Mission Viejo

The Dirty Secrets of Mello-Roos: Part II

Editor’s note: In last month’s issue, we explained the basics of Mello-Roos and its impacts to homeowners. In Part II we continue with an explanation of some of the pitfalls of Mello-Roos, and what prospective buyers may want to consider when searching for a home.

When you purchase a home in a Mello-Roos District (“CFD”), buried in the papers you receive just before closing is a document called “NOTICE OF SPECIAL TAX”. This notice provides very brief information on the tax but includes: notice that your home is in an area subject to the tax, the maximum tax for the particular year you are purchasing the home, that the tax will increase by 2% per year, and that the tax will continue to be levied until the “authorized facilities” are built and the Mello-Roos bonds are repaid. The “authorized facilities” are those to be built with the Mello-Roos funds and are identified in the CFD formation documents.

Following are our “Top 10 Dirty Secrets of Mello-Roos”. For this article we use as an example Capistrano Unified School District (CUSD) CFD 87-1 however, most of the items below pertain to all CUSD CFDs.

1. CUSD uses taxes from most of its CFDs to make the bond payments on the controversial non-classroom 126,000sf “Administration Building”. In 2006, CUSD finally acknowledged they were using CFD taxes to pay for this massive waste rather than on schools, a fact which they had previously denied.

2. Ten years ago, a group of taxpayers asked CUSD how much had been collected in 87-1 taxes and what CUSD funded with those taxes. CUSD still has not, cannot or will not answer these questions. Nor has it answered most of the questions that have been asked about 87-1 taxation.

3. CUSD continues to collect millions per year in 87-1 taxation, in excess of what is needed to pay bond debt, administrative expenses and to maintain a reserve. In 87-1 this amount is currently $3.5 million per year and increases 2% per year.

4. CUSD deposits these excess taxes into an account labeled “Special Reserve Fund”, then accounts for this excess tax as an “obligation.” CUSD uses this fund to pay for projects not authorized or even imagined in the 87-1 formation documents.

5. 87-1 taxpayers are funding improvement projects at various schools and at the Administration Building, while most residents in CUSD do not pay for the projects.

6. For years CUSD has transferred its deferred maintenance money into the general fund to pay salaries and benefits, leaving the schools in disrepair. CUSD is instead using the 87-1 taxes to “renovate” facilities that need major repairs due to years of neglect.

7. CUSD used 87-1 funds to install portable classrooms at schools where the building’s useful life is less than a permanent building, but the cost is nearly the same.

8. The CUSD has voted to increase the 87-1 special tax by 2% each year until recently. In September, the board finally voted on a one-year suspension of the 2 % tax increase in 87-1. Each increase in the tax generates more excess funds for the 87-1 Special Reserve Fund, for the CUSD to spend as it sees fit.

9. How and why CUSD is allowed to spend 87-1 taxes is a moving target. In 2004 CUSD stated 87-1 taxes could only be used in the 87-1 areas in which they were collected. In 2006 taxpayers were told the 87-1 taxes could not be spent on the district office, but they were anyway.

In 2010 CUSD obtained a “new” legal opinion that 87-1 funds could be spent on facilities proportionate to the number of 87-1 students attending the school. However, in 2012 CUSD funded 100% of several school projects regardless of the number of 87-1 students attending the school. CUSD has never disclosed why it thinks it can continuously change how and where it is spending 87-1 taxes.

10. If taxpayers believe there is mismanagement of taxes, the only recourse is a legal battle in court where you will spend your money and the agency you are suing will spend your tax money to fight you. This is a lose/lose for the taxpayers.

When buying a home in a Mello-Roos district, don’t rely on the disclosure; ask the real estate agent to show you the formation documents and to identify in writing exactly the terms of the CFD and what facilities can be funded.

Also make sure to get confirmation if the CFD special tax can continue to be collected even if the CFD bonds are paid off in full. Sadly, the answer for most CFDs is “yes”; the taxation can go on forever or for years beyond the bond payoff date.

Knowledge is power. Make sure you know all the key terms and provisions of a CFD before buying a house or property that is a part of a CFD.

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