BILL ANALYSIS Ó
REVISED
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 851 |Hearing |6/24/15 |
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|Author: |Mayes |Tax Levy: |No |
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|Version: |6/17/15 |Fiscal: |Yes |
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|Consultant|Favorini-Csorba |
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LOCAL GOVERNMENT: ORGANIZATION: DISINCORPORATIONS.
Amends the procedure that local agency formation commissions may
use to authorize the disincorporation of a city.
Background and Existing Law
LAFCOs are responsible for coordinating logical and timely
changes in local governmental boundaries, conducting special
studies that review ways to reorganize, simplify, and streamline
governmental structures, and preparing a sphere of influence for
each city and special district within each county. The courts
refer to LAFCOs as the Legislature's "watchdog" over local
boundary changes. The Cortese-Knox Hertzberg Local Government
Reorganization Act of 2000 (the Act) establishes procedures for
local government changes of organization, including city
incorporations, disincorporations, annexations to a city or
special district, and city and special district consolidations.
LAFCOs regulate boundary changes through the approval or denial
of proposals by other public agencies or individuals for these
procedures.
The Act prescribes a process for disincorporation, which is
similar to most boundary changes that require numerous steps in
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the following order:
First, there must be a completed application to LAFCO,
including a petition or resolution, a generic plan for
services, an environmental review document, and a property
tax exchange agreement between the county and the city.
Second, LAFCO must hold a noticed public hearing, take
testimony, and may approve the proposed city
disincorporation. LAFCO may impose terms and conditions
that spell out what happens to the city's property, assets,
and liabilities. If LAFCO disapproves, the proposed
disincorporation stops. A LAFCO may not approve a
disincorporation that impairs any indebtedness, such as
bonds, or any other contractual obligation, such as
pensions.
Third, LAFCO must hold another public hearing to measure
protests. The proposed disincorporation stops if there is
a majority protest; that is, if more than 50% of the city's
voters file written protests. Absent a majority protest,
LAFCO must order an election on the proposed
disincorporation.
Fourth, a disincorporation election occurs among the
city's voters. A successful city disincorporation requires
majority-voter approval.
Finally, LAFCO's staff files documents to complete the
disincorporation.
Financial Provisions of Disincorporations. Following the
disincorporation election, the LAFCO or the county conducts an
audit to determine the city's current debt, the amount of money
in its treasury, and the amount of unpaid taxes or other
obligations owed to the city. Prior to the effective date of a
disincorporation, public officers must turn over public property
to the county board of supervisors and the city council must
turn over all city funds to the county treasurer. Once the
disincorporation is in effect, the county board of supervisors
is responsible for winding up the affairs of the former city.
Residents of the former city no longer have any rights or duties
as inhabitants or voters of a city. The county tax collector
may collect any levied but uncollected taxes owed to the
disincorporated city, and the county may collect or sue for all
debts owed the city. Other territories within the county are
not responsible and may not be taxed for the debts or
liabilities of the former city. Instead, if the assets of the
former city aren't sufficient to cover the city's debt payments,
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the county is required to levy a tax on the formerly
incorporated territory that raises enough money to make the
payments.
Prior Disincorporations and Recent Discussions. Seventeen cities
have disincorporated in California's history, but only two
cities that have disincorporated since the creation of LAFCOs in
1963. The City of Cabazon, located in Riverside County, was
disincorporated in 1973, and went through the process contained
in LAFCO law. The Town of Hornitos, located in Mariposa County,
was disincorporated by statute in 1972.
More recent discussions surrounding the issue of
disincorporation are in reference to several cities in
California that were impacted by Governor Jerry Brown's 2011
"realignment" of some state responsibilities and commensurate to
local governments. The realignment proposal and subsequent
budgetary actions redirected Vehicle License Fee (VLF) revenues
from cities to other local governments. This created particular
fiscal hardships for recently incorporated cities and cities
that annexed inhabited areas with the expectation that they
would receive VLF revenue that would make the annexation
financially viable. After several failed legislative attempts to
remedy this issue, cities like Jurupa Valley have continued to
discuss possible disincorporation.
News reports on the possible disincorporation of the City of
Adelanto in San Bernardino County have persisted despite
assurances by city officials that the City has the budget for
one more fiscal year and that they continue to look into long
range revenue generating and saving opportunities. Most
recently, a Santa Barbara grand jury released a report earlier
this month calling for the City of Guadalupe to disincorporate
due to fiscal mismanagement, a declining tax base, and
increasing debt obligations. The Guadalupe City Council has not
taken any steps to suggest they will follow the recommendation
of the grand jury.
Limitations on Local Taxes. Beginning in 1978, voters approved a
series of constitutional amendments that established
voter-approval requirements for new local taxes. Proposition
13, approved in 1978, greatly constrained local governments'
ability to raise property tax rates and required all new local
government special taxes-taxes dedicated to a particular
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purpose-to be approved by two-thirds of voters. In order to
implement Proposition 13, the Legislature passed AB 8, which
created a formula to allocate the reduced property taxes among
local governments, based on the share that they received in
1978. Subsequently, Proposition 218 (1996) required new general
taxes-taxes to raise money for general purposes-to be approved
by a majority of voters.
Some LAFCOs want to alter the process for disincorporation to
increase the information available about the effects of
disincorporations prior to voter approval and to make it
consistent with the requirements of Proposition 13 and 218.
Proposed Law
AB 851 amends the Cortese-Knox-Hertzberg Act to make several
changes to the process that LAFCOs must use to approve a
disincorporation. First, AB 851 describes specific minimum
contents for the plan for services following disincorporation.
This plan for services must describe:
The services currently provided to the city, and what
agency will provide those services in the future;
The services that will be discontinued or transferred,
how those services were financed before, and how they will
be financed in the future;
The existing financing of services, including financial
tools such as bonds, assessments, or taxes;
The status and exit plan for any bankruptcy proceeding;
Any state enforcement action or other order relating to
services provided by the city; and
A written statement from each entity that will provide
services that it has received the plan for services.
Second, AB 851 includes several provisions that govern the
exchange of property tax revenues following a disincorporation,
as well as related technical changes to the Revenue and Taxation
Code. It requires the LAFCO to determine the amount of property
tax-and the corresponding increase in the state appropriations
limit-that goes from the former city to other local agencies
(such as schools and the county). AB 851 also specifies a
formula that LAFCO must use to make this determination.
Specifically, local agencies that take over service provision
get a share of the disincorporating city's property tax that is
proportional to the share of total costs that are attributable
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to the cost of the services that they take on. For example, if
the cost of providing fire protection was 25% of the city's
total costs to provide services, the entity that is taking over
fire protection would receive 25% of the property tax revenues
formerly going to the city. Agencies that do not take over any
services do not receive any property tax revenue.
Third, AB 851 states the Legislature's intent that the debts and
contractual obligations of a city that disincorporates shall be
the responsibility of the same territory for repayment. In
order to carry out this provision, AB 851 requires a city to
give the LAFCO a written statement of its debt, funds in its
treasury, unpaid taxes that the city is owed, and current and
future liabilities that are owed to lenders or by contract,
including pensions. The city must also identify the successor
agency for its former redevelopment agency. (Under current law,
the commission is charged with determining these amounts AFTER
the disincorporation completes.)
Fourth, AB 851 also requires the standard LAFCO report that
accompanies any proposal to include a comprehensive fiscal
analysis that reviews and documents, including the cost of
providing services and the revenues in the past 3 fiscal years,
the sources of funding available to the entities that take over
providing services, and the related costs of those services.
These costs must include both the direct costs and indirect
costs of providing the services.
Fifth, AB 851 requires the LAFCO to make several findings before
approving a disincorporation, including that:
The disincorporation proposal is consistent with the
intent that it provide sustainable delivery of services;
The LAFCO considered the relevant municipal service
reviews, and the disincorporation will address necessary
changes to spheres of influence;
The LAFCO reviewed the fiscal analysis and the executive
officer's report on the proposal; and
Service responsibilities have been assigned through
terms and conditions that the LAFCO imposes under its
existing authority to conditionally approve proposals.
Sixth, the bill requires that a single question regarding the
disincorporation be placed on the ballot if multiple
organizational changes are proposed.
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Seventh, AB 851 repeals several provisions that require taxes to
be levied on the formerly incorporated territory to pay off
indebtedness that remains after the disincorporation, as well as
other provisions that conflict with the new process that AB 851
establishes.
Eighth, AB 851 makes several technical changes to existing LAFCO
law where it refers to incorporation but not disincorporation,
in order to:
Declare the Legislature's intent that the
disincorporation be processed in a timely fashion;
Prohibit a city contemplating disincorporation from
increasing compensation for the governing board or the
city's expenditures or financial obligations beyond what
has already been approved in the city's budget;
Allow the local agency that conducts proceedings for the
disincorporation of a city to levy a special tax on behalf
of that city (as is already allowed with other types of
boundary changes).
AB 851 also provides that the general plan, zoning ordinances,
and conditional use permits issued by the disincorporated city
to continue in force for the formerly incorporated territory
until the county changes them.
Additionally, AB 851 extends the sunset period for an
alternative method to determine property tax allocations
resulting from city annexation from 2015 to 2021.
Comments
1. Purpose of the bill . As discussions of disincorporations
continue, AB 851 proactively addresses problems with the
disincorporation process. The statutes prescribing the
disincorporation process have not been significantly updated
since the inception of LAFCOs in 1963. Since then, LAFCOs have
had decades of experience with boundary changes. AB 851 applies
this experience in order to rationalize the disincorporation
process. AB 851 ensures that the full effects of
disincorporation are identified and understood before voters
have to make a decision by (1) requiring a more detailed plan
for services that is able to make provisions for discontinuing
services, and (2) ensuring that the financial condition of the
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city is fully evaluated prior to LAFCO approval of the
disincorporation. In addition, AB 851 brings the
disincorporation procedure into full compliance with the
mandates of Propositions 13 and 218. Under existing law, the
intended procedure for dispensing with debt and unfunded
liabilities requires counties to levy a tax without voter
approval. As a result, the current process is not in compliance
with Propositions 13 and 218. This could result in the county
at large being responsible for the debts and unfunded
liabilities of a city that has disincorporated. This bill does
not encourage disincorporations; in fact, by ensuring that the
full effects are known up front, it may discourage
disincorporations and encourage cities to pursue other means to
address their financial challenges.
2. Who has the say ? AB 851 creates a process whereby services,
and associated liabilities, can be transferred to other local
agencies in the county, as outlined in the plan for services and
the terms and conditions of the transfer. Yet it leaves the
decision to disincorporate with the city proposing
disincorporation, the LAFCO, and the residents of the city.
While affected local agencies must be notified of the plan for
services, they are not required to agree with it. In other
LAFCO proceedings, there is an effort to balance the rights of
all affected parties. For example, city incorporations only
require the vote of residents in the territory proposing
incorporation, but the city and county must agree on a property
tax exchange. In the case of disincorporations, there may be a
balance to be struck between the rights of the residents of the
city, who may be heavily impacted by poor service that their
city currently provides, and the rights of the other affected
parties (such as residents in the unincorporated area), who may
be more numerous but less heavily impacted by the process.
3. Follow the money . The way that property taxes are
reallocated under AB 851 differs from the way property taxes are
divvied up under typical boundary changes. In most boundary
changes, property taxes are exchanged between affected agencies
under a mutual agreement, but AB 851 requires LAFCO to determine
the allocation of a disincorporated city by formula, based on
the services that the affected entities take on. There are
legitimate reasons for prescribing a formula, such as avoiding
complex negotiations over what might be small amounts of
property tax. However, there are other ways of allocating
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property tax, such as by using the formula developed by the
Legislature after AB 8. Each of these different allocation
methods creates different winners and losers.
4. Let's be clear . Several provisions of AB 851 are ambiguous.
The Committee may wish to consider the following clarifying
amendments:
On p. 8, line 3, after "identification" insert ", where
applicable,". Currently, section 56653.1(a) potentially
implies that a successor must by designated for all
services, when other portions of this section clearly
indicate that some services may be discontinued.
Clarify that section 56804(c) requires LAFCOs to review
the cost that the successor will incur to provide services
to the area proposed for disincorporation. Currently, this
section could be construed to require LAFCOs to review the
cost of providing services to the entire territory of the
agency taking over service provision, instead of only the
formerly incorporated area.
Define "indirect costs." Although no definition of
indirect cost can be found in the Government Code,
Education Code section 33338(b)(2) defines "indirect cost"
to mean "the agency-wide, general management cost of the
activities for the direction and control of the agency as a
whole. Indirect costs include, but are not necessarily
limited to, administrative activities necessary for the
general operation of the agency, such as accounting,
budgeting, payroll preparation, personnel services,
purchasing, and centralized data processing."
5. Mandate. The California Constitution generally requires the
state to reimburse local agencies for their costs when the state
imposes new programs or additional duties on them. According to
the Legislative Counsel's Office, AB 851 creates a new
state-mandated local program because county auditors will have
to adjust property tax allocations for local agencies whose
boundaries change. AB 851 says that if the Commission on State
Mandates determines that it creates a state-mandated local
program, the state must reimburse local agencies by following
the existing statutory process for mandate claims.
Assembly Actions
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Assembly Local Government Committee: 9-0
Assembly Appropriations Committee: 17-0
Assembly Floor: 75-0
Support and
Opposition (6/18/15)
Support : California Association of Local Agency Formation
Commissions; Alameda Local Agency Formation Commission; Contra
Costa Local Agency Formation Commission; Imperial County Local
Agency Formation Commission; Marin Local Agency Formation
Commission; Nevada County Local Agency Formation Commission;
Orange County Local Agency Formation Commission; Riverside Local
Agency Formation Commission; San Diego Local Agency Formation
Commission; San Mateo Local Agency Formation Commission; Santa
Barbara Local Agency Formation Commission; San Bernardino County
Local Agency Formation Commission; San Luis Obispo Local Agency
Formation Commission; Sonoma Local Agency Formation Commission;
California State Association of Counties; Rural County
Representatives of California; San Bernardino County; Urban
Counties Caucus; California Special Districts Association;
Orange County; Riverside County.
Opposition : Unknown.
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