BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 614 HEARING: 8/21/14
AUTHOR: Wolk FISCAL: No
VERSION: 8/18/14 TAX LEVY: No
CONSULTANT: Urquiza
PURSUANT TO SENATE RULE 29.10
DISADVANTAGED UNINCORPORATED COMMUNITIES:
INFRASTRUCTURE FINANCING
Allows local agencies to use tax increment financing to
fund infrastructure improvements in disadvantaged
unincorporated communities.
Background and Existing Law
The Cortese-Knox-Hertzberg Local Government Reorganization
Act (CKH Act) delegates the Legislature's power to control
the boundaries of cities and special districts to local
agency formation commissions (LAFCOs). Boundary changes,
known as changes of organization or reorganization, include
annexations, which occur when a city or district attaches
additional territory within its boundaries.
The CKH Act requires several steps before a city can annex
inhabited territory. An annexation usually begins when a
city or special district submits a proposal for a change of
organization or reorganization to the LAFCO, including a
plan for providing services within the affected territory.
The LAFCO must hold a noticed public hearing, take
testimony, and approve or disapprove the proposed
annexation. If approved by LAFCO, the proposal is subject
to protest proceedings. Any owner of land or any
registered voter that is the subject of a proposed change
of organization or reorganization may file a written
protest against the change.
If protests are 0-25%, the annexation proceeds
without an election.
If protests are 25-50%, the annexation proceeds
subject to voter approval.
If protests are over 50%, the annexation stops.
SB 614 -- 8/18/14 -- Page 2
Tax increment financing (TIF) is a public financing method
that allows local governments to dedicate some or all of
the growth of property taxes within the affected area for a
fixed period of time to finance the improvement of
infrastructure. Prior to their dissolution, redevelopment
agencies in California used tax increment financing to
address urban blight. State law currently authorizes
cities and counties to use tax increment financing by
creating infrastructure financing districts (IFDs). Forming
an IFD and issuing bonds under IFD law requires two-thirds
voter approval (SB 308, Seymour, 1990).
State law defines disadvantaged communities as those with
median household incomes less than 80% of the statewide
average. Many disadvantaged unincorporated communities
lack public services, and even public facilities like
domestic water, sanitary sewers, paved streets, storm
drains, and street lights. To address infrastructure
deficits in disadvantaged unincorporated communities, SB
244 (Wolk, 2011) prohibits LAFCOs 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 necessary when cities
annex disadvantaged unincorporated communities. Local
government officials want to use tax increment financing to
fund the construction and upgrades of infrastructure in
disadvantaged unincorporated communities that are annexed
by cities.
Proposed Law
Senate Bill 614 allows a local agency to use tax increment
financing to fund infrastructure improvements in a
disadvantaged unincorporated community. The bill's
provisions sunset on January 1, 2025. Specifically, SB 614:
I. Allows local agencies, as part of the LAFCO annexation
process, to form or reorganize a special district to
improve infrastructure in a disadvantaged unincorporated
community.
II. Allows local agencies to adopt an annexation
development plan that specifies how tax increment will be
used to finance infrastructure improvements.
III. Defines several terms.
SB 614 -- 8/18/14 -- Page 3
I. Formation or Reorganization of a Special District . SB
614 allows a local agency to include in its resolution of
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.
SB 614 allows a local agency formation commission (LAFCO)
to approve the proposal for a change of organization or
reorganization to include the formation of a special
district or reorganization of a special district with the
special district's consent, including a community services
district, municipal water district, or sanitary district.
The bill requires that the formation or reorganization of a
special district must conform with the requirements of the
principal act of the proposed district and all required
formation proceedings.
SB 614 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:
The necessary financial resources to improve or
upgrade structures, roads, sewer, or water facilities
or other infrastructure. The annexation development
plan also must clarify the local entity responsible
for the delivery and maintenance of the services
identified in the application;
An estimated time frame for constructing and
delivering the services identified in the application;
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.
The bill requires LAFCO to include in its resolution making
determinations a description of the annexation development
plan, including an explanation of the proposed financing
mechanism, including any planned debt issuance associated
with the annexation development plan.
The bill provides that LAFCO is not precluded from
considering any other option or exercising its powers as
SB 614 -- 8/18/14 -- Page 4
defined in existing law.
II. Tax Increment Financing . SB 614 allows a local
agency's plan for financing services included with a
resolution of application for change of organization or
reorganization, to include an annexation development plan.
An annexation development plan may provide 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 be
divided as follows:
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,
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 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.
The bill requires the plan to specify a date upon which the
division of taxes shall terminate.
The bill allows the annexation development plan to include
a provision for the issuance of indebtedness and 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.
The bill prohibits any annexation development plan from
resulting in a reduction of property tax revenues allocated
to any school entity as defined by current law.
The bill allows a consenting local agency to advance funds
SB 614 -- 8/18/14 -- Page 5
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.
The bill 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.
III. Definitions . Senate Bill 614 defines the following
terms:
"Local agency" means a city, county, or special
district.
"Consenting local agency" means a local agency that
has adopted a resolution of its governing body
consenting to the annexation development plan.
"Territory" means 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.
"Certificate of completion" means the documents
prepared by the LAFCO executive officer and recorded
with the county recorded that confirms the final
successful completion of a change of organization or
reorganization.
"Disadvantaged unincorporated community" means an
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 as a community with an annual median household
income that is less than 80% of the statewide annual
median household income.
The bill makes other technical and conforming changes.
State Revenue Impact
No estimate.
SB 614 -- 8/18/14 -- Page 6
Comments
1. Purpose of the bill . According to U.S. Census data,
approximately 1 million Californians live in disadvantaged,
unincorporated communities. 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. In 2011, the
Legislature required local officials to include
disadvantaged unincorporated communities in their
annexation plans, but did not provide enough financial
mechanisms to make those annexations viable. SB 614 allows
local agencies to include tax-increment financing as part
of their plan to annex disadvantaged unincorporated
communities to improve or upgrade structures, roads, sewer
or water facilitates, or other infrastructure to serve the
community.
2. Voter approval . Under existing law, local governments
can use tax increment financing only by forming an
infrastructure financing district (IFD). When the
Legislature created the IFD law in 1990, legislators
decided that the use of the tool should require a
two-thirds vote of the people. By contrast, SB 614 does
not require a supermajority of voters to approve tax
increment financing. The LAFCO process for annexation
allows voters to reject the tax increment plan through a
protest proceeding. However, protests only trigger an
election if LAFCO receives protests for more than 25% of
affected voters or landowners. If an election occurs, only
majority approval is necessary to approve the plan.
3. Next steps ? SB 614 allows tax-increment financing to
cover the construction or upgrade of infrastructures, but
not for the ongoing operating costs of those facilities.
For instance, the tax increment may cover the construction
costs of a water treatment plant, but does not secure a
revenue stream to guarantee that the plant's operating
costs will also be covered. Given that LAFCO may determine
that the rate base in many disadvantaged unincorporated
communities may not be sufficient to cover the costs of
operating the infrastructure, it is unclear how useful this
tool will be for local governments without additional
SB 614 -- 8/18/14 -- Page 7
options for funding operational costs.
4. Gut and amend . As introduced and approved by the
Senate, SB 614 contained provisions relating to irrigation
districts. Amendments taken in the Assembly deleted the
initial contents of SB 614 and inserted the current
language relating to infrastructure financing. Because
this topic was never heard in the Senate, the Senate Rules
Committee referred the amended bill under Senate Rule 29.10
to the Senate Governance and Finance Committee for a
hearing on the Assembly's amendments. At its August 21st
hearing, the Committee has two choices:
Hold the bill
Return the bill to the Senate Floor.
Assembly Actions
Assembly Local Government Committee 7-2
Assembly Floor 55-23
Support and Opposition (8/21/14)
Support : California Association of Local Agency Formation
Commissions; California League of Cities; California
Special Districts Association; City of Rancho Cordova.
Opposition : California Taxpayers Association.
SB 614 -- 8/18/14 -- Page 8