3.3.7.2 Mello-Roos Bonds (Community Facilities Districts)

Mello Roos bonds are payable from special taxes imposed on real property. The types of improvements that may be financed through Mello Roos are broader than those that may be financed using assessment districts. The bonds are secured by a pledge of the special taxes imposed according to the formation of a community facilities district (CFD). The special tax is a lien upon the real property. Should a property owner fail to pay the special tax, the local governmental entity may (and will typically be required to) foreclose upon the real property to collect the special tax. Because CFDs must be formed before community facilities bonds may be issued, the process for issuing Mello Roos bonds often take 6 months or more.

PRINCIPAL USES – Proceeds from Mello Roos bonds may be used for a variety of public works or improvements as specified in the Mello Roos Community Facilities Act of 1982 (Mello Roos Act) (Government Code Section 53311 et. seq.). Generally, bonds may be issued to finance real or other tangible property with an estimated useful life of 5 years or longer and the financed property need not lie physically within the CFD. Property and facilities that may be financed include (but are not limited to) parks, schools, libraries, child care facilities, wet and dry utilities, under grounding of utilities, hazardous substance remediation, and seismic remediation. Under the Mello Roos Act, CFDs may be formed to collect a special tax for certain public services and maintenance as well, including fire and police services and maintenance of facilities. Bonds may not be issued to finance services, but the special tax collected for services may be pledged to the payment of debt service on bonds. The Mello Roos Act may also be used to finance public facilities and services provided by multiple local agencies if those agencies enter into a joint community facilities agreement or a joint exercise of powers agreement for this purpose.

PRINCIPAL USERS – A number of local government entities, including cities, counties, and special districts, use Mello Roos bond financing.

LEGAL AUTHORITY – The Mello Roos Act authorizes the formation of CFDs to finance the community facilities described above and authorizes the collection of special taxes within those districts. The special taxes may be used to either finance the facilities directly or to pay debt service on bonds issued to finance the facilities.

APPROVAL PROCESS – The formation process and authority to issue bonds involves several steps that begins with the adoption of local goals and policies. These goals and policies include certain provisions and limitations on the type of public facilities, credit quality for issuance of bonds, notice to subsequent owners of property, method for determining equity of tax allocation formulas, and for school districts, priority attendance to students residing in a CFD.

Once a local government entity has adopted local goals and policies, it may commence formation proceedings. The first step of formation proceedings may also be forced upon a local government entity if it receives a written request signed by two members of the legislative body or a petition of 10% of the registered voters or owners of 10% or more of the area of land proposed to be included within the proposed CFD. The local government entity must then adopt a resolution stating its intention to form a CFD, specifying the proposed improvements, the boundaries of the district, and the intent to levy a special tax. The resolution should also set an appropriations limit and direct preparation of a hearing report and a resolution of necessity to incur debt. Included in the resolution of intention is approval of the rate and method of apportionment, which must provide the detail to each landowner or resident within the proposed district to estimate the maximum amount of their respective special tax obligations. Either a special tax consultant or a civil engineer prepares the rate and method of apportionment. Following adoption of the resolution of intention, the local government entity records a map showing the proposed boundaries of the CFD.

A facilities report must then be prepared and filed with the legislative body of the local government entity describing the facilities and services and the costs of providing them. Typically, a special tax consultant or civil engineer prepares this report. After a hearing on the report, which must be conducted at least 30 days after adoption of the resolution of intention, if there is no majority protest (as described in the Mello Roos Act), the local government entity may adopt a resolution forming the CFD and a resolution to incur bonded indebtedness.

Thereafter, the local government entity must conduct an election by the qualified electors. Qualified electors are either landowners (if fewer than 12 persons were registered to vote for each of the 90 days preceding the close of the public hearing or if no special tax will be imposed on residential property) or the registered voters in the proposed district. Time limits, forms of election materials, notice, and ballot procedures are outlined in detail in the Mello Roos Act and the California Elections Code. In an uninhabited district where landowners make up the qualified electors, waivers and consent are often obtained to waive the form and timing of the election proceedings. In a landowner vote, votes are weighted by the number of acres owned within the proposed CFD. In each case, the special tax and the issuance of bonds is subject to two-thirds voter approval. A notice of special tax lien must then be recorded and an ordinance levying the special tax enacted for the special tax lien to attach to the property in the district.

Once the CFD is formed and the election completed favorably, the public agency’s governing board may approve the bonds and the financing documents by resolution.

STRUCTURE AND DOCUMENTATION – Generally, Mello Roos bonds are structured as fixed rate bonds with debt service that escalates by approximately 2% annually to take advantage of the ability to increase the special tax by the same amount (if so specified in the rate and method of apportionment). The Mello Roos Act describes in detail the structure of bonds, including interest payment dates of March 1 and September 1 in each year, with principal payable on September 1 in each year. The rate and method of apportionment may establish certain provisions for prepayment of the special tax by property owners.

OTHER CONSIDERATIONS

Special Benefit. The rate and method for the levy of special taxes may be based on the benefit received or “some other reasonable basis as determined by the legislative body.” The criteria are not as rigid as for assessments described above. However, in a landowner vote, the special tax may only be imposed to mitigate the effects of the new development. Specifically, a Mello Roos special tax may only finance services “to the extent they are in addition to those provided within the area of the district before the district was created,” and the “additional services may not supplant services already available within that territory when the district was created.” A local agency may only conduct a landowner vote if it determines “that any facilities financed by the district are necessary to meet increased demands placed on local agencies as the result of development or rehabilitation occurring in the district.”

Risk of Repeal of Tax. A special tax is generally subject to reduction or repeal using the local initiative power; however, federal contract impairment issues may preclude the exercise of the local initiative power where the special tax is pledged to pay debt service on bonds.

Landowner Voting Concerns. A public agency’s ability to the number of qualified voters may be limited. In City of San Diego v. Shapiro, 228 Cal. App. 4th 256 (2014), a California appellate court struck down a CFD like creation by the City of San Diego. The city had, by ordinance, created a convention center facilities district based in large part on the Mello Roos Act, which allowed the city to impose a special tax on hotel property. The qualified electors for the convention center facilities district consisted only of the owners of real property on which a hotel stood and the lessees of the hotel property. Although the appellate court made it clear that it was not deciding the validity of landowner voting under the city’s charter and ordinances, nor the Mello Roos Act, the court concluded that “[t]here is nothing in either the text or the constitutional history of Proposition 13 that suggests that voters intended for local governments to be able to exclude large numbers of registered voters from voting in a special tax election by limiting who would be deemed ‘qualified electors’ for purposes of the election.” Thus, though the Mello Roos Act permits a landowner vote when there are fewer than 12 persons registered to vote for each of the 90 days preceding the close of the public hearing, most recent CFDs have been formed in areas of undeveloped land with no registered voters.

POST CLOSING ADMINISTRATION AND OVERSIGHT – The special tax consultant or the local agency’s civil engineer must set the special tax levy on an annual basis in the amount specified in the rate and method of apportionment. Typically, the special tax is collected with the property taxes by the county and disbursed by the county together with other property tax collections. It is important for the local governmental entity to keep careful records of the amounts allocable to any CFD and not to comingle amounts. Some counties that participate in the Teeter Plan include CFDs therein. See Section 3.3.7.1, Assessment Bonds.