Co-authored by Sara Mares, Director, NBS; and Rick Brandis, Managing Director, Oppenheimer & Co. Inc.
The Community Facilities District (CFD) may be the most flexible funding and financing tool available to California’s local governmental agencies. This flexibility is demonstrated by the following attributes:
- A wide variety of facilities and services can be funded
- The special taxes can be apportioned simply on a reasonable basis, as opposed to the stringent benefit requirements of special assessments
- Flexibility is strengthened by utilizing zones, annexation areas, and improvement areas
These attributes can suit almost any situation, which makes the CFD an excellent choice for many municipalities seeking funding or financing.
A CFD can fund or finance a broad array of services over time and can be used by most types of special districts. The services that can be FUNDED include the following:
- Police protection
- Fire protection and suppression
- Ambulance/paramedic services
- Recreation programs
- Library services
- School maintenance
- Operation and maintenance of museums and cultural facilities
- Maintenance of lighting of parks/parkways/streets/roads/open space
- Flood and storm protection services
- Hazardous substance remediation/removal
- Maintenance and operation of any real property with an estimated useful life of five years or more owned by the local agency (or another local agency with a joint community facilities agreement)
Virtually any improvement or infrastructure can be FINANCED with a CFD. In addition to financing typical construction of parks, schools, and subdivision backbone infrastructure, CFDs can be used to:
- Repay existing indebtedness secured by a tax, assessment or fee, including that of another public agency
- Finance seismic safety and earthquake damage
- Pay for remediation of hazardous substances and soil deterioration
What Type of Debt can be Utilized With a CFD?
A CFD can leverage debt for capital facilities financing. The special tax levy, secured by the property within the CFD, is the security for any debt issued. Debt financing options include land-secured municipal bonds (Mello Roos Special Tax Bonds), bank loans, and State Revolving Fund loans. The debt is typically tax exempt and a limited obligation (i.e., not a general obligation) of the issuing agency. As tax exempt debt, public agencies and taxpayers get the advantage of lower interest rates.
When issuing debt to finance capital facilities, the issuer must consider the costs of issuance, the value of the underlying property (an appraisal may be required if the property is in a developing condition), the overall tax burden on the property including ad valorem taxes, and other overlapping debt. In some cases, facilities may be financed with pay-as-you-go funding in addition to or instead of issuing debt.
How is a CFD Formed?
A CFD can be initiated by registered voters, landowners, or members of a legislative body. The formation process begins with the one-time adoption of local goals and policies outlining the criteria under which CFDs may be used for facilities, services or both, credit requirements related to bonds issued and appraisal standards. Through a series of resolutions, the Rate and Method of Apportionment and Boundary Map are subsequently approved, the CFD is formed, and the election is called. With 2/3 approval of voters (if 12 or more registered voters reside within the boundaries of the proposed CFD) or landowners by acreage (if fewer than 12), the CFD is confirmed, and the special tax levy is ordered.
If there are 12 or more registered voters within the boundary of a CFD, an election must be held. Some agencies choose to consolidate with another election, while some may hold a mailed ballot or special election. Polling consultants may be used before the CFD formation process officially begins to determine whether there is sufficient voter support to win election approval. Outreach or strategy consultants may assist with developing informational messaging, preparing presentations for community meetings, writing informational mailings, and developing strategies early on for engaging key stakeholders. An advocacy campaign may be mounted: This cannot be funded by public dollars but rather it needs to be privately funded.
How is a CFD Managed Once it is Formed?
After formation, the CFD needs to be managed. On an annual basis, the special tax levy is calculated according to the RMA (the special tax “formula”) and typically billed via the county tax property billing process, though direct billing is allowed. The active parcels must be determined, and the special taxes allocated to any new parcels. Development status and land use may require review for each parcel. Any annexations must be accounted for. Once the parcel and property data has been determined, rates may require updating based on a cost-of-living inflator before being applied to each parcel. Mandatory reporting is needed, managing payment delinquencies is often required, and continuing bond disclosure may be necessary as part of the overall administration process. The annual administration is typically done by the same consultant that provided the formation services.
Special districts, cities, counties, and school districts have used the CFD since 1982 when the Mello Roos Community Facilities Act became law.