BILL ANALYSIS                                                                                                                                                                                                    

                                                                     AB 851

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          Date of Hearing:  April 22, 2015 


                              Brian Maienschein, Chair

          AB 851  
          (Mayes) - As Amended April 13, 2015

          SUBJECT:  Local government:  organization:  disincorporations.

          SUMMARY:  Makes changes to the city disincorporation process in  
          the Cortese-Knox Hertzberg Act.  Specifically, this bill:  

          1)Declares that it is the intent of the Legislature that any  
            proposal that includes the disincorporation of a city results  
            in a determination that the debt or contractual obligation and  
            responsibilities of the city being disincorporated shall be  
            the responsibility of that same territory for repayment.   
            Requires the city to provide a written statement to the local  
            agency formation commission (LAFCO) prior to filing a proposal  
            to initiate disincorporation proceedings that determines and  
            certifies all of the following:

             a)   The indebtedness of the city;

             b)   The amount of money in the city's treasury;

             c)   The amount of any tax levy or other obligation due the  
               city that is unpaid or has not been collected; and, 


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             d)   The amount of current and future liabilities, both  
               internal debt owed to other special or restricted funds or  
               enterprise funds within the agency and external debt owed  
               to other public agencies, outside lenders, or contractual  
               obligations.  Liabilities may include, but  not be limited  
               to, contracts, retirement obligations, and unfunded pension  

          2)Requires the city to provide a written statement identifying  
            the successor agency to the city's former redevelopment  
            agency, if any.  

          3) Specifies information that must be included in a plan for  
            services with a proposal for a disincorporation or  
            reorganization that includes a disincorporation, as follows:

             a)   An enumeration and description of the services currently  
               provided by the city proposed for disincorporation and an  
               identification of the entity or entities proposed to assume  
               responsibility for the services following the completion of  

             b)   An enumeration and description of each service proposed  
               to be discontinued, the current financing of the service or  
               services, and any method of financing proposed by the  
               successor agency or agencies;

             c)   A delineation of any existing financing of services  
               currently provided to include, but may not be limited to,  
               bonds, assessments, community facility district governance,  
               general taxes, special taxes, other charges, and joint  
               powers authorities or agreements;


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             d)   An indication of any current bankruptcy proceeding  
               including, but may not be limited to, status and exit plan;

             e)   An indication of any current order relating to services  
               provided by the city proposed for disincorporation by any  
               agency, department, office or other division of the state,  
               including, but may not be limited to, a cease and desist  
               order or water prohibition order;

             f)   A written statement from each affected local agency,  
               identified pursuant to a),  that they received a copy of  
               the plan for services; and,

             g)   Any other information the executive officer may deem  
               necessary to fully consider the disincorporation proposal.   

          4)Adds disincorporation to a provision in existing law for  
            incorporation that requires notification from an executive  
            officer to affected local agencies and requires local agencies  
            to provide data to the executive officer in order to process a  
            proposal in a timely manner.  

          5)Requires the executive officer to prepare a comprehensive  
            fiscal analysis for a disincorporation proposal.  Requires the  
            fiscal analysis to become part of the executive officer's  
            report prepared pursuant to existing law.  Requires data used  
            for the analysis to be from the most recent fiscal year (FY),  
            as specified. 

          6)Requires the fiscal analysis to review and document each of  


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            the following:

             a)   The direct and indirect costs incurred by the city  
               proposed for disincorporation for providing public services  
               and facilities during the three FYs immediately preceding  
               the submittal of the proposal for disincorporation;

             b)   The sources of funding, if any, available to the  
               entities proposed to assume the obligation of the city  
               being disincorporated and the related costs in the  
               provision of existing services;

             c)   Requires the executive officer, when determining costs  
               to include all direct and indirect costs of any public  
               services proposed to be transferred to state agencies for  
               delivery; and,

             d)   Any other information and analysis needed to allow the  
               LAFCO to make certain determinations prior to a city  
               disincorporation, as required by this bill.  

          7)Prohibits a LAFCO from approving or conditionally approving  
            any proposal that includes a disincorporation, unless a LAFCO  
            makes all of the following determinations:

             a)   The proposed disincorporation is consistent with the  
               intent of this division to provide for a sustainable system  
               for the delivery of services;

             b)   The LAFCO has considered the service reviews of  
               municipal services and spheres 


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             of influence of the affected local agencies, and the  
               disincorporation will address the necessary changes to  
               those spheres of influence, if any;
             c)   The LAFCO has reviewed the comprehensive fiscal  
               analysis, as required by this bill;

             d)   The LAFCO has reviewed the executive officer's report  
               and recommendations prepared pursuant to existing law, and  
               the oral or written testimony presented at public hearing;  

             e)   The service responsibility of the city proposed for  
               disincorporation has been assigned through the terms and  
               conditions, as authorized by existing law, and LAFCO has  
               approved a transition plan to provide those services, if  
               one was requested by the executive officer.  

          8)Requires LAFCO to determine the amount of property tax revenue  
            to be exchanged by the disincorporating city and any successor  
            agency or affected local agency pursuant to a specified  
            process that is substantially similar to the process in  
            existing law for incorporations. 

          9)Requires LAFCO to notify the county auditor of the  
            disincorporation proposal and the services proposed to be  
            transferred, as specified.  

          10)Establishes processes for calculating a property tax exchange  
            depending on, if the disincorporation proposal transfers all  
            of the service responsibilities of the disincorporating city  
            to the affected county or a single affected agency.  


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          11)Requires any action brought by a city or district to contest  
            any of the determinations of the county auditor or LAFCO in  
            regard to the amount of property tax revenue to be exchanged  
            to be commenced within three years of the effective date of  
            the disincorporation.  

          12)Requires LAFCO, if the proposal to disincorporate a city  
            includes the assignment of property tax revenues to a  
            successor agency, to make the following determinations, as  

             a)   The increase of the appropriations limit for the  
               successor agency or agencies, if the agency or agencies is  
               an existing entity; and,

             b)   The appropriations limit for a new special district  
               pursuant to the formation process in current law.  

          13)Adds city disincorporation to provisions of existing law that  
            establish the allocation of property tax revenue in the case  
            of a jurisdictional change, including incorporation.  

          14)Makes changes to provisions of existing law that specify the  
            factors a LAFCO can condition the approval of any change of  
            organization or reorganization upon.  

          15)Provides, as of the effective date of the disincorporation,  
            all of the following plans and documents that were in effect  
            immediately prior to the date of the disincorporation to  
            apply, as follows: 

             a)   Requires the general plan of the disincorporated city to  


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               constitute as the community plan of the county for the  
               territory of the disincorporated city until the county  
               updates the community plan; 

             b)   Requires the zoning ordinances of the disincorporated  
               city to constitute as the zoning ordinance of the county  
               for that territory of the disincorporated city until the  
               county updates the zoning ordinances; and,

             c)   Requires any conditional use permit or legal  
               nonconforming use to remain in force pursuant to the  
               community plan and zoning ordinances.  

          16)Repeals numerous outdated code sections in current law.  

          17)Provides that, if the Commission on State Mandates determines  
            that this bill contains costs mandated by the state,  
            reimbursement to local agencies and school districts for those  
            costs shall be made pursuant to current law governing state  
            mandated local costs.  

          EXISTING LAW:  

          1)Establishes the procedures for the organization and  
            reorganization of cities, counties, and special districts,  
            including procedures for the disincorporation of a city under  
            the Cortese-Knox-Hertzberg Act (Act).

          2)Defines "disincorporation" to mean "the dissolution,  
            extinguishment, or termination of the existence of a city and  
            the cessation of its corporate powers, except for the purpose  
            of winding up the affairs of the city."  


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          FISCAL EFFECT:  This bill is keyed fiscal and contains a  
          state-mandated local program.  


          1)LAFCOs and Current 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  
            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:  
            1) Application to LAFCO, by petition or resolution, for an  
            environmental review, and property tax exchange agreement; 2)  
            Noticed public hearing, testimony, and approval or disapproval  
            by LAFCO in which they can impose terms and conditions; 3)  
            Additional public hearing for protests (if a majority of the  
            city's voters file protest, the disincorporation stops, and if  
            not, LAFCO must order an election on the proposed  
            disincorporation); 4) Disincorporation election among city  
            voters, which requires a majority vote approval; and, 5) LAFCO  
            staff files documents to complete the disincorporation.  


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            Upon the effective date of a disincorporation, 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.   
            Prior to the effective date, public officers must turn over  
            public property to the county board of supervisors, and the  
            city council must turn over all city funds, as certified by  
            the LAFCO or the county, to the county treasurer.  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.   

           2)Bill Summary.  This bill makes several changes to the statutes  
            that govern the city disincorporation process.  In addition to  
            repealing several outdated code sections, this bill builds  
            upon provisions in existing law for incorporations which  
            require information about services and finances to be provided  
            with the proposal.  For example, current law requires an  
            applicant to submit a plan for providing services with a  
            proposal.  This bill specifies what must be included in that  
            plan for services in the case of a disincorporation, or a  
            reorganization that includes a disincorporation, to provide  
            LAFCOs with additional information about the provision of  
            services.  This bill also requires the executive officer of a  
            LAFCO to prepare a comprehensive fiscal analysis as part of  
            the report current law requires them to provide to LAFCO in  
            recommendation of approving or disapproving a proposed change  
            of organization or reorganization.   Current law requires a  
            fiscal analysis to be done for incorporations; this bill  
            mirrors those provisions in existing law and would provide  
            LAFCO, successor agencies, and the public with more  
            information about the financial status and impact of a city  
            disincorporation. Also, similar to provisions in current law  
            for incorporations, this bill establishes a process for the  
            exchange of property tax revenue for disincorporations.  Under  
            this bill, LAFCOs must make specified determinations before  


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            approving or conditionally approving a disincorporation  

            This bill does not make any changes to the existing  
            disincorporation process related to public involvement,  
            including public notice, hearing, protest, and election  

            This bill is sponsored by the California Association of Local  
            Agency Formation Commissions.  

          3)Author's Statement.  According to the author, "The statutes  
            addressing disincorporation have not been updated since the  
            inception of LAFCOs in 1963.  Under existing law, the intended  
            procedure for dispensing with debt and unfunded liabilities 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 brings the sections of the Act into full compliance  
            with the mandates of Propositions 13 and 218."

          4)Disincorporation in California.  Seventeen cities have  
            disincorporated in California's history, including the cities  
            of Long Beach (1896), Pismo Beach (1940), and Stanton (1924),  
            each of which later reincorporated.  The Legislature  
            disincorporated several cities by statute, including the  
            following cities:  Columbia (1870), Dutch Flat (1866), Felton  
            (1917), and Hornitos (1973).  Hornitos and Cabazon are the  
            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 


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          (AB 2374, Chappie).  
            More recent discussions surrounding the issue of  
            disincorporation are in reference to several cities in  
            California impacted by the redirection of Vehicle License Fee  
            (VLF) revenues away from newly incorporated cities and  
            annexations.  The realignment shift in 2011 disproportionally  
            endangered the fiscal viability of cities that rely on VLF  
            revenues and 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.  
          5)Policy Considerations.  The Committee may wish to ask the  
            author to consider the following:  

             a)   Clarity and Consistency.  The Act contains a number of  
               definitions frequently used in the statutes that govern  
               LAFCOs.  However, this bill contains references to several  
               phrases that are not defined in the Act, including a  
               "transition plan".  The Committee may wish to encourage the  
               author and sponsor to either provide a definition for the  
               plan or delete it from the bill to avoid confusion.   
               Additionally, while "successor agency" is used in the Act  


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               in reference to the designation of a city, county, or  
               district, as the successor to any local agency that is  
               extinguished as a result for any change of organization or  
               reorganization, given the common use of "successor agency"  
               in reference to Redevelopment Law, the author and sponsor  
               may wish to explicitly define this term in the Act.  

             b)   Striking a Balance.  Existing law authorizes LAFCOs to  
               subject any change of organization or reorganization to  
               terms and conditions that can include anything from  
               conditioning a city disincorporation on the passage of a  
               new revenue stream, to the transfer of contracts.  The  
               Committee may wish to encourage the author and sponsor to  
               continue to work with stakeholders to ensure there is an  
               adequate balance between providing individual LAFCOs with  
               the flexibility to address varying local needs, and  
               providing adequate guidance for local governments and the  

          6)Arguments in Support.  Supporters argue that this bill is not  
            intended to promote the use 

          of the disincorporation process, nor is intended to encourage  
            cities to consider this as an option to relieve their fiscal  
            emergencies.  The ultimate success or failure of a proposal  
            for disincorporation remains with the registered voters of the  
            city proposed to be disincorporated.  This bill just clarifies  
            the required process to get to that point.  
          7)Arguments in Opposition.  None on file.  



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          California Association of Local Agency Formation Commissions  

          Contra Costa Local Agency Formation Commission

          California State Association of Counties (In Concept)

          Imperial Local Agency Formation Commission

          Local Agency Formation Commission for San Bernardino County

          Orange County Local Agency Formation Commission

          Rural County Representatives of California (In Concept)

          San Bernardino County (In Concept)

          San Luis Obispo Local Agency Formation Commission

          San Mateo Local Agency Formation Commission

          Sonoma Local Agency Formation Commission

          Urban Counties Caucus (In Concept)


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          None on file

          Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958