ORANGE COUNTY PERSPECTIVE : Taxation Without Representation

The building boom of the 1980s, inhibited by the legacy of the tax revolt of the 1970s, now has produced financial headaches in the 1990s. Sprawling new communities, restricted by Proposition 13 in financing streets, sewers, schools and fire stations, wanted a creative financing mechanism to facilitate growth. An answer came in 1982 with legislation that permitted developers to create special bond districts, carrying the names of legislators Henry Mello and Mike Roos.

But while these bonds provided opportunities, they raised questions of fairness. In the current day of reckoning, municipal finance experts now predict that as many as 10 of California’s 226 Mello-Roos municipal bond districts may fall into default in the next few years. Many new homeowners find themselves strapped with oppressive tax burdens, holding the bag for developers who may have walked away from projects.

In the search for creative financing, Mello-Roos districts circumvented a restriction that built caution into conventional assessment districts; the latter do not permit landowners in a development project to shift the tax burden to homeowners, as is possible in a Mello-Roos district. As a result, home buyers in regular assessment districts know from the outset their payout on a bond issue; in a Mello-Roos district, the homeowners may keep paying more and more of the burden if a project is not built to completion, or if homes go unsold.

Moreover, financially inexperienced or careless local officials in Orange and Riverside counties have put through millions of dollars in Mello-Roos bond deals with development firms owned by S&Ls; that were in trouble financially. And local governments, failing either to mind the store or possess the necessary sophistication in bond financing, even have allowed developers to select and pay for their own property appraisers.

What a deal for the developers, and what a potential headache for the unsuspecting home buyer. So these abuses have produced a system that is plagued by some very basic problems. Mello-Roos districts as currently constituted allow taxation without representation, and they allow developers to play without necessarily having to pay.

Responding to a series of articles in The Times outlining these abuses, state Treasurer Kathleen Brown now says she will call a special hearing of the California Debt Advisory Commission to consider remedies. That’s good, because legislative reform is much needed. While Mello-Roos formulas are potentially a boon if properly regulated, they must in the future have much stricter oversight at the state level.