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AMEND THE COUNCIL POLICY MANUAL, TITLE 5, CHAPTER 5.05 - “DISTRICT FORMATION AND FINANCING,” TO INCLUDE POLICIES FOR THE FORMATION OF, AND ANNEXATION INTO, A NEW SERVICES AND MAINTENANCE COMMUNITY FACILITIES DISTRICT
recommended action
RECOMMENDATION
It is recommended that City Council adopt a resolution amending the Council Policy Manual, Title 5, Chapter 5.05, to include policies for the formation of, and annexation into, a new services and maintenance Community Facilities District.
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Summary
Over the past several months, staff analyzed the financial impact of potential residential development. Based on that analysis, new residential development is estimated to add net General Fund costs not included in the Long-Range Financial Plan (L-RFP). On March 6, 2018, staff presented these findings to Council at a study session and requested guidance regarding policy development. At that meeting, Council directed the City Manager to prepare a draft policy for consideration at a future meeting (Attachments A and B).
Staff drafted a citywide policy 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 increased cost of municipal services associated with new residential development would fulfill Council priorities related to fiscal sustainability, commitment to the L-RFP, and budget transparency.
It is recommended that Council adopt the proposed resolution revising Title 5, Chapter 5.05 of the Council Policy Manual (Exhibit 1 to the Resolution). The revision to Title 5, Chapter 5.05 allows for the formation of a new services and maintenance Community Facilities District to offset the cost of new residential development. To encourage infill development and development in disadvantaged areas, annexation into the proposed services and maintenance district would be optional in said areas. It is recommended that Council adopt the proposed policy to establish direction related to the formation of a services and maintenance community facilities district.
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. A CFD is authorized to collect special taxes to fund facilities, pay debt service on bonds sold to finance facilities, and provide funding for certain services. Upon approval by a two-thirds vote of the registered voters or a 100% consent of landowners within the district, a levy of special taxes is created on real property within the district. The special tax lien has the same priority as property taxes.
The amount of special taxes levied on real property within the district is 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 the special taxes nor pay the debt service on any bonds for a district. Because the obligation to pay special taxes is an obligation that attaches to the land rather than the owner of the land, CFDs are generically known as “land-secured districts.”
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 five 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 election or by landowner consent:
• 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 consent, 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.
New development is described as any newly constructed single family or multi-family residential development. 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, required as a condition of approval on a development project, or during initial formation, may be designated for annexation in the future. During the initial formation process, additional territory may be defined as an annexation area. With landowner consent, any land within the annexation area can annex by receipt of a letter requesting that all or a portion of the annexation area be allowed to annex into the existing district. The process to annex into an existing CFD by registered voter election mirrors the complete formation process for a new district. Under either 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 as governed by the RMA.
Even though local governments bear no direct financial responsibility for the payment of special taxes, they are responsible for managing the levels of special taxes within their boundaries, including the debt issued by CFDs. The ability to afford special taxes in developing or established areas is a finite resource. At some point, if the level of special taxes becomes excessive, property sales will decline and those taxpayers that do purchase may become unwilling or unable to pay over time.
Present Situation
On October 3, 2017, the Council adopted Title 5 - “Financial Management” as part of its Council Policy Manual, which included sections on:
• General Fund Reserve Policy
• Interfund Loans
• Investments
• Debt Management
• District Formation and Financing
• Debt Forgiveness
• Mayor and Council Discretionary Funding.
In the time since these policies were adopted, staff conducted analysis related to residential development and began drafting policies that would establish a citywide services CFD intended to address the deficit created because the revenues generated by residential development are less than the City cost of services to support 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 financial reports. The variables that affect the financial analysis include differing property tax rates, development size, and the type of residences 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. Implementation can be effectuated through development agreements and conditions of approval in development projects.
To encourage infill development and development in disadvantaged areas, annexation into the proposed services and maintenance district would be optional in said areas. Stockton Municipal Code Chapter 16.52- “Infill Development Standards” encourage applicants to develop unused or underutilized land. The SMC provides flexibility in meeting development standards and to maximize opportunities for infill development projects, which are beneficial to the community, protective of existing neighborhoods, and well designed. The benefits of infill include resource conservation, efficiency of facilities and services, promotion of alternative modes of transportation, and opportunities for diverse housing and mixed-use options. The State pursuant to SB 535 (Chp. 830, Stats. 2012) identified designated disadvantaged areas through the California Office of Environmental Health and Hazard Assessment using geographic, socioeconomic, public health, and environmental hazard criteria (Attachment C).
Staff recommended revisions include discretion within the policy to make annexation into a maintenance and services CFD optional in infill or state-designated disadvantaged areas.
Consistent with the Council’s commitment to the L-RFP and fiscal sustainability, staff drafted a policy to address the cost of increased services that result from residential development. The policy states new residential development should not proceed unless it provides adequate resources to cover the service and maintenance costs associated with that development and that annexation into the new services CFD is a condition of approval.
The new services CFD would be a stand-alone district solely formed to finance city services and maintenance, and would not finance any capital infrastructure. If the policy is adopted, staff will begin the work necessary to create the district. The process to create a CFD is generally:
• 1st Public Meeting: Initiation or Intent Meeting (“Resolution of Intent” or “ROI”): Bond counsel, working with local agency staff and other consultants, prepares resolutions for consideration by Council. These resolutions formally set forth the proposed package of governmental powers. Once approved, they set the maximum limits of those powers and sets forth the date of the public hearing.
• 2nd Public Meeting: Public Hearing and Formation Meeting (“Resolution of Formation” or “ROF”): A public hearing is conducted and assuming 100% landowner waiver, the Council adopts:
o Resolution of Formation
o Adopts Ordinance Levying the Special Tax
o Notice of Special Tax Lien recorded
o 30-days after notice is recorded, taxes become effective
With approval of this policy, District formation would begin with the next new development or financing brought to Council. Any future development would annex into the district as a condition of approval for development, or through adoption or amendment of a development agreement. A number of bond financing (Westlake and Cannery Park) or development projects (Calaveras Estates Unit No.4) already agreed to enter into a separate agreement or agreed as a condition of approval of their project to comply with this policy should it be adopted. On May 15, Council approved the initial steps to create a new CFD in the Westlake development that included a services component and also approved Calaveras Estates Unit No. 4 where the applicant, similarly, agreed to a services component.
Staff recommends that Council approve the revisions to the Council Policy to allow a new citywide Community Facilities/Mello Roos district that would address the costs of new residential development.
FINANCIAL SUMMARY
It is anticipated that costs related to any formation of a services and maintenance district would occur in the upcoming 2018-19 fiscal year. Cost estimates are not expected to exceed $50,000 and include services for a district consultant, bond counsel, and municipal advisor. An appropriation for district formation costs will be included in the FY 2018-19 budget process will be presented in the 201-2001-510 Debt Services Fund.
To the extent parcels are eventually taxed in any services maintenance district formed pursuant to this action, the City will record the corresponding revenue in the General Fund. The amount of revenue generated by the new CFD would depend on the number of homes that are constructed and annexed into the district.
The draft policy assumes the special tax would be $500 annually per single-family residence. The policy also assumes that the maximum allowable assessment is escalated each year by 4 percent. The special tax on multifamily residential would be two-thirds of the single-family amount ($330) per unit. The ability to afford special taxes in developing or established areas is a finite resource. At some point, if the level of special taxes becomes excessive, property sales will decline and taxpayers that do purchase may become unwilling or unable to pay over time. To promote residential development in infill or state-designated disadvantaged areas, this policy also makes it optional for those areas to annex into the new CFD.
Attachment A - Table of Contents for the Council Policy Manual
Attachment B - Draft Department Policy - Services and Maintenance District
Attachment C - Map of Designated Disadvantaged Areas