BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                 SB 614
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         SENATE THIRD READING
         SB 614 (Wolk)
         As Amended  August 18, 2014
         Majority vote

          SENATE VOTE  :Vote not relevant  
          
          LOCAL GOVERNMENT    7-2                                         
          
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         |Ayes:|Levine, Alejo, Bradford,  |     |                          |
         |     |Gordon, Frazier, Rendon,  |     |                          |
         |     |Waldron                   |     |                          |
         |     |                          |     |                          |
         |-----+--------------------------+-----+--------------------------|
         |Nays:|Achadjian, Melendez       |     |                          |
         |     |                          |     |                          |
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          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,     









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            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  








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           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  








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              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  








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           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.   








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           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  








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           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,  








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           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  








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                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 


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