Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: DISCUSSION OF ENHANCED INFRASTRUCTURE
FINANCING DISTRICTS (EIFDS)
Date: November 26, 2024
Written by: Damien O'Bid, City Manager
Recommendation
It is recommended that the City Council discuss Enhanced Infrastructure Financing Districts (EIFDS) and provide direction for staff to return with a proposal for an initial viability study at Strategic Planning.
Background
In 2011, the State was faced with a dire budget situation, including struggling to meet constitutionally required funding for schools, which is largely funded through local property tax (since Proposition 13) as well as State General Fund contributions. To lessen the State General Fund burden, the California legislature enacted ABx1 26, which dissolved all 400 redevelopment agencies in California, effective February 1, 2012. Statewide, this resulted in a massive redirection of property taxes from cities to schools and other local taxing entities. In Cotati, a significant portion of the City’s budget was funded through redevelopment activities. This, in combination with the recession, this resulted in layoffs of 28% of the City staff and 14% salary cuts for the remaining staff, ceasing closing the recreation department, pausing all infrastructure programs and other severe austerity measures across the board. Since that time, Cotati voters approved a local sales tax and a local cannabis business tax; the City updated fees to be current, aggressively pursued grants and continues to focus services and infrastructure to core areas of responsibility to ensure fiscal sustainability with what continues to be a very lean General Fund.
The City has also unwound all former redevelopment activities but is continuing to make payments on the bonds issued for the construction of the Police Station. Once this bond is paid off, the successor agency will be formally closed.
In the aftermath of ABx1 26, one of the ways that the State Legislature tried to address the budget fallout for cities was to create a new tool called an Enhanced Infrastructure Financing District (EIFD) in 2014. As discussed more in the Analysis section of this staff report, EIFDs are a way for multiple taxing entities to share some portion of future property tax growth to develop infrastructure that will provide common benefit.
Recently, the Sonoma County Board of Directors adopted a policy on EIFDs (see attached), which has allowed cities to explore this mechanism more seriously. At this time, the City of Santa Rosa is well into developing a Downtown EIFD to enable County contributions to infrastructure improvements in the downtown Santa Rosa area (see attached County Board of Supervisors Item). This will, in turn, increase property values and economic activity, resulting in elevated property taxes for both the City and the County and revenue for the City to provide improved services and infrastructure.
The City of Sebastopol is also exploring EIFDs but is early in the process. The City of Sonoma is just starting the process.
Analysis/Discussion
An Enhanced Infrastructure Financing District, or EIFD, is a type of special financing district that uses a portion of property tax increment revenues generated by community growth from a specifically defined area to finance public infrastructure and economic development projects of community-wide significance. EIFDs impose no new taxes, nor does it result in any new taxes or fees to property owners. Property tax increment revenues are derived by using a portion of the tax increment generated by the existing 1% ad valorem property tax. EIFDs are prohibited from using increments from educational agencies, such as the Cotati Rohnert Park Unified School District.
Once a District is formed, the EIFD allows for a reallocation of a portion of future property taxes (the tax increment) to a separate account to be used to pay for infrastructure improvements that benefit a designated area. The “baseline property value” for all properties within the District would be set, or frozen, at that year’s appraised value. Tax increment revenue is generated from the “captured appraised value” (the difference between the baseline value and the annually updated appraised value). A pre-designated percentage of this revenue establishes the fund that is administered by a Public Financing Authority (PFA) to be used for public infrastructure and community benefiting projects.
If Cotati were to form an EIFD, the most likely partner would be the County of Sonoma, and as affected taxing entities, the City would be required to create a PFA. PFA’s membership must consist of a majority of members from the legislative bodies of the participating entities, and a minimum of 2 members of the public chosen by the legislative bodies. Boards typically consist of an odd number of representatives, so the PFA might consist of 2 Cotati Councilmembers, 1 or 2 members from the Sonoma County Board of Supervisors, and 2 or 3 members of the public.
The PFA would authorize, develop, and eventually implement the Infrastructure Finance Plan (IFP), which is the investment plan of the EIFD. In essence, the PFA oversees EIFD finances and activities.
The PFA may decide to sell bonds when sufficient property tax increment has accrued to support the debt service. In this way, bonds are secured only by the tax increment generated within the District, NOT by the City’s or County’s General Funds. Bonds may not be sold until after some development has occurred and tax increment is generated, hence EIFDs are often used as a reimbursement mechanism. EIFDs have a lifespan of up to 45 years after the first bond is issued.
Infrastructure projects that provide community-wide benefit and have a useful life of at least 15 years are eligible to be funded by EIFDs. Examples of eligible projects include:
• Roads, highways, streets/streetscapes, parking facilities, and transit facilities • Affordable housing
• Internet access services
• Childcare facilities
• Libraries
• Parks, open space, and recreational facilities,
• Improvements related to fighting climate change
• Brownfield restoration and other environmental mitigation • Transit priority facilities
• Sewer, reclamation, and water facilities
• Solid waste facilities
• Flood control facilities, retention bases, and drainage channels In practice, the project(s) should facilitate community development and increase property values and economic activity in the long term to induce the County or other taxing entities to participate and provide a benefit to the City. In Cotati, the recommended areas for the EIFD are roughly the Priority Development Areas (Highway 116 corridor, Downtown, and potentially the Santero Plan Area). Each of these areas have significant infrastructure needs to facilitate future development.
If the City Council would like to explore EIFDs further, it is recommended that staff return with a proposal for an initial viability study at Strategic Planning.
Financial Considerations
The City of Cotati gets about 10% of the 1% Ad Valorum property tax. In other words, if a property has an assessed taxable value of $500,000, the annual property tax (1%) will be $5,000 and the City’s share of that will be $500 per year.
The primary entities receiving portions of the 1% Ad Valorum property tax are the County of Sonoma (20%) and the Cotati Rohnert Park Unified School District (28%). Given the relatively minor amounts of property tax going to other taxing entities, lack of policies in this area, and the state prohibition on sharing future tax revenue with schools, the only viable partner for an EIFD is the County of Sonoma. The property apportionment graph is attached.
The primary benefit of EIFD’s is that the City could use a portion of the County’s property tax revenue growth for a defined period of time to assist in funding infrastructure in Cotati that facilitates development in underdeveloped portions of the community. This in turn will ultimately increase property values and the resulting property tax revenues for the City and the County. For the City, the primary benefit is community development and economic growth, realized through sales taxes, as the City’s share of property taxes is relatively low.
During the life of the EIFD, the main drawback for the City is that a portion of the City’s future property tax revenue growth will be directed into the EIFD for specific projects rather than available in the General Fund for general governmental purposes. If the EIFD project is not a catalyst project, it may be a poor tradeoff, as the funds are spent but there is no corresponding additional growth in property taxes. If the project does catalyze growth, there would be additional growth in property taxes and increased economic activity, which may make this a good trade off.
The main costs are the costs of establishing an EIFD, staff costs managing the Public Financing Authority, and if bonds are issued, the costs of the bonding (which would be paid by the EIFD).
An initial study of the viability of an EIFD would cost $30,000. If the EIFD were to be developed and formed, the total costs (including the initial $30,000) are expected to be no more than $120,000 in total.
The on-going costs of managing the PFA would primarily be staff time for initial meetings that would likely drop to semi-annual or annual once the EIFD is established. If bonds are issued, there would be bonding costs, as well as annual reporting costs. The costs of these can ultimately be funded through the EIFD, if it is established. However, depending on the timing of development in the EIFD area(s), revenue growth may be slow initially, which is why it is often a reimbursement arrangement in the early years. Therefore, bonding may not be feasible/recommended until enough revenue comes in the EIFD to cover the annual principal and debt service.
Based on the County’s analysis of Santa Rosa’s EIFD, it is expected that if the County were to participate in an EIFD with Cotati, they would only contribute up to 30% of their tax increment to meet their fiscal and policy goals. The City could choose to contribute any portion of our property tax increment, provided it at least matches the County contribution (per the County EIFD policy).
The County Assessor normally enrolls new property tax values at the end of the calendar year for the next year’s tax roll. Increases in property taxes are based on completed building improvements (typically occupancy), so any developments that get occupancy prior to around December will have that increased value enrolled into the following year’s tax roll.
Environmental Issues
Where it can be determined with certainty that there is no possibility that the activity in question may have a significant effect on the environment, the activity is not subject to CEQA review.
This general rule can be applied to activities which could be subject to the CEQA process, but which logic dictates should not be subject to CEQA review. Therefore, based on the information provided above, the proposed resolution is exempt from CEQA pursuant to Section 14.03.021 of the CEQA Guidelines in that there is no possibility that the activity may have a significant impact on the environment.