A long running dispute between Serrano Associates and the El Dorado County over Mello-Roos surpluses ended last week with the board crediting Serrano roughly $1.85 million, but avoiding a large cash payout.
The parties agreed to an amendment to the governing indenture and a settlement of past claims that pays Serrano $233,546 in cash, $1,207,228 in credit with the El Dorado Irrigation District, and $417,600 in county transportation fee credits.
All the funds in question were paid by Serrano Associates and Serrano residents. Under Mello-Roos laws, the county collects it, holds it and administers it.
In October 2010 the El Dorado County Board of Supervisors denied a claim by Serrano Associates for a cash refund, reluctantly ruling that a yearlong parade of Serrano lawyers, accountants and tax consultants failed to demonstrate that the county had incorrectly applied the rate and method of apportionment (RMA) in levying the taxes in the “Community Facilities District,” and that despite the bulging surplus, the RMA made no provision for refunds.
Following the 2010 denial, the board considered how to curtail the ballooning reserve, and asked County Counsel Lou Green, County Auditor Joe Harn and the county’s outside bond attorney, Jonathon Christy, to meet with team Serrano, try to negotiate an agreement, and return with a recommendation. The matter is now settled.
Serrano’s “CFD” was created to fund roads, schools and public services. In return, lot owners, including Serrano Associates, pay an annual “Mello-Roos” tax to fund bond payments.
The tax calculation didn’t anticipate the real estate roller coaster ride that saw home prices, then delinquencies spike in the millennium decade. An estimated $1.9 million surplus piled up in a county-maintained Mello-Roos facilities account, available only for Serrano infrastructure or bond service.
All parcels are taxed. Unimproved parcels, typically owned by the developer, pay a lower rate. Serrano’s formula requires the homeowners to pay first each year, with the developer paying the balance.
Serrano officials argued that since they paid last, any overage came out of their pocket and should be refunded to them.
Harn agreed all along that the indenture’s rules have resulted in the current surplus. He said he’s simply administering those rules, which contain no provision for refunds, or for using a surplus to offset the following year’s taxes.
The bond indenture does allow surpluses to be used to pay off the bond early, he added.
“My position is unchanged,” he said last week. “My staff followed what was in the bond documents. That’s our promise to the residents and the bond holders.”
The indenture was amended to allow surplus moneys to offset future debt service, thus lowering the total Mello-Roos taxes. The board retained the authority to block such offsets in lean years. A $200,000 reserve fund will remain untouched.
The board went along with team Serrano’s “last-in first-out” refund strategy, which will net Serrano the $233,546 surplus from 2009-10, but only if a Superior Court judge rules that the retroactive refund is not a gift of public funds. That “validation action” could take months or years.
If it fails, EID will get the refund, with Serrano receiving future El Dorado Irrigation District credits in the same amount.
Longer term, homeowners will see more of the benefit, but Green warned Serrano residents not to expect a significant reduction on their Mello-Roos tax bill. “The way the formula works, delinquencies drove the surplus up,” he said. “Coming out of the housing crises, we should see fewer delinquencies, and therefore a lower surplus.”
The balance of the surplus will similarly be credited to Serrano through fee credits with the county Department of Transportation and EID, both of which built a great deal of infrastructure in Serrano.
The settlement will pay DOT $417,600 from the CFD’s facilities account for work the department paid for on the Silva Valley Parkway widening project. EID will get $1,207,228 for environmental work it paid for on a “recycled water master plan” for Serrano.
Serrano will get fee credits in matching amounts.
Green’s report sums up the situation: “In essence, [Serrano] receives a refund of the moneys they sought to recover in their claims for a refund, only payment will be made over time.”
As a condition of the settlement, Serrano will release all claims regarding past Mello-Roos tax overpayments.