BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 692 HEARING: 4/17/13 AUTHOR: Hancock FISCAL: No VERSION: 4/10/13 TAX LEVY: No CONSULTANT: Weinberger MELLO-ROOS COMMUNITY FACILITIES ACT Amends numerous provisions of the Mello-Roos Community Facilities Act. Background The Mello-Roos Community Facilities Act allows counties, cities, special districts, and school districts to finance public works projects and a limited list of public services by levying special taxes (parcel taxes). A Mello-Roos Community Facilities District (CFD) issues bonds against these special taxes to finance the public works projects. Like all special taxes, Mello-Roos Act special taxes require 2/3 -voter approval. If there are fewer than 12 registered voters, the affected landowners vote. The Mello-Roos Act is an important feature of the local fiscal landscape, providing local officials with a key tool for accumulating the public capital needed to pay for the public works projects that make new residential development possible. Since 1985, CFDs have issued over $18 billion in long-term bonds, mostly for capital improvements. Without access to Mello-Roos bond funding, many builders would have to pay higher development impact fees and raise housing prices. Based on nearly 30 years of experience, practitioners want the Legislature to adjust several statutory features of the Mello-Roos Community Facilities Act. Proposed Law Senate Bill 692 makes the following changes to the Mello-Roos Community Facilities Act and the Mark-Roos Bond Pooling Act: SB 692 -- 4/10/13 -- Page 2 Special taxes for maintenance . Mello-Roos Act special taxes for services can pay for police protection services, fire protection and suppression services, ambulance and paramedic services, recreation program services, library services, maintenance services for elementary and secondary schoolsites and structures, operation and maintenance of museums and cultural facilities, maintenance and lighting of parks, parkways, streets, roads, and open space, flood and storm protection services, and hazardous waste cleanup services. Senate Bill 692 additionally allows Mello-Roos Act special taxes to pay for maintenance and operation of any real or other tangible property with an estimated useful life of five years or longer that is owned by the local agency or by another local agency through an agreement entered into pursuant to a specified statute. The bill defines "maintenance" as including replacement and the creation and funding of a reserve to pay for replacement. Marks-Roos lease financing . The Joint Exercise of Powers Act allows two or more public agencies to exercise their common powers by signing joint powers agreements. Sometimes an agreement creates a joint powers authority (JPA). The Marks-Roos Local Bond Pooling Act allows public agencies to use JPAs to finance infrastructure. These JPAs issue Marks-Roos Act bonds and loan the capital to local agencies for public works, for working capital, and for insurance programs. The Marks-Roos Act allows a JPA to take title to, and sell, lands, structures, real or personal property, rights, rights-of-way, franchises, easements, and other interests in lands that are located within the state that the authority determines are necessary or convenient for the financing of public capital improvements. Senate Bill 692 adds leases to the list of property interests that JPAs can use to finance public capital improvements. Joint exercise of powers . A CFD can finance facilities to be owned or operated by a public agency other than the agency that created the district pursuant to a joint community facilities agreement or joint exercise of powers agreement. Senate Bill 692 declares that specified provisions in the Mello-Roos Act must not be construed to limit a joint powers authority's ability to exercise powers authorized by the Joint Powers Act. SB 692 -- 4/10/13 -- Page 3 Special tax prepayment provisions . A local agency's legislative body can form a CFD that initially consists solely of territory proposed for future annexation to the CFD, with the condition that a parcel or parcels within that territory may be annexed to the CFD and subjected to the special tax only with the unanimous approval of the parcel owner or owners at the time of annexation (SB 555, Hancock, 2011). Under this alternate CFD formation procedure, the resolution of intention to form the CFD need not specify the rate or rates of special tax, provided that: The resolution of intention and the resolution of formation include a statement that the rate must be established in an amount required to finance or refinance the authorized improvements and to pay the district's administrative expenses. The maximum rate of special tax applicable to a parcel or parcels must be specified in the unanimous approval provided by parcel owners when they annex to the CFD. Senate Bill 692 similarly provides that a resolution of intention need not specify the conditions under which a special tax obligation may be prepaid and permanently satisfied if the prepayment provisions are included in the unanimous approval by parcel owners when they annex to the CFD. Eliminating facilities and services . A local agency's legislative body, after conducting a public hearing, can eliminate one or more types of facilities and services specified in a CFD's resolution of formation. For a CFD formed under the alternate procedure, consisting solely of territory proposed for future annexation to the CFD, Senate Bill 692 allows facilities and services to be eliminated with the unanimous approval of affected parcel owners and written consent of the local agency. No additional hearing or procedures are required. The bill requires that the unanimous approval must contain specified provisions if the unanimous approval relates to the reduction of the special tax rate and the special tax proceeds are being used to retire debt. Special tax rate ordinances . Senate Bill 692 allows a local agency's legislative body, after creating a CFD that includes territory proposed for annexation in the future by SB 692 -- 4/10/13 -- Page 4 unanimous approval, to provide by ordinance for the levy of special taxes on parcels that will be annexed to the CFD at the rate or rates to be approved unanimously by parcel owners and for apportionment and collection of the special taxes in the manner specified in the resolution of formation. Improvement areas . Current law allows a local agency's legislative body to designate, by resolution, a portion or portions of a CFD as one or more improvement areas. After the designation of an improvement area, all proceedings for purposes of a bond election and for the purpose of levying special taxes for payment of the bonds, or for any other specified changes apply only to the improvement area. Senate Bill 692, in connection with the annexation by unanimous approval to a community facilities district of a parcel that was included in territory proposed for annexation in the future to the community facilities district, allows a local agency to designate a parcel or parcels as an improvement area within the CFD. The bill specifies that an agency can designate the improvement area without additional hearings or procedures. After the designation of a parcel or parcels as an improvement area, all proceedings for approval of the appropriations limit, the rate and method of apportionment and manner of collection of special taxes, and the authorization to incur bonded indebtedness for the parcel or parcels apply only to the improvement area. Continuing disclosure notice . Federal law requires some property owners in a CFD to disclose certain information on a continuous basis through an information clearinghouse established by the Municipal Securities Rulemaking Board (MSRB). Senate Bill 692 allows a local agency to execute and record in a County Recorder's office a notice of the owner's disclosure agreement for the purpose of providing notice to a subsequent transferee. The owner's written consent must be attached to the notice. The County Recorder's office must accept the notice. Senate Bill 692 requires a subsequent transferee of the property to be subject to the disclosure obligation. Upon the termination of the disclosure obligation, the bill allows a local agency to record a notice of termination with the office of the county recorder in which the original notice was recorded. The County Recorder's office must accept the notice of termination. SB 692 -- 4/10/13 -- Page 5 Bond refunding requirements . A certified public accountant must certify that proceeds and investment kept in a fund for a CFD's refunding bonds are sufficient to meet specified statutory requirements. Senate Bill 629 provides that an accountant's certification is not required if: The proceeds and any other cash in the refunding fund are held uninvested, or shall be invested, in noncallable obligations of, or obligations guaranteed as to principal and interest by, the U.S. government or any agency or instrumentality thereof, when those obligations are backed by the full faith and credit of the U.S. government. The amount invested is sufficient to pay the principal, interest, and redemption premiums, if any, on the refunded bonds as they become due or at designated dates prior to maturity. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Mello-Roos districts are the main mechanism used by local governments to finance new infrastructure and services to support new residential development. In recent years, practitioners have identified a number of improvements that need to be made to the Act. SB 692 compiles these improvements into a single piece of legislation. The bill clarifies ambiguous statutory provisions, eliminates unnecessary procedural requirements for some CFD actions that receive unanimous approval of parcel owners, and allows CFD special taxes to provide a much-needed source of funding for maintenance and operation of public facilities. These changes will make the Mello-Roos Act an even more effective tool for local finance in the years ahead. 2. Widening disparities ? By adding operations and maintenance to the list of services that may be financed through Mello-Roos special taxes, SB 692 allows communities to finance those services through a single mechanism. Under current law, communities commonly go through a SB 692 -- 4/10/13 -- Page 6 separate process to superimpose an assessment district for maintenance on top of a CFD. Critics say that Mello-Roos special taxes should not pay for these new services and that funding for regular maintenance programs should come out of existing funds. For example, a city may use its general fund to pay for street maintenance in the older parts of town, but insist that builders accept Mello-Roos Act special taxes for street maintenance as a condition of approving a new subdivision. SB 692 may widen disparities between the services supported by tax revenues from property owners within CFDs and those not in CFDs. 3. Improvement areas . SB 692 allows a local agency's legislative body to avoid a public hearing and other procedural requirements when designating an improvement area comprised of parcels that annex to the CFD with the parcel owner's unanimous consent. It is unclear whether this provision requires the agency to designate the improvement area at the same time as the annexation and whether the unanimous approval for the annexation must specify unanimous approval for creating the improvement area, as well. The Committee may wish to consider amending SB 692 to clarify the time and conditions under which a CFD can designate, without a hearing, an improvement area comprised of annexed parcels. Support and Opposition (4/11/13) Support : Unknown. Opposition : Unknown.