Public Finance

Court Upholds Imposition of Documentary Transfer Tax on Legal Entity Change in Ownership

Attorney Authors: 

In its September 22nd decision, 926 North Ardmore Ave., LLC v. County of Los Angeles, the Court of Appeal determined that the sale of a partnership that owned a limited liability company that held title to real property was a “change of ownership” that triggered imposition of the county’s documentary transfer tax.  The county imposed the tax on the limited liability company, or “Ardmore.”

Community Facilities District Financing Triggers Prevailing Wage Requirements For All Public Improvements of a Project

In Azusa Land Partners v. Department of Industrial Relations, the Second Appellate District Court of Appeal has upheld the California Director of Industrial Relations and the Superior Court of Los Angeles County in determining that use of Mello-Roos bonds to fund certain infrastructure required for a city’s approval of a mixed-use project requires payment of prevailing wages for the construction of all public facilities and infrastructure improvements required for the Project, and not just the public improvements funded by the bond proceeds.

In 2004 Monrovia Nursery entered into a Development Agreement with the City of Azusa (the City) for development of over 1,200 homes, 50,000 square feet of commercial construction, and public improvements and infrastructure, including a public school, park, sanitation district facilities, landscaping, and backbone infrastructure for the cities of Glendora and Azusa. The Nursery’s successor-in-interest, Azusa Land Partners (ALP) then entered into a Funding and Acquisition Agreement (Acquisition Agreement) with the City to provide partial funding of the required public facilities through establishment of a Community Facilities District to sell Mello-Roos tax bonds. The Acquisition Agreement initially referred to the eligible facilities simply as “Publicly Financed Facilities.” After the Mello-Roos bonds were issued, the City and ALP modified the Acquisition Agreement to identify specific, publicly financed facilities eligible for Mello-Roos funding.

The Acquisition Agreement required ALP to perform the public improvement work as a condition of approval of the project even if the actual cost exceeded the amount of bond funds. The bond proceeds funded a little less than half the actual cost of the public improvements, with the balance funded privately.

In 2007 the Director of Industrial Relations determined that the entire Project constituted a public work subject to prevailing wage requirements within the meaning of Labor Code Section 1720(a)(1). The Director also determined that the Project qualified for the partial prevailing wage exemption in Labor Code Section 1720(c)(2) under which only those public infrastructure improvements required as a condition of regulatory approval are subject to prevailing wage requirements, as long as the public funds contributed do not exceed the construction cost for the public improvements and the public entity does not retain a proprietary interest in the project. This determination was affirmed on administrative appeal in 2008.

ALP contended that only the public improvements actually funded by the Community Facilities District should be subject to prevailing wages and filed a petition for writ of mandate, which the trial court denied. The trial court found that Mello-Roos bond proceeds are public funds, the project is a “public work,” and that all public improvement work required as a condition of regulatory approval is subject to the prevailing wage law, regardless of the source of funding.

On appeal by ALP, the court of appeal stated that the entirety of Labor Code Section 1720 must be examined in analyzing prevailing wage issues, rather than focusing on select portions as ALP did. The statute should be liberally construed in keeping with the overall purpose of protecting employees on public works projects. The court addressed three specific arguments advanced by ALP.

First, the court rejected ALP’s contention that Section 1720(a)(2), defining public works as “[w]ork done for irrigation, utility, reclamation, and improvement districts…” limited application of prevailing wage requirements to work actually funded through the Community Facilities District. The court noted that the statute references “work done for” rather than “work paid for” by an improvement district, that all of the public improvement work was eligible for funding by the Community Facilities District and was required as a condition of regulatory approval, and that all work done for an improvement district is public work. Most important, the court found that the duty to pay prevailing wages on public works cannot be limited or eliminated by contract, such as specifying only certain public works that will be funded from Mello-Roos bond proceeds.

Next, the court determined that Mello-Roos bond funds “are public funds under the plain language of section 1720 and the Mello-Roos Act.” In so doing the court distinguished Mello-Roos bond financing from mere “conduit” financing where a public entity assigns its rights, including possession and control of the money, to a third party. The court also rejected ALP’s argument that Mello-Roos bond proceeds are akin to a government loan, the repayment of which is not contingent and is not at less than market rate interest.

Finally, the court held that use of the Mello-Roos bond proceeds to fund even a portion of the required public improvements triggered prevailing wage requirements for the entire project, subject to the Section 1720(c)(2) partial exemption. (The court also distinguished the analysis in Vineyard Creek Hotel & Conference Center, Redevelopment Agency, City of Santa Rosa (Oct. 16, 2000) Dept. Industrial Relations, PW 2000-016, which used a five-part test to determine whether “public” and “private” portions of a project were sufficiently integrated to impose prevailing wage requirements on the entire project, because the issue in Azusa was whether all public improvements should be subject to prevailing wages, and not the scope of the entire project. Following Azusa, it is unclear what effect the Vineyard Creek analysis may have in determining project scope outside the context of the Section 1720(c)(2) partial exemption.) The public improvements required for the project meet the test of the Section 1720(c)(2) partial exemption: The work was required as a condition of regulatory approval, the work cost more than the City’s contribution of public funds, and the City maintained no proprietary interest in the Project. The court found that applying ALP’s more narrow interpretation would result in developers being permitted to allocate lump sum public contributions to specific structures in order to minimize payment of prevailing wages and would thereby “render ineffectual” prevailing wage requirements for required public improvement work.

Proposition 26’s Immediate Impact on Local Governments Will Be Limited

Voters approved Proposition 26 at the November 2, 2010 election, and, upon certification of the results, the measure will be effective as of November 3. The main thrust of Proposition 26 was to require a two-thirds vote of both houses of the Legislature to approve “regulatory fees” that the measure indicates are unrelated to a regulatory program. But it will also directly limit local governments’ authority to levy new fees. Nonetheless, our initial judgment is that the impacts on most local governments will not be particularly significant, although the impact may increase as ambiguities regarding the text of the measure are resolved in the future.

Proposition 26’s stated purpose is to require voter approval for regulatory fees that “exceed the reasonable costs of actual regulation or are simply imposed to raise revenue for a new program and are not part of any licensing or permitting program. . . .” Thus, the proposition was aimed at a narrow class of regulatory fees. The text however is less surgical. It simply defines “tax” to include “any levy, charge, or exaction of any kind imposed by” local government except for those listed among seven exceptions. The significance of this new definition is that any levy not covered by one of the seven listed exceptions is subject to voter approval.

Importantly, though, Proposition 26 does not apply to any fees that were in effect on November 2, 2010. Thus, even if a fee enacted prior to November 3, 2010 does not fit within any of Proposition 218’s exceptions, it will nonetheless remain valid if it is not increased.

Additionally, most of the fees presently imposed by local governments fit clearly within one or more of the seven listed exceptions. For example, sewer and water service charges are exempted because they are subject to Proposition 218’s fees and charges provisions. Similarly, assessments that comply with Proposition 218 are exempt. And, Proposition 26 has no impact on development impact fees and other exactions imposed as a condition of property development.

Thus, Proposition 26’s key impact on local government is that it will prevent the enactment or increase of regulatory fees that do more than recover the costs of regulation. Proposition 26 restricts regulatory fees by limiting recoverable costs to those associated with issuing licenses and permits, performing investigations, inspections and audits, and administration and enforcement. For instance, the Legislative Analyst indicated in the ballot pamphlet that fees imposed on alcohol retailers to generate funds to reduce public nuisance problems associated with alcohol would likely be considered taxes.

Nonetheless, because of the manner in which it was drafted, Proposition 26 may result in legal disputes in the future over the local government’s authority to adopt and increase fees of all types. We along with other local government lawyers are presently analyzing the potential arguments that may arise. Time will tell, but our initial view is that, outside of the regulatory fee context, Proposition 26 is unlikely to be interpreted a manner that is substantially more restrictive than previous law.

California Supreme Court Holds Secret Ballots Unnecessary for Approving Property-Related Fees and Assessments

Proposition 218 limits local governments’ ability to raise or to impose new assessments or property-related fees and charges, requiring them to submit new or increased assessments or fees to approval by affected property owners, or by the whole electorate. The California Supreme Court unanimously ruled yesterday that, in such proceedings, secret ballots are not required. (Greene v. Marin County Flood Control & Water Conservation Dist.)

California Energy Commission Releases Guidelines on Energy Efficiency and Conservation Block Grants for Small Cities and Counties

On September 16, the California Energy Commission (CEC) released long-awaited guidance on grant allocations for small cities and counties. Under federal law, the CEC is required to allocate 60% of its federal funding directly to small cities and counties. For California, this results in approximately $30 million for the 265 small cities and 44 small counties that are eligible under the program.

Pooled Funding Program Established for Local Agencies From Whom Property Taxes Were Borrowed by the State

As anticipated, the California Statewide Communities Development Authority (CSCDA) is proceeding with the establishment of a pooled financing program (the "Proposition 1A Securitization Program") for the securitization of State reimbursement obligations to local agencies (cities, counties and special districts) from whom property tax revenues are being "borrowed" by the State as part of it's 2009-2010 budget package.

SB 1407: More Parking Fees

As of the first of January, SB 1407 has come into effect. The new law authorized the issuance of up to $5 billion in lease revenue bonds for purposes of financing, planning, design, construction, rehabilitation, renovation, replacement, and leasing or acquisition of state trial court facilities. The measure also authorizes a variety of increases to penalties and fees as revenue sources for the bonds. Click here to read more.

California Supreme Court Clarifies Proposition 218’s Provisions for Funding Open Space Acquisition through Special Assessments

In Silicon Valley Taxpayers Association, Inc. v. Santa Clara County Open Space Authority, California Supreme Court Case No. S136468 (July 14, 2008), a unanimous Court decided two key points concerning Prop. 218 assessments. First, the Court held that legal challenges to special assessments are subject to independent judicial review, thus reversing a line of pre-Prop. 218 cases which gave more deference to the public agency's determinations. The Silicon Valley Court noted that Proposition 218 “was intended to make it more difficult for an assessment to be validated in a court proceeding.” The Court’s decision makes it easier for individuals and organizations to challenge the validity of special assessments.

LAO's Budget Proposal Would Shift Tax Revenue From Special Districts to Counties

Attorney Authors: 

The Legislative Analyst’s Office (LAO) has proposed an alternative budget package that includes shifting responsibility for supervision of approximately 71,000 low-level parolees from the State to the counties. This parole realignment would be financed in part by reallocating property tax revenue from water and wastewater districts into a newly created county Public Safety Realignment Account (PSRA). Under the LAO’s proposal, each county would shift 70% of countywide water and wastewater property tax revenue into its PSRA, unless a lower percentage of property taxes would be sufficient to support the realignment program. While the actual amount of tax revenue shifted from each district would ultimately be determined by the county boards of supervisors, the LAO estimates that, statewide, its proposal would shift approximately $188 million, or 50%, of water and wastewater district property tax revenue to county PSRAs.

Additional sources of financing for the proposed parole realignment include approximately $178 million from city Proposition 172 sales taxes and approximately $130 million from vehicle license fees currently retained by the Department of Motor Vehicles for administrative purposes.

To read more about the LAO's parole realignment proposal, click here.

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