Mello-Roos Property Taxes: Taxation Without Representation

Are you paying Mello-Roos taxes, in addition to your regular property taxes?
Are the Mello-Roos taxes being used for their intended purpose?
Or do you even know what the intended purpose was?
For how long will you be paying those taxes?

What is Mello-Roos?

Proposition 13, the “People's Initiative to Limit Property Taxation,” was approved by voters in 1978, and is enshrined in the California Constitution as Article XIII A.  One of the results of Proposition 13 has been a blizzard of legislation imposing taxes not based on property value and therefore not subject to Proposition 13.  An example is the Communities Facilities Act, passed by the California Legislature in 1982 (CHAPTER 2.5. 53311 - 53368.3). The CFA is better known as “Mello-Roos,” derived from the act’s co-authors, Senator Henry J. Mello and Assembly Member Mike Roos.

Mello-Roos allows for the creation of special districts that issue bonds to finance infrastructure and certain services (streets, water, sewage, electricity, schools, parks, police) in development areas.  Residents of the development pay a tax, which attaches to their land (not to the structure) as a lien that remains in force until the bonds are paid in full and all other obligations associated with the bonds are satisfied.  Residents pay the Mello-Roos tax in addition to their ad-valorem property taxes.

The usual alternative to creation of a Communities Facilities District is a fee paid by the owner of the land to be developed to the city or county in which the development is located.  The fee is then passed on to the purchasers of property in the development. This alternative makes property more expensive to buy, but results in lower taxes to pay.

If the land owner decides to establish a CFD, and the jurisdiction’s council passes a resolution approving the CFD, voters residing in the CFD vote to pass or reject establishment of the district. In development areas where there is nobody there yet, the land owner is the only voter.  In development located in already urbanized areas, (say, additional condominiums in a cluster of already existing buildings), voters are whoever owns property located within the CFD.

But Mello-Roos Grew and Grew

The intent of Mello-Roos was to provide funds to pay for infrastructure that would serve a specific community, and to establish a method under which residents of that community would help with costs.  However, as often happens with laws, the scope and obscurity of Mello-Roos grew with time. Here are some highlights:

Senate Bill 1432 in 2006 extended Mello-Roos to include financing of “affordable housing.”  Then Governor Arnold Schwarzenegger vetoed, with a strong admonition regarding the housing clause, “This provision represents a fundamental shift in the purpose of Mello-Roos taxes and is one that I cannot support.”  However, attempts to shift and expand the purpose of the Mello-Roos tax were highly successful after 2006.

*   Senate Bill 555 in 2011 authorized a CFD to finance and refinance the acquisition, installation, and improvement of energy efficiency, water conservation, and renewable energy improvements to or on real property and in buildings, publicly or privately owned.  Thus the rule expands the meaning of infrastructure and services to include improvements to buildings.

*   In March 2014, the Pacific Legal Foundation filed a suit on behalf of the Building Industry Association against the City of San Ramon, claiming that Mello-Roos taxes were intended to finance new infrastructure and services in new development areas.  The court ruled that Mello-Roos could also apply to existing services in already urbanized areas.  This decision amounts to an increase in taxation without voter approval. 

*   Grand Jury Report issued on July 2015, Mello-Roos: Perpetual Debt Accumulation and Tax Assessment Obligation:  In a review of Orange County’s 119 Mello-Roos districts, the Grand Jury noted vague language on documents describing projects, lack of oversight, and indebtedness without end dates. “The descriptions often are vague statements such as ‘public works,’ ‘maintenance,’ and ‘schools’ which are very broad and do not have the detail that is required by the Act.”  “After bonds are paid off, a CFD tax may continue to be collected for maintenance of the facilities.” Residents could be obliged to pay taxes in perpetuity to satisfy the CFD lien on their land, and not know what revenues are being used for.  This is a much expanded interpretation of the original Mello-Roos Act.

*   Assembly Bill 2618 in August 2016, authorized a CFD that already allowed for financing of energy improvements to also finance seismic safety improvements on public or private property.

Extent of the CFD Network

The California Mello-Roos Communities Facilities Districts Yearly Status Reports for fiscal year 2014-2015 indicated 921 CFDs throughout California.  Each district carries a substantial burden of debt to finance a lot of vaguely-described projects. 

For example, San Francisco’s five CFDs (Rincon Hill, Mint Plaza, Power and Energy Generation, Mission Bay, and Hunters Point) reported a total of $209,751,688 in outstanding Mello-Roos bonds.  That figure does not yet include the San Francisco Transbay CFD, with authority to incur bond indebtedness in an aggregate amount not to exceed $1,400,000,000. 

As the scope of the Mello-Roos Act grows, so does what amounts to taxation without representation.  Obviously, the restrictions imposed by Proposition 13 have been successfully circumvented.  Residents continue to pay increasingly large property tax bills, are on the hook for growing obligations attached to their land, and wittingly or unwittingly subscribe to perpetual bonded indebtedness that mortgages their children and grandchildren’s future.

One hopeful note:   Establishment of obscure or irresponsible Communities Facilities Districts cannot occur without passage of a resolution by your city or county elected board or city council.