Ever since Proposition 13 put the squeeze on local governments, special assessment levies have become a convenient financing alternative in California because the public can be sidestepped. That may not be the case for much longer, however, if two taxpayer groups have their way. The Howard Jarvis Taxpayers Association and Paul Gann's Citizens Committee hope to place a constitutional initiative on the state ballot next year that would require voter approval for the creation of assessment districts. The groups plan to launch a signature-gathering drive within the next two months to get the initiative on the November 1994 ballot.
Their efforts are a backlash against a December 1992 California Supreme Court decision, Knox v. City of Orland. The ruling gave local governments broader latitude to impose special assessments without a public vote.
Under California's constitution, assessments can be imposed without a public vote "and that makes them attractive" to cash-strapped public agencies, said Brian S. Currey, a partner with the law firm of O'Melveny & Myers.
Assessments "fund activities that otherwise would be funded through [voter-authorized] general obligation bonds and special taxes, which are tough votes to get," Currey said.
Special assessments were first authorized by California law in the early 1900s. The levies are placed on property owners who receive demonstrable benefit from improvements adjacent to their property, such as sewers, sidewalks, and street lights.
Assessments have increased in importance to local governments since Proposition 13, the 1978 constitutional amendment that limits ad valorem property taxes to 1% of assessed valuation. Proposition 13 and later initiatives mandate that tax increases and general obligation bonds be approved by a two-thirds vote.
Finding a two-thirds vote difficult to obtain for general obligation bond authorizations, public agencies frequently rely on special assessments as an alternative financing source.
Taxpayer watchdog groups complain that assessment levies are property taxes in disguise, used by local governments as no-vote-required substitutes for parcel taxes.
Taxes in Disguise
Samuel A. Sperry, a lawyer in the public finance group at Orrick, Herrington & Sutcliffe, said "tension" provoked by the proposed ballot initiative of the two taxpayer groups could spur "a broadly based public dialogue about the use of benefit assessments."
Sperry said the debate probably would focus on agencies using assessment levies "as a replacement source of funds to conduct maintenance activities - as opposed to building capital improvements."
The initiative drive of the taxpayer groups is aimed al derailing pay-as-you-go assessments and long-term bond issuance supported by the assessments' revenue stream.
Ironically, in the current economic climate, local governments are selling few assessment bonds.
Special assessment bonds made a relatively minor contribution to California's overall bond activity during the first three quarters of the year, according to the California Debt Advisory Commission.
When measured by dollar volume, the commission said, assessment bond issuances accounted for only 1% of local government long-term debt issues during the period.
From Jan. 1 through Sept. 15, the commission said, there were 81 special assessment bond issues totaling $389.1 million. However, 62.9% of the total were refunding bonds issued to take advantage of attractive interest rates.
Last year, by comparison, 149 assessment issues - combining new-money and refundings - were sold for a total of $658.9 million. In 1991, there were 132 assessment issues worth $486.1 million.
~Hand in Hand'
John Knox, co-chairman of the special taxes and assessments group for Orrick Herrington, said that as California real estate shrinks in value, new-money assessment bonds are being issued less frequently. "Real estate and development activity is down," Knox said. "They go hand in hand."
New-money special assessment financings tend to be smaller issues and take longer to reach the market, which is "more cautious and conservative," Knox said. "If you don't have a solid financing, it is much tougher to get it sold than it was in the late 1980s, when people thought there was nowhere for real estate to go but up."
A pivotal recent event for special assessments was the state high court ruling in Knox v. Orland. The court upheld special assessments to fund $100,000 of annual maintenance costs for five parks in the rural city of Orland, about 90 miles north of Sacramento.
"Knox dealt only with the lawfulness of a special assessment for park maintenance," said Currey of O'Melveny & Myers. But the high court also held that special assessment financing can be used for schools and libraries, which are not traditionally financed through assessments, he said.
Some public finance professionals see the ruling as a way to bypass a municipality's general fund to pay for local government services without a public vote. Orrick Herrington's Knox, who is not related to the Knox named in the Orland case, said the decision "opened the door" in expanding special assessments to a broader range of projects.
Now, tax watchdog groups are striving to shut the door.
The proposed initiative of the Jarvis and Gann groups would create a voter-approval requirement for local governments trying to form assessment districts. The initiative is modeled after legislation sponsored by the groups and carried by two state law-makers this year.
The bills, titled "Homeowners Relief Act of 1993," were introduced by Sen. Bill Leonard, R-Upland, and Assemblyman Charles Quackenbush, R-San Jose. The measures quickly stalled in legislative committees.
Richard L. Gann, president of Paul Gann's Citizens Committee, said the bills are dead. However, a parliamentary maneuver could resurrect them in January, when the Legislature returns from a recess.
Kris Vosburgh, executive director of the Jarvis group, said the need for the public to vote on assessment districts is too urgent to wait for legislative action. "The house is burning while the Legislature is fiddling," Vosburgh said.
The proposed constitutional initiative is expected to closely model the stalled legislation. It would allow cities, counties, and special districts to establish special assessment districts only after calling an election. A majority vote of parcel owners would be required for direct benefit assessments. Those assessments are defined as levies to pay capital costs for sidewalk, sewer, water, or flood control. For indirect benefit assessments, approval would require a two-thirds vote of the electorate.
Gann said the initiative, which is being drafted by lawyers, "would probably" include a vote requirement for certificates of participation and other forms of long-term leasing that now do not require a public vote.
Special assessments are "an out-and-out attempt to circumvent Proposition 13," Gann said. "It is our primary issue. It has the highest priority." He said the two groups plan to kick off a one million-signature petition drive by December. For the initiative to get on the ballot, 615,958 signatures are required.
"Our purpose is to reintroduce what has been systematically taken away," Gann said. "And that is the right of people to participate in the government process." Gann is the son of the late Paul Gann, co-creator with Howard Jarvis of Proposition 13.
The proposed initiative, if approved by voters, "would be the death knell" for assessment district financings, said Stan Wolcott, a partner at Rutan & Tucker in Costa Mesa, Calif. Wolcott, president of the California Association of Bond Lawyers, said such an outcome "would also sound the death knell for the California economy."
Wolcott continued, "Assessments are one of the few straws remaining to be grasped by public entities for capital construction and ordinary maintenance and operation. If they go, California better get used to being a second-class state - maybe even third rate."
Knox of Orrick Herrington said he is not surprised by the Jarvis-Gann efforts. "When you see a broader use of assessments, it is fairly certain there will be a backlash of people who see it as an end run around Proposition 13 - more taxation. If there are enough of those angry people, the initiative might pass."
California lawmakers appear ambivalent about their role in tinkering with assessment financing statutes.
While legislators bottled up the Jarvis-Gann vote proposal, they routinely add language requiring a majority vote in assessment-related legislation.
For example, a bill pending before Gov. Pete Wilson this week would create benefit assessment districts for libraries, but only if a majority of local voters agreed. The bill was written by Sen. David Roberti D-Van Nuys.
Also pending before Wilson this week are two bills that would allow the creation of major assessment districts for park lands in Sacramento County and San Diego County - with a majority vote.
"You present the proposal to voters and they can decide whether they want to assess themselves for this purpose," said Priscilla Ouchida, an administrative analyst to state Sen. Patrick Johnston, D-Stockton, author of Senate Bill 730. The bill would create a regional park district in Sacramento County.
~Higher Test'
S.B. 730's majority vote requirement "is a higher test" than merely having politicians create an assessment district levy, Ouchida said.
Similar regional park, and open space districts were created recently in Los Angeles, Riverside, and San Bernardino counties after majority vote approval was obtained. The assessment districts were created under the Landscaping and Lighting Act of 1972.
Los Angeles County voters created one of the state's largest assessment districts in November 1992 when they approved Proposition A, the Los Angeles County Safe Neighborhood Park Act. The measure, which earmarked $540 million for various park projects, was approved by 64% of county voters.
Jan Takata, finance analyst for Los Angeles County, said the revenue stream created by the assessment district will allow the county in January to issue assessment bonds under the Improvement Bond Act of 1915. Takata said Lazard Freres & Co. will serve as underwriter on the negotiated sale and O'Melveny & Myers will be the bond counsel.
Meanwhile, the Senate Local Government Committee recently said it will hold a hearing Dec. 7 in Sacramento on special assessments. The hearing will examine whether the nearly 20 assessment acts on the books should be "harmonized," principal consultant Peter M. Detwiler said.
One of the issues the committee will address is the effectiveness of majority protest provisions, which allow property owners to override proposed assessment districts with a majority vote. Detwiler noted that in some assessment acts, a majority protest forces officials to abandon proceedings. In other acts, a majority protest can be overridden by officials with a four-fifths vote.
"I would hazard a prediction that in the next session of the Legislature [beginning in January], there will be an attempt to make uniform treatment of majority protests," Detwiler said.
While Knox v. Orland created the most stir among public finance officials, a little-noticed appellate-level court decision this year appears to expand the use of special assessments by school districts, Currey of O'Melveny & Myers said.
In May, the Second District Court of Appeal, in Howard Jarvis Taxpayers Association v. Whittier Union High School District, ruled that school districts have the right to impose assessments to build and maintain community facilities.
"A number of school districts have financed facilities through special assessments under the Landscape and Lighting Act of 1972," Currey said. Their right to do so was confirmed by the appellate court case. Schools may use the act to build playing fields, running tracks, blacktop areas, but not school science labs or other classroom facilities.
But the ruling could become moot for school districts if Proposition 170 on the Nov. 2 statewide special election ballot is approved, Currey said. Proposition 170 allows a simple majority, rather than a two-thirds majority, vote to approve bonds for schools.
"If schools can finance general obligation bonds through a 50% vote, the pressure to expand assessment financing will diminish," Currey said.
Nevertheless, the appellate court decision underscores the expanding use of assessment financings in nontraditional ways. The trend has caught the attention of the rating agencies.
David Brodsly, a vice president with Moody's Investors Service, said assessment bonds traditionally are sold unrated because the issuer "only assesses what is needed to pay debt service, so the first delinquency hits the reserve fund."
Now, Brodsly said, "assessments are being pushed into areas where they traditionally couldn't go." Moody's recently assigned a Baa rating to an innovative $246 million assessment refunding in Pleasanton, Calif. Brodsly said the investment grade rating was possible because of a "structural innovation" in which coverage was provided to senior lien debt by excluding the junior lien from consideration.
But as public finance professionals contemplate a window of opportunity for broadened use of assessment financings, the tax watchdog groups also see their chance to shut the window.
Both sides know the public is restless about paying more taxes and levies. A statewide uproar last year over perceived abuses of Mello-Roos special taxes, for example, led to reform legislation to provide better disclosure to home owners moving into the districts.
Knox of Orrick Herrington said he was leafing through a Contra Costa County, Calif., Sunday newspaper last month when an advertisement for a new housing tract stopped him cold.
The advertising line designed to lure home buyers promised "No Mello-Roos and No Assessments." Knox said it marked "the first time I've seen assessments in these kinds of ads."
Knox said there is "resistance on the part of home buyers to taking property subject to assessments and Mello-Roos taxes."
Nevertheless, market participants do not anticipate seeing an assessment financings backlash similar to the one that engulfed Mello-Roos taxes last year.
"I don't want to overstate our concern" regarding special assessments, said Steve Juarez, executive director of the debt advisory commission. "Problems are not at the same level as they were for Mello-Roos in past years."
