Basics of Municipal Finance: Revenue Sources, Debt Financing, and Spending and Debt Limitations

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Basics of Municipal Finance: Revenue Sources, Debt Financing, and Spending and Debt Limitations Sky Woodruff, Principal Chair, Public Finance Practice October 2, 2015

Overview Municipal Revenue Sources Taxes Fees Assessments Debt Financing Bonds Other options Spending and Debt Limitations Appropriations Limit Debt Limit Current Issues 2

Taxes Levies imposed for purpose of raising revenue Proposition 26 Most comprehensive definition of tax Any levy, charge, or exaction of any kind, unless the charge qualifies as a fee, fine, penalty, property development fee, assessment, etc. 3

Two Ways to Classify Taxes 4

Property Tax vs. Excise Tax Property Tax Excise Tax Imposes Tax On Ownership of property Use or activity Example Annual property tax Sales tax, TOT, real estate transfer tax, etc. Tax Amount Based On CA Constitutional Restrictions Value of property Prop. 13: - Tax is 1% of assessed value - Cities cannot impose add l tax except for bonds with 2/3 voter support - Limited annual adjustments based on market value - Reassessed when purchased, newly constructed, or ownership change Varies Props. 218, 26: - See next slide on General Tax vs. Special Tax 5

General Tax vs. Special Tax General Tax Special Tax Use of Revenue Any public purpose Specific purpose Legislative Body Support to Place Tax on Ballot Time of Public Vote Two-thirds supermajority Must coincide with general municipal election (unless emergency) Simple majority Can take place during special election Voters Support Required to Pass Simple majority Two-thirds supermajority 6

Fees Fees includes fees, charges, and rates Pay for a particular service or commodity, or Compensate government for a burden Amount cannot exceed estimated reasonable cost of the service, commodity, or burden Exceed reasonable cost = becomes a tax This is why fee studies or other methods of estimating costs are important. 7

Fee Examples and Limitations Development fees Offset cost of public facilities related to project Facilities must reasonably relate to project; fee amount must be reasonably proportional to project impact Mitigation Fee Act, Government Code 66000, et seq. 8

Fee Examples and Limitations Customer or user fees Fee, rate, or charge for service, commodity, benefit, or privilege Fee cannot exceed reasonable estimated cost of service, commodity, benefit or privilege Examples: Application fees, park and recreation program fees 9

Fee Examples and Limitations Property-related fees [Prop. 218 (1996)] Imposed on a parcel or person as an incident to his or her ownership of a property Includes user fees for a propertyrelated service Examples: Sewer and water rates, storm drain fee Special rules to adopt or increase of property-related fees 10

Fee Examples and Limitations Regulatory fees [Prop. 26 (2010)] Imposed on activity to fund a regulatory program necessitated by that activity Example: Fees on polluters to fund monitoring program Rental fees Charges for rental of public facilities or property Few restrictions; fee based on market value 11

Assessments Charges on real properties or businesses to fund an improvement or service that provides a special benefit to the properties or businesses Depending on whether assessment is imposed on real property or business, procedural requirements may vary and Prop. 218 or Prop. 26 apply Examples: street landscaping and lighting, financing construction and maintenance of roads and flood control facilities 12

Assessments Prop. 218 procedural and substantive requirements Engineer s report required Must determine the entire cost of the facility or service to be funded Must separate special and general benefit Amount of assessment imposed on each parcel cannot exceed the cost of special benefit conferred Public agencies bear the burden of proof 13

Debt Financing Bonds General obligation bonds Limited obligation bonds Other debt financing mechanisms 14

Bonds General Obligation Bonds General obligation bonds Secured by and repaid through general fund Only for real property acquisition or improvement Requires voter approval by two-thirds supermajority 15

Bonds Limited Obligation Bonds 1. Assessment bonds 2. Revenue bonds Secured by assessments Secured by specific revenue source related to facility funded by bonds Example: Bonds to finance airport construction, secured by airport fees 16

Bonds Limited Obligation Bonds 3. Special tax bonds Commonly used by Mello-Roos community facilities districts to finance facilities, services 4. Tax increment bonds Commonly used by redevelopment agencies before demise of redevelopment Secured by special taxes Secured by future tax revenue expected to be gained through development or improvements Can still be used by cities through special financing districts 17

Other Debt Financing Mechanisms Certificates of participation (COPs), lease-related financing, etc. See California Debt Issuance Primer (2006), published by California Debt and Investment Advisory Commission 18

Spending and Debt Limitations Appropriations limit Each city must establish appropriations limit by resolution Limit only applies to proceeds of taxes Amount of limit determined by previous year s limit, cost of living changes, and population growth Can be increased further in emergency circumstances, when financial responsibility for a service is transferred to city, or by majority of city voters 19

Spending and Debt Limitations Debt limit Debt limit calculation excludes expenditures for services required by law In any year, city cannot incur indebtedness that exceeds city s revenue for that year Unless voters approve by two-thirds supermajority 20

Current Issues Transient occupancy taxes (TOT) In re Transient Occupancy ax Cases Pending in CA Supreme Court Issue: Whether online resellers like Expedia must pay TOTs 21

Current Issues Propositions 26 and 218 Capistrano Taxpayers Ass n v. City of San Juan Capistrano (2015) 235 Cal.App.4th 1493 Decided by Court of Appeal in May 2015 Decision: Under Prop. 218, water agencies must calculate cost of providing water at various levels of usage to justify tiered rates. 22

Current Issues Propositions 26 and 218 City of San Buenaventura v. United Water Conservation Dist. Pending in CA Supreme Court Issue: Whether water district s groundwater charges are subject to Prop. 218 or Prop. 26 restrictions 23

Current Issues Propositions 26 and 218 Citizens for Fair REU Rates v. City of Redding Pending in CA Supreme Court Issue: Whether payment in lieu of taxes from city utility to city general fund is a tax under Prop. 26, plus related issues 24

Current Issues Development impact fees Cal. Building Industry Ass n v. City of San Jose (2015) 61 Cal.4th 435 Decided by CA Supreme Court in June 2015 Decision: Court upheld San Jose s inclusionary housing ordinance, which requires payment of an in-lieu fee where a developer does not include affordable housing units in a project or build off-site affordable units. 25

Basics of Municipal Finance 26

Basics of Municipal Finance Revenue Sources, Debt Financing, and Spending and Debt Limitations Sky Woodruff, Principal Chair, Public Finance Practice Oakland Office 555 12th Street, Suite 1500 Oakland, CA 94607 (510) 808-2000 swoodruff@meyersnave.com 2014 MEYERS NAVE A PROFESSIONAL LAW CORPORATION OAKLAND LOS ANGELES SACRAMENTO SAN FRANCISCO SANTA ROSA FRESNO 27