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Rancho Ortega Blog discusses matters of public interest in South Orange County, including the communities of San Juan Capistrano, Ladera Ranch and Rancho Mission Viejo.

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When it Comes to Cityhood, LAFCO is the Most Important Government Agency You Have Probably Never Heard Of

Yesterday, we kicked off a discussion about local governance, i.e., cityhood, and mentioned the Ladera Ranch Civic Council’s recent meetings and discussions with Supervisor Patricia Bates.  Let’s continue our discussion be starting an analysis of the Civic Council’s letter and using that as a tool for discussing LAFCO.  As a reminder, the full text of the letter with all exhibits is available from the Civic Council website here.

According to the letter:

The Ladera Ranch Civic Council respectfully requests that you [Supervisor Bates] have prepared and submit an application to the Orange County Local Agency Formation Commission (LAFCO) to establish a County Service Area (CSA) that includes both Ladera Ranch…and Rancho Mission Viejo.

Who is LAFCO?  Pay attention, because when it comes to cityhood, LAFCO is the most important government agency you have probably never heard of.

Orange County’s LAFCO is a state mandated independent regulatory commission (since 1963, every county is required by state law to have one) with the mission of assisting municipal governments in the promotion of orderly growth and the efficient delivery of services.  LAFCO exists in a gray area of state and county government – it is technically not a branch of Orange County government, but we will often refer to it as though it was.  Specifically, LAFCO is called upon to make decisions about municipal boundaries, to determine spheres of influence over unincorporated territories, to negotiate service sharing arrangements between cash-strapped cities, and to create special districts for the provision of special services, like water, sewer and roads.  LAFCO serves both a political and financial function, and its powers are both regulatory and planning.

LAFCO also makes critical determinations about the incorporation (as well as consolidations and disincorporations) of Orange County cities.  If the residents of South Orange County desire to incorporate as a new city, they must go through LAFCO for approval. LAFCO will evaluate the cityhood proposal and determine if the new city government is in the best interests of the citizens of Orange County.

OC LAFCO is governed by eleven Commissioners (which includes four alternates).  Supervisor Bates is one of two County Supervisors who serves on the LAFCO Commission. You can see all of the Commissioners and access their bios here.  Do you want to join LAFCO?  There are commission seats reserved for members of the public.

One of LAFCO’s goals is to eliminate unincorporated islands in Orange County by facilitating their annexation.  Unincorporated islands are expensive to the County because they don’t fall within any city’s jurisdiction, and therefore must be serviced by County resources.  Generally, these services can be more cost-effectively provided to residents by an adjacent or surrounding city.  Sixty-four such islands were identified in 2000 when LAFCO began its strategic planning process and about half have been annexed.  The largest island was the 4,287 acres of MCAS El Toro annexed by the City of Irvine.  The smallest was a one acre island that was annexed by the City of Costa Mesa.

South Orange County is too large to be considered an island, but LAFCO’s strategic plan also addresses South Orange County’s future governance.  Conceptually, OC LAFCO supports cityhood for unincorporated South Orange County.  It was specifically called out in LAFCO’s 2012 strategic plan, available here (PDF).  What’s more, LAFCO has already telegraphed what South Orange County governance might look like:  Las Flores and Coto de Caza may ultimately be annexed by Rancho Santa Margarita, and Ladera Ranch and Rancho Mission Viejo might form the general boundaries for a newly incorporated city – likely, the last city of Orange County.  From the strategic plan:

In 2010 the unincorporated communities of Coto De Caza and Las Flores were placed in the sphere of influence (SOI) of the City of Rancho Santa Margarita after a facilitated process with the County, the City, LAFCO and the communities to study governance options. With the economy improving (somewhat) and development starting on the Ranch, the discussion about future governance for the entire southern Orange County area is poised to begin anew.

Why is the extension of Rancho Santa Margarita’s sphere of influence over Coto de Caza and Las Flores meaningful?  Because in its own words, LAFCO views a city’s sphere of influence as “the probable long-term boundary (given population projections and future service needs) for a city or special district. It’s a planning tool used by LAFCOs to help determine if future annexations make sense.”  We’re not saying that eventual annexation is written in stone.  It is possible that Las Flores and/or Coto will never be annexed, but merely take advantage of Rancho Santa Margarita’s services.  Coto is an especially difficult case for annexation, but that’s not relevant for this article.  Further, spheres of influence are based on many future assumptions about revenue and population.  By law, LAFCO must reconsider spheres of influence periodically and it is possible that they will be changed.

Below is a map showing Rancho Santa Margarita’s current sphere of influence, compared to its municipal boundaries:

City of Rancho Santa Margarita’s Sphere of Influence (source: OC LAFCO)

In a way, however, we are getting ahead of ourselves.  The Ladera Civic Council did not request incorporation, nor a modification to any existing spheres of influence.  When the Civic Council made its request of Supervisor Bates, it specifically asked her to file an application with LAFCO to form a County Service Area, or CSA.

A County Service Area, for all intents and purposes, is an accounting unit that can be used to account for the provision of public services.  Sometimes CSAs are used to acquire services on behalf of an area’s residents because the CSA is an effective mechanism to collect payment from property owners within the CSA that benefit from the services provided by the CSA, often through a property tax assessment.  For our purposes, a CSA is a mechanism for tracking the cost and quantity of County services consumed by residents of the CSA in anticipation of an initial fiscal feasibility review, and the required comprehensive fiscal analysis in support of an application for cityhood.

When it comes time for the creation of the new city, LAFCO will largely control the negotiation of the terms and conditions of incorporation.  What?  You thought the citizens voted to incorporate and it was done?  Not at all.  Cityhood is a carefully orchestrated dance between the citizens and the County, chaperoned by LAFCO.  Before cityhood occurs, the representatives of the potential city, the County and LAFCO will enter into a lengthy agreement that may contain some or all of the following terms: transition services (with or without an escape clause), allocation of certain assets (transferring some to the new city and county retention of others), easements, financing packages (including loans and grants), service ranges and levels, the designation of any existing agencies or districts that will be merged into the new city, assignment and assumption of obligations and liabilities, reimbursements of expenses (including the expense of the incorporation election), agreed governance structure (including elected and appointed positions), environmental declarations and default/dispute resolution provisions.

Without a doubt, however, the most important role LAFCO will play in the incorporation of the new city will be the analysis of revenue neutrality.  In 1992, California passed a law to reduce the adverse financial impact that new municipal incorporations can have on counties, requiring “revenue neutrality” as a precondition for incorporation.  Or, as the law puts it:  “that any proposal that includes an incorporation should result in a similar exchange of both revenue and responsibility for service delivery among the county, the proposed city and other subject agencies”  By law, LAFCO cannot approve an incorporation proposal unless the cost savings to the County offsets all of the County revenues diverted to the new city.  The law permits the County and new city to agree on mitigation steps if the numbers do not net out.  Most commonly, that involves the payment of mitigation fees to the County by the new city.  It cannot be overstated how important this aspect is, both in terms of the revenue neutrality negotiation, but also timing of the study.  As part of its comprehensive fiscal analysis, LAFCO will develop an estimate of base year service costs which will be used as the basis for revenue neutrality calculations.  A bad decision on the base year – or even a little bad luck if tax revenues turn south following incorporation  – will result in burdensome mitigation payments that will cripple the fledgling city’s finances for generations.

The State of California has legislated certain guidelines surrounding the incorporation process, which are required to include:

  • Information to assist incorporation proponents to understand the incorporation process, its timelines, and likely costs.
  • Direction to affected agencies regarding the type of information that should be included in the comprehensive fiscal analysis of incorporation, as well as suggestions for alternative ways to achieve fiscally neutral incorporations.

On its own initiative, LAFCO staff has recommended a study of South Orange County regarding future governance.  LAFCO is almost certainly likely to be receptive to an application to form a CSA, should Supervisor Bates comply with the Ladera Ranch Civic Council’s request.  In short, cityhood is impossible without LAFCO’s support, but all indications are that LAFCO is supportive of at least discussing cityhood for portions of unincorporated South Orange County, likely to include Ladera Ranch and Rancho Mission Viejo.

Want to learn more about Orange County LAFCO?  The OC LAFCO web site is here, and LAFCO offers a helpful FAQ here (PDF).  Wikipedia has a page.  And if you are looking for a Master’s of Public Administration level education in local agency formation, the California Association of Local Agency Formation Commissions has an abundance of resources on its web site, including the helpful “Time to Draw the Line: A Citizen’s Guide to LAFCOs, California’s Local Agency Formation Commissions”, published by the Senate Committee on Local Government, available here (PDF).

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