Colorado Metro District Regulatory Oversight - Fact or Fiction?

Although the effect of laws and regulations can often be the same, it is important to understand how they are different.

LAWS

Laws are the products of written statutes passed by a government entity. The Federal government, state government, counties and cities are all examples of governments that adopt laws. Each government entity has a legislative process for creating bills, which upon adoption, becomes statutory law.

For example, in response to the stock market crash of 1929, Congress passed the Securities and Exchange Act of 1934 in an effort to curb securities fraud and insider trading. The Act is codified in the United States Code as Title 15, Section 78a, and, among other things, prohibits the disclosure of false or misleading information related to securities transactions. The Securities and Exchange Act also created the Securities and Exchange Commission (SEC), tasked with enforcing federal securities laws.

REGULATIONS

Regulations, on the other hand, are standards and rules adopted by administrative agencies that govern how specific laws will be enforced. Such administrative agencies are established by statute and are typically imbued with varing degrees of enforcement powers. So, an agency like the SEC can adopt its own rules, policies and procedures for enforcing major securities laws. For instance, while the Securities and Exchange Act prohibits using insider or nonpublic information to make trades, the SEC can adopt and enforce its own rules on how it will investigate charges of insider trading.

Like laws, regulations are codified and published so that those subject to regulatory oversight are on notice regarding what is and isn't legal. Regulations often have the same force as laws, since, without them, regulatory agencies wouldn't be able to enforce laws.

COLORADO REGULATORS

Per the Colorado Department of Regulatory Agencies' (DORA) website, DORA "...is the state's umbrella regulatory agency, charged with managing licensing and registration for multiple professions and businesses, implementing balanced regulation for Colorado industries, and protecting consumers. DORA is comprised of 10 distinct divisions, plus the Executive Director's Office which houses the Colorado Office of Policy, Research and Regulatory Reform. Each division is charged with administering a number of programs, and most house one or more Boards and Commissions made up of appointed members of the public that oversee a large variety of subjects and make a wide range of decisions affecting the day-to-day lives of Coloradans."

The various boards and commissions have the authority to levy fines, revoke or suspend professional licenses and/or require individuals and business to undertake training or other corrective actions to ensure compliance with Colorado laws.

Other than a few governmental agencies responsible for ensuring statutorily required reports are timely filed by metro districts, there are no governmental bodies assigned the responsibility to regulate and enforce metro districts' compliance with various Colorado statutes.   

Nobody! There is no governmental agency responsible for regulating Colorado special district elections.

The conduct of elections for all types of Colorado government entities except special districts are subject to oversight by the Colorado Secretary of State. What is even more concerning is that violations of certain election laws (such as registering unqualified individuals as voters) in the conduct of special district elections is exempt from criminal prosecution. (See CRS 1-13.5-1601)

A homeowner's only recourse is to personally hire an attorney and fund a lawsuit against the special district (which likely has significantly more financial resources than the homeowner).

Nobody! There are no governmental agencies responsible for regulating the ethical conduct of directors serving on the boards of special districts. Colorado statutes provide no form of regulatory oversight over the ethical conduct of directors serving on special district boards. Although municipal governments are required to authorize the creation of special districts within the boundaries of the municipal governments, such municipal governments do not regulate the conduct of the public officials serving on the boards of such special districts.

In 2006, Colorado voters passed Amendment 41 which added Article XXIX “Ethics in Government” to the State of Colorado’s constitution. Amendment 41 created the Colorado Independent Ethics Commission (CIEC). The purpose of the CIEC is to (1) provide advice and guidance regarding public officials’ compliance with the ethical standards and reporting requirements established by state law, (2) hear complaints, (3) issue findings, and (4) assess penalties and sanctions where appropriate.  The Commission has jurisdiction over all State executive and legislative branch elected officials and employees; the Commission also has jurisdiction over local officials and employees, unless a county or municipality is a home-rule entity that has adopted charters, ordinances, or resolutions that address the matters covered by Article XXIX. The Commission does not have jurisdiction over judges or employees of Colorado’s judicial branch .

The purpose of Article XXIX of the State of Colorado’s constitution is provided in Section 1 as follows:

The people of the state of Colorado hereby find and declare that:

(a)    The conduct of public officers, members of the general assembly, local government officials, and government employees must hold the respect and confidence of the people;

(b)    They shall carry out their duties for the benefit of the people of the state;

(c)    They shall, therefore, avoid conduct that is in violation of their public trust or that creates a justifiable impression among members of the public that such trust is being violated; 

(d)    Any effort to realize personal financial gain through public office other than compensation provided by law is a violation of that trust; and

(e)    To ensure propriety and to preserve public confidence, they must have the benefit of specific standards to guide their conduct, and of a penalty mechanism to enforce those standards. 

Per Section 2 of Article XXIX, the definition of “local government” includes counties and municipalities but it does not include special districts created under the Special District Act. Thus, the ethical conduct of directors serving on the boards of special districts is excluded from oversight and regulation by the State of Colorado.  Amendment 41 was a citizen-submitted initiative and 62% of Colorado voters approved Amendment 41.

Nobody! There is no governmental agency responsible for verifying whether directors comply with the legal requirements for serving on a special district board.

Interestingly, when districts issue bond debt, the legal opinions regarding the validity of the bonds will state that the attorneys simply rely on the directors representations that they qualify to serve on the board of the special district. Many firms that provide election services for special districts include safe harbor clauses in their service contracts that state the firms are not responsible for evaluating and verifying whether candidates qualify to serve on a special district board.

Many homeowners have questioned and challenged whether certain directors (who report conflicts of interest serving special district boards) are legally qualified to serve on such boards. In most cases, such directors have refused to produce the documents necessary to demonstrate such directors have met the legal qualifications to serve on a board.

A homeowner's only recourse is to personally hire an attorney and fund a lawsuit against the special district and its directors (which likely has significantly more financial resources than the homeowner).

2016 LANDMARK VS MARIN METROPOLITAN DISTRICT CASE

On April 21, 2016, the Colorado court of appeals ruling in the Landmark Towers Association vs Marin Metropolitan District case had a significant impact on special districts by clarifying the qualifications directors must meet to be eligible to serve on the boards of special districts. The appeals court found that the directors serving on the Marin Metropolitan District were not qualified to serve as directors on the board. Specifically, the court concluded the land purchase option contracts the directors relied upon to qualify themselves to serve on the board of Marin Metropolitan District were sham contracts and did not comply with CRS 32-1-808. The appeals court also provided the following five reasons why these land purchase option contracts were considered “sham” contracts:

•    None of the directors paid the down payment required by the option contracts;
•    None of the directors paid any property taxes on the property that they were under contract to purchase;
•    None of the directors exercised their purchase option contracts;
•    None of the directors recorded their purchase option contracts with the County Clerk & Recorder’s Office; and
•    The parcel of land each director was under contract to purchase (i.e. an undivided 1/20th interest in a 100-square-foot parcel) was too small to permit each director any beneficial use of such land.
 

LACK OF INTEREST AMONG CITIES TO REGULATE DISTRICT DIRECTOR QUALIFICATIONS

In 2021, homeowners questioned whether directors serving on the Willow Bend Metro District Board were legally qualified to serve on the Board. The majority of directors serving on that district board were employees of Lennar - the land developer that entered into a blank check reimbursement agreement with the district to be compensated millions of dollars for installing all public infrastructure within the district. After the directors all refused to produce documents demonstrating they qualified to serve on the Board, the homeowners submitted their concerns to Thornton City Council and requested their support and assistance. City Council directed the City attorney's office to investigate the homeowners' concerns. The City attorney reported back to City Council that they contacted the attorneys representing Lennar and Lennar's attorneys assured the City attorney that the Lennar employees serving on the Willow Bend District Board were legally qualified to serve on the board. Lennar provided the City attorney with no documents to support their claim. Both the City attorney's office and City Council were satisfied with Lennar's assurances and they informed the homeowners that their concerns were unfounded.

The Lennar employees continued to serve on the district board despite (1) no documents recorded with the Adams County Clerk & Recorder's Office (as required per the appeals court ruling in Landmark vs Marin) and (2) no record of these directors paying property taxes to the Adams County Treasurer on any land parcels located within the District (as required per the appeals court ruling in Landmark vs Marin).

Nobody! There are no governmental agencies responsible for ensuring special districts comply with various Colorado laws requiring special districts to hold board meetings in public locations within or near the boundaries of the district and to provide adequate public notice regarding such meetings.

Some cities now require new metro districts to adopt service plans that contain various rules improving the transparency of such districts with its taxpayers. Such rules include requiring districts to conduct public board meetings within the boundaries of the city in which the district is located. However, cities have a long history of failing to monitor whether metro districts comply with their respective service plans.

When a metro district violates its service plan and the district's board is comprised of directors who all report conflicts of interest related to their service on the board, such violations of the service plan usually directly benefit the directors to the detriment of the taxpayers.

Regulatory oversight is most needed when metro district boards are controlled by a majority of directors who report conflicts of interest serving on such boards. Unfortunately, during the development stage when public infrastructure is under construction within a metro district, the cities also posess conflicts of interest with the metro districts because the cities contract directly with the developers (who control the metro district boards) to receive new public infrastructure at no cost to the cities. The cities and land development companies negotiate over the scope of public infrastructure to be constructed by the land development companies. Generally, cities are willing to grant concessions to the developer-controlled metro districts in exchange for the land development companies agreeing to change or increase the scope of public infrastructure to be constructed and turned over to the cities. Cities cannot claim to be effective or motivated regulators of metro districts when such cities have significant construction contracts with the land development companies that are owned by and/or employ the board members controlling the metro districts.

Cities also recognize that by fining or otherwise financially penalizing developer-controlled metro districts for violating the districts' service plans, the taxpayers will be essentially double-penalized for abuses occurring on developer-controlled districts. In addition to the penalties placed upon taxpayers by a district that violates its service plan, taxpayers would be burdened with penalties levied by the city on the district for service plan violations. This is likely one of the main reasons why cities rarely, if ever, levy penalties on districts that are in violation of their service plans. Cities also lack the power to remove directors serving on a metro district board.

Cities can levy fines and special assessments on land owned by a metro district. However, all land owned by metro districts is exempt from property tax assessments. If a district fails to pay a special assessment levied by a city against metro district-owned land, the city has no recourse to collect the special assessment (other than initiating a lawsuit). 

A homeowner's only recourse against districts violating the various transparency laws applicable to special districts is to personally hire an attorney and fund a lawsuit against the special district (which likely has significantly more financial resources than the homeowner) or wait two to four years to remove the majority of directors from the board through the bi-annual district elections.

Nobody! There are no governmental agencies responsible for ensuring special districts comply with the Colorado Open Records Act (CORA).

A homeowner's only recourse against a district refusing to comply with CORA requests is to personally hire an attorney and fund a lawsuit against the special district (which likely has significantly more financial resources than the homeowner) or wait two to four years to remove the majority of directors from the board through the bi-annual district elections.

Nobody! There are no governmental agencies responsible for ensuring special districts comply with voter-imposed borrowing limits. However, the independent public financial markets and lending process are generally self-regulating regarding this matter. The financial markets are unwilling to loan metro districts money in excess of voter-imposed borrowing limits.

In the few instances where metro districts have exceeded the borrowing limits established in the districts' respective service plans, cities have issued waivers allowing such service plan violations.

Nobody! Homeowners have submitted complaints regarding their metro districts' misuse of public funds to the municipalities that authorized the creation of such metro districts. However, municipalities have refused to investigate such complaints. The attorney offices of these municipalities usually advise the municipal governing bodies that homeowners must work out their concerns with their metro district boards or homeowners must personally hire attorneys to litigate their claims in court.

The municipality that authorized the service plan for the metro district (whether a city, town or county) is the one that is responsible for monitoring whether the metro district has violated any operating restrictions or limitations identified in the metro district's service plan. Most municipalities only passively monitor whether a metro district's operations are in violation of the terms of its service plan. In other words, most municipalities will only evaluate whether a metro district's operations are in violation of its service plan if a complaint is filed by a resident of the district.

Regulatory oversight is most needed when metro district boards are controlled by a majority of directors who report conflicts of interest serving on such boards. Unfortunately, during the development stage when public infrastructure is under construction within a metro district, the cities also posess conflicts of interest with the metro districts because the cities contract directly with the developers (who control the metro district boards) to receive new public infrastructure at no cost to the cities. The cities and land development companies negotiate over the scope of public infrastructure to be constructed by the land development companies. Generally, cities are willing to grant concessions to the developer-controlled metro districts in exchange for the land development companies agreeing to change or increase the scope of public infrastructure to be constructed and turned over to the cities. Cities cannot claim to be effective or motivated regulators of metro districts when such cities have significant construction contracts with the land development companies that are owned by and/or employ the board members controlling the metro districts.

In addition, municipalities will typically only evaluate whether a district's service plan allows the metro district to provide certain services to its residents. Municipalities will rarely, if ever, evaluate whether the metro district is violating laws when providing any services allowed per its service plan. For example, a municipality may investigate whether a metro district's service plan allows the metro district to provide covenant enforcement services to the homeowners within the district. However, a municipality will rarely, if ever, investigate whether the covenant enforcement policies and procedures adopted by a metro district are legal.