BILL ANALYSIS                                                                                                                                                                                                    Ó

          |SENATE RULES COMMITTEE            |                        AB 851|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
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                                   THIRD READING 

          Bill No:  AB 851
          Author:   Mayes (R)
          Amended:  8/18/15 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 a local agency  
          formation commission uses to authorize the disincorporation of a  

          Senate Floor Amendments of 8/18/15 require that all public  
          property of the disincorporating city must be transferred to the  
          successor or successors designated by the local agency formation  
          commission, rather than to the county, and make other technical  


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          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  

           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 individuals.

           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  


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                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 disincorporation.

              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:

              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  


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                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  

           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;


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              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 services.

           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  

              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 851:


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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 services;

              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  


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                existing authority to conditionally approve proposals.

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

           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) Requires all public property of the disincorporating city to  
             be transferred to the successor or successors designated by  
             the commission

           10)Makes several technical changes to existing LAFCO law where  
             it refers to incorporation but not disincorporation, in order  

              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).

           11)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  


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             until the county changes them.

           12)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  
          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.


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          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  
            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  


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            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

          SUPPORT:   (Verified8/19/15)

          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 County
          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 


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          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:   (Verified8/19/15)

          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,  
            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
          8/20/15 14:26:00

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