Archives: 2015-16 Legislative Session

October 14, 1998 - LAFCO Governance Issues

LAFCO GOVERNANCE ISSUES & NEW CITIES' REVENUE NEUTRALITY

 

An Interim Hearing of the Senate Local Government Committee
 

October 14, 1998
State Capitol, Room 112
9:30 am to 1:00 pm

 

TABLE OF CONTENTS
Hearing Participants
Background paper
Senate Local Government Committee Analysis of AB 270 (6/29/98)
Government Code §56845
Senate Local Government Committee Analysis of AB 2147 (8/12/98)
Bibliography

 

LAFCO Governance Issues [9:30 - 10:40]
  • Christopher Tooker, Board member, CALAFCO
  • Harry Ehrlich, President, California Special Districts Association
  • Dan Carrigg, League of California Cities
  • Honorable Lowell Hurst, Councilmember, Watsonville
  • Charles Eadie, Community Development, Watsonville
  • Jim Murphy, City Manager, Portola
  • Honorable Michael Scavuzzo, Councilmember, Crescent City
  • Tim Goodman, County Administrative Officer, Del Norte County
  • Honorable Illa Collin, Supervisor, Sacramento County
Public comment [10:40 - 10:50]
  • New Cities' Revenue Neutrality
The state of the law [10:50 - 11:00]
 
  • S.R. Jones, CALAFCO
  • Walter Kieser, LAFCO consultant
Challenges for prospective cities [11:00 - 11:40]
 
  • Dan Carrigg, League of California Cities
  • Peg Battersby, Attorney, Brunick, Alvarez & Battersby
  • Stephen Wright, City Manger, Truckee
  • Jehan Flagg, Incorporation proponent
  • Dan Briggs, Incorporation proponent, Elk Grove
  • Gary Thompson, Incorporation proponent, Rancho Santa Margarita
  • Mary Boehlert, Incorporation proponent, Fallbrook
County perspectives [11:40 - 12:10]
 
  • Pat Leary, California State Association of Counties
  • Robert Thomas, Administrative Officer, Sacramento County
  • Cathy Knighten, Public and Legislative Affairs, Orange County
Converging on consensus: AB 2147 (Thompson, 1998) [12:10 - 12:50]
  • Assemblyman Bruce Thompson
  • Dan Carrigg, League of California Cities
  • Baxter Culver, Sacramento County
  • Joe Farrow, Assistant Chief, California Highway Patrol
  • Tim Turner, California Department of Forestry and Fire Protection
Public comment [12:50 - 1:00]

 

 

LAFCOs: NEW LEADERSHIP FOR A NEW CENTURY?

 

Before men walked on the moon, the "summer of love," and the first Superbowl, there were LAFCOs. Local agency formation commissions exist in every county (except the city and county of San Francisco) as the Legislature's watchdogs over city and special district boundary changes.

LAFCOs have two primary missions: to discourage urban sprawl and to encourage orderly local agencies. The Legislature also asks LAFCOs to consider preserving open space and promoting infill and compact development.

LAFCOs review and regulate city and special district boundary changes including formations, annexations, and dissolutions. Boundary changes are initiated by a resolution of an affected local agency or by a petition from voters or landowners. LAFCOs can approve proposals, modify them with terms and conditions, or deny them. If LAFCO approves a proposal, it goes before a "conducting authority" (usually the county board of supervisors) for a public hearing. Depending on the amount of protest, the conducting authority may be required to place the proposal before the voters.

The boundary lines that LAFCOs draw are important because they determine who benefits from local revenues and who exercises land use powers. As LAFCOs celebrate their 35th anniversary, some observers think that it's time to reevaluate their membership and level of independence. Are LAFCOs still set up to handle the job? And as the new century approaches, the Legislature may want to ensure that LAFCOs evolve along with their mission and challenges. How can LAFCOs best handle modern problems, such as creating new cities in a time of zero-sum revenues?

LAFCO GOVERNANCE

LAFCOS are governed by county supervisors, city councilmembers or mayors, public members, and sometimes, special district board members.

In the 45 counties with multiple cities, LAFCOs are governed by:

  • Two county supervisors.
  • Two city councilmembers.
  • One public member.
  • In some cases, two special district board members.

The board of supervisors picks two supervisors to be commissioners that represent the county, the mayors of the county's cities designate the city members, the independent special districts choose the district representatives, if any, and these commissioners select the public member.

In the counties of Los Angeles, Sacramento, Santa Clara, and San Diego, the Legislature modified the membership of LAFCOs to address special local conditions.

In the nine counties with a single city, LAFCOs consist of:

  • Two county supervisors.
  • One city councilmember.
  • Two public members.
  • In some cases, two special district representatives.

In the three counties without any cities, LAFCOs consist of:

  • Three county supervisors.
  • Two public members.

In these counties, special districts may appoint two commissioners if they petition the LAFCO.

Most counties have dependent LAFCOs; the county administrative officer appoints LAFCO staff and often requires them to perform county duties. At least 17 counties have independent LAFCOs; LAFCO commissioners choose their own staff and facilities.

Counties are responsible for funding LAFCOs. Most counties provide LAFCO funding from their general fund, but some LAFCOs are entirely supported by user fees. County financial support for LAFCOs varies from $736,000 in Monterey County and $352,000 in Sacramento County to $183 in San Benito County and $0 in Colusa County. Overall, county spending on LAFCOs totaled $5.9 million in 1995-96. Rethinking LAFCOs' membership and independence

LAFCOs' governance structure and traditional reliance on county government for funding, staffing, and facilities can make independent and assertive boundary decisions difficult. Here are some perceived problems and possible solutions:

Membership. LAFCO commissioners and staff candidly point out that it's very difficult to motivate elected office-holders from cities, counties, and districts to eliminate the job of another or preclude other elected officials from expanding their boundaries and turf. Because elected officials dominate LAFCOs, the commissions are extremely sensitive to local political pressure. When political offices and public turf is at stake, LAFCOs find that the overwhelming opposition from a few stake-holders can easily defeat the general public interest.

And because LAFCOs' public representatives are appointed by local agency representatives, critics argue that LAFCOs execute the public agencies' agenda, and not the citizens' interest. They argue that elected officeholders often think about institutions (e.g., city and county governments) and not issues, such as affordable housing, farming, water supply, and recreation. These observers speculate that more public members, especially public members that were not appointed by LAFCO, could help ensure that LAFCOs serve the broader public interest, and not the interests of public agencies.

In 1997, Assemblyman Pringle authored a bill to increase LAFCOs' accountability to the public at-large. Assembly Bill 694 would have reduced the number of LAFCO commissioners appointed by cities, counties, and districts, and increase the number of public members. AB 694 would have required that LAFCOs' public agency representatives select the public members from a list of nominees generated by the county grand jury. The bill would have eliminated LAFCOs' dominance by public agency representatives in two ways: by giving public members a majority of the seats on each LAFCO and by requiring the members to be selected from a list provided by the county grand jury. AB 694 failed in the Assembly Local Government Committee.

  • To make LAFCOs more accountable to citizens, the Legislature could require each LAFCO to have additional public members or a majority of public members. In addition, rather than having LAFCO commissioners appoint the public representatives, the Legislature could provide another mechanism, such as voter-approval, community-group appointment, or legislative selection, for the public member commissioners.
     
  • The Legislature could make LAFCOs directly accountable to the voters by making commissioners subject to election. Instead of relying on city, county, and special district boards to appoint commissioners --- and therefore insulating them from direct scrutiny --- voters could directly elect LAFCO commissioners. Direct elections for commissioners could have some unintended or undesired consequences, however, by encouraging candidates to appeal to special interests such as environmentalists, builders, agricultural groups, and developers. This cure may create worse problems.
     
  • To overcome local politics, the Legislature could add state legislators to LAFCOs. State legislators, with their wider government perspective, could provide leadership and help LAFCOs move beyond local politics. The inclusion of state legislators on LAFCO could also ensure that LAFCOs carry out the Legislature's will for local boundary changes.

Cities also criticize LAFCOs' dominance by county representatives. They say that united county members create a powerful voting block that can divide commissioners from different cities or different special districts, and can dominate the appointment and votes of the public member. Counties counter that their interests are county-wide, and aren't limited by the smaller boundaries represented by the two cities and special districts.

  • To reduce counties' political power on LAFCOs, the Legislature could increase the number of city, special district, or public members. However, the Legislature must ensure that LAFCOs' don't become dominated by commissioners with narrow, political, or parochial interests.

Finally, some observers argue that special district representation on LAFCO makes LAFCO-initiated special district proposals nearly impossible. They say that rather than helping LAFCOs better evaluate LAFCO-initiated district proposals, special districts work to defeat district-related plans. Special districts, however, argue that if districts aren't included in the decisions that affect them, city and county representatives could be tempted to initiate district proposals based on the potential financial and political gains to cities and counties.

  • To reduce the perception that special districts stymie district dissolutions, consolidations, and reorganizations, the Legislature could limit LAFCOs to one special district commissioner, or eliminate them entirely. But does any evidence exist that special district participation limits district reorganization proposals?

Single City Counties. In addition to these policy considerations, special governance concerns exist for LAFCOs in counties that have only a single city. In these nine counties --- Calaveras, Del Norte, Inyo, Lassen, Modoc, Mono, Plumas, Sierra, and Tuolumne --- county supervisors appoint two commissioners, the city council appoints one, and those commissioners (along with any special district commissioners) appoint two public members.

Some cities in single city counties don't think its fair that county supervisors get two seat on LAFCO when the city only gets one. Moreover, they say that the county can easily dominate every LAFCO decision by exercising a permanent super-majority through its appointment of the two public members.

  • If the Legislature wanted to balance the power between county and city interests on single city county LAFCOS, it could increase the city council commissioners to two, and decrease the public member slots to one.

Before the Legislature increases city representatives and decreases public members on LAFCOs in single city counties, it should consider the impacts on LAFCOs' accountability to the voters, susceptibility to political pressure, and regional decision-making responsibilities. Will city members be willing to participate in decisions affecting special districts dozens of miles from their borders? Some LAFCOs in single city counties say its already difficult to get the one city representative to attend meetings. In addition, would decreasing public member participation on boundary decisions make LAFCOs less accountable and more subject to public agency interest or local politics? By equalizing city and county representation on LAFCO, will its decisions make less sense for the entire county (since the city's interests may stop at its borders)?

Independence. Because most LAFCOs rely on the county government for staffing and facilities ---- and all LAFCO funding that's not generated by user fees comes from the county board of supervisors --- cities, special districts, local interests, and some critics argue that LAFCOs are dominated by county interests.

Because political and financial independence are often intertwined, Assemblyman Torlakson introduced a bill to make all LAFCOs in counties with populations over 40,000 independent of county government (AB 270, 1998). The bill would have created additional independence by requiring city and special districts (when seated) to share in LAFCOs' costs. AB 270 was approved by the Senate Local Government and Appropriations Committees, but defeated on the Senate Floor. AB 270 also required cities and special districts, if seated on LAFCO, to share in LAFCOs' annual operating costs. [For more information on AB 270, please see Appendix A on page 16 and Appendix B on page 30].

As an alternate approach to promoting LAFCO political independent through fiscal means, Assemblyman Granlund introduced a bill to provide LAFCO with a separate share of the local property tax revenue (AB 49xx, 1995). The Assembly never heard AB 49xx or analyzed its provisions.

  • To create more independent LAFCOs, the Legislature could require all LAFCOs to select their own staff and facilities instead of relying on county resources. The Legislature could exempt small counties --- those with a population under 100,000 from this requirement, since their LAFCOs workload are unlikely to warrant full-time staff.
     
  • To increase LAFCOs' independence, the Legislature could require cities and counties to share in LAFCO funding or give LAFCOs their own revenue source, such as a share of the local property tax revenue.

 

REVENUE-NEUTRALITY: CREATING CITIES IN A ZERO-SUM GAME

 

Communities incorporate into cities when residents want local control of revenues and land use decisions and a separate city identity. A new city assumes municipal services, such as police, roads, planning, and building inspection from the county. The county continues to provide state mandated functions like courts, jails, and public health.

To incorporate, communities must petition the Local Agency Formation Commission (LAFCO) and then clear several steps: calculation of property tax exchange, environmental review, fiscal viability study, and then LAFCO review and approval. After that, the county board of supervisors must call an incorporation election.

In 1992, the Legislature faced a daunting $11 billion budget deficit. To reduce State General Fund obligations to schools, the Legislature shifted $1.3 billion from cities, counties, special districts, and redevelopment agencies to an Educational Revenue Augmentation Fund (ERAF) for schools and community college districts. Because counties shifted the most money to ERAF -- $525 million -- the Legislature adopted several measures to mitigate county fiscal harm. One measure was the so-called "revenue neutrality" law for all local boundary changes (SB 1559, No Author, 1992). A later bill revised the statute and limited its application to city incorporations (AB 3027, No Author, 1992). [For the text of the revenue neutrality law, please see Appendix C on page 35].

The 1992 law prohibits LAFCO from approving an incorporation proposal if a difference exists between revenues currently received by the county that will transfer to the new city and the costs of services that the new city will assume from the county. However, LAFCO may approve an incorporation if it imposes terms and conditions that mitigate the difference.

Until the 1992 law, new cities didn't have to be revenue neutral and most weren't. Before 1978, when the voters passed Proposition 13, each local government levied its own property tax rate and property owners paid a tax bill that added all of these various rates together. When a community incorporated, the new city added its own property tax rate onto the other existing local governments. While the county government didn't lose property tax revenue to the new city under this regime, the county did lose its sales tax revenue to the new city. To make up for that loss, the county government could boost its countywide property tax rate. The property owners inside the new city had to pay the new municipal property tax rate and sometimes the higher county tax rate too. As a result, cityhood opponents could argue that incorporation triggered higher property tax rates.

Between 1978 and 1992, the fiscal rules for incorporation were considerably different, pitting new cities against existing counties. Proposition 13 wiped out the separate property tax rates and in their place created a countywide 1% property tax rate. The schools and local governments had to share the revenues produced by the new 1% rate. When a community wanted to incorporate, it couldn't add its own property tax rate; it had to claim a share of the property tax revenues generated within the new city's boundaries that used to go to the special districts and the county government. To the extent that the new city took over service duties from the county and districts, the city also took over some of those agencies' property tax revenues. In short, as someone once quipped, "the dollars follow the duties." Cityhood proponents could argue that incorporation was "free" to the property tax payers because the new city couldn't levy its own tax rate. But county officials noted that many incorporations diverted sales tax revenues as well as property taxes, resulting in "revenue inequity" for the county governments.

With the revenue neutrality law, the fiscal rules changed again. New cities still divert sales tax revenues from their county governments and property tax revenues follow the service responsibilities. What was new in 1992 was prohibiting LAFCOs from approving new incorporations unless cityhood was --- or could be made --- revenue neutral.

To balance the competing interests of cities and counties in a zero-sum game, the Legislature enacted the revenue neutrality law. City officials say that the revenue neutrality requirement had a chilling effect on cityhood attempts and have attempted to repeal it. Only two cities, Shasta Lake (Shasta County) and Citrus Heights (Sacramento County), have incorporated since this "revenue neutrality" law took effect.

Incorporation proponents argue that the notion of revenue neutrality is contrary to other historical legislative policy declarations. They note that the Cortese-Knox Act --- the Act that governs LAFCOs --- states that "a single government agency" is often the best way to assess and make accountable an urbanized communities needs and resources. Since this statement seems to favor cities over county and multiple special district control, incorporation proponents find the concept and application of revenue neutrality inconsistent.

Cities argue that the whole premise of revenue neutrality is flawed. Areas tend to incorporate when residents are unhappy with service levels provided by the county or perceive that their tax dollars are subsidizing services in other areas. Rather than allowing a new city to provide for more or more efficient service delivery with all the revenues it's able to generate, revenue neutrality allows the new city to keep only those revenues it needs to maintain services at the level the county was providing and leaves all the rest of the revenues to the county government. In doing so, the law ensures that the new city won't be able to meet its citizens demands and allows the county to continue to subsidize other services with the funds generated inside the new city.

Cities also say that the interpretation of the revenue neutrality statute is too broad and without uniformity. Specifically, they want cities to get credit for capital assets which city residents helped the county to fund. In addition, cities want time limits on new cities' mitigation payments to counties so that they don't continue for decades.

Counties, on the other hand, say that the revenue neutral law is absolutely essential in the post-Proposition 13 era to ensure that county residents don't end up paying for the incorporation desires of a small portion of residents. They say that without revenue neutrality, they aren't compensated for their continuing service responsibilities to the new city, including the courts, the district attorney and public defenders office, probation, jails, child and adult protective services, health and welfare, the coroner, and other functions. Without the revenue neutrality law, a few lucrative incorporations could drive a county towards bankruptcy.

Counties argue that revenue neutrality helps reduce the unintended and inappropriate outcomes by balancing the total financial resources available. Moreover, the law prevents a small group of citizens from taking over a regional commercial tax revenue generator --- like a shopping or auto mall -- for their exclusive benefit.

The only true real world application of the revenue neutrality statute came with the incorporation of Citrus Heights in Sacramento County in 1997. While slow, messy, controversial, litigious, and expensive, a new city exists today.

The Case of Citrus Heights

After a failed attempt at incorporation in the late 1980s, and a trip to the United State Supreme Court, the area of Citrus Heights (Sacramento County) finally became its own city in January 1997.

Under the 1992 revenue-neutrality law, the Sacramento LAFCO calculated that the incorporation would cost the County $14 million annually in lost revenues, but save the County $8.4 million annually in municipal service costs. Using the difference between these two figures, LAFCO conditioned the incorporation on annual payments from the City to the County of $5.6 million for 25 years.

In October 1997, the City refused to pay its first installment to the County. The County attempted to negotiate with the City to reduce the payments by extending them over additional years. The City rejected this proposal.

In August 1998, the City and the County finally settled their dispute. The new terms required the City to pay the County $2.2 million a year for 25 years, and to increase those payments proportionately by any increase in property tax revenues. The City also agreed to repay the County $4.5 million for services that the County provided as the area transitioned to cityhood, and also agreed to share any redevelopment proceeds with the County.

Eliminating the Gridlock: AB 2147

Survivors of the Citrus Heights incorporation, and critics of the revenue neutrality law, point out many challenges to the law's fair and useful implementation. Distrustful participants, vague terms, and inflexible payment schedules can lead to irreconcilable differences and costly litigation. Revenue neutrality's supporters and critics have turned to the Legislature in their battle over the provisions and implementation of the 1992 law.

Critics of revenue neutrality, including existing cities and incorporation proponents, argue that counties don't negotiate in good faith over the costs of services that new cities must assume and the service costs that counties will retain. City proponents also resent LAFCOs' ability to impose mitigation payments that continue for decades without regard for whether or not revenues and expenditures follow initial projections. They want an opportunity to revisit their financial agreements with the county if economic circumstances change.

Defenders of the revenue neutrality law, including counties, remain strongly committed to the law that prevents city incorporations from eroding the fixed revenues available for countywide services. But counties think that municipal proponents aren't always willing to accept the costs that are needed to protect countywide services. Counties do agree, however, that providing more and better information to incorporation proponents could help avoid later dissension, charges of foul play, and litigation. In addition, counties concur that the law should allow for a reexamination of any revenue neutrality payments if economic circumstances change.

Both cities and counties agree that the state could help make incorporations easier by adding some financial assistance for new cities.

After the Citrus Heights incorporation, cities began to pursue legislative erosion and outright repeal of the revenue neutrality law. In 1998, the City of Citrus Heights sponsored AB 2158 (Ortiz) to prohibit a new city's revenue neutrality payments from exceeding its annual income without 2/3 voter approval. In response, Sacramento County sponsored defensive legislation (SB 1793, Greene). AB 2158 was defeated by the Assembly Local Government Committee. In addition, AB 2147 (Thompson, 1998), with assistance of the League of California Cities, would have repealed the revenue neutrality statute.

In April 1998, representatives of the California State Association of Counties (CSAC) and the League of California Cities (League) convened to discuss their differences in a non-legislative forum. As a result of these discussions, representatives adopted the following "guiding principles:"

  • Californians have a right to pursue self-government through city incorporation.
  • Incorporations must result in a substantially equal transfer of revenues and service costs between the new city, the county, and other local agencies, as agreed to by the affected parties.
  • CSAC and the League will discuss procedural, definition, and technical issues relating to the revenue neutrality law and the city incorporation process.
  • AB 2147 (Thompson, 1998) will be amended to delete the repeal of the revenue neutrality statutes and will become the vehicle for their consensus findings.
  • CSAC and the League will not support any legislation either party considers hostile to the revenue neutrality process.

In August, the League and CSAC completed their negotiations. As a result, Assemblyman Thompson amended AB 2147 to require the transfer of State revenues to new cities, provided better information about the costs of city and county services, allowed the reevaluation of revenue neutrality agreements, and created a task force to adopt statewide guidelines on incorporations. Specifically, the bill contained the following provisions:

State Financial Participation. The California Highway Patrol (CHP) provides traffic control in unincorporated areas and on state highways. The California Department of Forestry and Fire Protection (CDF) provides fire protection on millions of acres in each county (except San Francisco and Sutter) designated "state responsibility areas" outside cities that represent valuable timber, watershed, and range land. Upon incorporation or annexation, the new city assumes responsibility to provide or pay for both of these services, often resulting in cost savings to the state. Though the responsibilities of the CHP and CDF are reduced by incorporations, their revenues are not. The League of California Cities wants the state government to give the revenues that result from these cost savings to new cities.

Assembly Bill 2147 requires LAFCO to calculate the state's savings for new cities that incorporate after January 1, 1999. AB 2147 requires the county auditor to transfer an equal amount of local school districts' property tax revenues to the new city. The state General Fund must backfill affected school districts with equal funds.

Cost Identification. The revenue neutrality calculation is based on the LAFCO executive officer's fiscal estimates of the proposed city's revenues and service costs. In previous cases, incorporation proponents have claimed that LAFCO underestimated service costs, resulting in larger mitigation payments to counties. Higher service costs result in lower mitigation payments by new cities. The League of California Cities wants LAFCO to include all direct and indirect costs in its fiscal analysis.

Assembly Bill 2147 requires LAFCO to include all direct and indirect costs of existing services in the area, including general fund subsidies to fee supported services when estimating service costs. AB 2147 requires LAFCO to calculate the proposed city's service costs by comparing them with the service costs of "incorporated areas of similar size." The bill also requires LAFCO to identify other agencies' administrative cost reductions resulting from service transfers.

Reevaluation. The 1992 revenue neutrality law does not allow a reevaluation of fiscal estimates when revenues or service costs rise or fall. If economic conditions change, altering the revenue mitigation payments is impossible. The League of California Cities wants to establish a mechanism to contest fiscal estimates, including the property tax exchange, the estimates of service costs and revenues, and the revenue mitigation payment.

Assembly Bill 2147 requires:

Representatives of the new city and the county to meet to review disputed estimates within 14 months after the first July 1 of the new city's creation.

· After 60 days of negotiations with no agreement, the two parties must mutually select and fund a mediator.

· After another 60 days with no agreement, each party must submit a last, best offer to the mediator, who issues an advisory opinion. The parties may file an action within six months of the end of negotiations if no agreement is reached.

Any agreement reached during negotiations supersedes any prior estimates or payments. AB 2147 requires that any ballot which proposes a new city incorporation shall require disputes to be mediated by this process.

Incorporation Guidelines. The Governor's Office of Planning and Research (OPR) issues advisory guidelines to help cities and counties write their general plans. OPR prepares the mandatory "CEQA Guidelines" as regulations that control the preparation of environmental documents. No guidelines currently exist to tell LAFCOs how to evaluate city incorporation proposals.

Assembly Bill 2147 requires OPR to convene a task force to create statewide guidelines for the incorporation process by March 1, 1999. OPR's task force must include nominees from statewide associations of cities, counties, and LAFCOs. OPR must publish these guidelines by July 1, 1999.

At the Senate Local Government Committee's August hearing on AB 2147, Members expressed concerns over the application and effects of the revenue neutrality statute. However, Members were not prepared to pass AB 2147 without further review and discussion. To provide a forum for a more thorough review of the revenue neutrality law and AB 2147, Members voted 6-0 to schedule an interim hearing.

[For more information about AB 2147, please see Appendix D on page 36 and Appendix E on page 52 ].

Evaluating AB 2147

AB 2147 represents a commendable effort by CSAC and the League to work together to solve an issue of significant mutual concern. Cities find it unacceptable that revenue neutrality has caused new incorporations to decline, while counties insist that the needs of the county itself --- and the residents left behind after an incorporation --- need to continue to be protected from new incorporations.

AB 2147 provides new information, procedures, and funding for incorporations in order to achieve both the cities' and the counties' goals, and to prevent lengthy and litigious local battles. But the Legislature should consider several issues carefully before adopting the measure.

State Financial Participation. At the Committee's August hearing, several legislators expressed confusion or concern over the AB 2147's state financial participation provisions.

AB 2147 requires the State General Fund to subsidize new cities when the CHP and the CDF withdraw their services. To break the political gridlock between cities and counties over the revenue neutrality issue, it was helpful to inject new revenues. But the bill's new property tax shift underwrites new incorporations for the first time, setting a precedent.

When incorporations occur, the CHP continues to provide traffic patrol services until either the end of the fiscal year or the city's creation of a police department, whichever comes first. Afterwards, the CHP simply redeploys its patrol force to another area or region. The CHP's funding comes primarily from the Motor Vehicle Account.

The Committee may wish to consider why the State General Fund should promote new cities when state officials don't participate in incorporation decisions. If the state doesn't play, why should the General Fund pay?

And while AB 2147's implicit policy is that the revenues saved by the CHP and CDF should be spent to promote city incorporations, the explicit procedures transfer revenues from the State General Fund rather than these two state agencies. Rather than tackle the powerful CHP and the CDF, new cities would prefer that the Legislature complete the reduction in the annual budget process. Because the bill doesn't actually transfer revenues from the affected state agencies to the new cities, one Committee member called the legislation "technically clever, but philosophically flawed."

The CHP concedes that its savings associated with incorporations and annexations each year aren't explicitly offset in the state budget, but that its annual appropriations don't compensate for the growth in state population, registered vehicles, and new roads. For example, between 1993 and 1997, the state's unincorporated population has grown by nearly 75,000, the average daily miles traveled on state highways has increased by 20 million and on county roads by 3 million, and the number of vehicle registrations have increased by 2.3 million. The CHP uses the revenue from any incorporations to offset the costs associated with increased service responsibilities.

And just because an area incorporates over a state responsibility area (SRA) for fire service, doesn't mean that CDF's costs decrease. The CDF's system is integrated across the state and removing one small geographic section from its jurisdiction may not result in any cost savings. Unlike the CHP, a redeployment of resources is not always practical or possible. Under AB 2147, will LAFCOs overestimate the state's cost savings and harm the statewide fire protection system?

In addition, would AB 2147 encourage prospective cities to incorporate additional wild land areas in order to gain revenues for their general fund? Ceding control over large portions of SRAs may harm the state's comprehensive prevention and containment efforts. Moreover, if new cities take on more SRA land than they can actually protect, a later fire emergency may lead to a state bailout of the city with disaster relief funds.

Retroactivity. Not only does AB 2147 require the state to subsidize future new cities, but the bill also allows the two cities formed after 1993 to claim retroactive subsidies. Citrus Heights and Shasta Lake can ask their LAFCOs to calculate the costs of services once provided by the CHP and CDF, recouping the state's savings. The revenues come at the expense of taxpayers statewide. Both communities knew the rules of the game when local voters endorsed cityhood, so why should they retroactively receive the benefits of the new policy?

 

SENATE LOCAL GOVERNMENT COMMITTEE
 

 

Senator William A. Craven, Chairman
BILL NO: AB 270 VERSION: 08/20/98
AUTHOR: Torlakson CONSULTANT: Manatt

 

LOCAL AGENCY FORMATION COMMISSION
GOVERNANCE, POWERS, AND FUNDING

 

Background and Existing Law

The Legislature created a local agency formation commission (LAFCO) in each county (except San Francisco) to regulate city and special district boundary changes. Most LAFCOs have five commissioners: two county supervisors, two city council members, and a public member. Nearly half of the LAFCOs have two additional commissioners representing special districts within the county. Several LAFCOs have additional members specified in state statute.

Counties fund LAFCO operations and pay for staff. LAFCO budgets totaled $5 million statewide in 1994-95, but these figures vary greatly between counties. In 1996-97, San Bernardino County reported spending over $400,000 on its LAFCO; Alpine County said it spent $2,000. In addition to county appropriations, LAFCOs can impose fees for processing proposals and can recoup costs from the affected agencies upon their proposal's completion. LAFCO fees cover between zero and 100% of each commission's costs, with a statewide average cost-recovery ratio of 27%.

Because LAFCOs only recoup a fraction of their costs through processing fees, and counties are the only local agencies providing LAFCOs with operational funding, state lawmakers want the other local agencies that benefit from LAFCO activities to share LAFCOs' costs. To make cost-sharing more palatable, they're also proposing to make LAFCOs more independent.

Proposed Law

Assembly Bill 270 changes the governance and financing of local agency formation commissions in several ways:

I. Governance. Current law requires that LAFCOs be comprised of two county representatives, two city representatives, and a public member, except in certain instances. Two special districts may be added if they petition the commission. Assembly Bill 270 requires any LAFCO that does not include two members representing special districts to be enlarged by two members and an alternate representing special districts if a majority of the special districts vote to join the commission and the independent special district selection committee selects these representatives by March 1 of any year.

II. Staff and Facilities. Current law requires the county government to furnish its LAFCO with quarters, equipment, and supplies. Assembly Bill 270 repeals this requirement, and in counties with populations over 40,000, requires the LAFCO to provide its own quarters, equipment, supplies, and personnel. In counties with populations of 40,000 or less, the LAFCO may make its own provisions for these items.

III. Budget and Funding. Current law requires the commission to transmit an estimate of its financial need to the county board of supervisors by June 10 each year. Assembly Bill 270 allows LAFCOs in counties with populations of 40,000 or less to transmit their expenses to the board of superiors or pursuant to the following procedure.

Assembly Bill 270 requires LAFCO to annually adopt a proposed budget by May 1 and a final budget by June 15. LAFCO must transmit the budgets to the board of supervisors, the city selection committee, the independent special district selection committee, and to any city or special district that requests one. After LAFCO adopts its final budget, the county auditor must apportion the operating expenses in the following manner:

  • If the LAFCO includes special district representatives, the county, cities, and special districts must each pay one-third of the commission's operational costs. The cities' share must be apportioned in proportion to each city's operations budget as a percentage of the total city budget, or according to any alternative method approved by a majority of the cities representing a majority of the combined cities' populations. The special districts' share must be apportioned similarly. A multicounty district must pay its apportionment in its principal county. AB 270 exempts a fire district from the bill's payment provisions if at least 80% of the district's firefighting and emergency medical staff, for which worker's compensation is obtained, are volunteers or if the district's total salaries for these personnel is 25% or less of its operating budget.
     
  • If the LAFCO does not have special district representatives, the county and its cities must each provide one-half of the commission's operations costs. The individual city's shares must be apportioned in the same manner as in counties with special district representation.
     
  • Alternately, LAFCO may apportion its costs pursuant to any other formula approved by a majority vote of the board of supervisors, the cities representing a majority of the combined city population, and the special districts representing a majority of the combined special district population.

After apportioning LAFCO's costs, the county auditor must request payment from the board of supervisors, each city, and each district no later than July 1. If a local agency does not remit its payment within 60 days, the auditor may collect the amount from any tax, benefit assessment, or fee revenue owed to the city or district.

Between the start of the fiscal year and the auditor's receipt of the payments, the board of supervisors must transmit two months' worth of funds to the commission. After receiving payment from a local agency, the auditor must credit the county for funds already paid.

IV. Fees. Current law permits LAFCOs to adopt a schedule of fees for their proceedings. Assembly Bill 270 requires LAFCO to take all feasible action to maximize its fees. A commission may decrease an individual fee after adopting explanatory criteria.

V. Latent Powers. Current law allows LAFCOs to regulate special districts' latent powers if the commission includes special districts members. Latent powers are those powers that districts are statutorily authorized to provide, but don't currently perform. Assembly Bill 270 prohibits LAFCOs that add two special district members pursuant to its provisions to regulate the special districts' latent powers. However, before a district can exercise a latent power, it must first submit an application to LAFCO. The commission must either adopt a resolution to approve or deny the proposal, including determinations that support its decision. The determinations must evaluate the proposal based on the Cortese-Knox Act's legislative intent and the following factors:

  • The population, density, land area and use, assessed valuation, topography, natural boundaries, drainage basins, proximity to populated areas, and anticipated growth.
  • The need for services and the probable effect of the proposal on services.
  • The effect of the proposal, and alternates, on adjacent areas, cultural social and economic interests, and local government structure.
  • The effect on the commission's policies on planned, orderly, efficient growth.
  • The effect on agricultural lands.
  • The certainty of the boundaries and their effect.
  • Consistency with city and county general plans.
  • Applicable spheres of influence.
  • The comments of affected local agencies.

AB 270 makes other technical changes.

VI. Sunset. AB 270's provisions sunset on January 1, 2004. The bill requires the California Association of Local Agency Formation Commissions to issue a report to the Senate and Assembly Local Government Committees by January 1, 2003.

Comments

  1. One small step. Counties pay the full cost of LAFCOs' $5 million budget. But LAFCOs process city annexations, special district consolidations, and local spheres-of-influence. Because LAFCO activities benefit cities and special districts too, proponents think they should help fund the commissions. AB 270 requires cities and special districts to help fund LAFCO in certain counties. Splitting up LAFCO costs will make its funding more equitable. And because political independence and fiscal independence are intertwined, AB 270 requires most LAFCOs to hire their own staff and choose their own facilities. Finally, the bill requires LAFCOs to maximize their processing fees, and keep local agencies' costs low. Though the bill may not result in huge county savings, it sets the appropriate policies and principles for LAFCO funding.
     
  2. A different kind of arbitrary? LAFCOs perform "good government" functions by helping to ensure rational growth, promote efficient service delivery, and protect agricultural land. LAFCOs also provide specific services for individual applicants. Some local agencies use LAFCO services frequently, while others --- like countywide districts --- may never use them. AB 270 requires cities and districts to help pay for LAFCO services, even if they never use them. Is arbitrarily allocating LAFCOs costs by thirds or halves among all local agencies better than arbitrarily allocating the entire cost to the county government?
     
  3. Worth the effort? The LAFCOs affected by AB 270 have an average budget of $126,000. In counties without special district representation, the cities and the county would each fund $63,000 of its LAFCO's cost. In counties where special districts serve on LAFCO, the county, cities, and special districts would each spend $42,000. Are these tiny amounts worth the work to calculate and collect the funds? Will the transaction costs exceed the benefits?
     
  4. A trial run? AB 270's cost-sharing procedures for LAFCO funding are mandatory for commissions with special district members. While the bill may be a good idea, some LAFCOs may be satisfied under the current system. The Committee may wish to consider whether it should limit the bill's cost-sharing provisions to a few counties before implementing these changes statewide.
     
  5. Latent powers. When special districts gain seats on LAFCO, they have to give up control over their latent powers (those powers that they're statutorily authorized to provide, but don't currently perform). Allowing LAFCOs to regulate districts' latent powers helps the commissions ensure more rational service delivery and avoid duplication and overlap. Under AB 270, districts that gain seats on LAFCO in the future don't have to give up their latent powers outright, but they do have to ask LAFCO before activating them. Because the bill still allows LAFCOs to reject district's proposals to activate latent powers, the new procedures aren't substantially different from the existing ones.
     
  6. Constitutional problems? If cities and special districts don't pay their LAFCO bill, AB 270 allows the county auditor to divert any tax, benefit assessment, or fee revenue owed to the city or the district. Special tax, benefit assessment, and property-related fee revenues are constitutionally restricted to the uses for which they were imposed. Diverting them from the agency and the purpose for which they were levied could be unconstitutional. General revenues, such as property tax and sales tax revenues, would be more suitable for diversion.
     
  7. No free rides. In most counties, LAFCOs don't recover a significant portion of their costs through fees. LAFCOs' low fees result from a variety of factors including a desire to promote development, to create an incentive to submit boundary change petitions, as a response to political pressure, or as a result of organizational culture or history. AB 270 requires LAFCOs to maximize their fees, whenever possible. The bill does however, allow LAFCOs to reduce their fees when necessary. By promoting better cost-recovery, AB 270 shifts LAFCO costs onto the parties that use its services.
     
  8. Last year. In July 1997, the Local Government Committee heard AB 270 and defeated the bill in Committee on a 2-2 vote. The measure was granted reconsideration, has been amended, and is now before the Committee.

Assembly Actions: Not relevant to this version of the bill.

Support and Opposition (06/25/98)

Support: California Association of Local Agency Formation Commissions, California Special Districts Association, Association of California Water Agencies, Urban Counties Caucus, California State Association of Counties, East Bay Municipal Utilities District, East Bay Regional Park District, Counties of: Contra Costa, Fresno, Kings, Madera, Nevada, Sacramento, and San Bernardino.

Opposition: League of California Cities, Sacramento Municipal Utility District, Lake County LAFCO, Los Angeles LAFCO, Contra Costa Water District, Foothill Municipal Water District, Cities of: Angeles, Barstow, Buena Park, Carlsbad, Chula Vista, Citrus Heights, Claremont, Clovis, Coronado, Costa Mesa, Crescent City, Culver City, Daly City, Dana Point, El Cajon, Fairfield, Fountain Valley, Lompoc, Menlo Park, Merced, Modesto, Monterey, Moreno Valley, Novato, Palm Springs, Poway, Rancho Cucamonga, San Jose, Santa Barbara, Stockton, Susanville, Taft, Tehachapi, Turlock, Tustin, Walnut Creek, and Yuba City.

 

Government Code §56845
The Revenue Neutrality Law

 

(a) It is the intent of the Legislature that any proposal that includes an incorporation should result in a similar exchange of both revenue and responsibility for service delivery among the county, the proposed city, and other subject agencies. It is the further intent of the Legislature that an incorporation should not occur primarily for financial reasons.

(b) The commission shall not approve a proposal that includes an incorporation unless it finds that the following two quantities are substantially equal:
(1) Revenues currently received by the local agency transferring the affected territory which, but for the operation of this section, would accrue to the local agency receiving the affected territory.
(2) Expenditures currently made by the local agency transferring the affected territory for those services which will be assumed by the local agency receiving the affected territory.
(c) Notwithstanding subdivision (b), the commission may approve a proposal that includes an incorporation if it finds either of the following:
(1) The county and all of the subject agencies agree to the proposed transfer.
(2) The negative fiscal effect has been adequately mitigated by tax sharing agreements, lump-sum payments, payments over a fixed period of time, or any other terms and conditions pursuant to Section 56844.

(d) Nothing in this section is intended to change the distribution of growth on the revenues within the affected territory unless otherwise provided in the agreement or agreements specified in paragraph (2) of subdivision (c).

(e) Any terms and conditions that mitigate the negative fiscal effect of a proposal that contains an incorporation shall be included in the commission resolution making determinations adopted pursuant to Section 56851 and the terms and conditions specified in the questions pursuant to Section 57134.

 

SENATE LOCAL GOVERNMENT COMMITTEE
Senator William A. Craven, Chairman

 

BILL: AB 2147 VERSION: 08/24/98
AUTHOR: Thompson CONSULTANT: Grinnell
CITY INCORPORATION

 

Background and Proposed Law

Communities incorporate into cities when residents want local control of revenues and land use decisions and a separate city identity. A new city assumes municipal services --- police, planning, and building inspection --- from the county. The county continues to provide state mandated services like courts, jails, and public health. To incorporate, communities must petition the Local Agency Formation Commission (LAFCO) and then clear several steps: calculation of property tax exchange, environmental impact report, fiscal viability study, and then LAFCO review and approval. After that, the county board of supervisors must set an election for the new incorporation.

A 1992 law prohibits LAFCO from approving an incorporation proposal if a difference exists between revenues currently received by the county that will transfer to the new city and the costs of services that the new city will assume from the county. However, LAFCO may approve an incorporation with terms and conditions that mitigate the difference (AB 3027, No Author, 1992). Only two cities, Shasta Lake (Shasta County) and Citrus Heights (Sacramento County), have incorporated since this "revenue neutrality" law took effect. City officials say that the revenue neutrality requirement had a chilling effect on cityhood attempts and wanted to repeal it. County officials resisted. The result has been a political gridlock. Representatives from cities and counties have met for months in an attempt to eliminate this gridlock.

I. State Cost Savings. The California Highway Patrol (CHP) provides traffic control in unincorporated areas and the California Department of Forestry and Fire Protection provides fire protection in designated "state responsibility areas" outside cities. Upon incorporation, the new city assumes these services, resulting in cost savings to the state. The League of California Cities wants the state to give these cost savings to new cities.

Assembly Bill 2147 requires LAFCO to calculate the state's savings for new cities that incorporate after January 1, 1999. AB 2147 requires the county auditor to transfer an equal amount of local school districts' property tax revenues to the new city. The state General Fund must backfill affected school districts with equal funds.

II. Cost Identification. The revenue neutrality calculation is based on the LAFCO executive officer's fiscal estimates of the proposed city's revenues and service costs. In previous cases, incorporation proponents have claimed that LAFCO underestimated service costs, resulting in larger mitigation payments to counties. Higher service costs result in lower mitigation payments by new cities. The League of California Cities wants LAFCO to include all direct and indirect costs in its fiscal analysis.

Assembly Bill 2147 requires LAFCO to include all direct and indirect costs of existing services in the area, including general fund subsidies to fee supported services when estimating service costs. AB 2147 requires LAFCO to calculate the proposed city's service costs by comparing them with the service costs of "incorporated areas of similar size." The bill also requires LAFCO to identify other agencies' administrative cost reductions resulting from service transfers.

III. Re-evaluation. The 1992 revenue neutrality law does not allow a reevaluation of fiscal estimates when revenues or service costs rise or fall. If economic conditions change, altering the revenue mitigation payments is impossible. The League of California Cities wants to establish a mechanism to contest fiscal estimates, including the property tax exchange, the estimates of service costs and revenues, and the revenue mitigation payment.

If the county or city disputes any mitigation measure, Assembly Bill 2147 requires:

  • Representatives of the new city and the county to meet to review disputed estimates within 14 months after the first July 1 of the new city's creation.
     
  • After 60 days of negotiations with no agreement, the two parties to mutually select and fund a mediator.
     
  • After another 60 days with no agreement, each party to submit a last, best offer to the mediator, who issues an advisory opinion. The parties may file an action within six months of the end of negotiations if no agreement is reached.

Any agreement reached during negotiations supersedes any prior estimates or payments. AB 2147 requires that any ballot which proposes a new city incorporation shall require disputes to be mediated by this process.

IV. Incorporation Guidelines. The Governor's Office of Planning and Research (OPR) issues advisory guidelines to help cities and counties write their general plans. OPR prepares the mandatory "CEQA Guidelines" as regulations that control the preparation of environmental documents. No guidelines currently exist to tell LAFCOs how to evaluate city incorporation proposals.

Assembly Bill 2147 requires OPR to convene a task force to create advisory statewide guidelines for the incorporation process by March 1, 1999. OPR's task force must include nominees from statewide associations of cities, counties, and LAFCOs. OPR must publish these guidelines by July 1, 1999.

Comments

  1. Confluence of streams. AB 2147 results from negotiations between cities and counties on a very contentious issue. While the "revenue neutrality" law shields county budgets from the negative fiscal effects of incorporations, the 1992 law has had a chilling effect on new incorporations. Both cities and counties agree that legislation can help more communities incorporate and still protect county budgets. AB 2147 allows for additional cost identification to lead to lower mitigation payments, creates a new dispute resolution mechanism to reexamine figures after a city incorporates, and provides additional funds from the state to help out new cities. AB 2147 helps new cities start off on more solid fiscal ground.
     
  2. New state subsidy for new cities. AB 2147 requires the state General Fund to subsidize new cities when the CHP and the CDF withdraw their services. To break the political gridlock between cities and counties over the revenue neutrality issue, it was helpful to inject new revenues. Cities and counties want the state to put up the money. This new property tax shift underwrites new incorporations for the first time, setting a precedent. The Committee may wish to consider why the state General Fund should promote new cities when state officials don't participate in incorporation decisions. If the state doesn't play, why should the General Fund pay?
     
  3. Retroactive relief. Not only does AB 2147 require the state to subsidize future new cities, the bill allows the two cities formed after 1993 to claim retroactive subsidies. Citrus Heights and Shasta Lake can ask LAFCO to calculate the costs of services once provided by the CHP and CDF, recouping the state's savings. The revenues come at the expense of taxpayers statewide. Both communities knew the rules of the game when local voters endorsed cityhood, so why should they retroactively receive the benefits of the new policy?

Support and Opposition (08/17/98)

Support: League of California Cities, California State Association of Counties, Urban Counties Caucus.

Opposition: Unknown.

 

BIBLIOGRAPHY

 

Dickinson, Roger. "Why the Revenue Neutral Law is Fair." California County, January/February 1998.

Wall, Dan, and Casey Kaneko. "The Revenue Neutral Law: The Other Side of the Story." California County, January/February 1998.

MacGlashan, Roberta. "How the Deck is Stacked Against New Cities." Western City Magazine, September 1997.

Committee Address

Staff