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Home My WebLink About09/27/1995, B-2 - PROPERTY TAX EXCHANGE POLICIES AND ANNEXATION Date��." A�tiort Memorandum September 14, 1995 To: Mayors & City Councils of SLO County From: City Manager Subcommittee on Tax Exchange Subject: PROPERTY TAX EXCHANGE POLICIES ANDANNEXATION Recommendation: Direct city managers to continue negotiations with County staff to establish a consistent, predictable, and equitable countywide property tax exchange policy at the earliest possible time. Discussion: Early this year, the Mayors of San Luis Obispo County referred to their respective city managers the issue of negotiating an equitable property tax exchange policy with the County. The city managers appointed the following three persons to represent the cities in these negotiations: ■ Richard Ramirez, City Manager, Paso Robles ■ Bob Hunt, City Manager, Arroyo Grande ■ Ken Hampian, Assistant CAO, San Luis Obispo The attached position paper fully explains the significance of this policy issue to cities, and the early efforts made by the managers to begin a dialogue with the County. In early September, the County issued its own paper on this subject, which is also attached. In addition, a meeting with the city manager committee has finally been scheduled by the County for Friday, September 22nd. The subcommittee will report on this first meeting under Item 2 of the September 27th meeting of all city councils. AN ANNEXATION KILLER: THE EVOLVING STATE OF COUNTY-CITY TAX EXCHANGE AGREEMENTS Recommended Action That San Luis Obispo County cities enter into negotiations with the County of San Luis Obispo to establish a consistent, predictable, and equitable countywide property tax exchange policy at the earliest possible time. Background: Straws in the Wind As a prerequisite to any annexation, Revenue and Taxation Code Section 99 requires the affected jurisdictions to negotiate an exchange of property tax revenue. Such negotiations are triggered by a Local Agency Formation Commission approving a Notice to Commence Negotiations for the Exchange of Property Tax Revenue and Annual Tax Increment". A 30 day period is allowed to complete such negotiations. For many years, San Luis Obispo County policy was to use a "standard property tax exchange formula" in determining the appropriate share of taxes for the County and the annexing city. Under this formula, the County retains all of its existing property tax base while the annexing city gets a share of the new increment equivalent to its average percent "take" of property tax in already annexed areas. In the City of San Luis Obispo, for example, the City's average property tax share is approximately 14%. On the whole, this policy has worked well, and has been perceived as predictable and equitable. However, a slow evolution -- if not a total abandonment of the policy -- appears to be underway. In recent years, as the County's fiscal environment has changed, County government has been asking for "something more" than the standard property tax exchange agreement. For example, in the late 1980s the City of Paso Robles agreed to a higher than usual allocation of tax increment to the County in exchange for an agreement that would facilitate significant commercial development in an expansion area. In 1992 the City of San Luis Obispo entered into a similar agreement to facilitate our "Broad Street annexation". The Broad Street annexation was fairly unique, in that much of the area was already developed, and the County was receiving sales tax revenue from an existing supermarket. Initially, the County asked that all of the existing sales tax base be "passed through" to them. The City, however, pointed out that the annexation would relieve the County of certain service provision . requirements -- and instead place new demands on the City -- and consequently the negotiated agreement should be based on a concept of "fiscal neutrality" and not "revenue neutrality". Ultimately, both parties agreed to a pass through of 50% of the existing sales tax, which only amounted to $21,000 annually. More importantly, the pass through was accommodated by adjusting the property tax allocation, and not through a direct sharing of sales tax revenues. In 1994, evidence of a further departure from past practice -- perhaps, even a total abandonment of past practice -- became apparent as a part of what is known in San Luis Obispo as the "TK Annexation". Few annexations could be more routine: The TK property is located on the corner of Tank Farm Road and South Higuera Street, and is only 22 acres in size. With the exception of a recently developed mini storage warehouse on 3.5 acres, the area is vacant. Both the County and City general plans support the eventual annexation of the land into the City. The County was providing virtually no services to the area while in county jurisdiction, nor were they expected to be impacted in any way by the future development of the property in the City. At the time of annexation, and still today, there are no development permits approved for the property. When the "30-day negotiation clock" began ticking, City staff was confident that the County would follow past practice for such a routine annexation and therefore use the standard property tax exchange formula. We were wrong. Instead, the County explained that like counties throughout the state, they had suffered significant revenue reductions in recent years, and therefore needed to be rigorous in their protection of current revenues, and in their search for new revenues. As such, the County stated that they wished to negotiate for potential sales tax from future anticipated development in the TK annexation area. The City refused to negotiate such a precedent setting agreement. Instead, we told the County that its interest in "potential sales tax" represented an entirely new countywide policy relative to property tax exchange agreements. We argued that the County should pursue this interest in a much broader forum, which included representative of all other cities. Conversely, we stated that attempting to extract such a concession "by holding the TK annexation hostage at the eleventh hour would clearly be viewed as a strong arm tactic not only by our city, but by all other cities, and as such would poison the atmosphere for a broader and more constructive dialogue on local government finance and annexation exchange policies. .Starting the dialogue — then stopping This issue was raised by SLO City officials during a January 1995 meeting of SLO County Mayors. The Mayors agreed to refer the issue to the city managers for discussion with the County CAO. The city managers met with the County CAO in February 1995. During this meeting, the CAO confirmed that the County wished to abandon the previous "standard property tax exchange formula", in light of the County's financial circumstances. He indicated that this was a trend statewide, and one that was being encouraged by the California State Association of Counties. However, Mr. Hendricks agreed to facilitate a more formal countywide dialogue on the matter. There has been no progress since that time. Why should cities proactively pursue this dialogue now? The short answer is: The County is in the position of strength on this issue. First, there is nothing in State law which establishes a formula that a County must follow in negotiating a tax exchange. In essence, what the law requires is that both jurisdictions reach a negotiated agreement. Of course, if a County is perceived as being "unreasonable", there is always legal recourse -- an expensive and uncertain proposition, at best. Second, time is on the County's side... and all the pressure is on the City. By the time an annexation reaches the LaFCO stage, it has already been through the rigors of local government review and community debate. Community consensus may finally have been reached, with controversy replaced by excitement and high expectations for "what is to come". Alas, the annexation proceeds to LaFCO.... whereupon the City has 30 days to reach agreement with the County, or the annexation dies! Hardlya position of strength. And, finally, cities have the most to lose financially... and the stakes can be very high. For the City, the financial implications of the TK Annexation are relatively insignificant. This is not true of several much larger annexation areas; areas where our major commercial, industrial, and residential expansions are to take place. Other cities undoubtedly have similar plans, or will some day. We should not wait until our moment of greatest weakness... when the 30-day clock starts ticking... to negotiate tax exchange in these areas. Chances are, we will give up more than necessary for all of the above stated reasons. Therefore, we believe that we should insist upon entering into a dialogue with the County at the earliest possible time to negotiate a new countywide property tax exchange agreement. In doing so, we must recognize that we may have to agree to some compromises and changes to past practice. However, if these compromises are reasonable, then we should gain important benefits from the standpoint of consistency and predictability... and by avoiding 11th hour power plays that are very difficult to defend against. In formulating our position, we may wish to consider the concept of "fiscal neutrality" instead of the County's preference for "revenue neutrality", or even revenue enhancement. Fiscal neutrality essentially means that the County should not "lose" in an annexation---but neither should they gain. The standard tax exchange formula assures that the County will retain its existing property tax base. With regard to sales tax, if for example the County is deriving $75,000 in sales tax from an area, but is relieved of $50,000 is service provision as a result of annexation, then the added pass through of property tax to them would be$25,000. This would be the calculation under "fiscal neutrality Under "revenue neutrality", the County would get the entire $75,000. Obviously, there are a number of other alternatives which we should discuss. What is most important, however, is that cities develop a strategy and proceed to discussions with the County in the very near future. KH:kk HAADNM4%XCMC0UNM.TAX County of San Luis Obispo i COUNTY GOVERNMENT CENTER.RM.370■SAN LUIS OBISPO,CALIFORNIA 93408■(805)781-5011 ',��M/N�s OFFICE OF THE ,�Tg9A COUNTY ADMINISTRATOR TO: ALL CITY MANAGERS FROM: ROBERT E. HENDRUf, COUNTY ADMINISTRATOR DATE: SEPTEMBER 1, 1995 SUBJECT: POSITION PAPER 'ON PROPERTY TAX EXCHANGES FOR ANNEXATIONS At the most recent City/County Managers meeting, a subcommittee of cities' representatives was appointed to meet with me to discuss the issue of property tax exchange for annexations. As a precursor to that meeting, I thought it would be helpful to provide you with our overall thoughts in the form of a position paper, which is attached for your review. The paper discusses the background of the issue and explains the current situation. The County of San Luis Obispo IS extremely interested in reaching an agreement with all cities on the approach to property tax exchange negotiations set forth in the paper. I will be pleased to discuss the approach further with your City Managers' subcommittee on this issue, and in this regard will be contacting the subcommittee members to schedule this meeting. It is my ope at s wi set a stage for the September 27, 1995 meeting of all cities on property tax negotiations. Please let me know if you have any questions or need additional information. POSITION PAPER ON PROPERTY TAX EXCHANGES FOR ANNEXATIONS Background County policy encourages urban growth within established urban centers. Land use policy establishes urban reserve lines that set boundaries between urban/suburban land uses and rural land uses. The urban reserve lines define urban growth areas around urban centers. In addition to the County planning process, the Local Agency Formation Commission (LAFCO), is responsible for ensuring the orderly'and rational growth of governmental entities that provide urban type services. LAFCO establishes.spheres of influence and decides if annexations to cities and special districts are reasonable and logical. Generally, urban growth is directed away from agricultural lands into areas that are set aside in city and. county- general plans for urban development. Although the fiscal ability of the annexing agency is considered by LAFCO, these decisions are generally outside of the purview of the Commission. As a prerequisite to any annexation, Revenue and Taxation Section 99 requires the affected jurisdictions to negotiate an exchange of property tax revenue. Such negotiations are initiated by a "Notice to Commence Negotiations placed on the agendas of the affected agencies. A 30- day negotiation period is allowed to complete negotiations. The period may be extended by 15- days only if LAFCO changes the boundaries of'the annexation. If agreement is not reached within the negotiation period, the annexation in essence is terminated and does not proceed to LAFCO. With respect to the above noted process, for many years the County of San Luis Obispo used a "standard agreement" whereby the County retained all of the base property tax revenue, while the annexing agency is transferred a share of the County's increment equivalent to the average increment the annexing agency receives from all of the Tax Rate Areas within its existing boundaries. The-standard agreement has not been followed in some instances where the territory to be annexed generated sales tax revenues. ' Since sales tax is allocated to counties and cities on a "situs" or point of sale basis, when unincorporated territory is annexed to a city the county loses sales tax and the city gains the same amount of revenue. In these cases the county and the annexing city have negotiated a lesser amount of property tax to offset the potential loss of sales tax revenue. Current Situation In recent years the fiscal picture of local government entities has changed. This change is due in large measure to the economy and the resultant inability of the State of California to balance its budget. Since the State Constitution requires schools district to be funded at historic levels, the State has aggressively sought to generate additional revenues. As a result, local property tax revenues have been diverted to schools thereby lowering the amount of State funds required to maintain funding levels. However, this loss of local property tax revenue has not fallen equally on cities and counties. Counties have bome the brunt of the States property tax "grab" having lost approximately 30% of property tax revenues in recent years. Cities have lost a much lesser amount, about 10%. This has unfortunately, but of necessity, caused the County of San Luis Obispo to reevaluate its historical position in many areas, including.property tax negotiations for jurisdictional changes. No longer can the County agree to transfers based on a generic formula agreed to under different ground rules. On the contrary, each jurisdictional change must now be evaluated based on its actual fiscal effect, both today and in the future. However, we expect to embody this process in a new standard concept. Clearly the County is not in a position where it wishes to "profit" from annexations and we will continue to work closely with cities to provide continuity between city and county land use planning. On the other hand, the County cannot afford to subsidize annexing agencies by agreeing to an unreasonable transfer of property tax revenue. There should therefore be a reasonable balance between service cost savings and revenue transfers. If the County is relived of$50,000 in service responsibility.then an equivalent amount of property tax revenue could be transferred to the annexing agency. Revenues.should however include all sources of revenue, including sales tax, TOT, and other revenues. A determination must also be made of future growth in the annexing area and the ability of the total revenue generation to the County being able to keep pace with the ultimate build out of the area in terms of our continuing and growing service responsibility. This may be viewed in terms of commercial/industrial development with. increases in the overall county employment base, or residential development with new inhabitants. In cases where no service responsibilities are being assumed by the annexing agency, a zero exchange of property tax revenue may be warranted. For example, a limited service district (water and sewer for instance) may annex vacant.land. The services are not currently being provided by the County and the district can recover its.cost from.user fees.- The County will incur additional service responsibilities in the future from new inhabitants,e.g.sheriff,fire,roads, health and welfare, courts,parks, etc.,and these services need to be financed by revenues general from the given area to maximum extent.possible. Overall, a new policy needs to be established by the County of San Luis Obispo that takes into account the following factors: 1. Total revenues generated from the annexing territory, both present and future. 2. Potential growth in the area that will increase future county service responsibilities and related costs. The growth projects would be based on maximum buildout in the annexing area based on prezoning by a city or county land use designations for special districts serving unincorporated county areas. 3. Savings to the County from transferring service responsibilities to the annexing agency. The concept of"revenue neutrality," which is currently in place for incorporations of new cities should be used as a basis for negotiations. Cost savings to the county should be balanced against revenue transfers. All current and future sources of revenue should be considered and balanced against service responsibility transfers to the annexing agency, and future service responsibilities for the county. I ITIEETING AGENDA DATE 1 7' ITEM # "� JOINT RESOLUTION NO. A JOINT RESOLUTION OF THE CITY COUNCIL OF THE CITIES OF SAN LUIS OBISPO COUNTY REGARDING PROPERTY TAX EXCHANGE POLICIES AND ANNEXATION WHEREAS, change in the current approach to determining property tax exchange is considered by all parties to be necessary; and WHEREAS, the extent and nature of such change should be determined through a process of negotiation between the cities and the County, the goal being to produce modifications that are fair to all parties; and WHEREAS, while cities appreciate the financial challenges faced by all local government agencies as a result of actions by the State of California, and thus can understand the County's interest in avoiding "fiscal losses" caused by annexation, tax exchange practices should not be used to create fiscal "profits" for the County, nor should they undermine good land use planning by removing city incentives for pursing logical and appropriate annexations. NOW, THEREFORE, BE IT RESOLVED by the City Council of the cities of San Luis Obispo County, that the City Manager Subcommittee be directed to continue negotiations with County staff to establish a consistent, predictable, and equitable countywide property tax xchange policy at the earliest possible time. PASSED AND ADOPTED by the City Council of the Cities of San Luis Obispo v at a special joint meeting thereof held on the 27th day of September, 1995. ATTEST: DOUGALL - a Grar ' --COUNCIL DIR � LaICAO WFlN DIR VACAO ❑ RE CHIEF , W/ATTORNEY !)�PW DIR O CLERWORIG ❑ POLICE CHF 1 ❑ MGMr TEAM ❑ REC DIR �' ❑ C D ILE ❑ U nL DIR ❑ PERS DIA ATTEST: MAYOR GEORGE HIGHLAND City of Atascadero ATTEST: MAYOR GENE GATES City of Grover Beach ATTEST: MAYOR WILLIAM YATES City of Morro Bay ATTEST: MAYOR WALT MACKLIN City of Paso Robles ATTEST: MAYOR PAUL BAILEY City of Pismo Beach ATTEST: MAYOR ALLEN SETTLE City of San Luis Obispo MEMORANDUM September 25, 1995 To: Mayors and City Councilmembers From: City Manager Property Tax Exchange Subcommittee Subject: Outcome of September 22, 1995 Meeting with the County On September 22, 1995, the Subcommittee, consisting of city mangers Richard Ramirez (Paso Robles) and Bob Hunt (Arroyo Grande), and assistant city administrator Ken Hampian, met with Bob Hendrix and Lee Williams of the County to begin the City-County dialogue concerning property tax exchange and annexation policies. During this first meeting, the following main principals were established to guide future discussions: 1. Change in the current approach to determining property tax exchange is necessary. The extent and nature of such change will be determined through a process of negotiation between the cities and the County, the goal being to produce modifications that are fair to all parties. 2. The County should not 'profit"from annexations, nor should a tax exchange approach be instituted that undermines good land use planning by discouraging cities from pursuing logical and appropriate annexations. On the other hand, annexations should not result in a net fiscal loss to the County. Any modifications to the current approach should achieve these respective goals. .3. A new approach should include a threshold under which the less complex annexations will proceed consistent with some preestablished, simple, and consistently applied formula. Thresholds can be defined, for example, based on annexation size and/or whether or not the property is already developed. More than one threshold is a possibility. 4. For the more complex annexations (those above the threshold), an impartial fiscal impact analysis should be completed based on a model pre-agreed upon by the cities and the County. The development of such a model will be pursued through these discussions. 5. A key point of future discussion shall be the length of time that will be considered in projecting and recognizing fiscal impacts through property tax exchange. City representatives strongly prefer to limit the timeframe to the time of annexation. County staff wishes to discuss alternatives for a longer time period. "tETING AGENDA fE9 �I a LITY OT Morro i5ay .}•:5• a••:i .'�ti^_ i i 'ri: �..r. �t _- - N: 4'ti= ADMINISTRATION ` - ''•' � "' " • - • - 595 HARBOR STREET. MORRO BAY, CALIFORNIA 93442 805-772-6200 SPECIAL MEETING PROTOCOL 1. Morro Bay Mayor William Yates will chair the meeting. 2. The meeting will begin promptly at 7:00 p.m. ; and adjourn no later than 11:00 p.m. 3. Public Comment Period will be limited to three minutes per speaker with a total of 30 minutes. 4. Each city will be provided with a table with five chairs; additional chairs will be provided behind each City Council for their respective staff members. 5. Because of the large number of City Council Members, Mayors and Council Members are respectfully requested to limit their comments and/or questions to two minutes. 6• If a Mayor or Council Member wishes to be recognized by the Chair, he or she may indicate so by placing the "Recognition Placard" (to be provided) next to their respective name plate. 7. Staff presentations will be limited to ten minutes. a- Motions will need to be ratified by each Council. Mayor Yates will recognize each of the respective Mayors, who in turn will put the item to a vote of his/her Council Member. In order to facilitate this process, discussion by individual Council Members should be limited to a minimum due to the large -number of elected officials present. I NCILDIR 93 PAO, FFIIR ❑ F15154HIEF EYW DIR CLER 10M(; ❑ POLICE CHF ❑ MGMT TEAM ❑ REC DIR ❑ _ ❑ UTIL DIR - 0 PERS DIR