State Law Proves Tough Obstacle to Incorporation

Years before its bankruptcy debacle, Orange County officials were anxious to stop the financial bleeding caused by the incorporation of five South County communities between 1988 and 1991.

Looking to stem the flow of tax revenue that new cities take with them, county officials successfully pushed for passage of SB 1559, a 1992 state Senate bill that now requires communities aspiring to cityhood to share precious tax dollars with county government.

That law is making more difficult ongoing cityhood efforts in at least four Orange County communities today: Foothill Ranch, Rancho Santa Margarita, Leisure World and Aliso Viejo.

Only one city in California has incorporated since the legislation took effect, compared with 22 incorporations in the previous five years. And that sole city, Citrus Heights in Sacramento County, is buckling under a $5.6-million annual payment that will be funneled to county coffers for 25 years.

The people running incorporation drives in Orange County are confident they will eventually succeed, but the law certainly isn’t helping. “We have every confidence that we will become the city of Foothill Ranch,” said Helen Ward, a member of the Foothill Ranch Governance Incorporation Committee. “But [the state law] really makes it tougher for us to get there.”

The California League of Cities and other observers say the deck is now stacked heavily against any community desiring cityhood.

“It was already hard to qualify for incorporation, and this law raised the bar even higher,” said Dwight Stenbakken, legislative director for the League of Cities.

“I think this law is a bad thing,” Stenbakken said. “The citizens in these unincorporated places are being denied what many other citizens enjoy--the right to self-determination.”

Orange County citizens pushing for incorporation aren’t happy with the legislation, known as the “revenue neutrality” law, but stoically view it as another expense required for cityhood.

“I don’t like it,” said Debra Brown, a member of a Foothill Ranch incorporation committee. “I don’t like taxes either, but you have to pay them.”

For Foothill Ranch residents, the chance for local control is worth the price, particularly when neighboring Lake Forest has made it clear it wants to annex them.

“What’s scarier than revenue neutrality is that if we remain unincorporated, Lake Forest is going to gobble us up,” Brown said.

Eventually, representatives from Foothill Ranch or any other community desiring cityhood have to sit down with the county to split up tax revenue.

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It’s a similar process to the negotiations that take place between cities and counties over annexations. However, with annexations, the county is generally limited to getting back property taxes.

With the revenue neutrality law, other taxes are fair game, including the sales tax money produced by shopping centers, Stenbakken said.

“What’s unfair about this is that counties can ask for whatever they want,” Stenbakken said, “because [new cities] have to get an agreement with the county” over revenue neutrality before being allowed to incorporate.

The Local Agency Formation Commission can’t approve an incorporation unless there’s a revenue-sharing agreement.

Since the law passed in 1992, revenue neutrality negotiations have only been completed by Citrus Heights. When their first installment came due this year, city officials went to Sacramento County asking for a reduction in their payment, which amounts to about 25% of the entire city budget.

“Citrus Heights is probably the poster child for the [post-SB 1559] cities,” Stenbakken said. “We’re getting phone calls all the time from communities asking about how this law can be changed.”

Current and former county officials feel that the law is fair and doesn’t need alteration.

Former Orange County Administrative Officer Ernie Schneider said that losing all tax revenue from incorporations means that there isn’t enough money to pay for countywide services like courts and health programs.

“At the time [1992], this was a problem for all the counties in the state,” he said. “All we were looking for was recovery of our costs.”

John O’Farrell, director of community development for Sacramento County, said his government agency was “struggling to maintain services” to unincorporated areas.

“When you lose revenues to incorporations, that makes our job that much tougher,” O’Farrell said. The revenue neutrality law “does make it harder to incorporate. But if a [community] has the tax base and is creative, they can incorporate.”

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Even though she helped push through the revenue neutrality bill, former state Sen. Marian Bergeson wonders if the legislation went too far.

“At the time the bill was introduced, counties were being eviscerated” by incorporations, said Bergeson, who is now Gov. Pete Wilson’s secretary of child development and education. “But this might be one of those cases when a bill can turn around and bite you.”

Ironically, even Orange County officials softened their position on incorporations and annexations after 1994, when the county went bankrupt and was desperate to cut costs.

Both Bergeson and former interim Supervisor Don Saltarelli advocated getting the county out of the business of providing municipal services by making it easier for unincorporated areas to either become cities or be annexed by existing cities.

Assistant County Administrative Officer Michael Ruane says that within a year the county will study the cost of providing municipal services like repairing roads and law enforcement in unincorporated communities; then the county will know how to negotiate with prospective cities.

Meanwhile, the law keeps out smaller, financially marginal communities that have no business becoming a city, Schneider said.

“You get these parochial interests who want to control their own little community and don’t want to look at the big picture,” Schneider said. “The larger the area, the better.”

But incorporation supporters like Foothill Ranch resident David Sparks say that giving up control to a larger outside community means giving up individuality.

“We’re not looking to create a metropolis,” Sparks said. “We don’t want to be part of a large city. We all moved here to get away from that.”