Grand Terrace Investigates Disincorporation

Disincorporation is a dirty word to hear and consider for a city council and staff, but the Grand Terrace City Council wanted to hear what the ramifications would be for both the city and its residents if this option was selected to cure the $3.7 million general fund budget deficit predicted over the next five years. (That works out to $62.50 per person per year.) At the first budget workshop meeting held on April 22, 2013, there was much discussion on how to address the general fund deficit, but heavy consideration was given to Budget Stabilization Plan Scenario A-3 dealing with city disincorporation and possibly setting up a Community Services District. At the workshop meeting the council and budget advisory committee were advised that the Executive Officer for the Local Agency Formation Commission for San Bernardino County (LAFCO) was available to attend the second Budget Workshop meeting on April 30, 2013 and answer any questions about disincorporation. Under direction from the council, City Manager Betsy Adams invited LAFCO’s Executive Officer, Kathleen Rollings-McDonald to the April 30th budget meeting. At the April 30th meeting, Kathleen Rollings-McDonald explained in detail the incorporation process that Grand Terrace went through in 1978 to become a city under LAFCO’s assistance. She pointed out to the council and special budget committee one of the financial recommendations the new city did not incorporate as suggested by LAFCO at that early juncture. The recommendation was for the new city to establish a 6% utility tax to create needed revenue in the early years of its formation. When the city was incorporated, it didn’t have any reserves and had minimal levels of service capital. Kathleen said, “Revenues at that time for the city weren’t sufficient for the long term. Also, another concern was that the city couldn’t expand its boundaries any longer. What you have is what you can generate your income from.” In the early 2000s, an initiative was put before the residents of Grand Terrace, giving citizens the opportunity to vote for a utility tax. It was strongly defeated. At present, introducing a new utility tax measure is a consideration being weighed by the budget advisory committee and City Council. Kathleen emphasized that disincorporation is a process with serious consequences. The city needs to look at this possible choice with diligence. “Disincorporation does nothing for your debt or existing contracts,” says Kathleen, “Claiming bankruptcy (as the City of San Bernardino did) is the only way to negotiate the amount of your debt and reduce your contract obligations. The debt of the city going through disincorporation must be borne by the property owners in that city.” Councilman Bernardo Sandoval further stated, “If a Community Service District was formed after a city’s disincorporation, the District could then charge a parcel tax to collect funds from the residents to pay off the debt of the city.” The disincorporation of a city has to be approved by an election requiring a two-thirds vote from eligible voters. If the ballot measure fails, the city still will have state-required services that need to be performed, such as: Law Enforcement, Land Use Planning, Fire Protection, and Road Maintenance. If disincorporation is selected by the residents, the county board of supervisors is responsible for winding up the affairs of the former city. Residents of the former city no longer have any rights or duties as inhabitants or voters of a city. Prior to the effective date of disincorporation, public officers must turn over public property to the county board of supervisors, and the city council must turn over all city funds, as certified by the LAFCO or the county, to the county treasurer. The county tax collector may collect any levied but yet uncollected taxes owed to the now disincorporated city, and the county may collect or sue for all debts owed the city. The county places all funds related to the former city in a special fund for winding up the city’s affairs and paying any debts owed by the city. If the special fund is insufficient to pay the former city’s indebtedness, the Cortese–Knox–Hertzberg Act states that the county “shall cause to be levied, and there shall be collected from the territory formerly included within the city, taxes sufficient to pay the indebtedness as it becomes due. All unfunded debt such as pension fund and medical debt (approx. $10 million) will need to be paid if the city disincorporates. “The disincorporation process will take 18–24 months, and under your present cash flow situation, this selection may not be viable for you,” says Kathleen. “Another planning scenario could be more effective.” Finally, after hearing all of the doom and gloom of disincorporation, Mayor Stanckiewitz said, “This is not my choice of action to solve the city’s financial issues. I want to try to save our current way of life and seek another answer to our problems.” All members of the council thanked Kathleen for her time and providing them with the answers to their questions about disincorporation.