BILL ANALYSIS Ó AB 851 Page 1 Date of Hearing: April 22, 2015 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT 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, AB 851 Page 2 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 liability. 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 disincorporation; 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; AB 851 Page 3 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 AB 851 Page 4 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 AB 851 Page 5 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; and, 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. AB 851 Page 6 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 appropriate: 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 AB 851 Page 7 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." AB 851 Page 8 FISCAL EFFECT: This bill is keyed fiscal and contains a state-mandated local program. COMMENTS: 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. AB 851 Page 9 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 AB 851 Page 10 approving or conditionally approving a disincorporation proposal. This bill does not make any changes to the existing disincorporation process related to public involvement, including public notice, hearing, protest, and election requirements. 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 AB 851 Page 11 (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 AB 851 Page 12 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 public. 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. AB 851 Page 13 REGISTERED SUPPORT / OPPOSITION: Support AB 851 Page 14 California Association of Local Agency Formation Commissions [SPONSOR] 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) AB 851 Page 15 Opposition None on file Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958