COMMENTARY ON MELLO-ROOS FINANCING : Legislature Trusted Local Officials to Use Good Sense on Bonds : Regrettable abuses that have come to light suggest it is time to rein in the trust and impose stricter limitations.

Last month’s Times series on Mello-Roos financing is generating plenty of discussion in Sacramento. But it’s not as if we didn’t see it coming. Local officials have sold more than $3.5 billion worth of Mello-Roos bonds in 288 separate issues since the Legislature passed the Mello-Roos Act 10 years ago. With volume like that, there are bound to be some regrettable abuses.

The overall consensus in Sacramento is that Mello-Roos bonds are a sound way to pay for local public works. Voters who support Mello-Roos special taxes do so knowing that their dollars will build specific local facilities. Dozens of new elementary schools exist in local neighborhoods today because voters knew the projects and they knew the costs.

Let’s get back to the abuses. State legislators often hear about “local control” and the importance of giving locally elected officials the power to make their own local decisions. The 1982 Mello-Roos Act was an investment of both trust and power in local officials. It gave them funding authority (the ability to raise special taxes with two-thirds voter approval) and it gave them flexibility (the ability to craft a Mello-Roos district to match local circumstances).

Citizens and local officials rightly complain that Sacramento imposes too many state requirements. By not mandating strict standards for Mello-Roos bonds, the Legislature trusts local officials to use their good fiscal sense.

Most have done so.

In 1991 alone, school districts in Los Alamitos, Costa Mesa and Trabuco Highlands issued $31.6 million worth of bonds backed by Mello-Roos special taxes. The bonds will help build schools for students that the districts could not otherwise accommodate.

These bonds are sound investments with secure and predictable revenues. Developers build houses, families buy them, and more students mean more schools. Using the Mello-Roos Act, homeowners can watch their tax dollars working in their own neighborhoods. Mello-Roos bonds allow developers to cooperate with local governments to benefit the general public.

But not all Mello-Roos districts are so popular.

Too many developers create new districts backed by insecure revenue sources. The local officials who approve these shaky districts are even more suspect. That’s why we need to rein in the “trust” side of the Mello-Roos equation.

First, local officials should not approve or use the Mello-Roos Act until their general plans explain clear policies for financing infrastructure. While they may include Mello-Roos among their policies, local plans must consider the fiscal effect of possible defaults.

Next, when developers want to use Mello-Roos special taxes to pay for a project’s infrastructure, state law should require them to guarantee and insure those bonds.

The ultimate burden of payment must fall on the landowners and developers who benefit, not on taxpayers outside the Mello-Roos district.

Other state officials have thought about these problems too. The California Debt Advisory Commission (CDAC) is the state’s respected clearinghouse for public debt information. CDAC suggests limiting the amount of Mello-Roos bonds that local officials can sell.

CDAC recommends applying a 3:1 value-to-debt ratio to new Mello-Roos bonds. Local officials could not issue bonds worth more than one-third of the value of the land and its existing and future improvements. Under CDAC’s plan, for example, a city could only issue $33 million worth of bonds on property and improvements worth $100 million.

But CDAC’s ratio may be too high. I think that a more prudent ratio may be $1 worth of debt for every $10 in land value alone. The improvements might exist only on paper. Let’s not bet our precious tax dollars on someone’s speculative fantasy for future improvements.

As The Times described Oceanside’s problems, sometimes local officials cannot be certain that developers will build even though the city issues the bonds. If no one buys property in a new subdivision, then there will be no revenues to repay the Mello-Roos bonds.

I believe that it’s completely unacceptable to issue Mello-Roos bonds where inflated property values and unsold homes might force taxpayers to “bail out” developers’ blunders. Likewise, lawsuits, voter initiatives, or even a new city council might stop construction projects that were supposed to generate the taxes needed to repay the bonds.

Without these expected revenues, local officials cannot make the required bond payments. The default of a single Mello-Roos bond must not be allowed to cripple a city’s general fund.

CDAC also suggests that local officials establish project review committees to assess developer applications for new Mello-Roos bonds. This idea has merit, but a new review committee must not become just another barrier in a development process that is already too complicated and takes too long.

Instead, a review committee should help developers reshape an imprudent Mello-Roos proposal into one which leads to sound and predictable funding sources.

I agree with HUD Secretary Jack Kemp that we need fewer barriers, not more, to promote affordable housing. Like the Kemp Commission, I believe that we need to put more certainty into the development process so that citizens, builders, and local officials can all be sure of the outcome.

We need fewer barriers, not more; we need more certainty, not less.

Lastly, to help take the pressure off local officials desperate for infrastructure dollars, it’s time for the Legislature to stop packaging “pork-barrel” statewide public works bonds.

Instead, statewide proposals must consider regional infrastructure needs. We need to channel our state public works dollars to those communities that are ready and willing to accept new development. Public works spending ought to go to towns that have carefully defined their needs and goals.

It’s about time that we started putting our money where our policies are.