May 7, 2004 - From the April, 2002 issue

LAFCO Secession Report Focuses On INfrastructure: Exec. Officer Outlines LAX, Harbor & Utilities Ownership

The most recent step in the state mandated timeline of the Cortese-Knox Act, was the release of the LAFCO Executive Officer's Report. The report reiterates that a new Valley city will be viable, analyzes how it would staff and operate the offices essential to providing government services and begins to shed light on the new city's water, power and sewer provision. Will the new city have enough money to support the necessary services? Who will be charged with Prop. K and the redevelopment districts? Larry Calemine examines these issues in this MIR excerpt.

By: Larry Calemine, LAFCO

PURPOSE

Pursuant to the Cortese-Knox Local Government Reorganization Act of 1985 (the "Cortese-Knox Act") the executive officer of a local agency formation commission is required to review each application for a change of organization or reorganization filed with the commission and prepare a report to the commission .

TRANSITION PERIOD

Accounting Costs

As the City's fiscal year ends on June 30 of each year, the December 30 and January 1 alternatives would fall in the middle of the fiscal year. The City of L.A. has indicated in the negotiation sessions that a mid-fiscal year effective date would require the City to produce two year-end financial statements during the 2002-03 fiscal year. Further, the City has indicated that the new Valley city should absorb the costs of producing the mid-fiscal year financial statements. The City has not provided staff with an estimate for the likely costs associated with producing audited financial statements for a mid-fiscal year effective date. The State Controller, however, did estimate that these costs-combined with redistricting and bond validation costs-would be about $566,500.

Recommendation: Although the Subcommittee recommended that the Commission adopt a January 1, 2003 effective date, the Exec. Officer continues to recommend a July 1, 2003 effective date in order to avoid the accounting and cash flow complexities inherent in a mid-fiscal year effective date. Should the Commission adopt a January 1, 2003 effective date, it is recommended that the Commission require that one-half of the fiscal year 2002-03 property and business license tax receipts generated in the Valley are allocated to each party. Further, its is recommended that the Commission accommodate the January 1 effective date by requiring the Valley to reimburse the City of L.A. for a portion of the City's tax and revenue anticipation notes outstanding as of the effective date. A December 30 effective date is not recommended.

Transition Period Length

The City of L.A. has proposed that the transition period cover the remainder of the fiscal year underway on the effective date, and last no longer than one year. With the City's preferred effective date of July 1, 2003, the transition period would end one year later, on June 30, 2004. The City has expressed concern over a lengthy period of service obligation without contracts or reimbursement guarantees.

The Applicant has proposed alternative transition period lengths, beginning with the effective date and ending on either June 30, 2004 or June 30, 2005. The Applicant's preference is for the longer transition period in order to accommodate what the Applicant expects to be lengthy negotiations over service contracts.

The Subcommittee recommended a transition period end-date of June 30, 2004. With the recommended effective date of January 1, 2003, the transition period would be 18 months. The recommendation of the Subcommittee reflects an attempt to accommodate the competing interests of both parties.

Recommendation: Consistent with the Subcommittee's recommendation, the transition period should end on June 30, 2004, coinciding with the end of the City of L.A. fiscal year. This date is recommended as a compromise between the competing interests of the parties If the Commission sets January 1, 2003 as the effective date, the parties will have approximately 19 months to negotiate service contracts, and limits the time in which the City of L.A. is required to provide services without a contract to 18 months. If the Commission sets July 1, 2003 as the effective date, the parties still have approximately 19 months to negotiate service contracts (although the elected Valley city council could not officially act until the effective date), and the transition period service obligation of the City of L.A. would be limited to one year.

EMPLOYEES

Government Code section 56844.2 requires that collective bargaining agreements continue to be honored by the City of L.A. and a new Valley city for the balance of the term, and that existing retirement benefits be maintained. Consistent with these restrictions, the Commission may impose conditions involving the employment, transfer, or discharge of employees, civil service rights, seniority rights, retirement rights, and other employee benefits and rights.

ASSETS

Generally speaking, the Applicant seeks a transfer of all assets located within the Valley Special Reorganization area, as well as a proportional interest or joint ownership of centralized assets. The Applicant contends that the Commission has the discretion to transfer assets of the City of L.A. to the new city with or without compensation.

The City of L.A. contends that there are constitutional constraints to the transfer of property held by a municipal corporation in its proprietary capacity. The City has asserted that municipal corporations hold property in their proprietary capacity in the same manner and with the same rights as private persons holding property, and based thereon, the California Constitution prohibits the State from taking such property without just compensation or the consent of the City. The City further asserts that the constitutional protections afforded the City's property is strengthened by the City's status as a charter city.

In negotiations, the City of L.A. has offered to transfer local assets to the Valley city as an overall resolution of special reorganization issues, including transition period service costs, and debts and liabilities. The parties, however, have not yet negotiated any written agreements. . . .

TRUST ACCOUNT FUNDS & LIQUID ASSETS

Trust account funds, which are funds held by the City of L.A. in trust for location-specific uses, include development impact fees, development agreement funds, project-appropriated Capital Improvement Expenditure Program ("CIEP") funds, and Quimby fees . Liquid assets include fund balances in the City's general fund and 50-plus special purpose funds.

Recommendation: Consistent with the Subcommittee's recommendation, the Commission should require the transfer of trust account fund balances for projects specific to the Valley Special Reorganization area, and any unexpended general fund balances (including reserves) and special fund balances, except: 1)Water Revenue Fund; 2)Power Revenue Fund; 3)Sewer Construction & Maintenance Fund; 4)Convention Center Revenue Fund; 5)Zoo Enterprise Trust Fund; 6)Special Police Communications/911 System Tax Fund; 7)City Employees Retirement Fund; 8)Fire and Police Pension Fund ; 9)El Pueblo de Los Angeles Historical Monument Revenue Fund; 10)Staples Arena Special Fund; 11)Tax and Revenue Anticipation Note Proceeds and Debt Service Funds; and 12) Bond Redemption & Interest Funds.

The Exec. Officer further recommends that the Commission require the new city to expend those impact fees and other special fees transferred for the original purposes for which the fees were collected, and be bound by all legal obligations with respect to use of those monies that would otherwise bind the City of L.A., including but not limited to, time limits, if any, in which to expend the money, or obligations to refund unexpended fees. The new city should be required to indemnify and hold harmless the City from any actions alleging improper use of these moneys.

STREETS AND HIGHWAYS

Recommendation: Consistent with the Subcommittee's recommendation, the Commission should impose the following term and condition: Upon the effective date of incorporation, all right, title, interest and responsibility for any and all public roads, adjacent slopes, medians, sidewalks, trails, bikeways, landscaped areas, open space, street lights, signals, and bridges located within the boundaries of the special reorganization area shall vest in the new city, except that the City of Los Angeles shall retain title to all assets, property, rights of way, easements, and other property interests (including, but not limited to, those that may be on, under, or adjacent to those roads and highways) related to operation of the water system, power system, wastewater system, and communications or other centralized systems.

STORM WATER> FACILITIES

Recommendation: speaking, the parties are in agreement that the storm drain facilities in the Valley Special Reorganization area should transfer to the new city.

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ENTERPRISES

Airports

Van Nuys Airport is one of four airports owned by the City of L.A. Van Nuys is a "general aviation" airport, serving recreational, corporate, and non-scheduled commercial flights. Typical of major international airport agencies in the nation, LAWA establishes asymmetric landing fees for recreational and other small aircraft to encourage them to use general aviation airports and draw small airplanes away from congested international hubs.

The federal government granted the Van Nuys Airport to the City of L.A. for "public airport purposes for the use and benefit of the public." The FAA has ultimate authority over the transfer of the Van Nuys Airport due to a restriction in the deed. If the Commission were to transfer Van Nuys Airport to the new city, it could only do so subject to FAA approval, otherwise the airport could revert back to federal government ownership.

The City of L.A. may also own properties adjacent to the original airport property transferred under the federal grant that may not be subject to a similar restriction.

Recommendation:Consistent with the Subcommittee's recommendation, the Commission should transfer the Van Nuys Airport to the Valley city subject to FAA approval; any City-owned property adjacent to the airport, the transfer of which is not subject to FAA approval, should transfer without compensation.

Port of Los Angeles

No part of the Port is located within the boundaries of the Valley Special Reorganization area. Both the City of L.A. and the Applicant agree that ownership and control over the Port will remain with the City of L.A.

Utilities

The City of L.A. has proposed that it retain ownership and control over the water, power and wastewater systems. Further, the City has proposed that it be explicitly allowed to impose wastewater fees and regulate industrial wastewater dischargers located in the Valley.

The Applicant has proposed that it receive an undivided proportional interest in these systems and, barring such an arrangement, that the City of L.A. be obligated to provide utility services to Valley residents at the same rates that the City charges its own residents.

Recommendation: The Commission should not transfer any public utility assets to the new Valley city. It is recommended that these integrated systems remain under single ownership and that the Commission, instead, fashion terms and conditions that will ensure that Valley customers continue to be provided the same level of service at the same rates as City of L.A. customers. In addition, it is recommended that the Commission adopt the City's proposed condition authorizing the City to continue to impose fees and charges related to operation of the wastewater system and to regulate industrial dischargers.

LIABILITIES

General Obligation [GO] Bonds

Recommendation: The Commission should require the new city to pass an ordinance by August 1 of each year adopting the GO property tax rate established by the City of L.A. for repayment of GO debt outstanding on the effective date, and require the new city to authorize the L.A. County Tax Collector to remit to the City of L.A. all Valley property owners' payments for GO debt outstanding on the effective date. The City of L.A. should continue to be responsible for repaying the bondholders.

Assessment Bonds & Special Tax Bonds

Recommendation: The Commission should require the parcels that are currently encumbered with such assessments to remain encumbered until the bonds are paid in full, including parcels within the Valley Special Reorganization area that are currently encumbered. Property owners in the new city would not bear liability for outstanding Pershing Square Park Project debt. Property owners in the new city would continue to bear liability for assessments related to the police emergency communications system, Prop. K, and the Cascades Business Park assessment in Sylmar.

Judgement Obligation [JO] Bonds

Recommendation: Similar to the Subcommittee's recommendation, the Commission should require the new city to pay 30.57 percent of City of L.A. debt service for the debt outstanding on the effective date consistent with the payment schedule in the bond covenant, unless and until the new city pays the City of L.A. for its share of the outstanding debt. The fiscal agent should be required to remit the debt payment to the City of L.A. in a timely fashion for repayment of the bondholders, with appropriate deductions for interest earned by the City on any pledged funds paid by the Valley to the City prior to the City's actual payment of debt service.

MISCELLANEOUS PROVISIONS

Redevelopment Areas

Recommendation: The parties are required by law to comply with the provisions of Health and Safety Code sections 33214-33217 to effectuate a transfer of responsibility for redevelopment areas, and the Commission has no role in that process; therefore, it is not recommended that the Commission adopt a term and condition with respect to the transfer of redevelopment areas. The Exec. Officer does recommend requiring the City of L.A. to obtain the consent of the new city's city council before it expands or establishes a redevelopment area within the new city during the transition period.

Prop. K Assessment District

Recommendation: The Commission should detach the Valley from the Prop. K assessment district, authorize the continuation of the assessment with a limit on the total amount assessed, and form a separate district in the Valley consistent with the responsibilities, powers and limitations of the current district. The Valley Prop. K district would continue to be liable for a pro rata share of the outstanding bonds of the former district, and should be obligated to carry out those specified projects in the Valley, unless the new City Council determines that they are infeasible, consistent with Proposition K. Since this is a previously authorized assessment that has been and is being collected in the Valley, and no increase in the assessment limitation is contemplated, the requirements of Prop. 218 should not be triggered.

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