In the wake of Proposition 13 in 1978, communities across California scrambled to adapt to its new constraints, including its 2/3 voter approval requirement for special taxes. In response, the state legislature passed the Mello-Roos Community Facilities Act (“Mello-Roos”) in 1982 to allow cities and counties to establish community facilities districts with the authority to impose special taxes to fund specified facilities and services in those districts. Nevertheless, coming up with the means of paying for the services and facilities necessitated by new residential development remains a thorny and complex issue under this tax structure.
Last October, California’s First District Court of Appeal affirmed a ruling by the Contra Costa County Superior Court rejecting a lawsuit brought by the Building Industry Association—Bay Area (“BIA”) against a tax imposed by the City of San Ramon under Mello-Roos in connection with its approval of a 48-unit townhouse project. While the lawsuit alleged that this tax, which was imposed in order to close a funding gap for public services for the development, was a general tax that violated Mello-Roos on its face, the Court of Appeal found that the tax qualified as a special tax allowed under that law.
In that case, the City of San Ramon conditioned its 2013 approval of this townhouse project on the creation of a means for funding the gap between the tax revenues generated by that development and the cost of providing project services. A financial analysis of the development showed that the cost of providing certain services and facilities with respect to this project would exceed revenues by about $500 per year per townhouse. To meet this condition, the project owner/developer filed a petition with the City of San Ramon to form a Mello-Roos community facilities district in order to fund certain services and facilities for the project, and voted to approve a tax to fund these project services and facilities as the sole property owner in the district.
Shortly after the project was approved, the BIA filed a lawsuit to invalidate the district and the tax, arguing they were unlawful on three grounds. First, the tax violated Mello-Roos because it would not pay for new or enhanced services. Second, the tax violated the ban on special districts levying general taxes under Proposition 218. Finally, the ordinance implementing the tax retaliated against residents by threatening them with financial liabilities for the services if the tax were repealed, in violation of their constitutional right to petition the government. The trial court ruled in favor of the City of San Ramon, finding that the tax did not violate Mello-Roos because the services funded would augment, not supplant, current services in the district, that the tax was not a general tax, and that the implementing ordinance did not violate the constitution.
In affirming the trial court’s decision, the Court of Appeal found that the services being funded by this special tax were in addition to the services provided within the district’s territory prior to the creation of the district. The Court of Appeal also found that the additional services did not supplant services already available within that territory when the district was created. Finally, the Court of Appeal found that the implementing ordinance did not threaten residents, but only informed them that repealing the tax would eliminate funding for district services.
Shortly after this ruling was handed down, the BIA sought review of the Court of Appeal’s decision by the California Supreme Court. In December 2016, the California Supreme Court denied the BIA’s petition for review. The BIA then filed a petition for writ of certiorari with the U.S. Supreme Court in March 2017. Signaling the end of the road for this facial challenge to the City of San Ramon’s actions, the U.S. Supreme Court denied the BIA’s petition late last month. In view of the result in this case, cities and counties across California now appear to have another arrow in their quiver of ways to fund government services and infrastructure for new residential development.
