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1 City of Stockton City Council Special Meeting Meeting Agenda - Final City Council Special Michael D. Tubbs Mayor/Chair Elbert H. Holman Jr. Vice Mayor/Vice Chair (District 1) Daniel R. Wright (District 2) Susan Lofthus (District 3) Susan Lenz (District 4) Christina Fugazi (District 5) Jesús M. Andrade (District 6) Tuesday, March 6, :30 PM Council Chamber, City Hall, 425 N. El Dorado Street, Stockton CA 1. SPECIAL SESSION CALL TO ORDER / ROLL CALL 2. NEW BUSINESS DISCUSS THE ESTABLISHMENT OF A NEW POLICY TO ESTABLISH A CITYWIDE COMMUNITY FACILITIES DISTRICT TO OFFSET THE COSTS OF NEW RESIDENTIAL DEVELOPMENT Recommended Action: RECOMMENDATION This is an informational item that does not require Council action. Council is asked to consider information presented by the City's Independent Registered Municipal Advisor and staff, and provide guidance regarding the development of policies for a new citywide Community Facilities/Mello Roos district that would address the costs of new residential development. Department: Administrative Services SUBMITTAL OF THE STOCKTON OPPORTUNITY ZONE PRIORITIES MAP TO THE CALIFORNIA STATE GOVERNOR Recommended Action: RECOMMENDATION It is recommended that the City Council approve a motion: 1. Authorizing the City Manager to submit the Stockton Opportunity Zone Priorities Map (Attachment A) and/or priority census tracts to the California State Governor; and 2. Authorizing the City Manager to take necessary and appropriate actions to carry out the purpose and intent of the motion. Department: Attachments: Economic Development Attachment A Stockton Opportunity Zone Priorities Map City of Stockton Page 1 1

2 City Council Special Meeting Agenda - Final March 6, PUBLIC COMMENT 4. ADJOURNMENT CERTIFICATE OF POSTING *Members of the public may only comment regarding items on this agenda. I declare, under penalty of perjury, that I am employed by the City of Stockton and that I caused this agenda to be posted in the City Hall notice case on March 1, 2018, in compliance with the Brown Act. Bret Hunter, CMC City Clerk By: Deputy *Members of the public may only comment regarding items on this agenda. All proceedings before the City Council are conducted in English. The City of Stockton does not furnish language interpreters and, if one is needed, it shall be the responsibility of the person needing one. In accordance with the Americans With Disabilities Act and California Law, it is the policy of the City of Stockton to offer its public programs, services and meetings in a manner that is readily accessible to everyone, including those with disabilities. If you are disabled and require a copy of a public hearing notice, or an agenda and/or agenda packet in an appropriate alternative format; or if you require other accommodation, please contact the Office of the City Clerk located at 425 North El Dorado Street, Stockton, California during normal business hours or by calling (209) , at least 5 days in advance of the hearing/meeting. Advance notification within this guideline will enable the City/Agency to make reasonable arrangements to ensure accessibility. Any writings or documents provided to a majority of the City Council regarding any item on this agenda will be made available for public inspection at the Office of the City Clerk located at 425 North El Dorado Street, Stockton, California during normal business hours or by calling (209) The Agenda is available on the City of Stockton Website: CHALLENGING CITY DECISIONS: The time limit within which to commence any lawsuit or legal challenge to any quasi-adjudicative decision made by the City is governed by Section of the Code of Civil Procedure, unless a shorter limitation period is specified by any other provision. Under Section , any lawsuit or legal challenge to any quasi-adjudicative decision made by the City must be filed no later than the 90th day following the date on which such decision becomes final. Any lawsuit or legal challenge, which is not filed within that 90-day period, will be barred. If a person wishes to challenge the nature of the above section in court, they may be limited to raising only those issues they or someone else raised at the meeting described in this notice, or in written correspondence delivered to the City of Stockton, at or prior to the meeting. In addition, judicial challenge may be limited or barred where the interested party has not sought and exhausted all available administrative remedies. City of Stockton Page 2 2

3 City of Stockton Legislation Text File #: , Version: 1 DISCUSS THE ESTABLISHMENT OF A NEW POLICY TO ESTABLISH A CITYWIDE COMMUNITY FACILITIES DISTRICT TO OFFSET THE COSTS OF NEW RESIDENTIAL DEVELOPMENT RECOMMENDATION This is an informational item that does not require Council action. Council is asked to consider information presented by the City s Independent Registered Municipal Advisor and staff, and provide guidance regarding the development of policies for a new citywide Community Facilities/Mello Roos district that would address the costs of new residential development. Summary Over the past six months, staff has analyzed the financial impact of potential residential development. Based on the analysis, the revenues and expenses related to new residential development are estimated to add net General Fund costs not included in the Long-Range Financial Plan (L-RFP). Staff is drafting a citywide policy for future consideration that would authorize a services and maintenance Community Facilities/Mello Roos district intended to address the unfunded costs. Establishing a citywide policy to fund the net increase in the cost of municipal services associated with new residential development would fulfill Council priorities related to budgeting consistent with the L-RFP and budget transparency. Council is asked to provide guidance that will be used to complete the draft policy. The draft policy would be presented to Council for consideration in the future. DISCUSSION Background The Mello-Roos Community Facilities Act of 1982 (the Mello-Roos Act ) provides a mechanism by which certain public entities (cities, counties, special districts, school districts and joint powers entities) can finance the construction or acquisition of facilities and the provision of certain services. The Mello-Roos Act authorizes a public entity to form a Community Facilities District (a CFD or district ), otherwise known as a Mello-Roos district. Once formed, the district can finance facilities and provide services. Upon approval by a two-thirds vote of the registered voters or landowners within the district, the district may issue bonds secured by the levy of special taxes and levy a special tax on real property within the district. The special tax lien has the same priority as property taxes. The Act does not direct how the special tax is to be applied, except that it may not be ad valorem (an ad valorem tax is one that utilizes a tax rate and applies it to a measure of value such as assessed valuation). Mello-Roos bonds are payable from and secured by special taxes, which are levied upon City of Stockton Page 1 of 4 3

4 File #: , Version: 1 the property in the district according to the rate and method of apportionment (the RMA ). Special taxes are levied upon real property and are not a personal debt of the property owners. The remedy for delinquencies is foreclosure. The General Fund of the local agency that created the district is not obligated to pay debt service on the bonds. Because the obligation to pay special taxes is an obligation that attaches to the land rather than the owner of the land, Mello-Roos bonds are generically known as land-secured bonds. Mello-Roos bonds are issued to finance construction or acquisition of certain authorized infrastructure projects, and the bonds are secured by (i) special taxes paid by property owners within a community facilities district, and (ii) proceeds generated by foreclosure sales on delinquent properties. As with other types of revenue bonds, the local government issuer usually has no legal responsibility to pay debt service on the bonds except from the revenue stream pledged to their repayment. The special tax may be used: To pay directly for facilities To pay directly for services To pay debt service on bonds or other debt, the proceeds of which are used to finance facilities For any combination of the above. The range of public facilities that may be financed is very broad. There is an extensive description of authorized facilities in the Act, which includes the purchase, construction, expansion, improvement or rehabilitation of real or other tangible property with an expected useful life of 5 years or longer which the local agency is authorized by law to construct, own, operate, or to which it may contribute revenue. Financed facilities are not required to be located within the boundaries of the CFD. By contrast, the services that may be financed are quite limited and are even more limited for landowner voted districts. The first group of services may be authorized by either a registered voter or a landowner election: Police protection services Jail, detention facility, and juvenile hall services Fire protection and suppression services Ambulance and paramedic services Maintenance and lighting of parks, parkways and open space Flood and storm protection services, including, but not limited to, the operation and maintenance of storm drainage systems, and sandstorm protection services Environmental cleanup and remediation services. A second classification of services may not be authorized by a landowner election, but only by a registered voter election: Recreation program services Library services Operation and maintenance of museums and cultural facilities Maintenance services for elementary and secondary school sites and structures. City of Stockton Page 2 of 4 4

5 File #: , Version: 1 There is flexibility to define who will pay the special tax. The primary way this is accomplished is by specifying what land area will be included in the CFD. Very significantly, the land area subject to the special tax need not conform to the jurisdictional boundaries of any local agency, and it need not be contiguous. A local agency cannot form a district that extends beyond its territorial limits. If such a district boundary is desired, it requires either a Joint Powers Agreement with the agency into whose territory the boundary extends or a larger agency that geographically encompasses the proposed CFD boundary (such as a county) to conduct the proceedings. Local Agency Formation Commission approval is not required. Territory may be annexed to an existing CFD, or it may be designated for annexation in the future. In that process, additional facilities and services may be added to those already authorized, but the additions may not increase the maximum tax rate in the existing district. The proceedings to annex, or to designate property for annexation in the future, are virtually identical to the proceedings to form the district. Even though local governments bear no direct financial responsibility for Mello-Roos special tax debt, they are responsible for managing the levels of tax-supported debt within their boundaries, including the debt issued by CFDs. The debt capacity of developing areas--or established areas, for that matter--is a finite resource. Municipal debt is, after all, serviced by tax revenues which are in turn paid from the incomes of taxpayers. At some point, if the debt burden reaches excessive levels, taxpayers may become unwilling or unable to pay. Present Situation In the fall of 2017, the Council adopted Title 5 - Financial Management as part of its Council Policy Manual, which included sections on: Reserve and Fund Balance Policy General Fund Interfund Loan Investment Debt Management District Formation and Financing Debt Forgiveness Mayor and Council Discretionary Funding. In the time since the Financial Management policies were adopted, City staff conducted analysis related to residential development and began drafting policies that would establish a citywide services CFD intended to address the net deficit between the revenues generated by residential development and the City costs necessary to service that development. The City historically utilized CFDs only to finance infrastructure related to new development. Local governments in California increasingly use CFDs to finance services and maintenance. The fiscal analysis of residential development focused primarily on General Fund impacts. The estimated net General Fund impact is expressed as a range because the revenues are dependent upon a variety of development options. The service and maintenance expenditures are consistent across the models. Using various estimates of home prices, the annual service and maintenance City of Stockton Page 3 of 4 5

6 File #: , Version: 1 deficits to the General Fund ranged from $453 to $787 per residence per year based on Fiscal Year activity. The variables that affect the financial analysis include: differing property tax rates, development size, and the type of residences being constructed. Increasingly, cities and counties are establishing comprehensive financing policies to mitigate the service level impacts as well as infrastructure impacts of growth. In many cases, the benefit principle serves as the model: existing residents pay for infrastructure that benefits existing areas, and new residents will pay for the infrastructure required to support developing areas. Communities typically define a general approach to financing services and infrastructure in the general plan because future development is subject to adequate service and infrastructure capacity. Specific implementation policies are usually adopted separately and may be adopted at any time. Consistent with the Council s commitment to the L-RFP, staff is drafting a Financial Management policy to address the cost of increased services that result from residential development. The potential services district would be a stand-alone district solely formed to finance city services, and would not finance any capital infrastructure. If adopted in the future, the district could begin with the next development or financing brought to Council and future residential development would annex into the district as a condition of approval of the development. Council is asked to consider information presented and provide guidance regarding development of policies for a new citywide Community Facilities/Mello Roos district that would address the costs of new residential development. FINANCIAL SUMMARY Staff estimates costs related to formation of a citywide services and maintenance district to be approximately $40,000 to $50,000 and will include fees for a district consultant, bond counsel, and municipal advisor. The amount of revenue generated by the new CFD would depend on the number of homes that are constructed and annexed into the district. City of Stockton Page 4 of 4 6

7 City of Stockton Legislation Text File #: , Version: 1 SUBMITTAL OF THE STOCKTON OPPORTUNITY ZONE PRIORITIES MAP TO THE CALIFORNIA STATE GOVERNOR RECOMMENDATION It is recommended that the City Council approve a motion: 1. Authorizing the City Manager to submit the Stockton Opportunity Zone Priorities Map (Attachment A) and/or priority census tracts to the California State Governor; and 2. Authorizing the City Manager to take necessary and appropriate actions to carry out the purpose and intent of the motion. Summary Congress established the Opportunity Zone program in December 2017, as part of the Tax Cuts and Jobs Act in an effort to stimulate long-term private investments in low-income communities. Governors must submit Opportunity Zone designations by March 21, Opportunity Zones cannot exceed 25% of the low-income qualified census tracts within each state. City staff has identified qualified census tracts that meet the low-income criteria, and that also demonstrate a need along with the opportunity for investment. It is requested that the City Council approve the Stockton Opportunity Zone Priorities Map for submittal to the California Governor prior to the March 21 deadline. DISCUSSION Background The Opportunity Zone program was established by Congress in the 2017 Tax Cuts, and Jobs Act signed into law on December 22, 2017, to spur long-term private sector investments in low-income communities across the nation. This new economic development program offers a way for investors to reinvest unrealized capital gains into distressed communities through Opportunity Funds in exchange for a graduated series of incentives tied to long-term holdings. Opportunity Zones offer investors three incentives for placing some of their unrealized capital gains to work rebuilding economically distressed communities: 1. Temporary Deferral - An investor can defer capital gains taxes until 2026 by putting and keeping unrealized gains in an Opportunity Fund. 2. Reduction - The original amount of capital gains on which an investor must pay deferred taxes is reduced by 10% if the Opportunity Fund investment is held for five years and another City of Stockton Page 1 of 3 7

8 File #: , Version: 1 5% if held for seven years. 3. Exemption - Any capital gains on investments made through the Opportunity Fund accrue tax -free as long as the investor holds them for at least ten years. Opportunity Funds are investment vehicles organized as corporations or partnerships that hold at least 90% of their assets in qualified Opportunity Zone business properties. There are several types of business properties eligible for investment: Original-issue stock of a qualified Opportunity Zone corporation. Interest in a qualified Opportunity Zone partnership. Tangible property used in qualified Opportunity Zones. In other words, just about any asset including high-growth startups, small businesses, real estate, manufacturing facilities, brownfield redevelopment, incubators, co-working spaces and rental housing may qualify as eligible Opportunity Fund investments. Those that will likely have interest in investing or establishing an Opportunity Fund include banks, venture capital partnerships, angel investor groups, multi-family developers, philanthropies, and CDFIs. Local municipalities may be able to set-up their own funds as well. Present Situation The California Governor has 90 days from enactment (or March 21, 2018) to designate Opportunity Zones for the state to the U.S. Treasury Secretary. The Secretary of Treasury has 30 days to review the recommended Opportunity Zones and approve or deny them. Opportunity Zones cannot exceed 25% of the low-income qualified census tracts within each state. While governors are given broad discretion when it comes to designating Opportunity Zones, Congress has advised them to give preference to areas that: 1. Are the focus of mutually-reinforcing state, local, and private development initiatives. 2. Have demonstrated past success in utilizing programs such as New Market Tax Credits, Enterprise Zones or Promise Zones. 3. Suffered major recent job losses from plant closures or relocations. Because it is unknown how the Governor will determine which qualified census tracts throughout California to recommend designation as Opportunity Zones to the Secretary of Treasury, City staff has identified three tiers of priority for the qualifying census tracts in Stockton, with Tier 1 being the highest priority: Tier 1 includes areas that have the highest likelihood for private investments, such Downtown Stockton, Port of Stockton, north and south shores of the Deep Water Channel, and industrial areas located in south and east Stockton. City of Stockton Page 2 of 3 8

9 File #: , Version: 1 Tier 2 areas have more limited opportunities for commercial investment, such as commercial corridors along El Dorado Street and Pershing Avenue, the Miracle Mile, and properties along Airport Way and Dr. Martin Luther King Jr. Boulevard. Tier 3 includes census tracts that are mostly residential with very limited investments for Opportunity Zones. It is at the Governor s sole discretion to recommend which qualifying census tracts are designated throughout California so long as it does not exceed 25% of the state s low -income census tracts. Approving a prioritized list of census tracts allows staff the ability to submit and advocate for designations of the most census tracts as possible for the City of Stockton. These prioritized tiers of qualified census tracts include a balance of areas that have demonstrated the greatest need of investment with those areas that provide greater opportunity for private investment. Overall, the priorities as recommended supports both neighborhood revitalization and large commercial development that would generate job growth. Should these areas in Stockton be designated as Opportunity Zones, it could bring awareness of the program to local bankers, financial institutions, investors, and business networks to encourage the establishment of Opportunity Funds. Once an Opportunity Fund has been established, the City and the private market could then actively promote itself to potential investors. Staff is requesting that the City Council approve the Stockton Opportunity Zone Priorities Map so that eligible census tracts may be submitted to the Governor s Office prior to the March 21 deadline. FINANCIAL SUMMARY There is no negative financial impact associated with this action. Attachment A - Stockton Opportunity Zone Priorities Map City of Stockton Page 3 of 3 9

10 Attachment A Opportunity Zone Map Legend City Limits Boundary Opportunity Zones Tier 1 Priority Tier 2 Priority Tier 3 Priority Not Eligible Miles R.Buck