General Obligation Bonds
Public Enterprise Revenue Bonds
Joint Powers Agreements
Pooled Financing
County Service Areas
Community Services Districts
In June 1986, California voters approved Proposition 46, a constitutional amendment that restored to county, city, and school districts the authority to issue general obligation (G.O.) bonds. Each local G.O. bond measure requires approval by 2/3 of the jurisdiction's voters. These bonds are used to finance the acquisition and construction of public capital facilities and real property (see Government Code sections 29900 et seq., 43600 et seq., and Education Code section 15100 et seq., respectively). Bond proceeds cannot be used for equipment purchases nor to pay for operations and maintenance. Certain other local governments are also authorized to issue G.O. bonds upon voter approval, under specific legislation.
The local entity's governing body initiates a G.O. bond election by passing a resolution placing the proposed bond issue on the ballot. The resolution must specify the public project to be financed. Voter election packets must include information about the proposed increase in the tax rate, ballot arguments, and the specific uses of the proceeds of the bonds. If sources of income other than property taxes are to be used to service the bonds, the voter pamphlet must disclose the effects of that upon the projected tax rate.
The jurisdiction issuing a G.O. bond is authorized to levy an ad valorem property tax at the rate necessary to repay the principal and interest of the bonds. The property taxes being appropriated to a G.O. bond issue do not count towards the jurisdiction's Gann appropriations limit. State law sets the maximum indebtedness which entities may incur through G.O. bond issues. General law cities are limited to 15% of the assessed valuation of all real and personal property within their boundaries. Counties are limited to 5% of their assessed valuations. A unified school district is limited to 2-1/2% of its assessed valuation and an elementary or high school district is limited to 1-1/4% (Education Code sections 15106 and 15102).
G.O. bonds are backed by the full faith and credit of the issuing jurisdiction and are paid for by increasing local property taxes above the limit imposed by Proposition 13. This security is attractive to potential investors. Accordingly, G.O. bonds will generally carry a moderate interest rate. In addition, G.O. bond issues do not require a reserve fund during construction of the authorized capital improvement.
November 1986 was the first opportunity for localities to reenter the G.O. bond market since the passage of Proposition 13 in 1978. Eight of the 17 local measures proposed around the state were approved. Projects to be financed included new schools in Bakersfield and Clovis, a police building and jail in Pasadena, an adult/juvenile detention center in Los Angeles County, fire protection system improvements in San Francisco, purchase and renovation of a new civic center in Auburn, highway widening in Suisun City, and a wastewater treatment facility in Sebastopol.
G.O. bonds are increasingly popular. According to the California Debt and Investment advisory Commission, there were 27 G.O. bond measures on local ballots for the November 1996 election. Fourteen of these passed; of the 13 that failed, nine had received more than 60 percent of the vote.
Here are some examples of the G.O. bonds approved in November 1996:
Cities and counties can issue bonds to finance facilities for revenue-producing public enterprises. This allows local governments to finance facilities, such as airports, water systems, sewer systems, and bridges, that can pay for themselves through service charges, connection fees, tolls, admission fees, and rents.
Revenue bonds do not require approval by two-thirds vote since they are neither payable from taxes, nor from the general fund. They are paid solely from a special fund consisting of the revenues generated by the facility being financed. Additionally, because the debt from revenue bonds in not generally a debt of the issuer, revenue bonds are not subject to the Gann limit.
The Revenue Bond Law of 1941 (Government Code sections 54300 et seq.) is the most popular of the many revenue bond acts available (a comprehensive list of these statutes can be found in the California Debt Issuance Primer published by the California Debt and Investment Advisory Commission). Under the 1941 Act, bonds may be issued for:
These bonds may also finance the land, vehicles, facilities necessary to the allowable enterprises.
Bonds are authorized pursuant to the 1941 Act by resolution of the city's or county's legislative body, subject to approval by a simple majority of the voters voting on the bond measure. The legislative body's resolution must state the purpose for which the bonds are proposed, the estimated cost of construction, improvement, and financing, the principal amount of the bonds, and the rate of interest. Furthermore, it must set a date for election and fix the particulars of that election. The 1941 Act goes on to establish the specific procedures for issuing these bonds.
Examples of public enterprise revenue bonds include the following. In 1987, the City of Napa sold $16 million of bonds to use for refunding debt on water supply facilities and San Francisco sold over $106 million for the same purpose. In late 1988, San Franciso issued $45 million in bonds for wastewater collection and treatment facilities. At nearly the same time, Los Angeles was issuing $125 million worth of bonds for the same purpose. The Cambria Community Services District offered $1.32 million worth of bonds to refund debt associated with a wastewater treatment plant in 1989.
A joint powers agreement (Government Code section 6500 et seq.) allows two or more agencies to jointly wield powers that are common to them. It does not create new powers, but instead provides a vehicle for the cooperative use of existing governmental powers. Agencies which may enter into joint exercise of powers agreements include the federal and state governments, cities, counties, county school boards, public districts, and public agencies of other states. A joint powers authority can enter into contracts, employ people, acquire, construct and maintain buildings, improvements and public works, and issue revenue bonds. The member agencies can also agree to exchange services.
The number of JPAs statewide has increased from 275 in fiscal year 1977-78 to 575 in fiscal year 1985-86 as agencies have found that creating a JPA can be a cost-efficient way to finance public buildings, capital improvements, police and fire protection, emergency medical services, libraries, and transportation. Self-insurance pools have accounted for a significant part of this increase. However, most JPAs are still concerned with providing infrastructure and services.
Examples of the use of joint powers agreements abound:
A joint powers agreement must describe the purpose for which it is being entered into, the power to be wielded jointly, the method by which its purpose is to be accomplished, and the manner in which the powers are to be exercised. The agreement may be administered by one or more of the agreeing parties, by a commission or board created as part of the agreement, or by a person, firm or corporation designated in the agreement.
Money for projects to be completed under joint powers authorities is provided by the member agencies in a manner prescribed in the agreement of formation. The Orange County Major Thoroughfares and Bridge Funding Program uses funds collected by the county and cities as part of subdivision approvals. The JPA may be used as the leasor in a lease-purchase agreement. Agencies may pool equipment and manpower more efficiently than they could operate separately. In other words, the sources of income for a JPA are not limited to tax revenues. Additionally, joint powers authorities may issue revenue bonds for a long list of projects including:
(Government Code section 6546)
"Pools" have become a popular method of bringing together several agencies for the purpose of jointly issuing public debt (i.e., bonds, COPs, etc.). According to the California Debt and Investment Advisory Commission's publication The Use of Pool Financing Techniques in California, the first pools in California were joint-use facility pools issued by joint powers authorities to finance capital improvement projects such as drainage systems which crossed jurisdictional lines. Now a variety of techniques are being employed to finance projects including water transmission facilities, wastewater management, and public buildings.
Pool financing techniques include:
In all the above methods, except for composite issues, the investor is purchasing a percentage of the debt being issued and accepts the credit risk of all the participants acting under the joint authority. In a composite issue, the debt is pooled only for purposes of marketing and an investor accepts the credit risk of the particular issuer whose debt they have purchased. The California Debt and Investment Advisory Commission notes that pools are useful for public agencies with little or no potential by themselves for entering public debt markets, but that they cannot substitute for the basic criterion that the agency be able to repay its debts.
Pool financing, in its various guises, is too complex a subject to be adequately discussed in this short section. For a detailed examination of pooled financing methods, see The Use of Pool Financing Techniques in California: A Look at Joint Issuance Techniques, published by the California Debt and Investment Advisory Commission. It carefully and impartially reviews the types of pooled financing that are currently available and describes their characteristics.
In 1996, the State Treasurer became very concerned over several bond pools which may have played fast and loose with the Marks-Roos Bond Pooling Act. These cases involved pools where the projects to be financed were not identified prior to issuance of the bonds and the agencies making up the JPA did not make the required finding that the financing would result in significant public (as opposed to private) benefit. While expressing a fear that these transactions were compromising the integrity of the municipal market, both with regard to the legality of the issuance and allegedly inadequate public disclosure of risks, the Treasurer asked both the State Attorney General and the Federal Security and Exchange Commission to investigate. As of this writing, the situation has not been resolved.
(Government Code section 25210.1 et seq.)
The County Service Area Law was enacted in the early 1950's to enable counties to localize the provision and financing of expanded services, such as street lighting or flood control, in areas which desired or needed a higher level of public service. For example, when a county provides extra services to an urbanized unincorporated area through a CSA, the residents in the rural areas of the county who don't receive those services are not charged for them. By establishing county service areas (CSAs), counties may identify those areas which desire a higher level of specific services than those already uniformly provided within the entire county (including the cities). These extended services are financed by the taxpayers of the CSA. By isolating the extra services provided within the CSA, the county can insure that the additional services are paid for only by those who will receive them.
CSAs are relatively versatile mechanisms. They can provide any of a wide range of municipal services. A CSA may encompass all of the county's unincorporated area (Gov. Code section 25210.4c) or only selected portions. CSAs are limited, however, by the county's ability to show that the proposed level of extended service is not otherwise provided on a countywide basis.
CSAs are the most common type of special district in the state. The use of CSAs has increased steadily since the passage of Proposition 13. According to information compiled by the State Controller, in fiscal year 1977-78 there were 701 CSAs in California, of which 563 were active. By fiscal year 1986-87, that number had grown to 816 (of which 661 were active) despite the inevitable loss of CSAs due to new city incorporation. Fast-growing counties such as Orange, Riverside, Sacramento, and San Bernardino have substantially increased their use of CSAs since fiscal year 1977-78. So have developing rural counties such as El Dorado, Kern, and Tulare.
Powers
Pursuant to Government Code section 25210.4, a CSA can provide one or more of the following extended services:
Funding
CSAs are empowered to levy ad valorem property taxes to pay for the extended services that they provide. Now that Proposition 13 has limited the availability of property taxes as a funding source, most recently created CSAs rely upon other financing methods.
Under current law, benefit assessments cannot be used to fund extended
police service, extended library services, limited television translator
facilities and services, or low power television services. As with all other
public agencies which levy taxes, fees, and assessements, CSAs are subject
to Proposition 218.
Formation
Nearly all CSAs are "dependent" special districts. Their governing bodies are usually the county board of supervisors. A CSA is established by the county, subject to prior approval of the proposed district by the Local Agency Formation Commission (LAFCO). The county board of supervisors may initiate formation proceedings on its own volition, upon receipt of a petition signed by voters in the proposed area, upon receipt of a resolution from any city in the county, or upon the request of two members of the board. As a condition of its approval, the LAFCO may limit the powers of the CSA to those specifically approved by the county (expansion of those powers would then require subsequent approval by the LAFCO).
After approval by the LAFCO, the supervisors must either adopt a resolution of intention to establish a CSA or, if so authorized by the LAFCO, a resolution establishing the CSA without notice and hearing, and without an election. The resolution of intention describes the boundaries of the proposed CSA, the services that it is to provide, and sets a time and place for a public hearing on the matter. Public notice must be published in a newspaper of general circulation and a hearing held for the purpose of receiving protests from involved citizens. Proceedings must be abandoned if the county receives protests from either 50% or more of the registered voters or from 50% or more of the landowners. After conclusion of the hearing, the board may adopt a resolution which either: (1) establishes the CSA (and describes the area boundaries and services to be provided) without an election or, (2) establishes the CSA subject to confirmation by area voters at a special election. CSAs approved without an election may be subjected to referendum.
When establishing a CSA, the county must determine whether "specified
services or the level of these services are being provided throughout the
county on a uniform basis within and without cities" (City of Santa
Barbara v. County of Santa Barbara (1974) 94 Cal.App.3d 277). The county
must show that the proposed level of extended service is not already provided
on a uniform basis.
(Government Code sections 61000 et seq.)
The community services district or CSD is a stalwart source of funding
for services in both unincorporated and incorporated areas. Because it may
be used to pay for a wide variety of facilities and services, the CSD is
often looked upon as a sort of mini-government in its own right. As of fiscal
year 1986-87 there were 280 CSDs (of which 262 are active). There were 212
CSDs in FY 1977-78, of which 200 were active. A number of rural counties,
including Calaveras, El Dorado, Lake, Monterey, Nevada, and Yolo, have significantly
increased their use of CSDs since 1978.
Powers
Government Code section 61600 provides that a CSD may exercise the following powers:
Some CSDs have also been granted certain additional powers on an individual
basis, such as the ability to construct and operate hydroelectric power
generation facilities.
Funding
CSDs are empowered to levy ad valorem property taxes, general taxes, special taxes, special assessments (upon formation of an improvement district within the CSD), water standby and delivery charges, and "rates and other charges." The California Attorney General stated in a 1987 opinion that fees assessed against real property in a CSD must directly relate to the benefit being received (70 Ops.Cal.Atty.Gen. 153). A CSD may be broken into zones for the purpose of financing capital improvements or services that will benefit only limited areas of the CSD. Within each such zone, bonds may be issued, special rates or charges may be collected, or special taxes levied to pay for the improvements or services being provided.
The effect of Proposition 218 on Community Services District financing is unclear at this time. Section 2 of Article XIII C of the California Constitution now states that "[s]pecial purpose districts or agencies, including school districts, shall have no power to levy general taxes." Some argue that because a CSD is a multi-purpose, as opposed to "special purpose" special district (Proposition 218 defines "special district," but not the term "special purpose district"), the initiative's restriction on general taxes does not apply to CSDs. It will be up to the Legislature and the Courts to clear up this ambiguity.
Improvement districts to finance improvements or facilities authorized of a CSD may also be formed, as provided under irrigation district law (Water Code section 236000, et seq.). Assessments within an improvement district must be levied, collected, and enforced in practically the same manner as annual taxes. Further, advance public notice must be provided for new or increased assessments pursuant to Government Code section 54954.6.
Here are some examples of CSD project financing reported to the California Debt Advisory Commission:
Formation
CSD formation proceedings are begun by filing a petition, signed by 10% or more of the proposed district's registered voters, with the county LAFCO. Only contiguous, unincorporated area can be included in the proposed boundaries. The LAFCO will convene a public hearing at which to consider the formation request. After hearing testimony, the LAFCO will either approve, modify or deny the proposal. If it is approved, the LAFCO will adopt terms and conditions for the formation and establish a sphere of influence for the CSD. Then, the LAFCO will direct the county board of supervisors to hold a hearing on the proposal.
If, at the hearing, the board of supervisors finds that 80% or more of the registered voters within the proposed district have signed the petition requesting formation, and no protests have been received, the supervisors may order the CSD formed without an election. The receipt of protests requires that the board consider whether an election should occur. An election cannot be waived when a proposed CSD crosses county lines. If an election is held and a majority of the qualified voters are in favor, the district will be formed. Upon formation, the supervisors will issue a resolution of formation establishing the boundaries of the district, its purpose(s), and its name.
Once a CSD is created, its boundaries may be altered and contiguous or noncontiguous unincorporated area added. In addition, incorporated territory located adjacent to the CSD may be annexed with the permission of the affected city. Annexation proceedings are initiated in accordance with the Cortese-Knox Act (Gov. Code section 56000 et seq.) and administered by the county LAFCO.
A CSD is governed by a three or five member board of directors elected
from among the registered voters residing within the district boundaries.
The number of directors is established in the resolution of formation approved
by the board of supervisors. Alternatively, the board of supervisors or
city council may constitute the directors of the CSD. Unlike CSAs, most
CSDs are independent districts with their own board of directors (there
were only nine dependent CSDs statewide in fiscal year 1986-87).