economic & planning systems, inc. 2501 ninth street, suite 200, berkeley, ca 94710 510.841-9190...

Economic & Planning Systems, Inc.2501 Ninth Street, Suite 200, Berkeley, CA 94710

510.841-9190 • 510.841-9208 fax

Economic & Planning Systems, Inc.2501 Ninth Street, Suite 200, Berkeley, CA 94710

510.841-9190 • 510.841-9208 fax

presented to

CALAFCO Staff Workshop

Negotiating Annexation Tax Sharing Agreements

presented by

Scott Smith, Partner, Best Best & Krieger, LLP

Walter Kieser, Managing Principal, Economic & Planning Systems, Inc.

Martha Poyatos, Executive Officer, San Mateo LAFCo

April 16, 2010

Economic & Planning Systems, Inc. 2

Overview

• Why Negotiate?

• Tax Exchange Procedural Summary

• Challenges and Motivations

• Role of Fiscal Analysis

• Property Tax Exchange Agreements

• LAFCO’s Role


Why Negotiate?

• Tax sharing agreements are subject to mediation/arbitration pursuant to Revenue & Tax Code section 99 (e)(1)(A).

• Negotiations allow parties to balance interests of the parties and assuring an acceptable agreement.

• Failure to negotiate and establish a balanced agreement will impede rational urban development and optimum delivery of municipal services.


Why Negotiate? (continued)

• Avoidance of exposure to legal actions related to disadvantaged communities (e.g., Committee Concerning Community Improvement v. City of Modesto).

• Structured and informed negotiations allow issues to be evaluated objectively and for equitable terms to be agreed upon.


Procedural Summary

Tax Exchange Procedural Summary


Property Tax Exchange Processes

• 99(b) LAFCo application triggers letter from County Auditor initiating property tax exchange negotiation by affected agencies.

• 99 (d) Master Property Tax Transfer Agreement.

• 99 (e) Qualified City Annexations where agencies fail to adopt either per 99(b) or 99 (d) “Independent Fiscal Analysis, Mediator, Arbitrator”.

• 99 (b)(7) Renegotiation when LAFCo approval amends the boundaries of an annexation, subject agency may request and LAFCo E.O. shall grant 15 days for negotiation.


Property Tax Exchange Processes (continued)

• 99(k) At any time after jurisdictional change agencies may renegotiate subject to approval by all affected local agencies.

• 99.02 Any local agency may determine to exchange any portion of its property tax revenues which is allocable to one or more tax rate areas within the local agency with one or more other local agencies.


Property Tax Exchange Process

LAFCO receives application

LAFCO NOTICE OF FILINGEO shall provide Notice of Filing to

County Assessor and Auditor R&T 99(b)

Assessor shall provide Auditor the assessedvalue of territory and the tax rate areas

R&T 99 (b)(1)(A)

Auditor shall estimate: amount ofproperty tax generated during current

fiscal year; and property tax attributableto each agency per R&T 96.1 & 96.5

R&T 99(b)(1)(B) & 99(b)(2)

AUDITOR’S LETTERAuditor shall notify agencies of the amount of

property tax revenue generated within the territory for the current fiscal year and allocation factors for each of the agencies in the territory.

R&T 99(b)(3)


Property Tax Exchange Process (continued)

Local agencies negotiate amount of property tax revenue to be exchanged

among local agencies R&T 99(b)(4)

Agencies fail to adopt resolutions ofproperty tax exchange and LAFCO deems

application incompleteGC 56668(h) & R&T99(b)(6)

LOCAL AGENCIES DO NOT REACH AGREEMENT

LOCAL AGENCY RESOLUTIONSAgencies adopt resolutions of property

tax exchange and transmit them to LAFCOR&T 99(b)(4)

LOCAL AGENCIES REACH AGREEMENT

If there is no master agreement and agencies fail to adopt resolutions agencies are directed to

follow 99(e) which provides for independent fiscal analysis, mediator and arbitrator.

R&T 99(b)(8) & 99(e)

Note: There is no requirement to agreeat end of process

If LAFCO amends proposal and upon request of affected agency, EO may allow 15

days for agencies to renegotiateR&T 99(b)(7)

Resolutions are presented to LAFCONo resolution / Proceedings automatically

terminated


Special District Negotiations

• R&T 99.01(a)(3) Special district affected by jurisdictional change may negotiate on its own behalf, if it chooses, in the instance of annexation of area not previously served by a local agency.

• R&T 99(b)(5) Otherwise, Board of Supervisors negotiates on behalf of district.


Effective Date of Annexation

• Jurisdictional change for service responsibility is either the date Certificate of Completion is recorded or a date determined by the Commission.

• Date of property tax redistribution is dependent upon State Board of Equalization and may be July 1 of next fiscal year if recorded by December 1 or July 1 of subsequent fiscal year if recorded December 1 or after.


Importance of Resolutions

• Notwithstanding existence of Master Agreement, LAFCO should wait for Resolutions affirming property tax transfer agreement in each case.

• “In short, sections 56828 and 99 mean what they say. [A] property tax revenue agreement is a precondition to a certificate of filing.” Greenwood Addition Homeowners Assn. v. City of San Marino (1993) 14 Cal. App. 4th 1360, 1377.


Procedural Error

• Section 56107 protects LAFCO from attack unless there’s prejudicial abuse of discretion.

• But, where Section 99 step is skipped completely, affected agencies can probably show this prejudice.


Challenges and Motivations


Achieving Rational Municipal Service Boundaries

• Rational boundaries are in the public interest (economic development, service standards, high-quality infrastructure, and resident enfranchisement).

• Annexation can help implement key city planning policies including provision of affordable housing.

• Achieving compact urban form and high quality and efficient municipal services are key elements in the efforts to control green house gas (GHG) emissions.

• Fiscal constraints faced by all local government creates incentive for achieving municipal service efficiency and an optimal allocation of fiscal resources.

• A recent court ruling creates a new mandate for annexation of unincorporated islands.


Poster Child (nearby)


Challenges

• Historical development patterns have created unincorporated islands, illogical boundaries, and discontinuous infrastructure and service standards.

• Inhabited territory resident opposition to annexation (opposition to increased taxes, etc.).

• Upgrading differential service standards in unincorporated area creates cost impact on annexing jurisdiction.

• Infrastructure deficiencies and deferred maintenance in unincorporated islands often expensive to repair or upgrade.

• Limited revenue potential, especially from inhabited territory as compared to service costs.


Challenges (continued)

• Fiscal inequities established by ERAF and other State actions.

• Ongoing conflicts between jurisdictions over fiscal resources (e.g., sales tax generators).

• Worsening fiscal conditions of cities and counties reduce ability to absorb higher costs or lower revenues.


Variation in Annexation Territory Characteristics

• Challenges to annexations vary with the spatial, demographic, and economic characteristics of each annexation:

– Developed unincorporated islands versus undeveloped territory with prospective development opportunities.

– Affluent versus disadvantaged resident population.

– Existence of significant revenue generators (retail sales outlets).

– Large versus small size of annexation territory.

– Existence and circumstances of other jurisdictions(e.g., special districts).


Getting to “Yes”—City Motivations

• Focus on long-term opportunities and benefits in addition to short-term cost impacts.

• Recognize existing benefits from annexation area, e.g., retail expenditures by residents within the area.

• Recognize cost impacts of unincorporated urban areas even without annexation.

• Identify potential long-term opportunities to improve municipal service efficiencies and to achieve specific policy objectives—reducing traffic congestion, crime, etc.

• Potential economic development, betterment, and related increase in tax revenues.


Getting to “Yes”—County Motivations

• Identify shifts in County-provided costs and revenues to determine potential savings to County.

• Consider revenues not shifted to city, e.g., Prop. 172, motor fuel taxes, etc., resulting from growth of the area.

• Provide service transition period to minimize impacts upon county services (stranded costs, etc.)

• Provide for annual accounting of actual costs and revenues (following annexation) to address disputes over accuracy of pro forma fiscal analysis.

• Reduce municipal service cost functions over time.


Role of Fiscal Analysis


Fiscal Analysis Objectives

• Establish objective, independent cost and revenue estimates as a basis for a tax sharing agreement.

• Determine fiscal outcomes for both jurisdictions:

– Impact of annexation on city (revenues >= costs?)

– Impact of annexation County (net loss of revenue?)

• Quantify magnitude of fiscal risks and opportunities:– Short term fiscal imbalances (e.g. first year property tax)

– Future growth potential

– Future changes in fiscal environment

• Identify mitigation measures for any potential adverse fiscal impacts on either jurisdiction.

• Identify required service and budget decisions that reduce cost exposure.


Fiscal Analysis Methodology

• Avoid “dual” fiscal analysis (one sponsored by each jurisdiction).

• Reach agreement regarding key assumptions in advance of analysis (growth, existing tax base, boundaries, alternatives, etc.).

• Reach agreement regarding “normalizing” current budget distortions (related to ongoing fiscal crisis).

• City fiscal analysis focus on costs of achieving service standards in annexing territory vs. revenue gained.

• County Fiscal Analysis focus upon revenues shifted to city versus opportunities to reduce municipal service costs, especially in developed area annexations.


Property Tax Exchange Agreements


Varied Forms of Agreements

• Agreements can either be annexation-specific or a “master agreement”—applying to all annexations to a given jurisdiction or even multiple jurisdictions.

• Revenue and Taxation Code Section 99 does not limit the scope of agreements.

• Some agreements are limited to a pre-determined split of property taxes while others also include other terms, e.g., sharing of other local taxes.

• Tax sharing agreements have been successful in promoting orderly development of uninhabited territory but less successful in resolving the more difficult circumstances of inhabited territory.


Property Tax Exchange Mechanics

• Logic is that county property taxes are exchanged for municipal service responsibilities shifted to city.

• Initiatives (Prop. 13) and statutory changes have eroded property tax allocation to city and county governments (property taxes may be less important than other issues).

• County share is fractionally allocated to annexing jurisdiction based upon terms of agreement(pre-determined formula or on case-by-case basis).

• Exchange is implemented by changes to the tax apportionment factors used by Auditor to allocate property taxes derived from individual tax rate areas.

• Alterations to tax apportionment factors are static.


Additional Property Tax Agreement Terms

• Structured property tax sharing:– Larger share of base retained by County provides

funding of Countywide services

– Larger share of increment to City helps fund higher service levels from potential increases in property value

• Redevelopment Agency terms– Redevelopment increment (e.g., city economic

development)

– Sharing post-redevelopment

• Sales Tax sharing

• City Impact Fees in SOI area or County fees in City by agreement

• Infrastructure planning and funding


Additional Property Tax Agreement Terms

• Addressing HCD-imposed Regional Housing Needs Allocation

• Transition period/County contracts at potentially lower cost

• Sharing of revenue and service cost responsibilities

– Road maintenance

• Collaborative law enforcement to address cost issues

– DUI enforcement/Sobriety checkpoints

– Drug and gang taskforces


San Joaquin County Case Study

• Multi-party Agreement (County and each City adopted by resolution).

• Negotiated through a County/City process engaging representatives of each city.

• Based upon a collaborative fiscal analysis that was reviewed by all parties.

• Agreement established a standard property tax sharing terms for all annexations.

• Agreement includes cooperation on planning, infrastructure funding, and County facilities.

• Exceptions were provided for the smaller cities in the County.


San Joaquin County Case Study—Terms

• Fixed percentage of property tax shared—80% County, 20% City.

• Defined variation in share where reorganization of fire protection is involved.

• Regional cooperation for funding County facilities—imposition by cities of impact fee for County capital facilities.

• Urban development cooperation—city-centered growth, referral of all SOI land use applications to city.

• Imposition of city fees in SOI to assure continuity of capital projects and service standards.

• Cooperative siting of County facilities within SOI areas as part of planning and development.


San Joaquin County Case Study—Performance

• Agreement has endured for 15 years (amended in 2005).

• 79 annexations, totaling over 11,000 acres, have been completed during past 10 years.

• Other reorganizations (e.g., fire district detachments) have also occurred as part of annexation.

• County has obtained substantial funding for its capital facilities.

• Urban growth on the urban fringe has been more orderly and cooperative.

• The Agreement has not incentivized annexation of island or inhabited territory annexations.


LAFCO’s Role


LAFCO’s Role in Master Tax Sharing Agreements

• Assure local LAFCO policies conducive to annexation.

• Perform detailed evaluations of current boundary conditions and service issues, including environmental justice issues, in municipal service reviews.

• Provide a “clearing house” of information for citizens and local governments related to annexation including statutory requirements, case studies, and document templates.

• Establish policies and guidelines related to annexation fiscal analysis and tax sharing options.

• Facilitate or mediate negotiations between cities and counties attempting to resolve annexation-related issues and reaching agreements that lead to rational urban boundaries and services.


LAFCO’s Role in Master Tax Sharing Agreements

• Provide technical support to citizens, cities, or counties seeking specific annexations (mapping, data assembly, etc.).

• Continue legislative advocacy to strengthen local government (and LAFCO) ability to reduce impediments to annexation.

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