HomeMy WebLinkAbout1982-08-31; City Council; N/A; Annexation TaxesLR
DATE: MAY 28, 1982
TO: CITY COUNCIL
CITY ATTORNEY
FROM: City Manager
ANNEXATION TAXES
At the request of Council a study was made of the property
taxes paid to the City by areas annexed.
The report dated May 27, 1982 is available from city Manager's
office.
Findings in the report show that Carlsbad has E3 different tax
code areas. Tax rates range from 11% to 25% with the average
city-wide rate being 21%. In an annexed area the average rate
would be 17%.
It is true that an annexed parcel will pay 20% less than a
comparable development inside the incorporated area. But there
is wide disparity between tax code areas.
it is also true that because of the way Proposition 13 works,
'we already have inequities between taxpayers inside the City.
For example: old Carlsbad pays 29%, La Costa pays 14%.
If we try to provide tax equity for annexed areas - which tax
rate do we use? How do we deal with equalization within the
existing city?
If we decide not to annex what would ,prevent the area from
developing as unincorporated territory and have the County keep
all of the taxes.
This is a very complex issue. We have checked with other cities
and with LAFCO. No one knows of a city that has tried to tackle*
this problem.
The state legislature is aware of the growing inequities caused
by Prop 13 and AB8. It is likely there will be some corrective
legislation within the next 10 years.
Please review the report and let me know when you want to discuss
it.
FRANK ALESHIRE
City Manager
COUNCIL ACTION:
FA:ldg
7-27-82 Council continued the matter for three weeks.
8-17-82 Continued to August 24, 1982
8-24-82 Continued to September 7, 1982
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CITY OF CARLSBAD
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ANNEXATION REVENUE
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CONSIDERATIONS
DISCUSSION PAPER
May 27, 1982
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Presented to:
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Frank Aleshire, City Manager
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City of Carlsbad
1200 Elm Avenue
Carlsbad, California 92008
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Prepared by:
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John J. McTighe, Principal Consultant
PUBLIC AFFAIRS CO?7SULTANTS
73.85 Navajo Road, Suite 0
San Diego, California 92119
(714) 464-8471
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DISCUSSION PAPER'
CITY OF CARLSBAD
ANNEXATION REVENUE CONSIDERATIONS
Problem Statement: Should property to be annexed to the City
of Carlsbad pay revenue to the City to offset the difference
between the percentage of property taxes to be received from
that property and the percentage of property taxes received
from property already sited in the City?
�- What advantages and disadvantages are there to such
a policy?
- What legal mechanisms exist to effectuate such a
Policy?
- What changes in current laws would-be necessary to
equalize the revenue from annexed property viith that
from property currently sited in the City?
Back round: Prior to the enactment of Article XIIIA of the
CaLi:fornia Constitution (Proposition 13) in June 1978, all
real.property was theoretically assessed annually based on
25% of its then current market value.' Local public agencies;
including cities, that were authorized by statute to levy
property taxes would annually establish a total revenue
requirement to be met from the levying of the property tax.
The dollar amount of the revenue requirement would be divid-
ed by one one -hundredth of the assessed value of property
hich was sited within, the boundaries of the agency to arrive
at a rate of tax per $100 of assessed valuation. This rate
as then applied to all property which was located within the
oundaries of the jurisdiction.
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en property was annexed to a jurisdiction, the assessed
luation of that property was added to the previous total
sessed value and the added costs to a jurisdiction of
rving that property was added to the revenue requirements
of the jurisdiction. The year following annexation the
anngxed property would pay the same tax rate per $100 of
assessed valuation as all other properties within the jar-,
isdiction.
Since the enactment of Article XIIIA, the State Legislature
found it necessary to provide a framework within which
local jurisdictions could operate in cases of annexation to
balance the dual objectives of 1) upholding the constit7nt4ona
limitation that no real property could be taxed at a rate
greater than one percent of the Assessor's market value of
the property (with the exception of voter -approved indebted-
ness), and 2) that an annexing local jurisdiction could
receive at least some share of the property tax collected
from that property. Assembly Bill a of 1979 was the most.
significant piece of legislation affecting the distribution
of the property tax revenues.
To meet the first objective of keeping the property tax wIth-
in one percent of the assessed market value, the Legislature
provided that all jurisdictions which had been receiving
property taxes before proposition 13 would contirrae to
receive property taxes, but at a reduced amount, in the same
proportion (with adjustments for bailout and shifting from
schools to cities and counties) as the average for the three
year period immediately preceeding proposition 13's effective
date. These proportions were determined for each tax rate
area (TRA) within a county. A TRA is an area in which all
properties are contained within the same taxing jurisdictions.
A simplified example of how this worked in a typical tax
rate area is illustrated below:
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Property within a city
Jurisdiction Pre-13 tax rate_* Post-13 tax
County $1.825 25.99% $1.040
City 1.667 23.74 .950
schools 3.269 46.57 1.863
Hospital District .139 1:98 .079
Water District .121 1.72 .068
$7.021 100.00% $4.000
*includes adjustments for "bailout" and AB 8 shifting
from schools to County and cities
Property outside of a city
Jurisdiction Pre-13 tax rate* 8 Post-13 tax
County $1.825 34.09% $1.363
Schools 3.269 61.06 2.443
Hospital District .139 2.60 .104
Water District .121 2.26 .090
Total - $5.3=4 100.00 $4.000
*includes adjustments for "bailout" and AB 8 shifting
from schools to County and cities
As can be clear'y seen in the above hypothetical example,
while the properties represented in our example were both
paying the same dollar amount per $100 of A.V. to the
County, schools, hospital district and water district,before
Proposition 3.3, after Proposition 13 the property located
outside of the city -was paying more per $100 A.V. to all
four of these jurisdictions than the property located in the
city. We will come back to t;iis example later after the
discussion of the property tax exchange upon annexation.
The second objective of the Legislature in enacting AB 8 was
to allow for the adjustment of property taxes. among local
4%,;cnict-inns when annexations take place. The Legislature
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determined that the differences among local agencies through-
out the State made it impossible to legislate a specific
formula to be applied to the exchange of• property tax among
local jurisdictions. Therefore, the legislation left the
issue of the amount of tax exchange to be determined by the
affected local agencies. The only requirement was that an
agreement on the exchange of property tax must be reached
before the Local Agency Formation Corunission could give its
approval to an annexation application.
Current Situation: After several atterapts to negotiate
property tax exchanges on a case by case basis within San
Diego County, some of which were successful and others which
were not, the County offered to enter into a "Master Pro-
perty Tax Transfer Agreement" with cities in the County
that would apply to all annexations taking place dtring the
term of the agreement. The City of Carlsbad approved the
agreement on April 7, 1982 and the County ratified the
agreement on June 16, 1981. The agreement• will remain in
effect until November.1, 1984. The agreement could be
ruminated sooner if there are changes in State statute or
cou,, decisions that effect changes in the distribution of
property tares among local agencies.
Under the Master Property Tax Transfer Agreement the City of
Carlsbad is entitled to receive 48% of the "pooled annual
tax increment" for undeveloped properties annexed to the City.
For developed properties annexed, the City will additionally
receive 17.S8 of the base property tax from the County's
and detaching special districts' base.
The "pooled annual tax increment" is the percentage of taxes
received by the County and any special district that is being
detached from as a result of the annexation. This percentage
is determined by adding together the percentage of taxes that
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are currently being received by the County and the affected
special districts. From our previous hypothetical example,
let us assume that an annexation will involve the detachment
of the territory from the water district. The pooled annual
tax increment would therefore be 34.09% + 2.26% = 36.35%.
The City would then receive 48% of 36.35%, or 17.45% of the
of the property taxes to be received from increases in the
assessed value that takes place in the tax rate area that is
annexed.
if the property to be annexed were already developed, the
City would receive -the 17.45% of the property taxes from
increases in the assessed value plus 17.5% of the current
revenue received by the County and the water district from
the property.. Developed property is defined in the agreement
as property which contains improvements with "an assessed
value at least equal to the assessed value of the land in
the, same assessor's parcel."'
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In fisLal year 1981-82 there are 68 separate tax rate areas
within the boundaries of the City of Carlsbad. The percentag
of taxes collected from within these TRAs that are received
py the City of Carlsbad ranges from a low of 11.11% to ahigh
of 25.00%. The predominant percentage received by the City
is 23.75% received in tax rate area #09000. The following
Lable shows the percentage of total property taxes received
by the city from tax rate areas in groupings by the percentag
that ins distributed to the City. The table also shows the
percentage of the total assessed value contained within the
City that is contained in each of the -groupings.
As noted on the table, current inequities exist in the per-
centage of property taxes received from properties in the
City. Currently property representing 70.76% of the total
assessed value in the City is paying 80.33% of the property J
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taxes received by the City,
while property representing
29.24d% of the assessed value is paying 19.67E of the pro-
perty taxes to the City.
A note of caution is in order at this point. Because of the
way Proposition 13 has affected the method of establishing
the assessed valuation of Properties, it cannot be easily
determined whether the properties sited within the tax rate
areas with the higher distribution of taxes to the City have
a higher or lower ratio of assessed value to actual market
value than the properties located in the tax rate areas with
the lower distribui:ion of taxes to the City. However, it
would intuitively appear that since most of the properties
in'the TRAs with the lower distribution are newly, annexed
properties that were mostly undeveloped at the time of
annexation, when those properties develop the assessed value
to market value ratio will be higher than in the deg=elaPed
portions of the City. The implicationiof this,, if true,
is that as a percentage of actual market value (rather. than
assessed value), the City taxes collected from properties
in the IRAs with a lower percentage of City tax may '.n fact
be higher than for those properties in the TRAs with the
higher percentage of City tax. While this might be true
for these groupings of properties, individual discrepancies
will occur in both the high and low percentage IRAs.
viewed from the standpoint of the property owner, there is
generally no perceived problem. The owner pays one percent
of the assessed market value of his property wherever it is
located. In return, the owner expects to receive the same
types and levels of service received by all other property
owners in the same jurisdiction.
Examining those tax rate areas which cover currently unin-
corporated areas within Carlsbad's -phere of influence, we
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found .that the annual tax increment pgol (ATI) that would
likely exist for these areas ranges from 35.28% to 43.45%.
Consequently, the City could expect t5 receive approxi-
mately 16.94% to 20.86% of the taxes generated from in-
creases in assessed value that would take place after these
properties were annexed.
The current city-wide average of the percent of total
property taxes received by the City of Carlsbad is about
20.84%. However, as noted previously, the predominant per-
centage represented by TRA 109000 is about 23.75%. If the
properties to be annexed were to be required to pay revenue
to the City to offset the difference between the percentage
of property taxes to be received from that property and the
average percentage received from properties currently
located in the City, the annexed properties would need to
annually pay revenue equivalent to the amount of property
tax represented bylbetween 0% and 3.9% of the total pro-
perty taxes collected from the property. if the annexed
property were to be required to pay the difference between
its actual City tax and the predominant tax (23..758), it
would annually need to pay revenues equivalent to the
amount of property tax represented by between 2.89% and
6.81% of the total property taxes collected from the pro-
perty. .
options:
1. Ad valorem special assessments
If it were still legal to impose ad valorem assessments
on property,, the differences could be made up by the
annual levying of a special assessment equal to the
percentage difference. However, Proposition 13 and
subsequent court decisions have prohibited ad valorem
assessments.
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2. 'Police_ and Fire Benefit Assessment
As an alternative, it might be possible to create a,
special benefit assessment for the costs of police and
fire protection (as authorized by current State lava)
that in total would be equivalent to the isaputed value
of.police and fire services provided to the property
to be annexed. The amount of the assessment may or
may not be equal to the difference between the property
tax percentage paid by the annexed property and the
percentage paid by all other properties in the City.
The cr.eatiofi cf'such a special assessment would require
analyzing the costs of police and fire protection to
various categories of.land uses and establishing* an
annual special assessment, subject to voter approval
in the area covered, relzted,directly to the benefit
received by the property from police and Eire pro-
'tection.
The advantages to such an approach would be that a
direct benefit could be identified for the assessment
levied and that it could be accomplished within
existing laws.
A disadvantage of this approach is that the annexed
property owner would be paying more in total property
taxes and assessments than property owners with pro-
perty already situated in'the City, but would not be
receiving any additional services.
3. Create a "S
A third option is ion of a "special tMx"
to be levied only ii. ;ory to be annexed in the
future. The ...aation of such a tax would require a
13rds vote within the City, but presumably could be
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limited to only those areas that would be added to the
city in the future. Such a special tax would have to
be levied on some basis other than property value.
Again, the classification of property by types of land
use might be a preferable method for this assessment.
An advantage to this approach would be its uniformity
in application to all future annexed properties-
-Disadvantages of this appr
oach would include the
potential for it to be used as a means of limiting
future growth, the inequity it places on prol-,rty
owners in annexed areas who and up paying higher taxes
but receiving the same level of services, and the fact
that Carlsbad would be the first city to attempt to
implement the special tax provisions of Proposition 13
in this manner.
4. _ Create_an Annexation or. "Buy -in" Fee
.A fourth option would be the establishment of an
annexation, or buy -in, fee for all properties to he
annexed to the City. This one• -time, fee could be
established on the Dasis of the city-wide infrastruc-
ture already in place that would be of benefit to the
property to be annexed. Such items as the police
station, library, city hall, and'portions of tha sewer
and water systems could be included in the calculation
of this fee.
An advantage of this approach is that it would provide
at least some compensation to existing taxpayers for
previous investments in capital made from their taxes.
Disadvantages of this approach are that it would not
ti, nn nnnoina source of revenue, it would increase the
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cost of annexation to the property owners, and it
would be subject to review and approval by the Local
Agency Formation Commission.
5. increase use of Special Assessment Districts for
rinancing ?'nfrastructure in Annexed Areas
While not a dixsct offset to the differential in pro-
perty taxes, the increased use of special assessment
districts in annexed areas for the financing of all the
infrastructure and some of the maintenance (i.e. median)i
needs of these areas would cause these properties to
directly bear the cost of certain items that were paid
for with general taxes in older portions of the City.
Advantages of this option include partial offset of
some of the costs that might have otherwise been borne
by all. properties in the City through the use of the
special assessment districts.
Disadvantages include the cost of establishing and ad-
ministering a number of special assessment districts,
the equity problem of the new areas paying more in
total than the areas in the City, and the resistence
of landowners to a proliferation of special assessments.
6. Seek ChanSe in State Law regarding Tax Split
A sixth option is to seek state legislation that would
change the existing method of distributing the property
tax to equalize the percentage of property taxes re-
ceived by cities from all tax rate areas included in
the city and from properties 'subsequently annexed to
the city.
The advantage to this option is that it would establish
a uniform percentage of property -taxes to be received
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by cities, thereby removing uncextainy and the need for
negotiations.
Disadvantages to this option are that the Legislature
would not likely want to deal with this issue, all
cities would be forced into a similar percentage or
formula distribution, and all other local agencies
that share in the'property tax would also attempt to
maximize their share of the distribution.
7. Request County to Reopen . e%otiations
A further option is to request the County to reopen
negotiations on the "Master Property Tax Transfer
Agreement" or to void the agreement and negotiate
individually on each annexation.
An advantage to this option is that the City might
increase its chances of receiving a greater share of
the tax distribution. For example, in Sacramento
County the master agreement with cities provides that
cities will receive the average of the percentage of
property taxes received by all TRAs in the city when
annexation takes place. The colxnty then receives
whatever is left over from the former county share and
the share from detaching special districts.
Disadvantages to this option are that the Count, might
not agree to renegotiate, or.if it does, the City
might end up with a smaller share of the distribution.
A further disadvantage in the amount of staff time that
is'spent in the negotiations that detracts 'from other
demands of the City.
8. Stop_ Annexations
An eighth option is to stop further annexation of
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property to the City.
An advantage to this approach is that it would reduce
future City obligations to service the property.
Disadvantages are that it would likely result in a
long term decline in potential City revenues as to
County allows the property to develop and receives
the applicable revenues and that it would not, allow
the City to fulfill its general plan development
due to the presence of the unincorporated islands.
3. Do Nothing
The final option is to do nothing about the current
situation. By doing nothing, the City will likely
find that the overall percentage of taxes received
by the City will decline, but as.annexa.tions take
-place. tine total City revenues will continue to in-
crease as the City takes advantage of the property
taxes and other revenues, such as sales taxes, that
begin to accrue as the annexed property develops.
Because of the higher assessed value base of this
property as noted earlier, this property will most
likely produce higher property tax revenues per
equivalent acre of development than older developed
portions of the City. The City would then find that
this newly annexed and developed properties would
actually be subsidizing 'services provided to older
areas of the City.
Conclusion: This paper has attempted to focus on the problem
created by the inequities of property tax distribution to
the City of Carlsbad caused by a combination of Article
XIIIA (proposition 13) o£ the State Constitution, subse-
n„A„t imnlementina legislation (AB 3) and the "Master
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roperty Tax Transfer Agreement" entered into between the
ounty of San Diego and the City of Carlsbad. We have
sed the background and current situation as it re-
iscus{
.ates the the percentage of property taxes received by the
,ity of Carlsbad upon annexation of unincorporated terri-
:cry. Finally: we have offered nine alternatives for
:onsideration by the City. We have tried to be objective in
)ur discussion of the alternatives so as not to prejudice
the decision of the City•CounciI as to whether or not to }
further pursue any of the alternatives discussed. i
hl,l of the options listed are conceptual in nature. Should
the -City Council determine to pursue any one or more, a
considerable amount of analysis would be regn1red to firmly -
establish the feasibility of implerientation.,
A check with sources around the State and ire San Diego
County has failed to come up with any other city in the
County or State that has addressed this problem in a direct
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manner. Therefore, it would appear that any actions taken ;
by Carlsbad in this regard will be watched by others in the
State who may be experiencing similar problems now or in j
the future. txyy
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