2006 ANNUAL CONFERENCE CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS COMMUNITY FACILITIES DISTRICT FINANCING FOR SERVICES AND INFRASTRUCTURE Sam Sperry, Attorney Orrick, Herrington & Sutcliffe LLP San Francisco, CA

Quick Intro to Community Facilities Districts (“CFDs”) l the Mello-Roos Community Facilities Act of 1982 (Sections and following, Government Code) (the “Mello-Roos Act”) l adopted in 1982 in the wake of Prop. 13 (June, 1978) to provide for property tax-supported financing of "community facilities" and some public services l requires 2/3 voter approval

CFD procedure entails 5 fairly distinct phases: l settling the preliminaries l district formation (concluding with the protest hearing) l the election l bond issuance/project implementation l on-going special tax and bond administration

The "Qualified Electors" for CFD Election l 2/3 voter approval is required, with either landowners or registered voters as the “qualified electors” l two VERY different categories of CFD’s, depending on which category of voters l 12 or more registered voters within the proposed CFD for the prescribed 90 day period - registered voters l 11 or fewer registered voters – landowners, with one vote per acre or portion of an acre

The CFD Special Tax l CFD’s involve the calculation of an annual special tax for each taxable parcel based upon the special tax formula l the Special Tax Formula is the most important legal document of the CFD formation process!! l the Mello-Roos Act anticipates tax roll collection of the special tax, although it also permits direct billing as an alternative

Adoption of Local Goals and Policies l local agency must “consider and adopt” "local goals and policies" PRIOR TO start of CFD formation proceedings l Section of Mello-Roos Act prescribes minimum contents, and they have little to do with services l clear focus on bond financing

Basic List of Eligible Services l police protection l fire protection and suppression, including ambulance and paramedic services l maintenance of parks, parkways, and open space l flood, storm protection, drainage and sandstorm protection systems l cleanup of hazardous substances l recreation, library, maintenance of elementary and secondary schools, and O/M for museums and cultural facilities

Two Categories of Restrictions on Eligible Services for Landowner CFDs l first, special tax proceeds may NOT be used for recreation, library, or maintenance of schools, museums or cultural facilities IF any residential property will be taxed l second, use of special tax proceeds must be restricted to services that are in addition to the services being provided within the CFD prior to formation, and the additional services may not supplant services already available within the CFD when it was formed.

Charter City Ordinance Provisions to Authorize Additional Services or Remove Restrictions l focus on making up negative fiscal impact of new residential development l some, particularly in the development community, question legality, arguing that this is NOT a legitimate use of the charter city powers over "municipal affairs" l road repair and maintenance - the most common

Exactions to Fund Services l "exaction" – meaning a forced payment imposed by government action (as opposed to a voluntary payment) l examples for this discussion: –CFD special taxes –parcel taxes –special assessments –fees and charges (edging toward voluntary)

Special Tax Formula Ingredients l determining the revenue needs –estimated cost of services being financed –estimated administrative expense l gauging the taxable property base l limitations on the maximum special tax –if a developer-oriented CFD, determining the competitive tax level –if a registered-voter CFD, determining the tolerance of the registered voters for differing levels of taxation

Basic Formula Structuring Concepts l special taxes NOT required to be allocated based on benefit l special tax categories may be based on lot size, home size, density, land use type, development status or other criteria l usually, there are categories of “developed property” and “undeveloped property,” with various trigger events for moving a parcel from undeveloped to developed l developed property special tax limited by marketing and public policy l special tax on developed property should be stable and unaffected by rate of development

Other Structuring Considerations l special tax escalator – Mello-Roos Act does NOT limit escalator for special taxes funding only services l sunset NOT required when funding only services l in multi-landowner, developer-oriented CFD’s, must decide whether to allow cross-collateralization among landowners

Formation and Election l formation milestones: –local goals and policies –boundary map –resolution of intention –conduct hearing –resolution of formation l call and conduct election –same day as hearing if 100% consent l authorize levy of special tax

Special Tax Administration l who's responsible – staff or consultant l annual tax levy procedure: –determine budget –update taxable parcel base –calculate special tax for each taxable parcel l coordination with County Auditor for posting l disclosure to prospective purchasers l various annual report requirements