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California City Disincorporates as Cash Goes to Prisons

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Sept. 13 (Bloomberg) -- California’s newest city may become the first to self-destruct in 40 years, disincorporating because Governor Jerry Brown and lawmakers stripped funds from local government to reduce prison crowding.

Jurupa Valley, a city of 100,000 formed two years ago about 50 miles (75 kilometers) east of Los Angeles, will file papers in December to revert to an unincorporated area of Riverside County, Mayor Verne Lauritzen said.

California cities have struggled since 2011 when Brown signed a bill redirecting $130 million in vehicle-license fees earmarked for municipalities. He put the funds toward a program that shifted social services and thousands of state prisoners to county responsibility. Three other suburbs in Riverside County face the same predicament.

“We don’t need a handout,” Lauritzen said in an interview. “All we’re looking to do is deal with an inequity. They should fix it.” A bill to make up for the funding has stalled in the state legislature, whose session ends today.

Jurupa Valley became California’s newest city in 2011, after 54 percent of voters in five unincorporated communities voted to form a municipality covering 45 square miles, about the area of San Francisco.

By incorporating, Lauritzen said, local residents took control of their taxes to fix roads, enhance police protection and regulate zoning to preserve rural pockets from encroaching development.

Fees Reallocated

The city officially came into being the day before Brown, facing a budget gap of $17.2 billion, reallocated the fees assessed against vehicle owners toward what he called realignment.

Faced with a federal court order to reduce prison crowding, he shifted felons convicted of nonviolent, low-level crimes to county jails. He also handed responsibility for anti-drug programs, criminal probation, mental health programs, foster care and other services to counties.

The decision cost Jurupa Valley $4.2 million, or 47 percent of its expected revenue in its first year as a city, Lauritzen said.

Legal Quirk

The vehicle fees are important to the youngest cities because of a quirk in the law. In 2004, then-Governor Arnold Schwarzenegger reduced car-registration fees, part of which went to municipalities, and compensated by directing a like amount of property taxes to their budgets, according to Michael Coleman, the fiscal adviser to the League of California Cities. Cities incorporated after 2004 didn’t receive the boost in property taxes; instead they were compensated with a larger share of car fees, Coleman said. But that ended in 2011.

While disincorporation might bear some resemblance to bankruptcy, there’s one important difference. Unlike the four California cities that have filed for Chapter 9 bankruptcy protection since 2008, Jurupa Valley won’t need to negotiate with creditors. It has none, Lauritzen said.

The city hasn’t issued debt and has no pension obligations, since all of its “employees” are contractors, he said. None of the other three vulnerable cities incorporated since 2004 -- Wildomar, Eastvale and Menifee, all in Riverside County -- have debt outstanding.

Utilities Debt

A separate government body, the Jurupa Community Services District, has $75.7 million in long-term debt. It provides water, sewer, landscaping and other services to most of Jurupa Valley and all of Eastvale. If one or both cities disincorporates, the district could lose contracts for graffiti removal, with minimal effect on its finances, General Manager Todd Corbin said.

“Disincorporation is going to be interesting, but it won’t directly affect our bonds,” he said by telephone. “All of those bonds are the responsibility of the community services district, not the cities.”

Even if all four cities revert to unincorporated areas, the municipal bond market is unlikely to react much, said Matt Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts.

“Without debt associated with it, it’s hard to take any kind of precedent from that,” Fabian said by telephone.

Mayors and city managers in Wildomar, Eastvale and Menifee said they’ve cut policing and other services since losing the vehicle-fee revenue. They said they should be able to avoid disincorporating if the state restores funding in the next few years.

‘Table Scraps’

“It’s unconscionable to me that the leaders in Sacramento couldn’t come up with legislation to give to the governor for him to sign,” said Scott Mann, the mayor of Menifee, a city of about 80,000 that incorporated in 2008. “Our four cities don’t even get table scraps from Sacramento.”

A bill in the Democrat-controlled legislature would have made up for the lost vehicle-license revenue by boosting the newer cities’ share of property taxes. The state’s general fund would have lost out, according to an analysis of the bill.

Brown’s press office didn’t respond to a message yesterday seeking comment on the 75-year-old Democrat’s position on the bill. Spokesman Evan Westrup said the governor doesn’t generally comment on bills before signing or vetoing them.

No Incentive

Until lawmakers restore funding for newer municipalities, no community will have an incentive to become a city, and cities will avoid annexing developing areas on their fringes, said Gary Nordquist, the Wildomar city manager. The city of 32,000 incorporated in 2008.

No California municipality has disincorporated since 1973, when Hornitos, a city of fewer than 100 in the agricultural San Joaquin Valley, was dissolved by the legislature, and Cabazon was terminated by a public vote after civic discord over gambling, according to a legislative analysis.

In 2011, state Assembly Speaker John Perez sponsored a bill to disincorporate Vernon, an industrial hamlet in Los Angeles plagued by allegations of corruption. Perez’s bill failed.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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