BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 551 (Ting) - Urban agriculture incentive zones. Amended: August 13, 2013 Policy Vote: G&F 7-0 Urgency: No Mandate: No Hearing Date: August 30, 2013 Consultant: Mark McKenzie SUSPENSE FILE. AS PROPOSED TO BE AMENDED. Bill Summary: AB 551 would authorize cities and counties to establish Urban Agriculture Incentive Zones (UAIZs) and allow landowners to enter into voluntary contracts restricting the use of the land to agricultural purposes in exchange for reduced property tax assessments. Fiscal Impact (as proposed to be amended): Unknown General Fund impact, likely less than $1 million in increased school aid annually in future years, related to reductions in assessed value of land placed under contract in an Urban Agriculture Incentive Zone. Approximately half of all losses in property tax revenues would accrue to K-14 schools. In general, any property tax proceeds diverted from schools results in an equivalent General Fund cost, pursuant to Proposition 98's minimum funding guarantees. Likely minor Board of Equalization costs to annually publish the per acre land value of irrigated cropland in California, and provide it to county assessors. Background: Existing law, the California Land Conservation Act of 1965 (Williamson Act), generally authorizes landowners to enter into voluntary contracts with counties for a period of ten years, pledging to conserve their property as farmland and open space in exchange for reductions in assessed value of the land under contract that reflects the enforceable restriction. Similarly, existing law authorizes voluntary contracts between landowners and cities and counties to create Farmland Security Zones, which restricts the use of the land for a minimum of 20 years in exchange for lower assessed valuations for property tax purposes. Both Williamson Act and Farmland Security Zone AB 551 (Ting) Page 1 contracts are automatically renewed annually, and an affirmative action must be taken to "nonrenew" a contract. Nonrenewal initiates a period in which the property tax gradually increases to market rate until the contract expires. Up until 2008, the state General Fund provided a subvention to local agencies to partially offset their property tax losses resulting from these contracts. The General Fund also backfills school districts to offset property tax revenues that are lost due to lower property tax assessments on contracted lands. The Mills Act (1972) authorizes cities and counties to enter into contracts with an owner of a qualified historic property. The owner pledges to restore, maintain, and protect the historical and architectural character of the property in exchange for property tax relief. Mills Act contracts are ten years with automatic yearly extensions and stay with the property when transferred. When assessing the value of land, an assessor must consider the effect of any enforceable restriction on the use of the land, including zoning, recorded contracts with governmental agencies, developmental controls, recorded conservation easements, environmental constraints, and solar-use easements. In recent years, public interest in urban agriculture, "farm-to-fork" practice, and access to healthy foods in "food deserts" has increased. Community-based organizations, nonprofits, and for-profit organizations engage in urban agricultural production within cities, and some small-scale producers sell their products in local farmers' markets or on-site produce stands. Proposed Law: AB 551 would authorize the establishment of UAIZs to allow a city or county to enter into voluntary contracts with landowners for the use of vacant, unimproved, or blighted lands for small-scale agricultural purposes. Specifically, this bill would: Authorize a county or city and county to establish a UAIZ within its boundaries by ordinance to allow for UAIZ contracts, as specified. Authorize a city within a county that has adopted a UAIZ ordinance to also establish a UAIZ within its boundaries by ordinance. Authorize a city or county to impose a fee on the AB 551 (Ting) Page 2 contracting landowners to cover the costs to implement and administer the contracts. Require a city or county to impose a fee for cancellation of UAIZ contracts equal to the cumulative value of the tax benefit received during the contract period. Define "agricultural use" to include cultivation and tillage of soil; production, cultivation, growing, and harvesting of any agricultural or horticultural products; the raising of livestock, bees, fur-bearing animals, dairy-producing animals, and poultry; agricultural education; sale of products through retail and farm stands; and any farming practices incident to or in conjunction with farming. Require a contract that enforceably restricts the use of land to be for an initial term of not less than five years, require restricted property to be at least 0.10 acres, require the entire property to be dedicated to commercial or non-commercial agricultural use, prohibit dwellings on the property, and include a notification that a city or county would assess a fee for cancellation of the contract. Require contracts to allow for the use of structures that support agricultural activity. Require contracts to permit the use of pesticides or fertilizers allowed under a specified organic agricultural program. Prohibit a county from establishing a UAIZ within a city's sphere of influence without prior approval by the city's legislative body. Prohibit the establishment of a UAIZ in an area that is currently subject to a Williamson Act contract, or has been subject to such a contract within the previous three years. Require land subject to a UAIZ contract to be valued by the assessor at a rate based upon the average per acre value of irrigated cropland in California, as published by the National Agricultural Statistics Service of the United States Department of Agriculture (USDA). Require the Board of Equalization to annually post the per acre land value specified above on its website within 30 days of publication by the USDA, and provide the rate to county assessors. Staff Comments: The fiscal impacts of this bill are AB 551 (Ting) Page 3 indeterminable at this time, but they would likely be significant to the extent cities and counties wish to incentivize urban agriculture. Actual losses would depend upon the number of counties, and cities within those counties, that adopt ordinances authorizing the establishment of UAIZs, the demand for contracts limiting land use to agricultural purposes, and the difference between the assessed value of the land before entering into the contract and the value of the land based on its agricultural use. Staff notes that any reductions in property taxes as a result of UAIZ contracts would affect other recipients of the property tax, including schools and special districts. Any reductions in the school share of property tax must be backfilled by the state General Fund. If assessed values of land statewide were reduced by $100 million as a result of the bill, the annual property tax losses would be $1 million, approximately half of which would accrue to K-14 schools. There are currently no maximum limits on the size of properties that could enter into UAIZ contracts. Without established limits, this tool could be used by large landowners, such as business interests or developers to "bank" the land for a period of time and benefit from reduced property tax assessments until the land is needed for commercial uses. For example, a developer who owns a large area of land within a city's sphere of influence that is planned for a future subdivision could enter into a UAIZ contract until the economy improved enough to warrant building homes on that land. In the meantime, the developer could lease the land for use as pasture for livestock or other agricultural use. The UAIZ contracts specified in the bill are for a minimum duration of five years. Presumably, those contracts would need to be renewed on a regular basis when they expire to retain the property for agricultural purposes. Williamson Act, Farmland Security Zone, and Mills Act contracts, on the other hand, are automatically renewed annually, so there is a rolling duration to the contracts until the local agency or landowner actively "nonrenews" the contract, at which time the contract is allowed to run its specified duration while the assessed value increases each year until it is eventually back at market value. These rolling contracts ensure that the property is retained for the intended incentivized use. However, the rolling contracts also results in a continuation of lower assessed values, and reduced AB 551 (Ting) Page 4 property taxes, until the period of "nonrenewal" is initiated. It is unclear who would enforce that property under a UAIZ contract is used for agricultural purposes. Without enforcement, it is likely that unscrupulous landowners would seek the reduced property tax benefits without converting the land to an agricultural use. PROPOSED AMENDMENTS would reinstate the maximum size of a contracted property at 3.0 acres and sunset the authority to approve new contracts on January 1, 2019.