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New Cities Raise Taxes, Pay Alimony To Get Past 然evenue Neutrality' Mandate

A decade after the passage of the "revenue neutrality" law, the incorporation of new cities appears to be back as a major planning issue in California. Now, however, there is a somewhat different twist. During the 1980s, almost every community with a strong retail base seemed to be incorporating. Then came the revenue neutrality law in 1992. Promoted by counties, the law was intended to ensure that a new city would not be created literally at the expense of a county. Incorporations slowed to a trickle because cityhood proponents were placed in a quandary. On the one hand, the community had to prove to the Local Agency Formation Commission that it would be fiscally viable on its own. On the other hand, proponents had to prove that the county would not be hurt financially by incorporation. (See CP&DR, May 1999, April 1998, April 1993.) In the tax-squeezed, post-Proposition 13 world, this seemed like an unsolvable dilemma. But it turns out to be a dilemma that can be solved by one concept: alimony. Virtually all new cities today get around the revenue neutrality requirement simply by agreeing to turn some of their tax money back over to the county and, therefore, holding the county harmless. Alimony payments can be large or small some are as little as a half-million dollars a year, others amount to tens of millions of dollars annually but they appear to be the key to allowing new incorporations. As a result of this newfound reliance on alimony, incorporation efforts are reappearing. In the last few years, three cities in south Orange County and two cities in Sacramento County have incorporated. In February, the Santa Barbara suburb of Goleta finally became a city after decades of talking about it, partly by agreeing to pay big alimony ($5.8 million a year) to Santa Barbara County. This November, it appears there will be four incorporations on the ballot. Two have received national publicity the secession attempts in Los Angeles by the San Fernando Valley (which would have to pay more than $100 million a year in alimony) and Hollywood. A third is in Rancho Cordova, another city being carved out of the vast swath of unincorporated Sacramento County suburbs. And the last is in Castro Valley in Alameda County, which, like Goleta, is a mature suburb that has been talking about incorporation for a long time. Although the secession efforts have received the most attention, the other two incorporations are more typical and, for insiders, perhaps more interesting for the way that they represent the emerging trends in relations between cities and counties. Rancho Cordova, a working-class suburb of 55,000 people near the closed Mather Air Force Base east of Sacramento, will have to pay almost $7 million a year in alimony to Sacramento County. Incorporations in Sacramento County have a checkered history dating back to the Citrus Heights incorporation, which was held up for 10 years by opposition from county officials and labor unions (see CP&DR, September 1998). In addition to steep alimony, the Rancho Cordova incorporation has an interesting wrinkle. The incorporation effort predates the "Hertzberg bill" (AB 2838, see CP&DR, September 2000) that reformed the Local Agency Formation Commission process. For this reason, the agency that must hold a legally required protest hearing and formally place the measure on the ballot is not the LAFCO but Sacramento County, which has often been hostile to incorporations. Fearing opposition and foot-dragging that might knock the Rancho Cordova incorporation off the ballot this fall, Republican Assemblyman Anthony Pescetti, who lives in Rancho Cordova, has engaged in a classic cityhood maneuver: He is doing an end-run around local authorities by sponsoring AB 1138, which would require the county to make a decision in time to get incorporation on the fall ballot. Thus, no matter what the opposition, it appears likely that Rancho Cordova voters will decide in November. The Castro Valley incorporation has even more interesting wrinkles. This unincorporated area of 60,000 people has tried for cityhood before and failed, largely because proponents could not get enough signatures to reach the ballot. So when Oakland City Councilman Nat Miley ran for Alameda County supervisor, he promised the proponents that he would move incorporation forward. Miley joined the Board of Supervisors in January 2001 and, as a result quite unlike the Sacramento experience the county itself is the official applicant for the Castro Valley incorporation. Having the county as the lead proponent is both good and bad, said Alameda County LAFCO Executive Officer Lou Ann Texiera. On the one hand, it has moved incorporation forward quickly; on the other hand, because it was not a ground-up movement, the public is not as aware of the issues, and sometimes people get suspicious. The alimony deal in Castro Valley is of interest as well. To be fiscally viable, Castro Valley must take over the county's utility user tax a tax that must be affirmed by city voters and must also adopt a bed tax, which the county does not have. (The city will have to pay Alameda County around $600,000 a year in alimony.) So the measure on the ballot is not simply a vote to incorporate. It is a vote on extending the utility tax and imposing the bed tax. In other words, no utility and bed tax, no city. That is not exactly a tax increase at least it is not a tax increase on the people who live in the city. But it is half-step back toward the old days prior to Proposition 13 when a city incorporation often meant a tax increase to support the new public entity. The rash of incorporations during the 1980s were "incorporations in the cheap" in the sense that the new cities simply transferred tax revenue from the counties and very often contracted back for services in a way that either enhanced critical services or saved money. It was simply a rearrangement of existing tax revenue. Today, however, communities seeking to incorporate will probably have to show more financial juice. In the face of alimony, potential new cities will probably have two choices. They will either need to have enough vacant land to grow their tax base in the future (the Rancho Cordova model) or they will have to take the hit for a few new taxes (the Castro Valley model). Simply put, if they can find a way to make the alimony payments, these communities can divorce themselves from the county. But if they are financially strapped or unwilling to tax themselves they may have to stay in a loveless governmental marriage.