BILL ANALYSIS                                                                                                                                                                                                    



          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  |
          |          |                                 |Date:      |         |
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          |Author:   |Mayes                            |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |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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