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Revenue Neutrality Does Not Prevent Incorporations

As the debate over revenue-neutrality continues at the state Capitol and in local board chambers, something strange is happening. New cities are incorporating anyway. There is no tidal wave of incorporations, but the City of Laguna Woods in Orange County started business March 24, and the Contra Costa County community of Oakley will become a city on July 1. Also, leaders of Elk Grove incorporation appear near an agreement with Sacramento County officials, who bitterly fought the 1997 incorporation of Citrus Heights. Do these developments mean revenue-neutrality the state requirement that a county be made fiscally whole by a newly incorporated city still pose a hurdle for would-be cities? Absolutely, say observers. But evidence indicates communities can cross the hurdle, especially if a community is growing. "You can get by it," Paul Hahn, assistant executive officer of the Sacramento Local Agency Formation Commission, said of the revenue neutrality requirement. A would-be city with the ability to increase its tax base stands a better chance of surviving the revenue-neutrality test, he said. Citrus Heights, for example, will not have a great deal of money because it is not growing much. Besides the revenue-neutrality requirement, the property tax shift from counties and cities to school districts is another factor that complicates incorporations, said Alvin D. Sokolow, a University of California, Davis, professor. Also, said Sokolow, "the cities that were primed to incorporate did so in the '80s and early '90s." The remaining would-be cities are more problematic or lack the momentum that other communities had 10 years ago, he said. Although only Citrus Heights and Shasta Lake incorporated from 1993 through 1998, at least 20 California communities are in some stage of the incorporation process. California's Newest Cities Two-month-old Laguna Woods may be the state's most peculiar city. Almost the entire city lies within Leisure World, a giant, gated retirement community. The four-square-mile city contains 18,000 residents, but only 60 businesses, no schools or public parks, and almost no public roads. Opposition to opening a commercial airport at nearby El Toro Marine Corps Base galvanized Laguna Woods' incorporation drive. Although the county backs base conversion, it did not stand in the way of the new city, which voters narrowly approved three weeks before the incorporation's effective date. Revenue-neutrality "was not a huge issue," Orange County LAFCO Executive Officer Dana Smith said, because Laguna Woods' $3 million annual budget is so small. The annexation agreement calls for Laguna Woods to pay the county $400,000 annually for seven years. Rancho Santa Margarita, near Mission Viejo, could be Orange County's next city. Incorporation hearings are likely by early July, Smith said. As in Orange County, Contra Costa County did not fight incorporation of Oakley, a formerly rural hamlet in the midst of the rapidly growing east county. Oakley voters last November approved incorporation of the first new city in Contra Costa County since the mid-1980s, said Annamaria Perrella, Contra Costa County LAFCO executive director. An analysis indicated the proposed incorporation would not harm county coffers, Perrella said. County supervisors did not dispute the finding and did not insist on mitigation payments from the city, she said. Perrella conceded, though, that Oakley is probably an exception. The mostly residential city of about 14,000 people lacks commerce, whose sales and property taxes often provide the basis for county-city squabbles. Peace in Sacramento? The majority of the Sacramento metropolitan area lies in unincorporated Sacramento County, which had not had a new city for 50 years prior to Citrus Heights' incorporation. The protracted battle between Citrus Heights and Sacramento County sent a message statewide, said Professor Sokolow, who was lead author of a guide for communities considering incorporation. The county fought incorporation of the eastern Sacramento suburb for years, and the two sides did battle in court regarding tax transfers from Citrus Heights, which has a great deal of retail development. A 1998 settlement essentially gives property taxes to the county for 25 years and lets the city keep sales tax revenue. (See CP&DR September 1998.) Indications were that Sacramento County might fight the proposed incorporation of Elk Grove, a few miles south of Sacramento, just as aggressively. The county was not friendly to previous Elk Grove incorporation attempts, which voters last rejected in 1994. Acting County Executive Officer Robert Ryan Jr. in March recommended the county insist that Elk Grove and other new cities provide revenue exchanges in perpetuity. The LAFCO board, however, declined to condition Elk Grove's incorporation on revenue transfers without a sunset date. Instead, the conditions require that the suburb surrender some of its property taxes for 25 years, said Hahn, the LAFCO assistant executive. "There is a better trust level between the county and the incorporation proponents this time. There is an amount of property tax that can be secured," Hahn said. Because property taxes are paid directly to the county, the city cannot withhold payments, he noted. Elk Grove incorporation is scheduled to return to the ballot next year. Sacramento County also is the site of the fledgling movement to incorporate Rancho Cordova, on the Highway 50 corridor. The proposed city contains extensive retail, office and industrial development, the former Mather Air Force Base (which the county owns), and parcels of pasture owned by high-powered developers. Incorporation proponents began collecting petition signatures in April in hopes of getting the issue on the November 2000 ballot. Hahn said he doubted that timeframe. "This one has incredible financial implications for Sacramento County," he warned. More cities may be on the way The largest movement is actually a secession. In March, Los Angeles County officials determined petitions to detach the San Fernando Valley from the City of Los Angeles were valid, setting the stage for a massive study. Who will perform and pay for the study estimated to cost at least $2 million remains undecided. Los Angeles officials, led by Mayor Richard Riordon, are vigorously fighting secession, which would create a city of roughly 1.5 million people in the northern half of what is now Los Angeles. An election on San Fernando Valley secession is unlikely before 2002. Among the more unusual incorporation drives is one in the Fresno County industrial area of Malaga, where the Malaga County Water District is leading the charge. The proposed city would encompass seven to eight square miles southeast of Fresno. Malaga has long been a warehouse and manufacturing district, and about 80 percent of the proposed city is zoned commercial or industrial. Only 1,200 people live in the area, said Gerald Forde, water district general manager. Leaders of the district, which provides water, wastewater treatment, solid waste collection and recreation services, are charged with ensuring the financial health of the area, Forde said. Gaining control of land use decisions is the best way to ensure the district develops as needed, he said. "It's part of prudent management by the board, and it's providing for the future financial stability of the district," Forde said. "By going out on our own, we felt we could plan our destiny a little." Fresno County sees Malaga, the majority of which remains undeveloped, as a cash cow, and the county's land use decisions may not be best for the district, Forde contended. For instance, most of the county's sites for adult businesses are in Malaga, he complained. Until coming to the district in December 1996, Forde was in charge of economic development in Vernon, an industrial city with few residents in Los Angeles County. "Malaga can become the Central Valley's City of Vernon or City of Industry," Forde said. Fresno County, however, has sued the district. The county argues the district has no authority to pursue incorporation, and the county seeks an injunction to prevent the district from spending funds on the effort. Back at the Capitol The California State Association of Counties and the League of California Cities are behind competing Assembly bills regarding revenue-neutrality. The CSAC-backed measure, AB 1495 by Assemblyman Dave Cox, R-Sacramento, contains provisions on which the cities and counties agreed last year and builds on some of those provisions, said Hugh Bower, Assembly Local Government Committee consultant. Last year's bill, carried by Assembly Bruce Thompson, R-Fallbrook, did not become law. This year, Thompson had introduced city-backed legislation that dilutes the revenue-neutrality mandate, imposes shorter timelines on the LAFCO process and requires a LAFCO to compare like-sized communities. The legislation requires a LAFCO to take a "balanced approach" and states, "Communities that demonstrate the necessary resources, capacity and desire for self-governance shall not be denied the opportunity to incorporate solely due to the amount of mitigation payments required." Although the two sides appear far apart, CSAC and the League have been negotiating. "I think they both have legitimate concerns. I think until we have a more equitable way of financing municipal services, it seems the county loses every time," Bower said. "It all comes back to local government finance." Contacts: Paul Hahn, Sacramento County Local Agency Formation Commission, (916) 874-6458. Gerald Forde, Malaga County Water District, (559) 485-7353. Hugh Bower, Assembly Local Government Committee, (916) 445-6034. Dana Smith, Orange County Local Agency Formation Commission, (714) 834-2556. Alvin D. Sokolow, University of California, Davis, (530) 752-0979.