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DISCUSS THE ESTABLISHMENT OF A NEW POLICY TO ESTABLISH A CITYWIDE COMMUNITY FACILITIES DISTRICT TO OFFSET THE COSTS OF NEW RESIDENTIAL DEVELOPMENT
recommended action
RECOMMENDATION
This is an informational item that does not require Council action.
Council is asked to consider information presented by the City’s Independent Registered Municipal Advisor and staff, and provide guidance regarding the development of policies for a new citywide Community Facilities/Mello Roos district that would address the costs of new residential development.
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Summary
Over the past six months, staff has analyzed the financial impact of potential residential development. Based on the analysis, the revenues and expenses related to new residential development are estimated to add net General Fund costs not included in the Long-Range Financial Plan (L-RFP). Staff is drafting a citywide policy for future consideration that would authorize a services and maintenance Community Facilities/Mello Roos district intended to address the unfunded costs. Establishing a citywide policy to fund the net increase in the cost of municipal services associated with new residential development would fulfill Council priorities related to budgeting consistent with the L-RFP and budget transparency. Council is asked to provide guidance that will be used to complete the draft policy. The draft policy would be presented to Council for consideration in the future.
DISCUSSION
Background
The Mello-Roos Community Facilities Act of 1982 (the “Mello-Roos Act”) provides a mechanism by which certain public entities (cities, counties, special districts, school districts and joint powers entities) can finance the construction or acquisition of facilities and the provision of certain services. The Mello-Roos Act authorizes a public entity to form a Community Facilities District (a “CFD” or “district”), otherwise known as a Mello-Roos district. Once formed, the district can finance facilities and provide services. Upon approval by a two-thirds vote of the registered voters or landowners within the district, the district may issue bonds secured by the levy of special taxes and levy a special tax on real property within the district. The special tax lien has the same priority as property taxes.
The Act does not direct how the special tax is to be applied, except that it may not be ad valorem (an ad valorem tax is one that utilizes a tax rate and applies it to a measure of value such as assessed valuation). Mello-Roos bonds are payable from and secured by special taxes, which are levied upon the property in the district according to the rate and method of apportionment (the “RMA”). Special taxes are levied upon real property and are not a personal debt of the property owners. The remedy for delinquencies is foreclosure.
The General Fund of the local agency that created the district is not obligated to pay debt service on the bonds. Because the obligation to pay special taxes is an obligation that attaches to the land rather than the owner of the land, Mello-Roos bonds are generically known as “land-secured bonds.” Mello-Roos bonds are issued to finance construction or acquisition of certain authorized infrastructure projects, and the bonds are secured by (i) special taxes paid by property owners within a community facilities district, and (ii) proceeds generated by foreclosure sales on delinquent properties. As with other types of revenue bonds, the local government issuer usually has no legal responsibility to pay debt service on the bonds except from the revenue stream pledged to their repayment. The special tax may be used:
• To pay directly for facilities
• To pay directly for services
• To pay debt service on bonds or other debt, the proceeds of which are used to finance facilities
• For any combination of the above.
The range of public facilities that may be financed is very broad. There is an extensive description of authorized facilities in the Act, which includes the purchase, construction, expansion, improvement or rehabilitation of real or other tangible property with an expected useful life of 5 years or longer which the local agency is authorized by law to construct, own, operate, or to which it may contribute revenue. Financed facilities are not required to be located within the boundaries of the CFD.
By contrast, the services that may be financed are quite limited and are even more limited for landowner voted districts. The first group of services may be authorized by either a registered voter or a landowner election:
• Police protection services
• Jail, detention facility, and juvenile hall services
• Fire protection and suppression services
• Ambulance and paramedic services
• Maintenance and lighting of parks, parkways and open space
• Flood and storm protection services, including, but not limited to, the operation and maintenance of storm drainage systems, and sandstorm protection services
• Environmental cleanup and remediation services.
A second classification of services may not be authorized by a landowner election, but only by a registered voter election:
• Recreation program services
• Library services
• Operation and maintenance of museums and cultural facilities
• Maintenance services for elementary and secondary school sites and structures.
There is flexibility to define who will pay the special tax. The primary way this is accomplished is by specifying what land area will be included in the CFD. Very significantly, the land area subject to the special tax need not conform to the jurisdictional boundaries of any local agency, and it need not be contiguous. A local agency cannot form a district that extends beyond its territorial limits. If such a district boundary is desired, it requires either a Joint Powers Agreement with the agency into whose territory the boundary extends or a larger agency that geographically encompasses the proposed CFD boundary (such as a county) to conduct the proceedings. Local Agency Formation Commission approval is not required.
Territory may be annexed to an existing CFD, or it may be designated for annexation in the future. In that process, additional facilities and services may be added to those already authorized, but the additions may not increase the maximum tax rate in the existing district. The proceedings to annex, or to designate property for annexation in the future, are virtually identical to the proceedings to form the district.
Even though local governments bear no direct financial responsibility for Mello-Roos special tax debt, they are responsible for managing the levels of tax-supported debt within their boundaries, including the debt issued by CFDs. The debt capacity of developing areas--or established areas, for that matter--is a finite resource. Municipal debt is, after all, serviced by tax revenues which are in turn paid from the incomes of taxpayers. At some point, if the debt burden reaches excessive levels, taxpayers may become unwilling or unable to pay.
Present Situation
In the fall of 2017, the Council adopted Title 5 - Financial Management as part of its Council Policy Manual, which included sections on:
• Reserve and Fund Balance Policy General Fund
• Interfund Loan
• Investment
• Debt Management
• District Formation and Financing
• Debt Forgiveness
• Mayor and Council Discretionary Funding.
In the time since the Financial Management policies were adopted, City staff conducted analysis related to residential development and began drafting policies that would establish a citywide services CFD intended to address the net deficit between the revenues generated by residential development and the City costs necessary to service that development. The City historically utilized CFDs only to finance infrastructure related to new development. Local governments in California increasingly use CFDs to finance services and maintenance.
The fiscal analysis of residential development focused primarily on General Fund impacts. The estimated net General Fund impact is expressed as a range because the revenues are dependent upon a variety of development options. The service and maintenance expenditures are consistent across the models. Using various estimates of home prices, the annual service and maintenance deficits to the General Fund ranged from $453 to $787 per residence per year based on Fiscal Year 2016-17 activity. The variables that affect the financial analysis include: differing property tax rates, development size, and the type of residences being constructed.
Increasingly, cities and counties are establishing comprehensive financing policies to mitigate the service level impacts as well as infrastructure impacts of growth. In many cases, the benefit principle serves as the model: existing residents pay for infrastructure that benefits existing areas, and new residents will pay for the infrastructure required to support developing areas. Communities typically define a general approach to financing services and infrastructure in the general plan because future development is subject to adequate service and infrastructure capacity. Specific implementation policies are usually adopted separately and may be adopted at any time.
Consistent with the Council’s commitment to the L-RFP, staff is drafting a Financial Management policy to address the cost of increased services that result from residential development. The potential services district would be a stand-alone district solely formed to finance city services, and would not finance any capital infrastructure. If adopted in the future, the district could begin with the next development or financing brought to Council and future residential development would annex into the district as a condition of approval of the development.
Council is asked to consider information presented and provide guidance regarding development of policies for a new citywide Community Facilities/Mello Roos district that would address the costs of new residential development.
FINANCIAL SUMMARY
Staff estimates costs related to formation of a citywide services and maintenance district to be approximately $40,000 to $50,000 and will include fees for a district consultant, bond counsel, and municipal advisor.
The amount of revenue generated by the new CFD would depend on the number of homes that are constructed and annexed into the district.