Our review of the disposition of bond proceeds for Community Facilities District No. 2004-3 (Terra Lago) highlighted the following:
The city of Indio (city) complied with requirements of the Mello-Roos Community Facilities Act of 1982 (Act) in forming Community Facilities District No. 2004-3 (Terra Lago), assigning and paying Terra Lago's development costs, and responding to a tax relief petition from residents. It also constructed facilities as specified in Terra Lago's formation documents. However, it created inequities when it charged Terra Lago's Improvement Area Number 1 (Area 1) $2.6 million for water fees that will primarily benefit Improvement Area Number 2 (Area 2) and when it paid $1.1 million for sewer infrastructure that solely benefits Area 2. As a result, Area 1 property owners are paying higher Mello-Roos special taxes. While this created inequity between the two areas, Area 1 and Terra Lago as a whole have benefitted from the constructed facilities.
The city's recent actions related to Terra Lago's Area 1 have partially addressed Area 1 residents' concerns that Area 2 unfairly benefited from bonds supported by Area 1. The city finalized an agreement with the new property developer for Area 2, which will pay $2 million to the city for use in retiring a portion of Area 1 bonds. This agreement was contingent on the city's elimination of any authority to levy special taxes on Area 2 property owners. While the city has thus taken some steps to reduce the inequities, Area 1's bond debt still covers about $1.2 million of remaining costs benefitting Area 2. Although the Act may not require it, we believe that the city should require Area 2 property owners to pay for their share of Terra Lago costs.
The city should shift a share of the water facilities cost borne by Area 1 to Area 2 residents in proportion to the benefits Area 2 residents receive from the facilities. To do so, it should impose through its Indio Water Authority a water fee on Area 2 residents and use the related revenues to reduce the bond debt of Area 1.
The city believes its actions have already significantly resolved the inequity between Area 1 and Area 2 and that our recommendation raises procedural and other legal issues that may be difficult to overcome. Nevertheless, it has agreed to further evaluate imposing the water fee that we recommend.