CITY OF GALT LIGHTING AND LANDSCAPING DISTRICT
Subject of Investigation
The financial administration of two Lighting and Landscaping Assessment Districts formed by the City of Galt. The two districts are the Westside Galt Lighting, Landscaping and Maintenance District (Westside District), and the Northeast Galt Landscaping and Lighting District (Northeast District).
Reason for Investigation
The Grand Jury received a complaint from a resident of Galt questioning, among other items, the setting of yearly assessments and the transfer of monies out of the district funds to other funds.
Method of Investigation
Grand Jury members reviewed materials submitted by the complainant consisting of a 30-page handwritten document with thirteen attachments submitted on three occasions over a period of approximately six months. The members met with the complainant to clarify concerns and the submitted materials.
Grand Jurors reviewed various laws related to the management of these types of special districts, which are in the California Streets and Highways Code (hereafter, "S&HC"). In addition, Article XIII D of the State Constitution, added by Proposition 218 (Assessment and Property-Related Fee Reform) in 1997, regulates assessments, fees and charges. In order to assist in the interpretation of these laws, the Grand Jury requested an opinion from the County Counsel relative to the formation of, and annexations to, the districts and how assessments are developed and allocated to individual properties.
Based on the information from the complainant, these laws, and the County Counsel opinion, the Grand Jury requested the following information from the City of Galt:
The Grand Jurors prepared charts for each district comparing yearly amounts both for costs assessed and for revenues and operating expenditures (but not capital improvement expenditures). They then met with the County Auditor to discuss financial questions concerning the management of assessment districts. For comparative information, the Grand Jury also requested and reviewed information from another city regarding the administration of Lighting and Landscaping Districts formed by that city.
Based on these inquiries and responses, the Grand Jury retained an outside Certified Public Accounting firm to perform the following procedures:
The two assessment districts were formed by the City of Galt pursuant to The Landscaping and Lighting Act of 1972, hereafter, "the Act", which is located in the Streets and Highways Code in Sections 22500 and following. The Act governs the formation and operation of these districts. Article XIII D of the California Constitution prescribes additional requirements for approval of new or increased assessments.
In assessing the validity of assessments and expenditures of lighting and landscape districts, these laws have specific protections for property owners such as requirements that assessments and expenditures relate to the benefits to assessed properties and that written notices regarding costs and assessments generally be provided. However, these laws also provide significant flexibility to the government agencies in their justifying the validity of the assessments, costs and notices. Thus, even assuming that a property owner (or councilmember) could obtain and understand the volumes of confusing financial documents, there are two significant hurdles to finding that actions are invalid.
First, S&HC Section 22509 states that the Act should be "liberally construed to effectuate its purpose" and that assessments shall not be invalidated "for failure to comply with the provisions of this part if such failure does not substantially and adversely affect the rights of any person." Also, the Act and cases interpreting it state that the determination of a benefit from an improvement is conclusively presumed to be valid in the absence of fraud or an abuse of discretion. These burdens make legal challenges to assessment determinations and related financial procedures almost impossible because the presumption is that the government action was valid.
This district, consisting of seven original parcels with eleven added in later years, was formed by Resolution 90-131, adopted by the City Council on August 9, 1990. The resolution indicates that it was formed without notice, hearing, and filing of an engineer's report pursuant to Section 22608.1 of the Act in order to levy and collect annual assessments for construction, installation and maintenance of certain generally identified improvements. Assessed costs are calculated for eighteen "Parcels" that contain subdivisions or commercial properties. These costs are then apportioned among individual properties.
This district, consisting of nine contiguous properties, with another added in FY2000-2001, was formed by Resolution 90-47 adopted by the Galt City Council on March 20, 1990. The resolution indicates that the district was formed "without notice, hearing, and filing of an engineer's report" pursuant to Section 22608.1 of the Act. This was done in order to levy and collect annual assessments for construction, installation and maintenance of certain generally identified improvements.
Based on the review of the information related to both districts, the Grand Jurors identified the following areas for further evaluation although, as noted below, much of the documentation reviewed is unclear, incomplete, and/or inconsistent:
· Validity of lack of annual notices to property owners.
Annual Notices to Property Owners
Section 22626 of the Act states that, if the assessed amounts are the same or less than the previous year, the City Clerk is to give notice by having the resolution of intention to assess published one time in a newspaper of general circulation (Government Code Section 6061). However, if the assessments are to be increased from any previous year, notice of the public meeting and public hearing must be mailed to all property owners whose names and addresses appear on the last equalized county assessment roll (Government Code Section 54954.6).
In addition to the Act's specific requirements, Section 4 of Article XIII D of the California Constitution delineates procedures and requirements for assessments, including the calculation and consideration of "special benefits". It also provides that the amount of the proposed assessment for each identified parcel must be calculated and the owner of record of each parcel be given written notice by mail of the proposed assessment; the total amount chargeable to the entire district and to the owner's parcel; other specific information; and the date, time and location of the public hearing.
In the information provided, City staff indicated that public notices were published; however, no such notices were mailed to individual property owners. To the extent that information has been provided or is available regarding past and future activities and expenditures, it is technical, confusing, incomplete, and generally difficult-if not impossible-to reconcile with a layperson's knowledge of either accounting or government finance. However, City staff stated "no letters have been sent per Cal Code since inception of districts as no assessments have ever been increased.
Whether or not there were assessment increases or apportionment issues that required written notices are complex legal, fiscal, and programmatic questions discussed below. Thus, the validity of the lack of written notices depends on the validity of the City's determinations of how "increases" in assessments and benefit allocations are calculated.
Definition and Calculation of "Increased Assessments"
The difficulty in determining whether "new or increased assessments" exist arises because the legal definitions of these terms are unclear. The Act does not specifically state whether "new or increased assessments" (which then triggers special notice requirements) means (a) the total assessment for the district, or (b) the individual costs assessed by the district for various services.
Total Assessment Increases.
In at least two cases, the total assessments have been increased as shown below. However, the Galt Director of Public Works stated in a November 20, 2000, memo to the City Clerk that these increases did not, in his opinion, constitute "increased assessments" which would trigger the notice requirements. The rationale for this opinion is unclear, since the assessments themselves increased.
Westside. The total assessment for Parcels 1-7 was increased from $117,604 in 1990-91 to $140,050 in 1991-92. This increase resulted in increased assessments on 660 properties. And the total assessment for Parcel 11 was increased from $4,950 in 1992-93 to $5,346 in 1993-94. This increase resulted from the unexplained increase in the number of properties assessed.
Component Cost Increases.
In most cases, however, the total assessments remained the same and possible "assessment increases" were attributable to individual cost items such as the following examples, while other component costs were decreased or eliminated.
Administrative Costs. The pattern for assessing administrative costs is similar for both districts, with some variations. The Westside district assessed 5% for all administrative costs for the first three years. In 1994-1995 the administrative cost increased to 5% for the Finance Department and 5% for Engineering. In 1996-1997 a new administrative cost was added for City Administration and included in the total assessment. The net result was that the 1991-1992 assessment for these administrative costs was $5,000 and the 1999-2000 amount was $25,564. In 2000-2001 the amount was reduced to $7,610.
In the Northeast District there were no administrative charges for the first two years. In 1992-1993 $8,000 was added for engineering. In 1994-1995 $10,747 was added for the Finance Department, and in 1996-1997, $13,495 was added for City Administration. The administrative cost totals ranged from a low of $8,000 in 1992-1993 to a high of $46,705 in 1998-1999. In 1999-2000, administrative costs were reduced to $31,380, and in 2000-2001 to $29,800
Program Monitoring for Deadman Gulch. This cost was assessed in the Northeast District for a monitoring of a revegetation project. The maintenance costs for Deadman Gulch open space have been assessed each year beginning in 1990-1991. However, the Program Monitoring cost was first assessed in 1991-1992 in the amount of $25,000. In 1993-1994 the amount was increased to $27,000 and in 1994-1995 to $45,000. It was deleted in 1998-1999.
It is unclear legally whether component cost increases such as these should have resulted in mailed notices. The County Counsel's opinion merely stated that "the new costs are legal" and that increases in annual assessments trigger the notice requirement; it did not state whether or not the increased component costs, themselves, were equivalent to an increased assessment. The auditor's report stated generally that the Districts were complying with applicable laws, but did not address this question directly.
Apportionment of Assessed Costs
From the review of the materials submitted by the complainant and by City staff, Grand Jury members identified some concerns about the apportionment of certain specific assessed costs. The most significant examples of questionable apportionments are discussed in more detail below.
Maintenance of sound walls and landscaped medians and frontages. These improvements (and related maintenance) generally are located on the major streets bordering subdivisions. Two questions exist. First, are these maintenance expenses a general benefit or a special benefit to certain properties? And second, if they are a special benefit, do all properties benefit equally from these improvements?
Based on concerns about the validity of the apportionment of assessed costs, the Grand Jury asked County Counsel, "Is there a standard to determine if the formula or method of apportionment of benefit per parcel is correct?" County Counsel responded that Section 22572 of the Act requires the district to "assess the net amount upon all assessable lots or parcels of land within the district apportioning that amount among the several lots or parcels in proportion to the estimated benefits to be received by each lot or parcel from the improvements." It also indicated that S&HC Section 22573 states that the net amount to be assessed may be apportioned by any formula or method which fairly distributes the net mount among all assessable lots or parcels in proportion to the estimated benefits to be received by each such lot or parcel from the improvements. However, no specific formula or method is provided by the applicable laws.
In addition, County Counsel noted that Article XIII D of the California Constitution prohibits assessments "on any parcel which exceeds the reasonable cost of the proportional special benefit being conferred on that parcel. However, this Article also has no specific formulas.
The County Counsel's opinion did not address the validity of specific assessments, but referred to a 1953 case which held that "the decision of the City Council is final unless the court can plainly see that manifestly and certainly no benefit can or could reasonably have been expected to accrue to realty from the improvement." A 1973 case held that the determination of the legislative body on the question of benefit received from a particular public improvement is conclusive in the absence of fraud or an abuse of discretion. The outside auditor found that the assessments appear to be appropriately apportioned within the limits of state and local laws, regulations, ordinances, and resolution reviewed by them. (emphasis added)
The Grand Jury was concerned with several aspects of the surpluses identified for each District, including how they were created, whether their general use (roll-over to a subsequent year) was valid, and whether their ultimate use (benefiting the assessed parcels) was consistent with law.
Creation: Members of the Grand Jury compared assessed (estimated) operating costs with actual operating cost expenditures. The results of that comparison are shown in the chart on the facing page. As shown, the operations surpluses were created by consistently assessing operating costs that exceeded historical expenditures. This is inconsistent with the intent of the annual process, which requires an Engineer's report assessing potential costs and setting assessments based on those costs.
The County Counsel's opinion did not address specific surpluses and expenditures in subsequent years for maintenance and/or capital improvements. It merely restated the law, stating that "any surplus assessments in the improvement fund left over at the end of a fiscal year should have been deducted from the amount assessed for improvements in the next fiscal year in that district." It adds, "regarding apportionment based on special benefit to a particular lot or parcel, if an assessment is levied for a particular improvement which benefits a particular parcel, the surplus should offset the next year's assessment for that parcel's benefit."
Validity of Use of Surplus Funds
A decision to allocate any assessed funds to capital improvements must be supported by a resolution. In response to a request for copies resolutions ordering annual installments, the Director of Public Works indicated that levies for installments for capital improvements were approved annually as part of the Engineer's Reports and have not been specifically cited in the resolutions themselves.
The outside auditor, after discussions with City staff, postulated an additional (and contrary) statutory justification for the improvements. The auditor stated that the City has adopted plans for improvements. These plans are not specific to just these two districts, but include the City General Plan, a Capital Improvements Plan, and a description of facilities to be constructed by a Community Facilities District covering the Northeast Area of the city. All of these plans were approved by resolutions adopted by the City Council.
Based on its own review and the findings of County Counsel and the outside auditor, the Grand Jury reached the following conclusions:
Findings and Recommendations
Finding #1. The City and Districts do not have a single, clear annual report or other official document for each district which displays prior and current maintenance, operations, and capital improvement expenses; an explanation of the specific benefits to specific property owners in a ratio reasonably related to their assessments; and identification of resolutions or other official acts which support current and future capital improvements. While such a unified report is not required by law, it would assist council members in their consideration of expenses and assessments, and property owners in the districts to evaluate the appropriateness of expenditures and assessments.
Finding #2. The total annual assessment for both districts has been maintained at a constant level during most years by adjusting the assessed costs for each of the specific purposes listed in the resolutions forming the districts, rather than being based on prior year experience and expenses and actual future anticipated expenses.
Finding #3. If an annual operating surplus exists in any year, it appears that the City has not used the surpluses to reduce assessments in the subsequent year as required by law.
Finding #4. The City of Galt takes the position that only increases in total assessed costs, rather than increases in any components of those costs (and concurrent decreases in other costs), trigger additional notice requirements, and that operational surpluses may be rolled-over for any pending capital improve expenses. These practices have deprived property owners of a realistic opportunity to question or challenge assessments.
Finding #5: There appears to be legally inadequate formal justification, by way of resolutions or other official acts of the Council, to justify some past, current, and future capital improvements, including identification of the necessity of accruing reserves to pay for those improvements.
Finding #6. Surplus funds in each District appear to have been derived in the past from funds against all properties in a district but then reallocated in the past to finance capital improvements without adequate specific benefits to all assessed properties.
Penal Code Section 933.05 requires that specific responses to both the findings and recommendations contained in this report be submitted to the Presiding Judge of the Sacramento Superior Court by September 30, 2001, from:
· Galt City Council: Recommendations 1, 2, 3, 5, and 6