BILL ANALYSIS Ó SB 614 Page 1 SENATE THIRD READING SB 614 (Wolk) As Amended August 18, 2014 Majority vote SENATE VOTE :Vote not relevant LOCAL GOVERNMENT 7-2 ----------------------------------------------------------------- |Ayes:|Levine, Alejo, Bradford, | | | | |Gordon, Frazier, Rendon, | | | | |Waldron | | | | | | | | |-----+--------------------------+-----+--------------------------| |Nays:|Achadjian, Melendez | | | | | | | | ----------------------------------------------------------------- SUMMARY : Allows a local agency, until January 1, 2025, to use tax increment financing in a newly formed or reorganized district to fund infrastructure improvements in disadvantaged unincorporated communities. Specifically, this bill : 1)Allows a local agency, until January 1, 2025, to include in its resolution of an application for change of organization or reorganization an annexation development plan to improve or upgrade infrastructure in a disadvantaged unincorporated community through the formation or reorganization of a special district. 2)Requires an annexation development plan to include information that demonstrates that the formation or reorganization of the special district will provide all of the following: a) The necessary financial resources to improve or upgrade structures, roads, sewer, or water facilities or other infrastructure. The annexation development plan shall also clarify the local entity that shall be responsible for the delivery and maintenance of the services identified in the application; b) An estimated time frame for constructing and delivering the services identified in the application; and, SB 614 Page 2 c) The governance, oversight, and long-term maintenance of the services identified in the application after the initial costs are recouped and the tax increment financing terminates. 3)Allows a local agency formation commission (LAFCO) to approve the proposal for a change of organization or reorganization, if a local agency includes a plan pursuant to 1) and 2) above, to include the formation of a special district or reorganization of one or more existing special districts with the consent of each special district's governing body. 4)Specifies that the district can be, but are not limited to, a community services district, municipal water district, or sanitary district to provide financing to improve or upgrade structures, roads, sewer, water facilities, or other infrastructure needs to serve a disadvantaged unincorporated community. 5)Requires the LAFCO to include in its resolution making determinations a description of the annexation development plan, including, but not limited to, an explanation of the proposed financing mechanism, as specified, including, but not limited to, any planned debt issuance associated with that annexation development plan. 6)Requires the formation of a special district to be in conformity with the requirements of the principal act of the proposed district and all required formation proceedings. 7)Provides that the LAFCO is not precluded from considering any other options or exercising its powers as defined in existing law. 8)Allows a local agency's plan for financing services that is included with a resolution of application for a change of organization, consented to by each affected agency, to include a tax increment financing plan, pursuant to the authority granted by this bill. 9)Authorizes the local agency that files the resolution of application for a change of organization or reorganization, and one or more other local agencies that will improve or upgrade structures to serve a disadvantaged unincorporated community, to agree on an annexation development plan for financing services SB 614 Page 3 and structures. 10)Authorizes the annexation development plan to contain a provision that taxes levied upon taxable property in the area included within the territory each year by or for the benefit of the local agency and one or more other consenting local agencies that consent to the plan, be divided as follows: a) Requires that portion of the taxes that would have been produced by the rate upon which the tax is levied each year by or for each consenting local agency, prior to the effective date of the certification of completion, and that portion of taxes by or for each school entity is allocated to the respective consenting local agencies and school entities as taxes by or for the consenting local agencies and school entities on all property paid; and, b) Requires that portion of levied taxes each year specified in the adopted annexation development plan for the city and each consenting local agency that has agreed to participate, in excess of the amount specified in a), above, is allocated into a special fund of a special district formed or reorganized to finance the infrastructure improvements to serve the disadvantaged unincorporated community. 11)Requires the plan to specify a date upon which the division of taxes described in 10), above, shall terminate. 12)Allows the annexation development plan to include a provision for the issuance of indebtedness. Requires any indebtedness to be issued in conformity with current law which governs the issuance of general obligation bonds for local agencies or the principal act of the special district. 13)Prohibits any annexation development plan adopted pursuant to this bill to result in the reduction of property tax revenues allocated to any school entity as defined by current law. 14)Defines terms as follows: a) "Local agency" to mean a "city, county, and special district"; b) "Consenting local agency" to mean "a local agency that has adopted a resolution of its governing body consenting to the SB 614 Page 4 annexation development plan"; c) "Territory" to mean "all or part of the land that is included in the resolution of application for change of organization or reorganization filed by the local agency"; d) "Certificate of completion" to mean "the document prepared by the [LAFCO] executive officer and recorded with the county recorder that confirms the final successful completion of a change of organization or reorganization"; and, e) "Disadvantaged unincorporated community" to mean "inhabited territory with 12 or more registered voters, or as determined by LAFCO policy, that constitutes all or a portion of a disadvantaged community, which is defined in the Water Code to mean "a community with an annual median household income that is less than 80% of the statewide annual median household income." 15)Allows a consenting local agency to advance funds to the special district that is formed or reorganized as specified, and requires the special district to use those advanced funds solely for the purposes specified in the annexation development plan. Requires the special district to repay the consenting local agency with revenue from the taxes received, as specified. 16)Prohibits any plan adopted pursuant to the bill's provisions from including any portion of a redevelopment project area which is or has been previously created pursuant to existing law. 17)States that it is the intent of the Legislature to provide additional options for financing infrastructure that can be considered by local agencies and the LAFCO when evaluating the proposal for an annexation of a disadvantaged, unincorporated community. 18)Makes other technical and conforming changes. FISCAL EFFECT : None COMMENTS : 1)Purpose of this bill. This bill adds new provisions within the change of organization or reorganization process in the CKH Act that require a local agency to submit a plan for providing SB 614 Page 5 services and how those services will be financed. This bill allows a local agency to include in resolution of application a plan to use tax increment financing in a new or reorganized special district to provide infrastructure in a disadvantaged unincorporated community. The bill includes the tax increment allocation established in existing IFD law, but relies on requirements in the CKH Act for a change of organization or reorganization for notification, hearings, protest, and overall voter involvement. The availability of tax increment financing under this bill is limited to proposals for a change of organization or reorganization by a local agency that will create a special district or reorganize one or more existing special districts in order to provide infrastructure to a disadvantaged unincorporated community, which may include improving or upgrading structures, roads, sewer, water facilities, or other infrastructure needs. This bill is author-sponsored. 2)Background on disadvantaged unincorporated communities. SB 244 (Wolk), Chapter 513, Statutes of 2011, took a two-pronged approach in establishing new requirements for local officials to consider disadvantaged communities. First, SB 244 established a process for the identification of service deficiencies in disadvantaged communities through the LAFCO planning process, therefore adding new duties to LAFCOs in the preparation of municipal service reviews and when reviewing and updating a city or a special district's sphere of influence, starting after July 1, 2012. Second, SB 244 required each city or county to update the land use element of its general plan to address the presence of these types of communities, and for each identified community, the city or county is required to do an analysis of water, wastewater, stormwater drainage, and structural fire protection needs or deficiencies. SB 244 also prohibits a LAFCO, in specified circumstances, from approving an annexation to a city of any territory greater than 10 acres where there exists a disadvantaged inhabited community that is contiguous to the area of proposed annexation, unless the annexation application includes a separate application to annex the disadvantaged unincorporated inhabited territory to the subject city. 3)Author's statement. The author notes that, "According to U.S. [United States] Census data, approximately 1 million of Californians live in disadvantaged, unincorporated communities. SB 614 Page 6 Residents of these areas often live without the basic features of a safe and healthy environment, such as access to clean water, sewage lines, storm drains, streetlights, sidewalks, and safe housing. These communities are systematically underserved in the overall allocation of public resources and are frequently left out of local planning processes. "To address infrastructure deficits in disadvantaged unincorporated communities, SB 244 (Wolk) requires cities and counties to identify and include these communities in their long-range planning. LAFCOs are prohibited from approving specific annexations unless the contiguous disadvantaged unincorporated community is also annexed. Local governments currently lack financial tools necessary to fund the infrastructure upgrades that are necessary when cities annex these communities. "This bill allows local agencies to include tax-increment financing as part of their plan to annex disadvantaged unincorporated communities. By agreeing to form a special district as part of the annexation process, local agencies may use tax-increment financing to improve or upgrade structures, roads, sewer or water facilitates, or other infrastructure to serve the community." 4)LAFCO process - change of organization or reorganization. The CKH Act establishes the process for a change of organization (a single proposed change like an annexation which is when a city adds territory to its boundary) or reorganization (more than one change of organization in one proposal like an annexation to a city and detachment from a special district). Existing law provides that a change of organization or reorganization can be initiated in several ways, including by resolution of application by an affected local agency. Upon receipt of a resolution of application by an affected local agency, LAFCO determines if an application is complete if it contains the components required by existing law, including an application fee. A local agency is required to submit a plan for providing services which must include a description of the services, the level and range of those services, an indication of whether those services can feasibly be extended to the affected territory, an indication of any improvement or upgrading of structure, roads, sewer or water facilities or other conditions the local agency would impose or SB 614 Page 7 require within the affected territory and information with respect to how those services will be financed. The CKH Act outlines public notice, hearing, and written report and recommendation requirements on the proposal. A LAFCO can deny an application, approve an application, and attach terms and conditions to an approval. If approved by the LAFCO, the proposal is subject to a protest proceeding, unless certain circumstances apply to allow that provision to be waived. If the protest proceedings have not been waived, then the LAFCO conducts a noticed public hearing to accept protest. The CKH Act prescribes several different processes for protest and further election requirements depending on the type of organization or reorganization being proposed and the controversy surrounding it. 5)Infrastructure Financing Districts (IFDs). Currently, cities and counties can create IFDs and issue bonds to pay for community scale public works, including highways, transit, water systems, sewer projects, flood control, child care facilities, libraries, parks and solid waste facilities. To repay the bonds, IFDs divert property tax increment revenues from other local governments for a period of 30 years. IFDs, however, are prohibited from diverting property tax increment revenues from schools. To begin the process for establishing an IFD, current law requires the legislative body of a city to adopt a resolution of intention, which must include; 1) a statement that the IFD is proposed to be established, with a description of the boundaries, 2) a statement of the type of public facilities proposed to be financed, 3) a statement that the tax increment revenue from affected taxing entities may be used, and 4) a time and place for a public hearing on the proposal. Additionally, the city or county must develop an infrastructure plan, send copies to every landowner, consult with other local governments, and hold a public hearing. Every local agency that will contribute its property tax increment revenue to the IFD must approve the plan. Once the other local officials approve, the city or county must still get the approval of voters in the proposed district, specifically: two-thirds vote to create the district, two-thirds vote to issue bonds, and a majority-vote to set the district's appropriations limit. The deadline for filing lawsuits to challenge an IFD's creation, financing plan, SB 614 Page 8 allocation of property tax increment revenues, and tax allocation bonds is 30 days after local officials obtain voter approval. This bill utilizes the tax increment financing mechanism in IFD Law and requires that the local agencies that choose to participate in the financing plan specify when the tax increment will terminate. Additionally, this bill allows the tax increment financing plan to include the issuance of debt, but does not contain any of additional requirements described below in IFD Law. 6)Policy considerations. The Legislature may wish to consider the following: a) IFDs and absence of voter threshold. The California Taxpayers Association, in opposition to the bill, argues that this bill "creates a backdoor procedure to use tax increment financing without the creation of an infrastructure financing district, which requires a vote of the people. Should local governments wish to fund new development with tax increment financing, they can already do so by creating an infrastructure financing district with approval from their constituents." Supporters of this bill argue that the CKH Act already includes requirements that will provide for a public process and voter involvement. The Legislature may wish to consider if that is sufficient, absent separate voter requirements pursuant to IFD law. b) Type of district. i) Financing vs. services. Although financing is necessary to enable the provision of services, it should be noted that districts for the sole purpose of providing a financing mechanism that do not deliver services (like benefit assessment and Mello-Roos districts) are not under the purview of LAFCOs and are inherently different than special districts which provide specific public services. Given that the Legislature has repeatedly heard concerns about the large number of special districts in California, the Legislature may wish to consider if this bill will increase the number of independent special districts unnecessarily. ii) Independent vs. dependent. The issue that this bill SB 614 Page 9 seeks to address is how to finance infrastructure in disadvantaged unincorporated communities in light of the financial obstacles to annexing these communities. The Legislature may wish to consider if the barrier for a city or county in providing these services to these communities is financial, that it may then be appropriate to only allow new dependent districts to be formed. Dependent districts are governed by existing legislative bodies so either a city council or county board of supervisors would serve as the governing board of the district. All County Service Areas which deliver additional, tailored county services to specific geographic areas in an unincorporated area, for example, are dependent districts. 7)Related legislation addressing financial disincentives for annexations. AB 1521 (Fox) of the current legislative session, pending in the Senate, would change the way that growth in the vehicle license fee adjustment amount is calculated to include the growth of assessed valuation including in an annexed area. Supporters of AB 1521 argue that the bill would remove the fiscal disincentive for existing cities to annex inhabited territory which is inconsistent with state and local growth and governance policies. 8)Arguments in support. Supporters argue that this bill takes advantage of special districts' ability to provide services to address specific core local service needs and matches it with the utility of tax increment financing. 9)Arguments in opposition. Opposition argues that this bill creates a backdoor procedure to use tax increment financing without a vote of the people, and creates a funding gap for critical government services. Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916) 319-3958 FN: 0004886