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HomeMy WebLinkAbout12 Mello-Roos Community Facility District Agenda Item # • � Memorandum To: Board or Directors From: Peter Holzmeister Date: March 26, 2002 Subject: Mello--Roos Community Facility District At the last Board meeting I was asked to schedule a workshop for the Directors to discuss Mello-Roos Community Facility District processes. Attached is a chapter entitled "Mello-Roos Bond(Community Facilities Districts)"that I have copied from a much larger document entitled California Debt issuance Primer. Also attached is the outline of the discussion we had in the past concerning Mello-Roos. This is probably an excellent time to review the Mello-Roos material. The last time you discussed this matter the directors posed the following questions or concerns: Why would we do it? How does the District as a whole benefit? What areas would be covered by the CFD and be subject to the tax? We are so busy now why tackle another big project? Will other developers ask us to provide Mello-Roos for them? We will become identified with the tax. There can be no cost to the other customers of the District It is not our practice to provide financing for development What impact would there be on our bonded debt limits This is agendized as a workshop so I have no formal recommendation, and not action is necessary at this time. Mello-Roos Community Facility District (CFD) 1. This discussion initiated by East West partners. Request TDPUD for a CFD. I have no experience with CFD 2. Burdens shift to TDPUD. Burdens can be mitigated by compensation. What are the burdens? CEQA CDF formation process Debt issuance process On-going disclosure On-going administration Possible JPA 3. Process for forming a CFD Adoption of local goals and policies JPA Resolution of intention Report of responsible officer Notice Protest hearing Resolution of formation Election (2/3 of property owners must approve) Recording and notice of special tax lien 4. Process for approving and issuing bonds Public hearing Resolution of necessity Resolution to incur bonded debt 5. Financing team Bond counsel Financial advisor Underwriter Fiscal agent Trustee 6. General consideration Financial master plan Debt standards and policies General Fund of TDPUD not obligated to pay Security of debt Value of land must be three times debt Additional security Tax formula can be complex and confusing Who owns the improvements - CFD or TDPUD MELLO-ROOS BONDS (COMMUNITY FACILITIES DISTRICTS) DEFINITION AND PURPOSE The Mello-Roos Community Facilities Act of 1982 (the "Mello-Roos Act") provides a mechanism by which certain public entities, such as cities, counties, special districts, school districts, joint powers entities and redevelopment agencies, can finance the construction and/or acquisition of facilities and the provision of certain services. The Mello-Roos Act authorizes such a public entity to form a Comm uuty 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-thrids vote of the registered voters or landowners within the district, the district may issue bonds secured by the levy of special taxes. The special taxes are not assessments, and there is no requirement that the special tax be apportioned on the basis of benefit to property. This affords greater flexibility in designing the special tax. A special tax levied by a district is not an ad valorem property tax under Article XIIIA of the California Constitution, however the lien of the special taxes has the same priority as property taxes. PROJECTS WHICH MAY BE FINANCED A district may finance the purchase, construction, expansion, improvement or rehabilitation of real or other tangible property with an estimated useful life of five or more years, or planning and design work that is directly related thereto. The financed facilities do not need to be physically located within the district. In general, a district may finance the purchase of facilities that are completed before the resolution of formation to establish the district is adopted. A district may also finance the purchase of facilities that are completed after the adoption of the resolution of formation, so long as such facilities were constructed as if they had been constructed under the direction and supervision, or under the authority of, the local agency creating the district. This means, at a minimum, that the prevailing wage law applies if the resolution of formation is adopted before the public improvement is completed. In addition, a district may finance facilities to be owned or operated, or services to be provided, by an entity other than the entity that created the district, pursuant to a joint community facilities agreement or a joint exercise of powers agreement entered into pursuant to the Mello-Roos Act. Facilities. Examples of the types of facilities that may be financed are as follows: • Local park, recreation,parkway and open-space facilities • Elementary and secondary school sites and structures that meet the building area and cost standards of the State Allocation Board • Libraries • Child care facilities MELLo-Roos BONDS 183 • Facilities to transmit and distribute water, natural -as pipeline facilities, telephone lines, facilities to transmit or distribute electrical energy and cable television lines for customers that do not have those services or to mitigate existing visual blight • Facilities, whether publicly or privately owned, for flood and storm protection purposes, including storm drainage systems and sandstorm protection systems • Any other governmental facilities the legislative body creating the district is authorized by law to contribute revenue toward, construct, own or operate • Work to bring buildings or real property, including privately owned buildings and real property, into compliance with seismic safety standards and regulations, if such work is certified as necessary by local building officials • Work deemed necessary to repair damage to real property caused by the occurrence of an earthquake within any county or area designated by the President of the United States or the Governor as a disaster area(subject to certain limitations in the Mello-Roos Act) • Work deemed necessary to repair and abate damage caused to privately owned buildings and structures by soil deterioration (subject to certain limitations in the Mello-Roos Act) A district may not own any facilities for the transmission or distribution of natural gas, telephone service or electrical energy and may only operate and maintain those facilities pursuant to an agreement with a public utility. A district may be used to eliminate fixed special assessment liens on property within the district and to repay any indebtedness secured by any tax, fee, charge or assessment levied within the area of the district, or may pay debt service on that indebtedness. Services. Types of services that may be provided by a district are as follows: • Police protection services • Fire protection and suppression services and ambulance and paramedic services • Recreation program services, library services, maintenance services for elementary and secondary school sites and structures, and the operation and maintenance of museums and cultural facilities • Maintenance of parks, parkways and open space T 184 MELLO-Roos BONDS • Flood and storm protection services, including but not limited to the operation and maintenance of storm drainage systems and sandstorm protection systems • Removal or remedial action services for the cleanup of any hazardous substance released or threatened to be released into the environment The Mello-Roos Act contains restrictions on services authorized by landowner election. Such services may only be paid for by a CID to the extent that they are in addition to those provided in the territory of the CFD before it was created. The services to be paid for by the CFD may not supplant services already available within that territory when the CFD was created. In addition, a landowner election may not authorize the levy of a special tax for recreation program services, library services, school maintenance services or museum and cultural facility maintenance services. Such restrictions do not apply, however to services authorized by registered voter election. POLICY CONSIDERATIONS The nature of the facilities and services to be financed or paid for largely determine whether special taxes are levied instead of special assessments. Special taxes permit financing such general benefit facilities as libraries and schools, which are not authorized by the special assessment statutes. In addition, the financed facilities are not required to be located in the district, which allows a district to finance regional facilities. Finally, the flexibility allowed in structuring a Mello-Roos tax formula (also known as the rate and method of apportionment) may make a Mello-Roos financing a more attractive alternative than an assessment district financing. Because of the election requirement, the Mello-Roos Act has been used as a financing vehicle primarily where the voters are landowners as rather than registered voters. Compared to special assessment financings, most Mello-Roos district financings are complicated. Because of the flexibility provided by the Mello-Roos Act, special tax formulas are often quite complex and specific, making it difficult for a property owner to understand the nature of the burden on his property. Great care must be taken in designing the special tax formula to reduce political concerns and to provide clear and complete disclosure to home buyers of the burden imposed by the special tax. SECURITY AND SOURCES OF REPAYMENT FEATURES Mello-Roos bonds are payable from and secured by special taxes, which are levied upon the property in the district according to the rate and method of apportionment approved by the voters in the district. Like assessments, 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. A bond reserve fund is permitted, and the special tax may be levied to replenish the bond reserve fund so long as the tax rate does not exceed the maximum special tax rate approved by the voters in the district. t MELLO-Roos BONDS 185 The proceeds of a special tax may only be used to pay the cost of providing the facilities, services and incidental expenses authorized by the election. Special taxes are generally collected in the same manner as ad valorem property taxes are collected and are subject to the same penalties and the same procedure, sale and lien priority in the case of delinquency as are ad valorem property taxes. However, the legislative body may adopt another collection procedure, including direct billing of property owners, if circumstances so require. The legislative body may provide additional security for the bonds by covenanting on behalf of the bondholders that it will commence foreclosure proceedings by a specified time if a special tax installment is delinquent. Because the foreclosure process can be lengthy, the legislative body may also provide for special tax alternate procedures, such as the waiver of delinquency and redemption penalties and the acceptance of bonds tendered in payment of special taxes or at a foreclosure sale. The legislative body may require additional security for the bonds in the form of a letter of credit or a guaranty where the land in the district is largely undeveloped and is owned by a few persons. The additional security is typically only required until the district is fully developed and the property is sold to the general public. Bond insurance may be available for bonds issued by substantially developed districts, but is not commonly available for bonds issued by new, undeveloped districts. The formula for levying special taxes may be based upon a variety of factors, including density of development, square footage of construction, acreage or zoning. Unlike special assessment districts, there is no requirement that the special tax be based upon the benefit a parcel receives from the facilities or services to be financed, however, the tax must be levied on a reasonable basis, as determined by the legislative body of the district. PROCESS FOR APPROVAL—ESTABLISIIING COMMUNITY FACILITIES DISTRICT AND LEVYING SPECIAL TAX Adoption of Local Goals and Policies. Local agencies that initiate proceedings to establish districts on or after January 1, 1994 must first adopt local goals and policies concerning the use of the Mello-Roos Act. The policies must at least include: • A statement of the priority that various kinds of facilities will have for financing through the use of the Mello-Roos Act, including public facilities to be owned and operated by other public agencies (such as school districts) • A statement concerning the credit quality to be required of bond issues, including criteria to be used in evaluating the credit quality + A statement concerning the steps to be taken to ensure that prospective property purchasers are fully informed about their taxpaying obligations under the Mello-Roos Act -` 186 MELLO-Roos BONDS • A statement concerning the criteria for evaluating the equity of tax allocation formulas, and the desirable and maximum amounts of special tax to be levied against any parcel • A statement of the definitions, standards and assumptions to be used in appraisals required by the Mello-Roos Act In addition, the local goals and policies adopted by school districts must include a priority access policy that gives priority attendance access to students residing in a school district whose residents have contributed to the financing of the construction of school district facilities. Initiation of proceedings. Proceedings to establish a district may be instituted in any of the following ways: • By initiative of the legislative body • By written request signed by two members of the legislative body containing the information required by the Mello-Roos Act • By petition signed by not less than 10% of the registered voters residing within the proposed district • By petition signed by the owners of not less than 10% of the area of land within the proposed district 4 If the facilities to be financed by the district will be owned or operated by an entity other than the local agency creating the district, the local agency and the entity must enter into a joint community facilities agreement or a joint exercise of powers agreement prior to the adoption of the resolution of formation creating the district. No local agency that is a party to a joint community facilities agreement or a joint exercise of powers agreement may have primary responsibility for formation of the district unless that local agency is: (i) A city, a county or a city and county (ii) An agency created pursuant to a joint powers agreement that is separate from the parties to the agreement, is responsible for the administration of the agreement and subject to certain notification requirements under the Government Code (iii) An agency that is reasonably expected to have responsibility for providing facilities or services to be financed by a larger share of the proceeds of special taxes or bonds of the district created pursuant to the joint exercise of powers agreement or the joint community facilities agreement than any other local agency Resolution of intention. A "resolution of intention" to establish a district must be a adopted within 40 days after a written request or a petition to create the district is filed with the legislative body of the local agency that will form the district. The resolution of intention must: MELLo-Roos BONDS 187 • State that the district is being formed pursuant to the Mello-Roos Act • Describe the proposed boundaries of the district (which need not be contiguous) • State the name of the proposed district • Describe the facilities or services to be financed in a manner sufficient to allow a taxpayer within the district to understand what district funds may be used to finance • Describe any financing plan, lease, lease-purchase or installment-purchase arrangement that will be used to finance the facilities • Identify any completed facilities to be purchased or incidental expenses to be incurred • State that except where funds are otherwise available, a special tax will be levied annually to pay for the facilities and services and that it will be secured by recordation of a continuing lien against all nonexempt property in the district • Specify the rate and method of apportionment and manner of collection of the special tax in sufficient detail so each landowner or resident is able to estimate the maximum annual amount to be paid, and if the special taxes - will be levied against property used for private residential purposes, specify (a) the dollar amount of the maximum special tax, and state that such amount will not be increased by more than 2% per year, (b) the tax year after which no further special tax will be levied or collected, and (c) that under no circumstances will the special tax levied against any parcel be increased as a consequence of delinquency or default by the owner of any other parcel within the district by more than 10% • Specify the conditions under which the obligation to pay the special tax may be prepaid and permanently satisfied • Fix a time and place for a public hearing not less than 30 days nor more than 60 days after the resolution of intention is adopted • Describe any adjustment in property taxation to pay prior indebtedness • Describe the proposed voting procedure Report. When the resolution of intention is adopted, the legislative body must direct each officer responsible for providing one or more of the proposed facilities or services to file a report at or before the time of the hearing that contains: 188 MELLO-Roos BONDS • A brief description of the type of facilities or services required to meet adequately the needs of the district • An estimate of the cost of providing the facilities or services • If the district proposes to purchase completed facilities or to pay incidental expenses, an estimate of the fair and reasonable cost of those facilities or expenses • If the district proposes to finance removal or remedial action for the cleanup of any hazardous substance, either (i) a remedial action plan, or (ii) a determination that the remedial action plan is not required Notice. The clerk of the legislative body is required to publish a notice of the public hearing once, in a newspaper of general circulation in the proposed district, at least seven days before the public hearing, containing the information required by the Mello-Roos Act. Notice of the public hearing may also be given by first-class mail to each registered voter and to each landowner within the proposed district, sent at least 15 days before the public hearing Protests. Oral or written protests may be made at the public hearing by any interested persons or taxpayers against the establishment of the district, the extent of the district, the type of facilities or services to be provided or the regularity or sufficiency of the proceedings. Protests about the regularity or the sufficiency of the proceedings must be in writing and filed ._K with the clerk of the legislative body prior to the hearing, and must specify the irregularities or defects. Written protests may be withdrawn at any time before the conclusion of the hearing. Majority protest to formation of district. If 50% of the registered voters or six of the registered voters (whichever is more) residing in, or the owners of one-half or more of the nonexempt land in, the territory proposed to be included in the district protest against the establishment of the district, the proceedings to create the district or to levy the special tax must be discontinued for a period of one year. If the majority protest is only against the furnishing of a specified type of facility or service, that facility or service must be eliminated. If the protest is against levying a specified special tax, that special tax must be eliminated. At the public hearing, the resolution of intention may be modified by eliminating proposed facilities or services, reducing the special tax, or removing territory from the proposed district. Any modification of the resolution of intention that would increase the probable special tax must be preceded by a report analyzing the impact of the proposed modification on the special tax, which report must be considered prior to approval of the modification. Resolution of Formation. If, at the conclusion of the public hearing, the determination is made to establish a district, a "resolution of formation" must be adopted. The resolution of formation must: • Contain all of the information contained in the resolution of intention MELLO-Roos BONDS 189 • State that the proposed special tax to be levied in the district has not been precluded by majority protest • Identify the facilities and services to be funded • State the name, address and telephone number of the entity responsible for preparing the annual roll of special tax levy obligations by assessor's parcel number and for estimating future special tax levies • State that upon recordation of a notice of special tax lien, a continuing lien to secure each levy of the special tax will attach to all non exempt real property in the district and will continue until the special tax obligation is permanently satisfied or the legislative body ceases collection of the special tax • State the county of recordation and the recording information for the boundary map of the proposed district • Determine by a specific finding whether the proceedings were valid and in conformity with the Mello-Roos Act Election. The levy of a special tax must be approved by two-thirds of the votes cast by the qualified electors of the district in a general or special election held at least 90 days, but not more than 180 days, after the public hearing. These time limits may be waived with the unanimous consent of the qualified electors and the concurrence of election officials, and this action is typically taken in a developer(i.e. landowner vote) district. Determining who votes. The vote on the special tax must generally be by registered voters residing in the district. However, if fewer than 12 persons have been registered to vote within the district for any of the 90 days preceding the close of the public hearing, the vote must, or if the special tax will not be apportioned on any then residential property, the vote may be by the landowners within the district. Each of such landowners must be granted one vote for each acre or portion of an acre owned within the district. Manner of conducting election. The election may be conducted by mail, or ballots may be delivered by personal service to the voters. A ballot proposition may combine the questions relating to the levy of a special tax, the incurring of bonded indebtedness and the establishment or change of an appropriations limit. If the vote is to be by the landowners of the district, analysis and arguments may be waived with the unanimous consent of all of the landowners, and such waiver must be stated in the order for the election. Recordation and Notice of Special Tax Lien. Upon a determination by the legislative body that the requisite two-thirds of votes cast in the election are in favor of levying the special tax, the clerk of the legislative body must record a notice of special tax lien in the office of the county recorder for each county in which the district is located, whereupon the lien of the special tax will attach as provided in Section 3114.5 of the Streets and Highways Code. 190 MELLO-Roos BONDS Levy of special tax. The provisions of Streets and Highways Code, Sections 3100 et seq. apply to any proceedings taken under the Mello-Roos Act. The special tax must be levied initially by an ordinance adopted by the legislative body, and thereafter (assuming the tax is levied at the same or a lower rate than in the ordinance), it may be adjusted annually by the adoption of a resolution. Reasonable administrative costs incurred in collecting the special tax may be deducted by the tax collector. Extension of Authorized Facilities and Services and Changes in Special Taxes. After adoption of the resolution of formation, the legislative body, 25% or more of the registered voters residing in the district or the owners of 25% or more of the land in the district may institute proceedings to change the types of public facilities or services financed by the district, change the rate and method of apportionment or levy an new special tax, as specified in the Mello-Roos Act. Disclosure Requirements. In addition to the continuing disclosure requirements under SEC Rule 15c2-12, the Mello-Roos Act requires the legislative body to supply the certain information to CDIAC by October 30 of each year after the sale of any bonds, until the final maturity of such bonds. The information required to be supplied to CDIAC includes (i) the principal amount of the bonds outstanding, (ii) the balance in the bond reserve fund, (iii) the balance in the capitalized interest fund, if any, (iv) the number of parcels which are delinquent with respect to their special tax payments, the amount that each parcel is delinquent, the length of time that each has been delinquent, and when foreclosure was commenced for each delinquent parcel, (v)the balance in any construction funds, and (vi) the assessed value of all parcels subject to special tax to repay the bonds as shown on the most recent equalized roll. In addition, the Mello-Roos Act requires the legislative body to notify CDIAC within 10 days upon the occurrence of(x) a failure of the local agency or the paying agent or fiscal agent to pay principal and interest due on the bonds on any scheduled payment date, or (y) withdrawal of funds from a reserve fund to pay principal and interest on the bonds beyond the levels set by CDIAC. Proposition 218. Proposition 218 added Article X1HC and Article XIM to the California Constitution. Article XIED has no direct application to bonds issued under the Mello-Roos Act, because they are authorized by a two-thirds vote of the qualified electors of the district. Article XlHC states, among other things, that ". . . the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge." As discussed above, the Mello-Roos Act provides for a procedure, which includes notice, hearing, protest and voting requirements, to alter the rate and method of apportionment of an existing special tax. However, the Mello-Roos Act also prohibits the legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Mello-Roos Act unless the legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. Consequently, although the matter is not free from doubt, it is likely that Proposition 218 has not conferred on the voters the power to repeal or reduce special taxes if such reduction would interfere with the timely retirement of any bonds issued by a district. For more information regarding Proposition 218, see "State Constitutional Limitations —The Jarvis Family of Initiatives." MELLo-Roos BONDS 191 PROCESS FOR APPROVAL—ISSUING BONDS The legislative body may generally only sell Mello-Roos bonds if it determines, prior to the sale of the bonds, that the value of the property in the district that would be subject to the special tax will be at least three times the principal amount of bonds to be sold plus the principal amount of all other bonds outstanding and secured by a special tax or a special assessment on the property in the district. However, if the legislative body concludes that the proposed bonds do not present any unusual credit risk (due to credit enhancement or for other reasons), or that the bond issue should proceed for specified public policy reasons, then such determination need not be made. The proceedings to issue bonds secured by the levy of a special tax are usually combined with proceedings to establish a district. In such cases, a resolution of intention to issue bonds is adopted at the same time as the resolution of intention to establish the district. The local agency is required to hold a public hearing regarding the proposed bond issuance and to publish notice of the hearing, which actions are typically combined with the public hearing and notice published in connection with the establishment of the district. At the public hearing, any interested person may appear and present any matters material to the question of issuing the bonds. After the public hearing, a district may authorize the issuance of bonds by adopting a resolution of necessity to issue bonds, and a resolution to incur bonded indebtedness. Resolution of Necessitv. The resolution of necessity must: • Contain a declaration of the necessity for the indebtedness • State the purpose for which the proposed debt is to be incurred • State the amount of the proposed debt • State the time and place for a hearing by the legislative body on the proposed debtissue Resolution to Incur Bonded Indebtedness. The resolution to incur bonded indebtedness must: • State that the legislative body deems it necessary to incur the bonded indebtedness • State the purpose for which the bonded indebtedness will be incurred • State that either the whole of the district or a portion of the district will pay for the bonded indebtedness, as previously determined by the legislative body • State the amount of debt to be incurred 192 MELLO-Roos BONDS • Describe the maximum the bonds to be issued will run before maturity, which term may not exceed 40 years • State the maximum annual rate of interest to be paid, payable annually or semiannually, or in part annually and in part semiannually • State the date of the election (which may be consolidated with the election to levy the special tax), the polling hours if the election will not be conducted by mail or the hour when the mailed ballots must be returned to the election officer if the election is conducted by mail If more than two-thirds of the votes cast at the election are in favor of incurring the indebtedness, the legislative body may, by resolution, provide for: • The form, execution and issuance of the bonds • The appointment of a paying agent or bond registrar • The execution financing documents securing the bonds • The pledge or assignment of any revenues of the district to the repayment of the bonds Y • The investment of bond proceeds and other revenues, which investment provisions must comply with the restrictions in the Mello-Roos Act • The dated date and maturity date(s) of the bonds, and the place(s) and time(s) that the bonds are payable • The denominations, forms and registration privileges of the bonds • Any other terms and conditions determined to be necessary by the legislative body PROCESS FOR SALE Mello-Roos bonds may be sold at negotiated sale if the governing body determines that a negotiated sale would result in a lower overall cost. Otherwise, the bonds must be sold at competitive sale. MAXIMUM AMOUNT; OTHER LIMITATIONS ON TERMS OF BONDS The maximum amount of the bonds that may be issued is the amount approved by the qualified electors at the bond election. Bonds may bear Fixed or Variable interest at a Rate not exceeding 12% per year. Interest on the bonds may be paid annually or semiannually. The maximum maturity of any bond may not exceed forty years. MELLO-Roos BONDS 191 SPECIAL FEDERAL TAX CONSIDERATIONS The federal tax considerations that apply to a community facilities district are identical to the tax considerations that apply to assessment districts. See "Assessment Bonds" above. 194 MELLO•ROOS BONDS