A Planners Guide to Financing Public Improvements
 

Chapter 2

Special Taxes

"Special tax" means any tax imposed for specific purposes, including a tax imposed for special purposes, which is placed into a general fund.

Subdivision (d), Section 1, Article XIII C of the California Constitution

All taxes imposed by any local government shall be deemed to be either general taxes or special taxes. Special purpose districts or agencies, including school districts, shall have no power to levy general taxes.

Subdivision (a), Section 2, Article XIII C of the California Constitution

Proposition 218 has clarified that a special tax may take either of two forms: any tax imposed for specific purpose whose proceeds are held in a separate account for that purpose, or any tax imposed by a special purpose district or agency, including a tax whose proceeds are placed in the general fund of that district or agency. This distinction reflects the evolving judicial view of special taxes set forth by the California Supreme Court's 1991 Rider (Rider v. County of San Diego 1 Cal.4th 1) and 1995 Guardino (Santa Clara County Local Transportation Authority v. Guardino 11 Cal.4th 220) decisions. In Rider, the Court overturned a sales tax being levied by San Diego County to fund a special authority created to finance construction of justice facilities, holding that it was a special tax subject to a two-thirds majority vote. The Guardino decision overturned a Santa Clara County sales tax on similar grounds (the tax was administered by a special authority and intended to finance transportation improvements, but did not receive two-thirds approval).

Under Proposition 218, a special tax is subject to reduction or repeal by popular initiative. An initiative campaign may be launched at any time after approval of the special tax.

Because it is a tax, not a fee or assessment, the amount of the special tax is not limited to the relative benefit it provides to taxpayers. Special taxes cannot be imposed on an ad valorem (property value) basis. They must be levied uniformly on all eligible properties or taxpayers. Typically, they are "per parcel" taxes apportioned according to the square footage of the parcel or on a flat charge. The proceeds of a special tax count toward a local government's Gann appropriations limit.

The Guardino decision affirmed that Proposition 62's definition of "district" (Government Code Section 53720) includes districts which have no property tax power. This specifically set aside the California Supreme Court's 1982 decision in Los Angeles County Transportation Commission v. Richmond 31 Cal.3d 197 which limited the application of Proposition 13 to only those special districts with property tax powers. Through Guardino, the Supreme Court has declared that Proposition 62 closes the Richmond "loophole" for districts created after Proposition 13.

The California Constitution does not, in itself, enable local governments to levy special taxes; that authorization must be specifically granted by the State Legislature (California Building Industry Association v. Newhall School District, etc. et al. (1988) 206 Cal.App.3d 212). Government Code sections 50075 et seq. provide much of the enabling language necessary for imposing special taxes. A city, county or special district (now including a school district) contemplating a special tax levy must hold a noticed public hearing and adopt an ordinance or resolution prior to placing the tax on the ballot. The ordinance or resolution must specify the purpose of the tax, the rate at which it will be imposed, the method of collection, and the date of the election to approve the tax levy. Approval by a 2/3 vote of the city, county or district electorate is necessary for adoption.

Experience has shown the 2/3 vote requirement to be a major hurdle for attempts at raising local special taxes. A Marin County special tax intended to help finance land acquisitions by its popular open space district and a proposed San Diego County special tax for libraries both failed to receive the required supermajority in the November 1996 general election.

Nonetheless, special taxes have been imposed for a variety of uses. For example, some of the special taxes approved in 1997 include: library, fire safety, and paramedic services in Los Angeles County; paramedic services in Mendocino County (Coast Life Support District); and fire protection in Marin County (Tamalpais Valley FPD).

Special taxes for public libraries

Government Code sections 53717-53717.6 enables any city, county or library district to impose a special tax within their jurisdiction for the purpose of funding public library facilities and services. These taxes may be applied on a uniform basis to real property or on the basis of benefit, cost of providing services or other reasonable basis (Government Code section 53717.3).

Special taxes for fire or police protection

Government Code section 53978 authorizes any local agency which provides fire protection, fire prevention services or police protection (either directly or by contract with another agency) to levy special taxes for fire protection/prevention and police protection. Prior to placing the tax proposal on the ballot, the agency must adopt an ordinance describing the rate of taxation and maximum tax levy. When a local agency determines the amount of tax annually, it must not exceed the maximum amount established by the original ordinance. The taxes must be levied on a parcel, class of improvement to property or use of property basis and may be varied to each parcel, improvement or use of property based on the degree of availability of fire or police services in the affected area.

The local agency need not impose this as a jurisdiction-wide special tax. It can establish particular areas or zones which will be assessed taxes to pay for services in those areas. The graduated application of this tax based on zoning classifications, where a flat tax rate was applied on all parcels within each zone regardless of size or other characteristics, was upheld in a 1986 California Supreme Court case (Heckendorn v. City of San Marino (1986) 42 Cal.3d 481). The court distinguished this method of calculating the tax burden from an ad valorem tax.

This tax may be used to pay for "obtaining, furnishing, and maintaining fire suppression and police protection equipment or apparatus or either such service" (Government Code section 53978(b)). It may also be used to pay salaries and benefits for firefighting or police protection personnel and for related expenses. Like other special taxes, a police/fire protection tax is dedicated to the use for which it was levied. It is subject to approval by two-thirds of the voters within the jurisdiction or zone proposed for taxation.

County Sales Tax Legislation

As discussed in Chapter 1, statute authorizes a county to levy a countywide sales tax increase, the proceeds of which are to be used within its boundaries. Two of these statutes allow a county to establish an authority which will administer the proceeds of the sales tax for specific purposes. Although the Legislature intended these to be characterized as general taxes subject to a simple majority vote, first the Guardino decision and now Proposition 218 make it very clear that the proceeds of this sales tax are "special taxes" and may only be imposed upon two-thirds approval.

The Local Transportation Authority and Improvement Act (Public Utilities Code sections 18000 et seq.) enables counties to impose an additional one-percent (or less) sales tax for a period of up to 20 years. The revenues generated by this tax are used to finance specific transportation projects either directly or through bonded indebtedness.

Pursuant to this Act, the county board of supervisors, by 2/3 vote, can create a local transportation authority for the purpose of administering the proceeds of a sales tax increase and call a popular election on the proposed tax increase. The membership of the transportation authority and the proposed expenditure plan must be approved by a majority of the cities having a majority of the city population in the county prior to placing the measure on the countywide ballot. The expenditure plan must be included in the official voters' pamphlets. Pursuant to Proposition 218, passage of the tax requires affirmation by a two-thirds majority of the voters taking part in that election.

Alternately, the county board of supervisors may establish an authority which would be empowered to propose a 1/4 or 1/2 percent sales tax increase for specific purposes (Revenue and Taxation Code section 7285.5). The authority must follow the same procedure that applies to the levy of a special tax. In addition, the authority must adopt an expenditure plan describing the specific projects on which the new tax revenues will be spent.

The Mello-Roos Act

The 1982 Mello-Roos Community Facilities Act (Government Code Sections 53311 et seq.) enables cities, counties, special districts, and school districts to establish community facilities districts (CFDs) and to levy special taxes to fund a wide variety of facilities and services. The proceeds of a Mello-Roos tax can be used for direct funding and, in the case of capital facilities, to pay off bonds. Mello-Roos financing has similarities to special taxes and special assessments and, in some situations, it has advantages over both.

The procedure for establishing a Mello-Roos district is not simple. The following is a general example of how it is done.

Proceedings may be started:

(1) by the local legislative body acting on its own initiative;

(2) at the request of at least two members of the body; or,

(3) when the body receives a petition signed by either 10% of the registered voters residing within the proposed district or by the owners of 10% of the land within the proposed district.

Within 90 days of the initiation of proceedings, the legislative body must adopt a resolution of intention which:

(1) describes the boundaries of the proposed district;

(2) states the name of the proposed CFD;

(3) describes the types of facilities and services to be provided or purchased within the district and any incidental expenses;

(4) states that a special tax, secured by recordation of a continuing lien on nonexempt property, will be levied annually. It must also specify the rate, method of apportionment, and manner of collection of the special tax in a way which will allow each landowner to estimate their tax liability;

(5) fixes a time and place for a public hearing on the district formation;

(6) describes any adjustment in property taxation necessary to pay prior indebtedness; and

(7) describes the proposed voting procedure.

(Government Code section 53321)

By the time of the public hearing, the agency must have prepared and made available a report explaining the proposed purpose of the district and containing an estimate of costs. (Government Code section 53321.5) Advance notice of the hearing must be published in a newspaper of general circulation and a notice mailed to each landowner and registered voter within the proposed district. The notice must contain the text of the resolution of intention, the time and place of the hearing, and a description of the protest procedure. Written or oral protests against creation of the district, the proposed district boundaries or the particular facilities or services to be funded can be filed prior to or at the public hearing. Proceedings must be abandoned for a period of one year if protests are received from either:

(1) 50% or more of the registered voters residing within the proposed district or six of such voters, whichever is more; or,

(2) the owners of one-half or more of the land in the district.

If the protests relate to particular boundaries, facilities, services, or taxes, the legislative body may revise the proposed district to accomodate those concerns. If, upon conclusion of the hearing (and any continuances thereto), the legislative body decides to create the CFD it must adopt a resolution of formation.

The next step is an election to authorize levying the specified tax. If necessary, this election may be combined with an election to raise the local Gann limit. The required election procedure varies depending upon the number of registered voters residing within the boundaries of the CFD. When there are 12 or more registered voters, the election is held among the registered voters residing within the CFD. If there are fewer than 12 voters, then a vote is held among landowners, with each acre of land or portion of an acre counting as one vote. Landowner elections may be conducted by mail, as was done by the Rocklin Unified School District in creating a Mello-Roos district covering 4454 acres of rural land slated for residential development. In both such circumstances, approval requires a two-thirds affirmative vote

As originally enacted, the Mello-Roos Act did not provide notice to prospective property buyers of their special tax obligations under a CFD. This shortcoming has been largely redressed by requiring: (1) clearer disclosure of the potential special tax burden at the time of a CFD election; (2) designation by the legislative body levying the special tax of an agency to respond to public inquiries about current and future special tax levies; and (3) full disclosure of the tax by the agency and sellers to prospective property buyers.

The Mello-Roos Act is designed to be flexible. Interestingly, the land included within the district boundaries need not be contiguous. As time goes by, additional area may be added to the Mello-Roos district through much the same manner as the district was originally created (Government Code section 53339 et seq.). A CFD can be broken into improvement districts that, subject to their own elections, can contribute to an overall project (Government Code section 53350). In addition, the facilities being funded need not be physically located within the boundaries of the Mello-Roos district (Government Code section 53313.5). CFD formation proceedings may be initiated in an area proposed for annexation to a city when that city has filed a resolution of intention for annexation with the Local Agency Formation Commission. Actual formation will be contingent upon approval of the proposed annexation (Government Code section 53316). Furthermore, the legislative bodies of two or more local agencies can enter into a joint community facilities agreement or a joint powers agreement in order to finance cooperative improvements or services. Such agreements may also include state or federal agencies.

Upon formation of the CFD and levy of the special tax, a special tax lien will be recorded against all eligible properties in the district (Government Code section 53340). This and the other disclosure requirements noted above ensure that purchasers of taxable properties will have constructive notice of the existence of the special tax.

The Mello-Roos Act is designed to make it as easy as possible to gain passage of the special tax within the constraints of a two-thirds vote. Because the CFD boundaries may be discontiguous, those areas which will not support the tax can be avoided. In landowner elections, the ballots may be distributed in any manner approved by the registrar of voters, including at the formation hearing.

A Mello-Roos tax is not a special assessment, so there is no requirement that the tax be apportioned on the basis of property benefit. Nonetheless, this can be done at local option (Government Code section 53325.3). When so apportioned, it may possibly be subject to the assessment requirements of Proposition 218. The tax can be structured so that it varies depending upon the zoning or development intensity of the property being assessed. Apportionment cannot, however, be done on an ad valorem basis.

A Mello-Roos tax can be used to finance the purchase, construction, expansion, improvement or rehabilitation of real property with a useful life of five years or more (Government Code section 53313.5). It can pay for other capital facilities including, but not limited to:

• local park, recreation, and open-space facilities (Government Code section 53313.5(a));

• parkway facilities (Government Code section 53313.5(a));

• elementary and secondary school sites and structures that meet the building area and cost standards of the State Allocation Board (Government Code section 53313.3(b));

• fire stations;
• highway interchanges;
• water and sewer systems;

• libraries (Government Code section 53313.5(c));

• child care facilities (Government Code section 53313.5(d));

• the undergrounding of utilities;

• acquisition, improvement, rehabilitation, or maintenance of public or private property for the purpose of removing or cleaning up hazardous materials (section 53313.5);

• work found necessary to bring public or private buildings into compliance with seismic safety standards or regulations (Government Code section 53313.5 (h));

• any governmental facilities which the legislative body creating the CFD is authorized by law to contribute revenue to, own, construct, or operate (Government Code section 53313.5 (g));

• acquisition, improvement rehabilitation, or maintenance of real or other tangible property, whether publicly or privately owned, for the purpose of removal or remediation of any hazardous substance (Government Code sections 53314.6 and 53313.8); and,

• the repair and abatement of damage caused to privately owned buildings and structures by soil deterioration, provided (a) the vote on the question of imposition of the special tax is unanimous, and (b) the work to be financed is certified as necessary by local building codes (Government Code section 53313.5).

There are certain limitations upon the use of Mello-Roos taxes for seismic safety improvements. First, only that work certified by local building officials as necessary to meet seismic safety regulations can be financed. Second, no dismantling of an existing building or construction of any new or substantially new building can be financed. Third, if improvements to private buildings are to be financed, the CFD must have unanimous approval of the affected land owners. Fourth, work on private buildings is limited to those that need seismic safety retrofitting or that were destroyed by the October 17, 1989 Loma Prieta earthquake.

In addition, within the counties declared disaster areas as a result of the Loma Prieta quake, a CFD may be formed to pay for any work needed to rebuild, repair, or replace any public or private building damaged or destroyed in that temblor. Work financed under this provision of Government Code section 53313.5 (h) is limited to those buildings which have been specifically identified in the resolution of intention to establish the CFD. The resolution must have been adopted before October 17, 1994.

A Mello-Roos tax can pay for the planning and design work directly related to the improvements being financed. Mello-Roos proceeds may also be put toward eliminating fixed special assessment liens or repaying any indebtedness secured by a tax, fee, charge or assessment levied within the CFD. (Government Code section 53313.5)

A Mello-Roos CFD may also fund the following services on a pay-as-you-go basis:

• police protection (including the provision of jails and detention facilities);

• fire protection and suppression;

• ambulance and paramedics;

• flood protection;

• recreation program and library services and additional funds for the operation and maintenance of parks, parkways, open space, museums, and cultural facilities (this final service cannot be approved through a landowner election); and,

• removal or remedial action for cleanup of any hazardous substance. (Government Code section 53313).

A CFD tax approved by landowners' vote (i.e. when there are less than 12 registered voters in the proposed district) can only finance the above services to the extent that they are in addition to services that were already being provided to the area before the district was formed (Government Code section 53313).

Bonds may be issued to finance infrastructure (but not services) under the Mello-Roos Act. Debt service is paid from the proceeds of the district. However, in order to avoid defaults, the legislative body must determine before the sale of bonds that the value of the real property that would be subject to the special tax will be at least three times the principal amount of the bonds to be sold and the principal amount of all other outstanding bonds within the CFD boundaries secured by Mello-Roos special taxes and special assessments. This rule and the exceptions to it may be found in Government Code section 53345.8. Refer to Government Code section 53345 for the procedure for issuing bonds.

Issuing bonds secured by the proceeds of the CFD has become quite popular. This provides an immediate source of cash for CFD projects that can then be repaid over time.

Some of the types of projects that have been funded through Mello-Roos bonds include:

• fire stations (Corona, Portola, and Riverside County);

• flood control/drainage improvements (Ontario, Fontana, Rancho Cucamonga, Oceanside, and others);

• K-12 school facilities (Chino Unified School District, Vallejo Unified School District, Corona-Norco Unified School District, Mountain View School District, and others);

• multiple public works in "planned communities" (Orange County, Riverside County, San Bernardino County, Thousand Oaks, Vallejo, and others);

• public park improvements (Tiburon and Riverside County);

• recreation and sports facilities (Highlands Recreation District of San Mateo County)

• road construction, bridges, and highways (Banning, Orange County, Poway, Riverside, Rocklin, Yorba Linda, and many others);

• solid waste recovery (Fontana); and,

• water supply/wastewater disposal (Corona, Los Angeles County, Riverside County, Santa Ana Mountains County Water District, and others).

Mello-Roos financing is the basis for a novel program to preserve open space and farmland near Fairfield in Solano County. The Solano County Open Space and Farmland Foundation administers the proceeds from Mello-Roos CFDs established by the city of Fairfield in conjunction with three large development projects. Once these projects are completed and a constant flow of income made available, the foundation will sell Mello-Roos bonds secured by the special taxes. The $3.5 million that is estimated to be raised will be used to purchase farmlands in the Suisun Valley and open space near Fairfield.

As with all special taxes, Mello-Roos taxes are subject to reduction or repeal by initiative. Proposition 218 does not specify whether the qualifying signatures for an initiative must be gathered jurisdiction-wide and the question put to jurisdiction-wide vote, or whether the initiative is limited to that portion of the jurisdiction within the boundaries of the CFD.

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