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California Court of Appeal Approves Use of Community Facilities Districts to Achieve Fiscal Neutrality in New Developments

In the post-Great Recession era, cities and counties are highly aware of the potential fiscal impacts of new development in their jurisdictions. “Fiscal neutrality” is therefore a popular phrase among staff and decisionmakers. But how can agencies ensure that new development (especially residential development) will be self-funding? One tool that is increasingly popular is the Mello-Roos Act, Government Code § 53311 et seq., which provides for the levying of special taxes in Community Facilities Districts (CFDs). The question of the legality of using the “special” tax mechanism of a CFD to provide for garden-variety municipal services (police, recreation, streets, etc.) was recently addressed in Building Industry Assn. of the Bay Area v. City of San Ramon. In this case the First District Court of Appeal recognized the propriety of using CFDs in this way, a development that will no doubt be welcome to proponents of fiscal neutrality and public agencies throughout the state. [Building Industry Association of the Bay Area v. City of San Ramon, ___Cal.App.5th___, Case No. A145575 (1st Dist. Oct. 13, 2016).]

Fiscal neutrality is frequently a point of emphasis for budget-strapped agencies presented with development proposals. The strictures of California tax law following the passage of Proposition 13 have constrained local governments’ ability to easily deal with the financial impact of new development. Mello-Roos thus provides an attractive means to deal with this problem. Developers will often be amenable to creating Community Facilities Districts as they will ultimately not be the ones to pay the ongoing special taxes to be levied. Collectively they may decry the practice but on an individual basis there is little incentive for them to put up a fight. Thus, the Association’s involvement in the case makes perfect sense even though the developer itself did not challenge the imposition of the levy. No doubt local agencies will continue to emphasize the use of Mello-Roos to pay for development in the aftermath of this decision. The court’s decision is accessible online at:

(Matthew Henderson)