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HomeMy WebLinkAbout10-12-1992 Item #SS5STUDY SESSION Agenda Item No. 5 CITY OF NEWPORT BEACH OFFICE OF THE CITY MANAGER October 12, 1992 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Kevin J. Murphy, City Manager SUBJECT: FINANCING OPTIONS FOR OPEN SPACE ACQUISITIONS PURPOSE To provide information to the City Council on alternative methods of financing the acquisition of public open space. BACKGROUND On September 14th at the City Council's Study Session staff was asked to prepare a report on the various methods of financing the acquisition of public open space. This discussion follows the recent approval of the Circulation Improvement and Open Space Agreement between the City and The Irvine Company covering 258 acres of undeveloped land, and in particular, recent discussions by members of the newly formed Newport Conservancy on the public acquisition of the parcels known as Newporter North and Upper Castaways. It has been estimated that the purchase of the Upper Castaways and Newporter North sites could cost approximately $80 million. On October 26th, based on the current economic conditions, the City Council will be asked to approve an update on the appraisal prepared for the City in 1991 paid for by the Conservancy and The Irvine Company. The Newport Conservancy has expressed an interest in seeking City and voter approval of the acquisition of one or both of the sites. Below is a list of various options on the financing of the acquisition of the property(s). OPTION 1: CASH Obviously if the City and/or the Newport Conservancy were able to purchase one or both of the parcels through a cash purchase it would be the cheapest and simplest acquisition process. Although the acquisition would require only the approval of the City Council, it is quite likely that the City Council would want to assess public approval through a binding or advisory ballot measure. At this time the City and Conservancy are not in a financial position to consider such a proposal. -2 - OPTION 2• GENERAL OBLIGATION BOND Throughout the State's history, local governments have most commonly used the general obligation bond to finance major capital improvements. Today a G.O. bond requires approval of 2/3rds of the voters and in passage sets an override to the local property tax rate and bill of every owner of property. Its advantages are in its simplicity, there is only one required hearing and the election to approve the sale of the G.O. bonds. Because the G.O. bond has voter approval and is a lien on all taxable parcels for the duration of the repayment schedule, it carries little risk and hence has a very low interest rate. These are the most marketable securities for cities financing capital improvements or acquisitions of property. Its advantages are also a disadvantage to cities trying to create a fair and equitable way to spread a tax burden. The value of property is not always the fairest way to spread the tax burden. In many cases there are questions raised as to how the value of the improvements relate to the tax on a parcel. On one street there may be identical homes in age and size, however based on the year of purchase and the price paid, the assessed value may be twice as much as another. Therefore, one home would pay twice the special tax for a G.O. bond issue. OPTION 3: CERTIFICATES OF PARTICIPATION A financing tool for cities created in the 1980's in response to the tightening of the voter approval requirements of Proposition 13, Certificates of Participation are very commonly used by cities. C.O.P.'s were used to finance the construction of the new Central Library. Basically C.O.P.'s are a variation of a lease/purchase theme. Most commonly under a C.O.P. issue a city will create a new tax exempt financing authority or entity. The entity then sells the certificates, constructs the facility and leases it to the city. At the end of the lease term the city receives title to the improvements. Following the sale of the certificates the new tax exempt authority assigns its rights to the lease stream to a third party trustee who handles repayment to certificate holders. The payments on the certificates have been held to be tax exempt for federal tax purposes. In the case of the acquisition of the public open space, the City in theory could create a new tax-exempt authority to finance the acquisition with a commitment by the City to lease/purchase the open space over 15-30 years. The difficulty in this scenario is the City's lack of funds to currently support annual lease payments. On an $80 million issue the annual lease payment would range from $6-$7 million at current interest rates. Even the acquisition of only one site at $40 million poses a difficult financial obstacle. OPTION 4: MELLO-ROOS BONDS In 1982 the Governor signed into law the Mello -Roos Community Facilities Act to provide an alternative method of financing public facilities and services. It has been used extensively since 1982 in financing the infrastructure in newly developing areas or redevelopment areas. Local park, 'recreational and parkway facilities are legally permitted uses for Mello -Roos districts. ME receive from the acquisition or maintenance of improvements. This permits residential, commercial and industrial properties to be assessed at different levels based on benefit. In fact, parcels could also be assessed based on their proximity to the open spaces. Flexibility is a key part of an assessment proceeding. Assessment district formation doesn't require a formal vote by the electorate or owners of the parcels. Under the 1972 Act there is written notice given to each parcel owner and a majority protest procedure is followed to discontinue formation of a district. Inasmuch as the proposal to acquire open space likely involves all property owners, it is my recommendation that if the assessment district method is selected that an advisory election take place to give the City Council guidance on whether to form an assessment district. There are disadvantages to an assessment district. Generally the cost of forming the district and selling the bonds are higher than a G.O. or Mello -Roos issue. In addition, the City Council each year would be required to publish a notice on the renewal of the district over the life of the bond issue and conduct a hearing on the levy of the assessment. This process requires City staff or a consultant to update the assessment rolls annually. ADDITIONAL INFORMATION The City staff has recently met with representatives of the Newport Conservancy and the Trust for Public Land (TPL). The TPL would like to formally meet with the City Council at its Study Session on October 26th to describe its history and role in working with The Irvine Company and Newport Conservancy. RECOMMENDATION The City Council discuss the various financing alternatives, direct questions to staff and take appropriate action. i -3- The process of creating a Mello -Roos district is fairly simple and moves at a quick pace. A Community Facilities District (CFD) may be initiated by the City Council or by the written request of two members of the City Council or by a petition of not less than 10% of the registered voters residing within the CFD proposed boundaries. Presumably in the case of Newport Beach's acquisition of open space the City's boundaries would constitute the CFD's boundaries as well. Within forty days of the receipt of a written request or petition the City Council may adopt a Resolution of Intention to establish a CFD. Upon adoption of the Resolution of Intention a public hearing must be held in not less than thirty, nor more than sixty days to determine whether to proceed with the CFD. If more than 50% of the registered voters residing within the proposed CFD, or owners of one-half or more of the land, file a written protest opposing the formation of the district then the CFD must be abandoned by the City Council. If there is less than 50% of a written protest by voters or owners then the City Council by a majority vote may declare their intention to form the CFD. Following the City Council's action, an election must take place within ninety days. If there are more than twelve registered voters in the CFD area then each voter is entitled to one vote. The voters thus decide by a 2/3rds vote if a special tax is to be levied to provide the facilities or services proposed in the resolution. If less than a 2/3rds vote is cast affirmatively, the City Council can take no action to form a new CFD for one year. In a CFD, properties which are exempt from general (ad valorem) taxes are also exempt from special taxes imposed by a CFD election. The special tax is collected along with regular property tax payments and is subject to the regular penalties and delinquency procedures. A distinct advantage of the Mello -Roos District is the ability of a city to create a CFD that creates a special tax that is commensurate with the benefit conferred on the property. Put more simply, a CFD has the ability to levy a special tax on a flexible formula, not as in a G.O. Bond where it is strictly tied to the value of the land. In an election to form the CFD the City Council may also request the voters to authorize the sale of bonds to acquire or construct improvements in the CFD. If the City Council pledges the special tax to payment of the bonded indebtedness, the special tax cannot be reduced or eliminated if it would impair the bond repayment schedule. OPTION 5: ASSESSMENT DISTRICTS I have previously provided to the City Council the provisions of one of the Assessment District proceedings which could be used to finance the acquisition of open space... the 1972 Landscaping and Lighting Act. The City, if it chooses to do so, could create its own Assessment District proceedings pursuant to our City's Charter. Other Charter cities have undertaken this step to finance public improvements and utilize various existing State statutes, such as the 1911 or 1915 Act to issue bonds and levy the assessments. Using the 1972 Landscaping and Lighting Act as the example, the advantages of an assessment district are many. First, the formula for assessing the parcels can be tailored to fit a unique or particular circumstance. In the 1972 Act an engineering feasibility report is prepared wherein a benefit formula is created and benefit units assigned to each parcel to be assessed. Each parcel thus pays in direct proportion to the benefits it would