BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 851| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 851 Author: Mayes (R) Amended: 6/30/15 in Senate Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/24/15 AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8 ASSEMBLY FLOOR: 75-0, 5/22/15 - See last page for vote SUBJECT: Local government: organization: disincorporations SOURCE: California Association of Local Agency Formation Commissions DIGEST: This bill amends the procedure that local agency formation commissions may use to authorize the disincorporation of a city. ANALYSIS: Existing Law: 1)Establishes the Cortese-Knox Hertzberg Local Government Reorganization Act of 2000, which specifies procedures for local government changes of organization, including city incorporations, disincorporations, annexations to a city or special district, and city and special district consolidations. AB 851 Page 2 2)Vests responsibility for controlling boundaries with local agency formation commissions (LAFCOs) in each county. 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. LAFCOs regulate boundary changes through the approval or denial of proposals for these changes by other public agencies or individuals. 3)Prescribes a process for disincorporation, which is similar to most boundary changes that require numerous steps in the following order: a) 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. b) 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. c) 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. d) Fourth, a disincorporation election occurs among the city's voters. A successful city disincorporation requires majority-voter approval. e) Finally, LAFCO's staff files documents to complete the disincorporation. 4)Establishes processes for LAFCOs to implement the disincorporation, as follows: AB 851 Page 3 a) 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. b) 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. c) 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, the county is required to levy a tax on the formerly incorporated territory that raises enough money to make the payments. 5)Establishes voter approval requirements for new 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 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. This bill: 1) Amends the Cortese-Knox-Hertzberg Act to make several changes to the process that LAFCOs must use to approve a disincorporation. AB 851 Page 4 2) Describes specific minimum contents for the plan for services following disincorporation. This plan for services must describe: a) The services currently provided to the city, and what agency will provide those services in the future; b) The services that will be discontinued or transferred, how those services were financed before, and how they will be financed in the future; c) The existing financing of services, including financial tools such as bonds, assessments, or taxes; d) The status and exit plan for any bankruptcy proceeding; e) Any state enforcement action or other order relating to services provided by the city; and f) A written statement from each entity that will provide services that it has received the plan for services. 3) 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, including that it: a) 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) b) 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 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. c) 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 AB 851 Page 5 851: i) 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. ii) Requires the city to identify the successor agency for its former redevelopment agency. (Under current law, the commission is charged with determining these amounts AFTER the disincorporation completes.) 4) 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. 5) Defines indirect costs for the purposes of the Cortese-Knox-Hertzberg Act. 6) Requires the LAFCO to make several findings before approving a disincorporation, including that: a) The disincorporation proposal is consistent with the intent that it provide sustainable delivery of services; b) The LAFCO considered the relevant municipal service reviews, and the disincorporation will address necessary changes to spheres of influence; c) The LAFCO reviewed the fiscal analysis and the executive officer's report on the proposal; and d) Service responsibilities have been assigned through terms and conditions that the LAFCO imposes under its existing authority to conditionally approve proposals. 7) Requires that a single question regarding the disincorporation be placed on the ballot if multiple organizational changes are proposed. AB 851 Page 6 8) 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. 9) Makes several technical changes to existing LAFCO law where it refers to incorporation but not disincorporation, in order to: a) Declare the Legislature's intent that the disincorporation be processed in a timely fashion; b) 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; c) 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). 10) 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. 11) Extends the sunset period for an alternative method to determine property tax allocations resulting from city annexation from 2015 to 2021. Background 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 AB 851 Page 7 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. 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 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 AB 851 Page 8 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 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. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: Yes AB 851 Page 9 SUPPORT: (Verified7/14/15) California Association of Local Agency Formation Commissions Alameda Local Agency Formation Commission California Special Districts Association California State Association of Counties Contra Costa Local Agency Formation Commission Imperial County Local Agency Formation Commission Marin Local Agency Formation Commission Nevada County Local Agency Formation Commission Orange Count Orange County Local Agency Formation Commission Riverside County Riverside Local Agency Formation Commission Rural County Representatives of California San Bernardino County 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 Urban Counties Caucus OPPOSITION: (Verified7/14/15) None received ASSEMBLY FLOOR: 75-0, 5/22/15 AYES: Achadjian, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Wilk, Williams, AB 851 Page 10 Wood, Atkins NO VOTE RECORDED: Alejo, O'Donnell, Olsen, Waldron, Weber Prepared by:Anton Favorini-Csorba / GOV. & F. / (916) 651-4119 7/14/15 19:05:54 **** END ****