BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 781 HEARING: 7/6/11
AUTHOR: John A. Pérez FISCAL: Yes
VERSION: 6/29/11 TAX LEVY: No
CONSULTANT: Detwiler
CITY DISINCORPORATION
Enacts provisions for the disincorporation of a city with
fewer than 150 residents.
Background and Existing Law
The Cortese-Knox-Hertzberg Act controls how local officials
change the boundaries of cities and special districts,
putting local agency formation commissions (LAFCOs) in
control. The courts call LAFCOs the Legislature's
"watchdog" over boundary changes. Besides the more common
annexations to cities and special districts, LAFCOs also
control district formations, consolidations, and
dissolutions, as well as city incorporations,
consolidations, and disincorporations.
With just over 100 residents, the City of Vernon (Los
Angeles County) has the smallest population of California's
481 cities. Vernon's city government has attracted
attention over allegations of corruption, misspending, and
mismanagement. City officials have started to react, but
Vernon's critics say that small cities lack the democratic
checks and balances that are essential to open and fair
governance.
AB 46 (John A. Pérez) disincorporates every city that had
fewer than 150 residents on January 1, 2010. On June 22,
the Senate Governance & Finance Committee passed AB 46 by
the vote of 6-3. Vernon is the only city that meets the
bill's population criterion. AB 46 is silent on how local
officials will implement the intricate details surrounding
Vernon's disincorporation.
Vernon's residents, city workers, businesses, and employees
worry about what disincorporation means for their futures.
Who governs after disincorporation? What becomes of city
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services, facilities, assets, liabilities, taxes, and
permits?
Proposed Law
Assembly Bill 781 enacts provisions for the
disincorporation of cities that had fewer than 150
residents on January 1, 2010. The bill does not become
operative unless AB 46 takes effect.
I. Governance . County boards of supervisors have
corporate, fiscal, and regulatory powers in unincorporated
territory. Further, county boards of supervisors are the
legislative bodies for the community redevelopment agencies
that operate in unincorporated areas. County supervisors
can create municipal advisory councils (MACs) in
unincorporated communities to give advice on any topic the
supervisors designate. MAC members can be elected or
appointed. County supervisors can create area planning
commissions (APCs) to carry out the county's land use
planning and development role in a designated area, in
place of the county's planning commission. County
supervisors appoint the APC members. Special districts can
exercise corporate, fiscal, and limited regulatory
authority, as authorized by state law. For example,
community services districts (CSDs) can deliver over 30
kinds of public services and facilities. Special
legislation allows particular CSDs to deliver additional
services and facilities. Directly elected boards of
directors govern most CSDs. In areas with fewer than 100
registered voters, county boards of supervisors may
initially govern new CSDs for up to 10 years (SB 135,
Kehoe, 2005).
Assembly Bill 781 requires the county sheriff to provide
law enforcement services after a city disincorporates under
a proposed state law.
AB 781 declares that the county board of supervisors is the
legislative body of a redevelopment agency of a city that
was disincorporated by a proposed state law.
The bill creates a community services district to provide
fire protection, water, telecommunication, gas, electric
utility services, and street maintenance within the
AB 781 -- 6/29/11 -- Page 3
boundaries of a city that had provided those services when
a proposed state law disincorporates that city. The county
board of supervisors serves as the CSD's board of
directors. At its first meeting, the CSD's board must
adopt the disincorporated city's ordinances regarding those
designated services. The CSD's boundaries and service
areas are coterminous with the disincorporated city's
boundaries and service areas.
The CSD may own and operate facilities for gas or electric
utility services. The CSD may function within the
California Independent System Operator market and issue
revenue bonds as permitted by law. The disincorporated
city's assets, liabilities, rights, privileges, permits,
authorizations, and contracts regarding designated services
vest in the CSD. The CSD can finance land use planning by
an APC and finance a MAC's operations.
AB 781 prohibits the CSD from contracting with a municipal
corporation, municipal utility district, public utility
district, irrigation district, electrical corporation, gas
corporation, or water corporation to provide water,
telecommunications, gas, or electric utility services
unless the MAC consents and the contract doesn't conflict
with the CSD's labor relations obligations.
Within 45 days of city disincorporation, AB 781 requires
the county board of supervisors to appoint a municipal
advisory commission with five members, and specify their
terms and ethical standards. MAC members must be either
CSD residents or county residents who own or work for a
business with a fixed location within the CSD.
Within 45 days of disincorporation, the bill requires the
county board of supervisors to appoint an area planning
commission with five members, and specify their terms and
ethical standards. One APC member must be an environmental
justice community representative who is also a county
resident. The other four APC members must be either CSD
residents or county residents who own or work for a
business with a fixed location within the CSD.
AB 781 encourages the county supervisors to appoint people
to the APC and MAC who do not simultaneously serve on both
bodies.
AB 781 -- 6/29/11 -- Page 4
II. Boundary changes . On the 91st day after its effective
date, AB 46 disincorporates cities that have fewer than 150
residents. However, a county board of supervisors may
continue a city in existence if the board determines within
90 days of the bill's effective date that continuing the
city would serve a public purpose. AB 46 applies the
statutory provisions for terms and conditions for
disincorporated cities and requires the local agency
formation commission (LAFCO) to oversee these conditions.
Assembly Bill 781 allows the county board of supervisors
and the local agency formation commission to start the
actions needed to accomplish a city disincorporation once
the board of supervisors notifies the LAFCO that the county
will allow the 90-day period to expire without action. AB
781 requires LAFCO to take the necessary actions to ensure
that the new CSD is formed and operative by the time that
the city disincorporates.
LAFCO can start acting: (a) when it receives notice from
the county that the city has disincorporated, (b) when it
receives notice from the county that it will allow the
90-day period to expire without action, or (c) earlier if
LAFCO's executive officer deems prudent. LAFCO can begin
acting before the city disincorporates.
The bill says that its provisions don't affect LAFCO's
authority to act with respect to the CSD under the
Cortese-Knox-Hertzberg Act. After the CSD is established,
LAFCO may seek reimbursement for its costs which the county
must pay out of the special fund that holds the
disincorporated city's remaining funds.
III. Records . The California Constitution allows charter
cities to control their own municipal affairs, while
general laws control issues of statewide concern. With
exceptions, city department heads can destroy city records
without making copies, if they have the city council's
approval and the city attorney's written consent. City
officials can't destroy certain types of records, including
those less than two years old. A 1981 Attorney General's
opinion explained that the state laws governing the
destruction of city records is not a municipal affair and,
therefore, apply to charter cities as well as to general
AB 781 -- 6/29/11 -- Page 5
law cities.
Assembly Bill 781 prohibits the officers, employees, and
consultants of a city subject to disincorporation under a
proposed state law from destroying or authorizing the
destruction of city records. Once a city disincorporates
under a proposed state law, the CSD becomes the custodian
of the disincorporated city's records relating to the
disincorporated city's designated services. The county
board of supervisors becomes the custodian of the
disincorporated city's other records.
IV. Employee relations . The Meyers-Milias-Brown Act
governs local governments' labor relations. Assembly Bill
781 makes the CSD the employer of a disincorporated city's
nonmanagerial service employees. The bill binds the CSD to
the disincorporated city's Meyers-Milias-Brown Act
memorandum of understanding with these nonmanagerial
service employees. AB 781 protects these nonmanagerial
service employees from discharge, absent just cause, until
the CSD reaches a new labor agreement. The bill declares
that its provisions, the CSD's duties, and the city's
disincorporation do not change labor relations agreements
with a party to a contract with the disincorporated city
for designated services. Within 90 days after its
creation, the CSD must review the employment of the
disincorporated city's management employees and determine
whether to continue their employment.
V. Gas and electric utilities . When cities and special
districts own gas or electric utilities, they set their own
service rates. Assembly Bill 781 prohibits the CSD from
increasing the disincorporated city's gas or electric
utility rates for at least a year after the CSD's creation,
with two exceptions:
To satisfy bond covenants or other contractual
obligations.
If three conditions occur:
o The CSD's board of directors requests and receives
an independent financial and programmatic audit;
o The board of directors and the MAC each hold a
public hearing; and
o The board of directors finds that a fiscal
emergency exists that requires a gas or electric
AB 781 -- 6/29/11 -- Page 6
utility rate increase.
After the one-year period, AB 781 allows the CSD to
increase gas or electric utility rates if it gives the
proposal to the MAC at least 30 days before the rate
increase and complies with constitutional provisions. The
bill declares that its provisions do not keep the CSD from
decreasing gas or electric utility rates.
VI. Fiscal affairs . When LAFCOs approves boundary
changes, they can impose detailed terms and conditions
regarding public assets, obligations, and liabilities. The
Cortese-Knox-Hertzberg Act gives LAFCOs a list of more than
20 terms and conditions, including authority over existing
taxes, assessments, fees, and other charges. The terms and
conditions imposed by LAFCO supersede any general statutory
provisions. Assembly Bill 781 continues the
disincorporated city's parcel taxes and remits the revenues
to the CSD to use consistent with their original purposes.
The CSD can use parcel tax revenues and other available
revenues to fund a higher level of law enforcement than
otherwise funded by the county. The CSD may continue the
disincorporated city's electric utility franchise fees.
The bill requires the CSD to continue the disincorporated
city's other service fees, charges, or rates, subject to
modification.
VII. Property tax transfer . When forming a new special
district, local officials must determine the amount of
property tax that transfers from existing local agencies to
the new district. If the proposal to form a new district
doesn't transfer all of an affected agency's service
responsibilities to the proposed district, then LAFCO and
the county auditor must follow a four-part statutory
formula to calculate a proportional transfer of the
property tax revenues. The county auditor then adjusts the
allocation of property tax revenues among the affected
local agencies. Assembly Bill 781 requires the county
board of supervisors to negotiate the agreement required by
state law in good faith on behalf of the local agencies
affected by the city disincorporation and the CSD's
formation.
AB 781 -- 6/29/11 -- Page 7
VIII. County taxes . The California Constitution requires
voter approval before local governments can impose or
increase local taxes; general taxes require majority-voter
approval, special taxes need 2/3-voter approval. Counties
can levy only the taxes authorized by state law. Among
those taxes are business license taxes in unincorporated
areas and utility user taxes in unincorporated areas (SB
2557, Maddy, 1990). Some legal observers say that these
tax elections occur only in the unincorporated areas where
counties charge the taxes. However, mainstream legal
thinking says that counties' tax elections must be
countywide, even if those county taxes apply only to
unincorporated areas. Neither the state statutes nor the
appellate courts have resolved this question.
For a city disincorporated under a proposed state law,
Assembly Bill 781 requires the county board of supervisors
to maintain the disincorporated city's business license tax
at the same rates, including methods to adjust the rates,
for at least five years. AB 781 prohibits the county board
of supervisors from levying an additional business license
tax on the disincorporated city's territory during those
five years.
The bill prohibits a county from imposing a county utility
user tax on utility users within the disincorporated city's
territory for at least five years. After five years, the
county board of supervisors cannot levy a county utility
user tax on that territory unless the voters in the
county's unincorporated area vote to continue, increase, or
decrease the tax on a uniform basis throughout the
unincorporated area.
IX. Land use planning and development . Every county and
every city, including a charter city, must adopt a general
plan with seven specified elements. County and city
decisions regarding subdivisions and public works projects
must be consistent with these general plans, even for
charter cities. The zoning ordinances and conditional use
permits of counties and general law cities (but not charter
cities, except for Los Angeles's zoning ordinance) must be
consistent with local general plans.
Assembly Bill 781 requires that the county must continue a
disincorporated city's general plan, zoning ordinances,
AB 781 -- 6/29/11 -- Page 8
conditional use permits, and legal nonconforming uses. The
county must continue any land use authorized by the
disincorporated city's general plan and zoning ordinances
for 10 years, any constitutionally required longer period,
or any longer period permitted by the county's general plan
or zoning ordinance. The bill prohibits the county from
amending the general plan, zoning ordinances, and permits
for 10 years after city disincorporation without the MAC's
consent. That prohibition doesn't apply to amendments
required by law which are presented, after notice to the
MAC, to the APC for hearing.
Within 90 days after city disincorporation and after
consulting with the MAC, the county board of supervisors
must adopt an expedited permit process for business,
development, and health and safety permits in the
disincorporated city's former territory. The county's
process must be comparable to the disincorporated city's
permit process.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Vernon's disincorporation ---
like all boundary changes --- comes down to the details.
AB 46 disincorporates Vernon, but the bill is silent on how
local officials will implement the intricate details that
must be worked out. Anticipating questions from Vernon
city employees, Los Angeles County officials, local
business owners, and the area's workers, AB 781 provides
answers to the questions of governance, land use, public
finance, and local utilities. While the Legislature has
disincorporated other cities before, none was as active or
controversial as Vernon. By creating a new special
district, governed by the Los Angeles County Board of
Supervisors and helped by a municipal advisory council and
an area planning commission, the bill creates a governance
structure with enough power to sort out Vernon's transition
from cityhood to the future. Contingent on AB 46, AB 781
shows public officials, private businesses, and their
employees the way forward.
AB 781 -- 6/29/11 -- Page 9
2. The county town . Since the early 1970s, LAFCO staffs
have talked about setting up "county towns" as an
alternative to city incorporations. Most communities
pursue incorporation so they can assert local control over
land use, public services, and other local topics. When
communities can't afford cityhood, they can set up special
districts to deliver public services, APCs to control land
use, and MACs to focus community identity. Combining these
three governance alternatives results in a "county town"
that has most of the characteristics of cityhood. Some
existing cities started their paths to incorporation by
using variations on this theme. The Committee may wish to
consider if the "county town" created by AB 781 is a
feasible substitute for Vernon's city government.
3. What comes next . Cities and county governments have
broad corporate powers (facilities, services, programs) and
police (regulatory) powers. Special districts have the
limited corporate powers assigned to them; they rarely have
police powers, except to regulate their own facilities and
services. Counties exercise their regulatory powers over
unincorporated territory, so that when a city
disincorporates, the county's regulations substitute for
the former city's regulations. AB 781 addresses this
transition by requiring Los Angeles County to maintain and,
in some cases, reenact Vernon's regulatory programs. The
bill's provisions for zoning and conditional use permits
are one example. The county sheriff becomes responsible
for law enforcement, although AB 781 allows the new CSD to
fund higher service levels than the County usually funds.
Because Vernon is one of the few cities to have kept a
separate local health department, the County also takes
over that responsibility after disincorporation. The new
CSD created by AB 781 has the duty of providing fire
protection, water, telecommunications, gas utility
services, electric utility services, and street
maintenance. The bill doesn't change the duties of other
existing service providers such as mutual water companies
or other special districts that include Vernon. In
general, the county government takes over regulatory duties
while the new CSD takes over corporate responsibilities.
4. But what about ? AB 781 is incomplete. Although the
bill answers many of the obvious questions about Vernon's
disincorporation, legislators don't have the foresight to
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anticipate every nuance about governance, land use, and
public finance. The bill's list of topics looks a lot like
the terms and conditions that a LAFCO would need to impose
when approving a city disincorporation. When LAFCOs act as
the Legislature's watchdogs over boundary changes, they can
bark or even bite as each local situation demands. But
it's really hard for Sacramento-based legislators to be as
agile or responsive when they don't have the deep knowledge
that LAFCOs acquire. Before Vernon disincorporates in
April 2012, legislators may need to pass more bills to
respond to topics that they don't even know exist in July
2011. To avoid the need for repeated legislative
intervention, the Committee may wish to consider an
amendment that allows local officials, property owners, and
residents to apply to the LAFCO in Los Angeles County and
ask for additional conditions. After holding noticed
public hearings, LAFCO could adopt more terms from the
existing statutory list, provided that they further and
don't hinder the goals of AB 46 and AB 781.
5. Not quite the same . While many of the terms spelled
out by AB 781 are similar to those which LAFCO could impose
under current law, the bill goes further than LAFCOs can.
The Cortese-Knox-Hertzberg Act specifically prohibits
LAFCOs from imposing conditions that directly regulate land
use density or intensity, property development, or
subdivision requirements. In contrast, Section 7 of the
bill specifically requires Los Angeles County to maintain
Vernon's general plan, zoning ordinances, and conditional
use permits for at least 10 years. While LAFCOs can extend
or continue existing charges, fees, assessments, or taxes,
Sections 8 and 9 of the bill specifically prohibit Los
Angeles County from imposing county business license taxes
and county utility user taxes for at least five years.
Further, the bill keeps the CSD from contracting-out
designated services without consulting the new MAC. In
these ways, AB 781 goes beyond what LAFCOs can do.
6. What a difference a decade makes . When a LAFCO forms a
new CSD for an unincorporated community that has fewer than
100 voters, the county board of supervisors can be the new
district's ex officio board of directors. That's not far
from AB 781's initial governance solution that makes the
Los Angeles County Board of Supervisors the ex officio
board of directors for the new Vernon CSD. However,
current law tells a new CSD that it must ask its voters if
AB 781 -- 6/29/11 -- Page 11
they want their own directly elected board of directors.
That election on independence from county rule must occur
once there are 500 registered voters or within 10 years
after the CSD's formation, whichever comes first. AB 781
specifically prevents that election. However, the bill
clearly allows LAFCO to apply the Cortese-Knox-Hertzberg
Act to the new CSD. The Committee may wish to consider if
the CSD created by AB 781 is a permanent form of local
government or a transitional institution that will give way
to something else in the future. Annexation to the City of
Los Angeles? Division and annexation to multiple adjacent
cities? Combining several adjacent, small cities with
Vernon into a large municipality? Reincorporation? The
Committee may wish to consider an amendment that requires
the LAFCO in Los Angeles County to design a permanent
governance structure and call for an election by 2020.
7. A governance alternative ? While many businesses oppose
disincorporation, some have explored alternatives other
than the "county town" arrangement (CSD, MAC, APC) proposed
by AB 781. One possible alternative would call for the
Legislature to set up a unique special district to deliver
local services to the former City of Vernon. Overseen by a
board of directors composed of business owners, business
employees, and residents, the district's board would
oversee the day-to-day operations which would be managed by
a cadre of professional employees. The county board of
supervisors would control the district's governing board
only by "negative consent." In other words, the district
board's decisions would stand unless overturned by a
4/5-vote of the county supervisors. Although not in the
tradition of direct democracy, this corporate influenced
model might be tailored to Vernon's unusual collection of
industries.
8. Who votes on taxes ? By prohibiting Los Angeles County
from levying additional business license taxes and county
utility user taxes, AB 781 begs a constitutional question
that's remained unanswered for over 20 years. Who votes on
a county tax that applies only in the county's
unincorporated territory? All of the voters in the county,
because it's a countywide ordinance? Or just the voters in
the unincorporated area because that's where the tax
applies? The answer to these questions will continue to
vex all counties --- not just Los Angeles --- until either
the courts or the Legislature delivers a constitutionally
AB 781 -- 6/29/11 -- Page 12
reliable answer. AB 781 says that an election to impose a
county utility user tax on the utility users within the
disincorporated city must be conducted among the voters in
the county's unincorporated area. Is that the
constitutionally correct answer for all counties'
unincorporated taxes?
9. Contingent enactment . The provisions in AB 781 will
not go become operative unless the Legislature also passes
and Governor Brown signs AB 46.
Assembly Actions
Not relevant to the June 29, 2011 version of the bill.
Support and Opposition (6/30/11)
Support : Los Angeles County Sheriff's Department.
Opposition : City of Vernon.