I orginally published a version of this article almost two years ago, in March 2005.  A version of it is on my old blog, and a version was published in the Adobe Press. I’m updating and republishing it now to reflect the most current events, and my own personal thinking about incorporation. I’ve previously published a short history of Nipomo’s incorporation movement here. While there is certainly more to this history, I think what I provided is a fairly accurate overview–though admitedly brief.

On 2/15/05, the Davis Company submitted its final report on its preliminary feasibility analysis of Nipomo’s incorporation. You may read that report on line here. This report, some times called the Davis report, was prepared on behalf the Nipomo Community Services District (NCSD), which hired Mr. Davis to perform an intial feasibility study to determine whether it was fiscally feasible for Nipomo to incorporate–that is become a city. The study cost the NCSD approximately $25,000.00, which in my opinion was money well spent.

The most critical finding of the Davis Company (at that time) was summarized on page one of Mr. Davis’ cover letter:

“In general, however, most of the $720,000 amount that was originally projected from Vehicle License Fees has now been eliminated from the revenue estimates for the new city. Only a residual estimate of $61,000 remains. The change means that the fiscal viability of incorporation is well beyond the three – five year period originally estimated. For example, current estimates indicate that, in the year 2008, a new city would still be almost $600,000 short of breaking even.”

Mr. Davis went into greater detail in his report about the VLF issues, and why we were then in a situation, that did not exist in November 2004, when the first version of Mr. Davis’ report was released. Assuming Mr. Davis’ research to be reliable and his prognostications to be accurate, based on his own conclusions:

These recent policy changes, if unchanged, are likely to put off Nipomo incorporation for a period of seven to ten more years.

Mr. Davis’ initial projection, in November, 2004 was that Nipomo’s incorporation was at least three to five years in the future. In February 2005, he believed Nipomo’s incorporation was between seven to 10 years away. Or, somewhere between 2012 to 2015. Since the incorporation process, even if started today, would take two to three years, no matter what the immediate fiscal feasibility, Nipomo’s incorporation is still several years in the future.

In November 2006, the current incorporation committee obtained the latest sales tax figures from San Luis Obispo County, which I discussed here. The good news was that we were over two years ahead of Mr. Davis’ sales tax projections. With several commercial and retail projects in the planning and even construction stage here in Nipomo, it is my opinion that these sales tax figures will continue to rise.

The question is, in terms of incorporation, where does Nipomo go from here? The answer, I believe lies northward, and inward. The Cambria CSD was also contemplating incorporation back in 2004. This was not the first time that Cambria had considered becoming a city. In 1974, some Cal Poly students completed a preliminary feasibility study for the Cambria community, which concluded that in the mid 1970’s it was fiscally feasible for Cambria to become a city. Yet, Cambria did not pursue incorporation in the mid 1970’s.

In 1989 another Cal Poly study also concluded that Cambria could become a city. This conclusion was confirmed by two more studies, one in 1991, just prior to the enactment of revenue neutrality, and then again in 1995, even after revenue neutrality had become law. Still, Cambria decided not to pursue incorporation.

In 2004, Cambria again decided to look at incorporation, and appointed a committee to assist them in that endeavor. Cambria’s most recent incorporation website is here.

In late 2005, I spoke with Tammy Rudock, General Manager for the Cambria CSD about their incorporation process. In order to gauge and garner public support for Cambria’s incorporation, the Cambria CSD board of directors appointed a public panel (of 10) consisting of volunteers from Cambria’s citizenry to oversee their incorporation process, in conjunction with their incorporation consultant, Andy Belnap associated with Management Partners. Mr. Belnap guided the citizens’ group in this process.

This panel, under Belnap’s guidance reported directly to Ms. Rudock and the CSD board. Interestingly, the Cambria CSD decided that they would pay (up to $150,000) for the comprehensive fiscal feasibility study required by LAFCO, if they had voted to proceed with a petition to LAFCO to begin the formal incorporation process.

Unfortunately, for Cambria, their incorporation committee decided that the alimony payments under revenue neutrality that they would need to make to San Luis Obispo County, were just too high, i.e., up to $2.2 million a year for an undetermined period of time. In their final report to the Cambria CSD, the citizen incorporation committee in part recommended:

The Ad Hoc Citizens Incorporation Committee was appointed by the CCSD Board of Directors in September 2004 and has worked diligently to evaluate the feasibility of incorporation. Generally speaking the Committee believes that Cambria would be better served as an incorporated area with local control/planning, and regrets that the area did not incorporate years ago. However, in light of the results of the recent community questionnaire and in light of the following four points, the Committee recommends that no further steps towards incorporation be taken at this time.

Having the Cambria Community Services District behind the incorpration movement was a hugh advantage for the Cambria community. According to Ms. Ruduck, the primary rationale in Cambria for incorporation was to assume all land use and planning decisions from the county, in order to better control their destiny. This is the same rationale here in Nipomo.

Of course Cambria’s most recent feasibility study was much different from Nipomo’s. Cambria has the opposite problem than Nipomo–they are too feasible, while we are not yet feasible. As a result, Cambria, was looking at having to pay $2.2 million dollars in revenue neutrality payments for as yet an undetermined number of years. In other words, in late 2005 Cambria was generating so much revenue to the county, that under the revenue neutrality law San Luis Obispo County was going to require them to pay up to $2.2 million a year in alimony to break away from the county. The reason is that under the revenue neutrality law, since Cambria was making more money than it was costing San Luis Obisop County to support at the time, Cambria would have to make up for the lost revenue they would take with them as the new city.

While Nipomo is not yet fiscally feasible for incorporation, we are in a better position than Cambria, because we are on the correct side of the revenue neutrality equation, and probably will be for the next few years; however, if Nipomo’s incorporation is to succeed, we need to follow some of Cambria’s example, and look inward as well to see whether enough community support exists for success.

The NCSD cannot sustain the incorporation burden alone. They do not have the manpower, either in board members or staff. And, quite frankly, there needs to be much greater community support. I believe Nipomo’s current incorporation movement is at a cross roads. We can build on the past work our CSD board has accomplished. Or (like Cambria) we can let the incorporation dialogue dissolve into the background, and perhaps reinvent the wheel again several years or decades down the road. These will be years and decades that San Luis Obispo County will continue to make, implement and enforce planning and land use decisions by people who do not live here, work here, have any roots here, or are accountable in anyway to Nipomo’s citizens.

I believe the time has come for our own NCSD to form a similar citizen’s panel to Cambria’s. The community needs to support this movement, or Nipomo must remain under county control for land use and planning decisions for the indefinite future.

I have spoken with or exchanged emails with several individuals in the community about Nipomo’s incorporation. Many have expressed interest in keeping the issue alive. With the current explosion in commercial development in Nipomo, such a citizen’s panel could and should continue to update the Davis report, and keep the CSD board current. The current and likely continued growth in sales tax revenues may make incorporation feasible more quickly than the 7 to 10 year projections; however, we will need some mechanism to do this. We need to stay on this side of the revenue neutrality equation, while monitoring our fiscal feasibility. We cannot afford, as Cambria did, to let incorporation wait until the future. Cambria set a good example of what not to do in that situation. Had Cambria incorporated in the mid 1970’s, pre revenue neutrality, they would be a city today, controlling their own destiny, without ever having paid a dime to the county.  We need to learn from Cambria’s mistake, and make certain we move forward on incorporation before Nipomo begins to generate the type of reveunes that will fall under the revenue neutrality laws. We don’t want to wake up decades from now and find out that Nipomo is on the wrong side of the revenue neutrality equation.

Another example of revenue neutrality’s harshness can be found in another neighbor to the south, Goleta. They also were on the wrong side of the revenue neutrality equation when they finally did incorporate, and are now paying millions of dollars to Santa Barabara County under their revenutraility agreement with them. Let’s not repeat the mistakes either of Cambria or Goleta here in Nipomo.

This is an exciting time here in Nipomo.  The SCAC Incorporation sub-committtee is going to be planning and holding an incorporation workshop in the near future.  Once I have more details, I will publish them here, and on the Nipomo Community egroups.  As always, feel free to leave comments or questions if you have any.

The 2,000 pound gorilla hindering incorporation of new cities in California is something called “revenue neutrality.” Amended to a 1985 law in 1992 and currently listed as Section 56815 of the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000, revenue neutrality has caused incorporations across California to grind to a virtual halt. Prior to revenue neutrality (1992), California averaged about four incorporations per year, which was natural given the rapid growth in the state. Since revenue neutrality was adopted, there has been less than one new incorporation per year in California on average. In fact, since 1992 only eight cities have actually incorporated. Revenue neutrality was enacted in 1992. It took an additional five years before the first city, Citrus Heights incorporated in 1997. Since then, seven additional cities incorporated, the last of which, Rancho Cordova was in 2003. No other cities have incorporated in California since that time.

This unnatural restriction on self-government has predictably led to strange developments. For example, San Fernando Valley has thus far been unsuccessful in its long struggle to incorporate even though if allowed to it would be California’s second most populous city.

Section 56815 appears rather innocuous at first glance. It says that an incorporation “should result in a similar exchange of both revenue and responsibility for service delivery among the county, the proposed city, and other subject agencies.” In reality, it has had a stifling effect on self-government in California. Instead of self-determination being the principle underlying incorporation — which should be the case — the welfare of county budgets has become the overriding factor. The revenue neutrality process in incorporations has become what I call alimony payments in the disolution of an unhappy marriage, i.e., the county and the new city.

There is an old saying that the two things you never want to see being made are sausages and legislation. Revenue neutrality is a good example of this truism. The legislation was written by a paid lobbyist of the counties’ lobbying arm in Sacramento (CSAC, or the California State Association of Counties) as a form of the worst kind of “special interest” pork. It was then tacked on to other legislation, had no public hearings, and was passed almost without notice or discussion literally in the middle of the night during the annual Sacramento flurry of legislation typical at the end of a session.

The state had recently raided county budgets for educational expenditures, so at the time revenue neutrality passed in 1992 county budgets were in desperate straits; however, it is doubtful that counties still need wrong-headed props like revenue neutrality to meet their own budgetary requirements. But, once a special interest law has been passed, its benefactors fight vigorously to defend it. CSAC has thus far successfully fended off attempts to revisit the question of how proper revenue neutrality really is.

How Revenue Neutrality Works in Practice.

In reality, there is no standard mechanism to implement revenue neutrality. The law does not specify any formula for satisfying revenue neutrality. It does state that the county can agree to the incorporation without insisting on revenue neutrality, or that revenue neutrality can be satisfied through “tax sharing agreements, lump-sum payments, payments over a fixed period of time, or any other terms and conditions. . . .” In short, whatever deal the county and new city strike satisfies the law.

Revenue neutrality may very well be unconstitutional, but it has yet to be fully litigated–and doing so would likely be costly. Citrus Heights — the poster child for the abuse of revenue neutrality — began litigating revenue neutrality when the County of Sacramento tried to prevent it from incorporating through an exorbitant revenue neutrality demand of over $5 million per year indefinitely. However, before the suit was decided, Citrus Heights cut a deal with the county to lower the payments to $2 million per year with a cap of 25 years. Remember: this money does not purchase any services for Citrus Heights; it is merely a ransom that Citrus Heights had to pay to get its freedom.

The single most important factor in determining whether revenue neutrality will be a barrier to incorporation is the particular county’s attitude toward incorporation. Counties across California have taken very different approaches to implementing revenue neutrality. Frankly, if a county is dead set against incorporation, it will be nearly impossible for any community to incorporate. So far, all my dealings with San Luis Obispo County officials, including LAFCO officials have been positive.

A great contrast in county attitudes toward incorporation is evident between the counties of Sacramento and Orange. Sacramento county is infamous for opposing incorporation in any of its fast-growing communities. A more recent example than Citrus Heights is Rancho Cordova, which has pushed for incorporation for several years. What prevented it from incorporating for many years was the revenue neutrality demand of the county. The county estimated that it collected $20 million in taxes from Rancho Cordova, but only provided $9.3 million in services. Thus, Rancho Cordova was free to incorporate as long as it paid Sacramento County $10.7 million per year in perpetuity. A deal was eventually struck and Rancho Cordova eventually incorporated; however, it is still pursuing legal action to recover some of it’s alimony payments to Sacramento County.

Ironically, one of California’s newest cities (as of July 2000), Elk Grove, is in Sacramento County. Elk Grove was able to meet revenue neutrality demands in an unusual way. Since revenue neutrality is calculated on the previous year’s data, and Elk Grove’s largest projected tax-generator, a large automall, is only now getting under way, the automall could not be counted in the calculation.

The deal that was struck between Elk Grove and the county was that the county could keep a declining percentage of property tax while the new city kept all other taxes, including its share of sales tax and the “hotel tax” (TOT). After 25 years, no more revenue neutral payments were due. The fact that the automall will be generating lots of taxes in the future but had yielded virtually none at the time of revenue neutrality calculation made the difference in Elk Grove’s successful incorporation.

By contrast, Orange County has been quite supportive of incorporation efforts in its communities. Orange County is interested in shedding municipal services wherever possible, and is philosophically supportive of self-government. Thus, the deal that it has made with local communities balances the county’s need for fiscal stability over the short term with an interest in making sure the new city gets off to a good start and becomes successful. It has not taken the same kind of punitive approach as has Sacramento County. For example, the recently incorporated city of Rancho Santa Margarita reached agreement with the county in a cooperative atmosphere. The gist of their deal is that Rancho Santa Margarita pays Orange County a total of $12 million over a ten-year period.

In exchange, Orange County covered much of the cost for providing police protection and road maintenance during the first two years following incorporation, and helped pick up the cost of building a new community center in Rancho Santa Margarita.

What Does This Mean for Nipomo?

If the financial conditions are favorable and the residents of Nipomo decide to pursue incorporation, the issue of revenue neutrality may or may not come up, depending on when Nipomo decides to pursue incorporation. Right now, Nipomo does not generate enough revenue to the county to be upside down in terms of revenue neutrality. In other words, it costs San Luis Obispo County more money to support Nipomo with county run services than Nipomo generates in revenue for the county. We are in a much better position for incorporation than are our neighbors to the north in Cambria. That, however, is the topic of still another post. In short, Nipomo does not now need to be worried about revenue neutrality issues, because their proposed fiscal feasibility as a stand alone city is still in the red, rather than the black. This is rapidly changing, and will continue to change in Nipomo’s favor as time goes by.