2005-2006 Stanislaus County Civil Grand Jury Report*

The City of Modesto presented the CGJ with several financial audits and account reviews for the North Beyer Park CFD 1997-1. The spreadsheets show the revenue and expenses for CFD 1997-1. The Consultant's Performance Audit of CFD 1997-1, as reviewed by the City of Modesto's Audit Committee at their November 22, 2004 meeting, verified the accuracy of the spreadsheets. Agree. These records, and the responses from City Staff during sworn testimony before the CGJ, indicate that the City of Modesto has maintained an accurate and responsible record of the taxes collected and the expenditures paid from the CFD 1997-1 account. (emphasis added) The Capital Investment Plan indicates the anticipated future expenditures for CFD 1997-1. Agree. -- oOo -- Level of management the City of Modesto exercises in the

administration of Community Facilities District funds; the amount of funds being spent for administrative and consulting fees, and the control of consultant charges. Management of CFDs Administrative direction to local agencies desiring to create a Community Facilities District is provided in Government Code Section 53312.7(a), "On or after January 1, 1994, a local agency may initiate proceedings to establish a district pursuant to this chapter only if it has considered and adopted local goals and policies concerning the use of this chapter." ("Goals and Policies to be Adopted Before Initiation of Proceedings to Establish District.") Agree. Response to 2005-2006 Civil Grand Jury Report re CFD 1997-1.doc The City of Modesto has met this requirement by adopting "Policies And Procedures for the Formation, Annexation and Administration of Community Facilities Districts Created Pursuant to the Provisions of The Mello-Roos Community Facilities Act of 1982." (adopted September 3, 1996 Policy Manual.) Agree. The Policy Manual specifies the City's intent to use the Mello-Roos Act to provide for the financing of City owned and operated infrastructure and services. The Policy Manual, p. 26, further establishes the staff/administrative infrastructure to oversee CFDs and defines the duties of the District Administrator post formation/post annexation. Agree. Currently, a division with the City Manager's office oversees the CFDs for the City of Modesto. The City Manager, one Senior Structural Engineer, one Administrative Office Assistant, and two CFD Administrative Officers (who share one position) comprise the CFD Administration division. A Senior Civil Engineer, not a Senior Structural Engineer, assists with the administration of the CFDs. Otherwise, agree. Services paid from the CFD 1997-1 account The City of Modesto, as the legislative body, has established administrative and financial services for the management of the nine (9) CFDs within the City's jurisdiction. CFD administration employees bill the CFD for working time spent on CFD services, including responding to question from citizens, providing reports and documents and an annual audit/financial reporting program for CFD 1997-1. The City has been utilizing consultants to perform some of these services. During sworn testimony before the CGJ several City staff members contended that this section of Policy Manual indicates that these are necessary administrative/financial services and the "CFD must pay its own way." Agree. Government Code Sections 6250 through 6276.48, The California Public Records Act, includes inquiries regarding CFDs. Under this Code, public agencies must give access to view the records of the CFD at no cost, and if a citizen requests a copy of that report, he can be charged the direct cost of duplication, usually $.10 to $.25 per page. Charges for research, review and deletion are not allowed. We agree that records pertaining to a CFD are subject to the California Public Records Act and that an individual can only be charged for the direct cost of duplication. Response to 2005-2006 Civil Grand Jury Report re CFD 1997-1.doc The Policy Manual does not define "services." The CGJ reviewed the definition of services applicable to a CFD, as stated in Government Code Section 53313, "Services Which May Be Provided." The definition of services eligible under this government code section does not support the City's practice of charging administrative fees for answering questions, committee work, or other administrative functions. We agree that Government Code Section 53313 defines "Services" that are eligible to be funded through a CFD. However, the City is not relying on this code section for its authority to charge administrative expenses. The City's authority is found in Government Code Section 53340(d). See below. Government Code section 53343, "Use of Charges," states, "A Community Facilities District may be established under this chapter to finance any one or more of the following types of services within an area ... "Administrative, audit, and consulting fees are not included as authorized "services." Disagree. Government Code section 53343 states "[a]ny charges collected pursuant to this chapter may only be used for facilities and services authorized by this chapter. Government Code section 53340(d) further provides that any special tax may be used to pay for the "cost of providing public facilities, services, and incidental expenses." Government Code section 53317(e)(2) specifically defines "incidental expenses" to include, among other things, "The costs associated with the creation of the district, issuance of bonds, determination of the amount of taxes, collection of taxes, payment of taxes, or costs otherwise incurred in order to carry out the authorized purposes of the district." (emphasis added). In addition, Government Code Section 53343.1(d)(5) specifically requires a District to include "Other administrative and overhead costs" in an Annual Report, demonstrating that such costs are both authorized and anticipated. These Government Code sections and others clearly allow the CFD to pay for administrative expenses. Reasonable administrative expenses include but are not limited to the costs and staff time associated with oversight and management of a CFD, costs and staff time related to property owner inquiries, and consultant time and costs associated with levy of annual taxes and preparation of reports. Government Code Section 53343.1 "Annual Report" only requires this report if requested by a person who resides in or owns property in the district. The district may charge a fee for the report not exceeding the cost of preparing the report. While we agree that this code section provides for preparation of an Annual Report if requested to do so by a person who resides in or owns Response to 2005-2006 Civil Grand Jury Report re CFD 1997-1.doc property in the district, we disagree with the CGJ's interpretation. While it only requires a report under specified circumstances, this section does not preclude a local agency from preparing an Annual report should a legislative body choose to do so. There is no provision for an administrative services component. The Policy Manual ( ) states: "all City administrative and consultant costs, including those of the District Administrator related to administration of a CFD and incurred after formation shall be included within the special tax formula (emphasis added) in accordance with the applicable provisions of law." Agree as to the policy language. Disagree that the special tax formula for CFD 1997-1 does not provide for administrative expenses. A special tax formula is also known as the Rate and Method of Apportionment ("RMA"). An RMA was adopted for CFD 1997-1 and can be found in Appendix A of the CFD Report adopted for CFD 1997-1 (a copy of which is provided as Attachment 1.) of the RMA defines the "Maintenance Special Tax Requirement" to be "the amount necessary ... to (i) pay for authorized maintenance expenses [and] (ii) pay administrative expenses (emphasis added) of CFD No. 1997-1." However, CFD 1997-1, as one of the first Community Facilities Districts enacted by the City of Modesto and unlike current CFD programs, does not have the "special tax formula" (an administrative account.) Disagree, see response above. The City Attorney's office informed the CGJ that, "There are two special tax components in the North Beyer Community Facilities District: a one-time Facilities Special Tax and an annual Maintenance Special Tax. Administrative expenses are included within the Maintenance Special Tax component." Agree. Based on the time of issuance of the administrative component section of the Policy Manual (July 18, 2000), the lack of the special tax formula, the cited Government Code sections, and the opinion from the City Attorney's office, the administrative fees policy does not apply to CFD 1997-1. Disagree. As discussed above, Government Code Sections 53317(e)(2), 53340(d) and 53343.1(d)(5), as well as others, allow a CFD to pay for administrative expenses. In addition, an RMA was adopted for CFD 1997-1 that includes a provision for administrative expenses to be collected and charged against the maintenance special taxes collected for CFD 1997-1. There is no legal requirement that administrative expenses be collected as a separate "component" of the special tax. The City Attorney's office and the City's outside bond counsel have reviewed the relevant Government Code sections, the Rate and Method of Response to 2005-2006 Civil Grand Jury Report re CFD 1997-1.doc Apportionment for CFD No. 1997-1 and this response and concur that the City is legally authorized to charge administrative expenses to CFD No. 1997-1. To date, the CFD has been unable to construct the medians, because (1) insufficient tax monies have been collected for the construction projects and (2) the medians cannot be installed until property owners/developers on both Oakdale Road and Coffee Road dedicate the necessary right-of-way to construct the full roadway width. Agree. Additionally, while CFD 1997-1 have been sitting for nine years without being used for the purposes for which they were intended, the city has continued to deduct CFD funds to pay for services not authorized by CFD 1997-1 language or account design. The City's practice of charging for annual audits and reports is not support by Government Code Section 53343, 53343.1, or the Policy Manual. Therefore, the CGJ finds that the City is performing unnecessary financial functions and charging in a manner not provided for in the language or design of CFD 1997-1. The City may not charge administrative, auditing, or consulting fees against CFD 1997-1 until CFD 1997-1 enters its landscape maintenance phase. Disagree. As discussed above, Government Code Section 53340(d) provides that any special tax may be used to pay for the "cost of providing public facilities, services, and incidental expenses." Administrative expenses are considered incidental expenses and are authorized charges against the Maintenance Special Taxes. -- oOo --

The provision in law for an election to change an existing Community Facilities District is found in the following sections of the Government Code. Government Code Section 53332(a). "Petition For Changes In Facilities, Services, Or Taxes": If a petition signed by 25 percent or more of the registered voters residing in the district, or by the owners of 25 percent or more of the territory within the district, is filed with the legislative body requesting that proceedings be commenced to change the types of public facilities or services financed by the district or that the rate or method of apportionment of an existing special tax be changed, or that a new special tax be levied, the legislative body shall within 40 days thereafter adopt a resolution of consideration in the form specified in Section 53334 to make those changes within the community facilities district ... Agree. Response to 2005-2006 Civil Grand Jury Report re CFD 1997-1.doc The following exchange took place between the CGJ and a representative of the City Attorney's Office: CGJ: "If a proposal to dissolve a community facilities district is submitted to the qualified electors of the district and two-thirds (2/3) of the qualified electors are in favor of the dissolution, is the vote binding on the City?" Interviewee: "Government Code Section 53338(b) provides that if two thirds of the votes cast on a proposition are in favor of the proposed change, then the legislative body is required to adopt a resolution determining that the proposed change is lawfully authorized." The law clearly provides a method for altering a CFD by election. The outcome of that election is binding on the City of Modesto as the legislative body. However, according to Government Code Section 53332(b), "Any petition filed by the landowners shall be accompanied by the payment of the fee which the legislative body determines. That fee may be imposed in an amount sufficient to compensate the legislative body for all costs incurred in conducting proceedings to change the district pursuant to this article." Agree.