Negotiating Annexation Tax
Sharing Agreements
presented to
CALAFCO Staff Workshop
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.
2501 Ninth Street, Suite 200, Berkeley, CA 94710
510.841-9190 • 510.841-9208 fax
Overview
• Why Negotiate?
• Tax Exchange Procedural Summary
• Challenges and Motivations
• Role of Fiscal Analysis
• Property Tax Exchange Agreements
• LAFCO’s Role
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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.
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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.
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Procedural Summary
Tax Exchange Procedural Summary
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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.
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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.
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Property Tax Exchange Process
LAFCO receives application
Auditor shall estimate: amount of
property tax generated during current
fiscal year; and property tax attributable
to each agency per R&T 96.1 & 96.5
R&T 99(b)(1)(B) & 99(b)(2)
LAFCO NOTICE OF FILING
EO shall provide Notice of Filing to
County Assessor and Auditor
R&T 99(b)
Assessor shall provide Auditor the assessed
value of territory and the tax rate areas
R&T 99 (b)(1)(A)
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AUDITOR’S LETTER
Auditor 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)
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Property Tax Exchange Process (continued)
Local agencies negotiate amount of
property tax revenue to be exchanged
among local agencies
R&T 99(b)(4)
LOCAL AGENCIES REACH AGREEMENT
LOCAL AGENCY RESOLUTIONS
Agencies adopt resolutions of property
tax exchange and transmit them to LAFCO
R&T 99(b)(4)
If LAFCO amends proposal and upon
request of affected agency, EO may allow 15
days for agencies to renegotiate
R&T 99(b)(7)
LOCAL AGENCIES DO NOT REACH AGREEMENT
Agencies fail to adopt resolutions of
property tax exchange and LAFCO deems
application incomplete
GC 56668(h) & R&T99(b)(6)
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 agree
at end of process
Resolutions are presented to LAFCO
No resolution / Proceedings automatically
terminated
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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.
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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.
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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.
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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.
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Challenges and Motivations
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Achieving Rational Municipal Service
Boundaries
• Rational boundaries are in the public interest
(economic development, service standards, highquality 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.
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Poster Child (nearby)
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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.
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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.
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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).
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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.
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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.
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Role of Fiscal Analysis
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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.
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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.
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Property Tax Exchange Agreements
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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.
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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.
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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
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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
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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.
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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.
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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.
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LAFCO’s Role
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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.
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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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