United States: Financing Increased Demand On Pre-Existing Services Constitutes "Additional Services"

Last Updated: November 18 2016
Article by Kelly J. Salt and Lutfi Kharuf

California Court Decision Rules on Mello-Roos Community Facilities Act of 1982

Community Facilities Districts formed by a landowner vote may be used to finance increased demand on pre-existing services, a California Appellate Court has held. Further, a CFD tax is a special tax and may finance multiple municipal services, so long as the revenue raised is not available for general governmental purposes. This decision reaffirms the flexibility and versatility of CFDs under the Mello-Roos Community Facilities Act of 1982 to fund services, and may be applied more broadly when distinguishing special taxes from general taxes in other contexts.

In Building Industry Association of the Bay Area v. City of San Ramon, a developer sought approval from the City of San Ramon to develop a 48-unit townhouse project. After conducting a study that showed the cost of providing services to the new development would exceed the revenue generated by the project, the City conditioned its approval of the project on the developer providing a funding mechanism to cover the difference. The developer petitioned the City to form a CFD for this purpose. A CFD was formed by a landowner vote (in which the developer was the only landowner), and the City authorized the revenue raised by the CFD to be used for multiple services authorized under the Act. The Building Industry Association of the Bay Area challenged the validity of the tax on the following grounds: 1.) the tax does not provide for "additional services," 2.) the tax is an unconstitutional general tax and 3.) the City's ordinance authorizing the tax is unconstitutional because it retaliates against property owners by providing that the City will cease to provide the tax-funded services in the CFD if the CFD property owners repeal the tax in the future.

Government Code section 53313 authorizes CFDs to be formed by landowner vote to finance numerous municipal services if the services are in addition to those already provided in the CFD before formation, and do not replace pre-existing services. BIA argued that the CFD does not provide for "additional services" because it "pays for increased quantities of existing services to meet increased demand." The court disagreed, stating that pre-existing service levels would be insufficient to meet increased demand in the CFD without an additional cost. The CFD would thus finance services supplementary to, and not in replacement of, pre-existing services. The court further clarified that landowner-approved CFD taxes may be used to satisfy an increased demand for existing services. Further, the Act does not require such a CFD to provide its property owners services that are superior to services in areas not subject to the tax.

BIA also argued that, because the CFD finances "a widely disparate menu of services and facilities" and its purpose is to raise revenue to supplement the City's general fund, it is a general tax that the CFD is not authorized to levy. Article XIIIC, section 1 of the California Constitution defines a general tax as "any tax imposed for general governmental purposes," and a special tax as "any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund." The court disagreed, finding that, so long as the tax is restricted to specific enumerated purposes — even if such purposes are "a widely disparate menu of services" — the CFD tax will not be characterized as a general tax.

Finally, the court rejected BIA's claim that the ordinance authorizing the CFD tax was unconstitutional because it retaliates against property owners in the CFD if they repeal the tax. The court found that it is not a violation of due process for the ordinance to recognize that if a tax has been imposed to provide additional services and facilities to a CFD, and if that tax is repealed and not collected, there will no longer be funds to provide properties in the CFD with those additional services and facilities, and any obligations that have been incurred to provide those services and facilities will need to be met from other sources.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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