BILL ANALYSIS                                                                                                                                                                                                    Ó

          |SENATE RULES COMMITTEE            |                        AB 851|
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                                    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,  


           ASSEMBLY FLOOR:  75-0, 5/22/15 - See last page for vote

           SUBJECT:   Local government:  organization:  disincorporations

          SOURCE:    California Association of Local Agency Formation  

          DIGEST:   This bill amends the procedure that local agency  
          formation commissions may use to authorize the disincorporation  
          of a city.

          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  


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          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  

          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  
             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  
             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  

          4)Establishes processes for LAFCOs to implement the  
            disincorporation, as follows:


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             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  
             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  


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            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  
                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  

            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  


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                    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  
                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  

            7)  Requires that a single question regarding the  
              disincorporation be placed on the ballot if multiple  
              organizational changes are proposed.


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            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.

          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  


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          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.

          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  


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            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


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          SUPPORT:   (Verified7/15/15)

          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
          League of California Cities
          Los Angeles 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
          Solano 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,  


                                                                     AB 851  
                                                                    Page  10

            Melendez, Mullin, Nazarian, Obernolte, Patterson, Perea,  
            Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago,  
            Steinorth, Mark Stone, Thurmond, Ting, Wagner, Wilk, Williams,  
            Wood, Atkins
          NO VOTE RECORDED:  Alejo, O'Donnell, Olsen, Waldron, Weber

          Prepared by:Anton Favorini-Csorba / GOV. & F. / (916) 651-4119
          7/15/15 17:08:50

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