels in each group. It provides a decreasing contribution per average lot that reflects the decreasing benefit to the property owner as distance from the beach increases. Other distribution ratios would result in different contributions from each group. Table 2 shows another distribution ratio:
Table 2ZONE / Share / Avg. $/Parcel
Ocean Front 1a / 65% / $ 1,394.33
East Side Non Oceanfront 1b / 20% / $ 770.84
Between the highways 2 / 15% / $ 176.74
[8] The number of parcels in each zone was researched by Town of Nags Head staff for this memo
[9] From Draft Beach Restoration Plan for a Locally Sponsored Project at Nags Head, Coastal Science and Engineering, December 2004, page 26