Utah Constitutional Revision Commission

the Auditor does not know whether all special districts are in compliance with the reporting requirements, he said.

Overall, he said, budgets and financial statements help special districts to be more accountable.

For example:

.     Budgets are formally adopted and indicate whether taxes have been raised;
.     Budgets are required to be balanced;
.     Special districts with revenue less than $50,000 per year undergo a simple review. They fill out a form prepared by the State Auditor concerning the districts fund balances but these districts do not provide a financial statement or an audit.
.     Special district's that have revenues between $50,000 and $150,000 per year undergo a compilation review, which is a financial statement, but they are not audited.
.     Special districts with revenue in excess of $150,000 receive an annual audit.
.     The Auditor reviews each special districts report by checking its budget, financial statement, or audit for correct accounting, compliance with state law, and determines whether the general fund is within the required parameters; and
.     Special districts are notified by letter concerning the Auditor's findings.

    Mr. Bauer explained that special districts can have two forms of bonds: general obligation bonds and revenue bonds. General obligation bonds are debt that is paid by taxes collected by the district, usually property tax, but that revenue bonds are debt that is paid from fees charged by the district for its services. Revenue bonds, he said, are generally not subject to debt limits like general obligation bonds.

    Furthermore, he explained that when a district is found to be in noncompliance, the auditor is permitted to withhold funds. As one can imagine, this is a powerful tool which is not necessary to use often. However, when a district operates with revenue bonds, (fees for service rather than a property tax), he said that the Auditor's influence is diminished because there are no funds to withhold since the district collects the fee itself whereas property taxes are collected by the county and then later appropriated to the district. Notwithstanding, Mr. Bauer emphasized that special districts almost without exception try to comply with the established reporting requirements. When noncompliance has been an issue, he said, it is more often because they need help with accounting not because they willfully neglect the law.

    Mr. Bauer explained the three common funds of special districts.

.     The General Fund. This fund is used for the day-to-day maintenance and operations of special districts. The general fund is limited to the amount of the current year's property tax, 50% of revenues if revenues are less than $100,000, or 25% of revenues

if revenues are above $100,000.
.     Enterprise Fund. This fund is used to deposit fees from services which are later transferred to the general fund or capital projects fund. This fund is not limited.
.     Capital Projects Fund. This fund is used to save large sums of money for capital projects. Monies budgeted from the general fund or enterprise funds can be deposited into a capital projects fund. This fund is not limited.

    Responding to questions, Mr. Bauer explained:

.     Special districts have autonomy over the funds they spend. In its review, the auditor does not suggest how money should be spent.
.     If a special district goes inactive, they would simply stop sending the auditor reports. No district to Mr. Bauer's knowledge has gone inactive.
.     Dependent special districts are not subject to the same reporting requirements as independent special districts. The auditor does not review dependent special district financial statements or audits.
.     Without an accurate number of special districts, it is hard to determine whether they are growing at an alarming rate. Mr. Bauer did not think the number of special districts had doubled in five years.
.     The auditor has created a telephone hotline to field complaints about special districts. Legal questions are referred to a county attorney, although complaints have sometimes been forwarded to the attorney general, but the auditor does not have the ability to enforce the law, he said.

     Ms. Baskin asked why a small special district would not want to dissolve and let volunteers come and accomplish the needed service? Mr. Bauer responded that this issue would be between the creating entity and the district itself.

    Chair McKeachnie stated that the role of the commission is to determine if the constitution serves special districts as it should. The districts themselves, he stated, are good advocates for their individual purposes. The state constitution authorizes cities, counties and towns to establish special districts and the state has no control over when they are created or how long they exist. He asked Mr. Bauer if there are any changes or recommendations his office would have, and if he knew of any other state offices that are concerned about special districts? Mr. Bauer stated they have no formal way to find out where, or how many special districts exists. Mr. Bauer expressed hope that the special districts out there voluntarily comply with the law.

     Rep. Harward suggested that, like a corporation, a special district should have to file annual papers with the state before it is legally authorized to conduct its business. Mr. Bauer agreed that such a requirement would allow accurate reporting of special districts. Presently,

he said, nothing of the sort is required and he does not know how many districts are in compliance. Rep. Harward said that residents deserve a government responsive to their complaints.

    Duplication of services between counties, cities, and special districts

    Mr. Marc T. Wangsgard, Attorney for approximately two-thousand homeowners who are seeking to withdraw from the White City Water Improvement District. Mr. Wangsgard introduced Nick Sefakis, general manager of the Salt Lake City Metropolitan Water District. Mr. Wangsgard explained that Salt Lake County created the White City Water Improvement District through a property owner petition. The district, he said, is independent, and that once its governing board was in place there has been no oversight from the county commission. The district, he noted, includes both incorporated and unincorporated area so neither the city nor the county provide oversight. The district, he said, competes directly with the Salt Lake City Metropolitan Water District, its services are more expensive, and the people within the the White City Water Improvement District cannot get out. He said they are essentially held hostage to higher rates.

    Mr. Wangsgard explained that he is not seeking a remedy from the commission. Instead, he explained that his purpose was to explain the trouble competing governments can bring upon residents. The White City Improvement District and the Sandy City controversy, he said, is in stark contrast to the theme of the last commission meeting, which was that special districts are some of the most accountable governments in the state, only existing to provide services that a city or county cannot or will not provide. He explained that his clients have a different view because 1) they are trapped in a district that charges more for a service that they could get cheaper elsewhere, 2) the board of directors is not accountable to their needs, 3) they fear multiple taxation because the district has taxing authority, and 4) they cannot get out of the district.

    Mr. Wangsgard directed the committee's attention to a map of the White City Water Improvement Service area which illustrated an unusual set of boundaries. He explained that Sandy City operates 29 wells with lines that course through the White City Water District area but that many of the actual connections to the homes are not provided by Sandy City. He said this problem developed because of divergent interests. Some residents wanted the White City Water because they were in an unincorporated area and this could stave off annexation. Originally, he said, the White City Water was provided by private investors.

    In 1993 the White City Water was put up for sale and a special district was created to buy and operate the water delivery system. There was a public hearing, those in attendance were primarily from the unincorporated areas. (Minutes of the meeting are included in Mr. Wangsgard's handout) Mr. Wangsgard explained the major problem was that Sandy City

residents are a minority, so election results are controlled by the county (unincorporated) residents.

    In October of 1994, a bond election was held and the district proposed to incur general obligation debt. Sandy City began a petition drive to withdraw from the district because they feared double taxation. The petition was organized by dividing up the incorporated areas to gather signatures. The state statute requires fifty percent of the citizens to sign the petition to withdraw from a district, which must be submitted to the district court prior to the time water service begins. Most of the neighborhoods did not meet the legal criteria because they did not own property, which resulted in small geographical areas meeting the criteria to withdraw while the non-property owners did not meet the requirements. This harmed those who wanted out but were left behind because rates were raised. The bonds were purchased, the water company was purchased, and service began--locking the door to those who wanted out, he said.

    Incidently, he explained, although the district decided to charge a fee rather than tax, which would have resulted in double taxation, there is still a legitimate concern that double taxation could occur. Sandy City residents are already taxed by the Metropolitan Water District, the Central Utah Water Conservancy District, and by Sandy City. After the petitions were filed, the water district sued Sandy City, claiming interference with their service. A legislative solution was sought that would provide a way for those who want out of the district to leave.

The legislation provided:

    .     a referendum process so people could choose which water service they belonged to;
    .     people who chose to withdraw from White City, Sandy City would handle the withdrawal action; and
    .     Sandy City would then have to retire the outstanding bonds for those who switched.

    This proposed legislation did not pass out of committee. In the future, he noted, they will attempt to find some way to equitably divide facilities in the street so both the city and the unincorporated areas can use them.

    Rep. Harward noted that this is an example where a municipal service is provided to a non-municipal area to prevent it from becoming municipal. He expressed concern that a special district has been allowed to encroach upon a city's boundaries and meddle with municipal services.

     Mr. Nick Sefakis explained that the Metropolitan Water District was created during the drought of 1935 to develop a long-range water plan and supply. He explained that the appointment process is different from a conservancy district because the city council appoints the directors to the board for six-year terms, which make them more accountable. In 1990, ninety-five percent of the people in Sandy City voted in a referendum to join the Metropolitan Water Conservancy District because it has:

    .     a large water supply
    .     the ability to deliver that water supply to the residents
    .     the ability to tax residents of both Salt Lake City and Sandy City at different rates (resulting in approximately $800,000 from Sandy and $2.8 million from Salt Lake)

    Mr. Sefakis said that it seems odd that a city is prevented from serving its residents; especially when the city has the ability and desire to deliver the service, the service is one the residents want to receive from the city, and can provided by the city for less money. If residents want to withdraw from a special district, he said, they should have that option.

     Pres. Beattie asked if Sandy City took over the whole district, would their water rates remain lower than White City rates? Mr. Sefakis said that their rates would remain lower because their water is purchased wholesale.

    Ms. Baskin noted areas where people are paying taxes to the Metropolitan Water District, but receiving water from the White City Water Improvement District, thus paying for services they do not receive.

    Rep. Harward questioned how one district could charge different rates for the same service, an apparent violation of Article XIII, Sec. 2. Mr. Sefakis stated that Sandy City residents pay a different tax rate than Salt Lake City residents because the Salt Lake County Auditor has identified a fixed evaluation of property which varies the rate.

     Chair McKeachnie thanked Mr. Wangsgard for his presentation. He then recognized Sen. Hillyard for his service to the Constitutional Revision Commission, the maximum amount of time allowed by law, he added, which is twelve years. He expressed the commission's admiration and gratitude for these many years of service. A plaque of appreciation was presented to the senator and he stated that he regarded it an honor to serve and that it has been rewarding to see the work of the commission improve the state.

    The committee recessed.

     Mr. Charles Batten, Editor of Innovative Government, distributed preliminary copies

of his book and introduced three students who completed research for the book. From this project, Mr. Batten learned that privatization is not a matter of political philosophy, but a matter of economic survival.

     Matthew Checketts, USU student researcher, stated that in his studies, he found 150 volunteer tutors donating time to help others with their education. He also studied a soccer program in Hyde Park. If the city were to pay for the soccer program, which used 5,244 volunteer hours, it would cost $26,000. Because of volunteers, he said, the city only pays for basic liability insurance. Volunteers are responsible for a huge savings; they are also very effective workers because they have a higher motivation level, he said.

     Laura Huggins, USU student researcher, explained that she looked to ways other than privatization to encourage innovative government. Methods she studied included encouraging citizens and government employees to become more entrepreneurial, enacting user fees when it is favorable, promoting performance-based budgeting, and utilizing roll-over budgets. She developed steps to encourage entrepreneurs with incentives so their ideas could be used to improve the community.

     Roman Pikula, USU student researcher, reviewed his study of the Economic Development Office of Logan and its relationship with the Chamber of Commerce. He stated that Logan has developed a plan that aims to unite public and private leadership in order to initiate business development and retention programs that maintain and expand the city's economic base.

    Pres. Beattie reported on an example of privatization in the Texas prison system and noted some benefits that are being realized through privatization.
    
    Special Districts in Utah

    Mr. Jerry Howe explained that special districts have been justified because of three constitutional provisions. The first, he said, was Article XIII, Section 2, "Uniform and Equal Rate of Taxation." This provision prevents a county or municipality from charging different tax rates to individuals within the same taxing boundaries so it is difficult for a county to provide a service to a limited geographical area without taxing the entire county. He said, that people within the county who do not receive a service, strongly object to paying for it. The same is true for cities he said. This example has been used as an argument to allow special "taxing" districts within the county or city to tax only the residents who will benefit or use the service provided by the district.

    Article XIV, Sections 3 and 4, provide debt limits for counties, cities, towns, and school districts. Traditionally, when a county or city approaches its debt limit it still receives

political pressure to provide services. This pressure can be relieved by the creation of a special district because services can be provided without having to account for the expenditures under the debt limit provisions. This has worked as an incentive to create special districts, he said.

    Mr. Howe also explained that federal money has been available to special districts when it has not been available to counties and cities. This fact has obviously helped special districts become more palatable, he said. Furthermore, arguments concerning specialized managers have been advanced to justify special districts. A city, he explained, with all of its responsibilities has less time to devote to certain services. A special district has the opportunity to focus on the one service. This allows specialized management if the service is provided by a special district. Although, this argument has been advanced, he said that some counties and cities do not feel that they could not provide the service.

    Finally, he said, an argument has been advanced that elected officials are too election oriented. This sometimes prevents long-term planning for projects that may be politically unpopular but are nonetheless vital to good government. Special districts with their appointed boards are insulated from the political arena which make them more able to make long term decisions. This argument can be turned against appointed boards of special districts as well, he said, as you have heard from individuals charging that special districts are not accountable to the public.

    An understanding of why special districts have been created will help the commission evaluate the role special districts ought to play in local governance, he added. As the commission has noted, the term "special district" has been used in the constitution and statutes over a long period of time. One report, he said, indicated that the first special district in America was a prison in 1790. In Utah, the first special district seems to have been a library in 1898. From that first special district until 1990, all the special districts created in the state were authorized by statute in the part of the code that seemed applicable. Eventually this lead to inconsistent creation procedures, some required a petition and other an election, governing body provisions were varied, some were appointed, others elected, and there seems to have been no rhyme nor reason to the differences in these special district statutes.

    Mr. Howe explained that in 1990 the legislature recognized this problem and authorized a recodification of all special districts into Title 17A. At that time special districts were categorized into two catagories: dependent special districts and independent special districts. Independent special districts were considered to be a separate political and corporate entity, having independent taxing authority, while a dependent special district was not a separate entity but was rather a sub-unit of the county or city that created it. As such, dependent special districts do not have individual taxing authority.

    It was also explained that t he Political Subdivision Interim Committee is attempting to

understand the different statutory provisions relating to the creation, dissolution, and governing bodies of all special districts. A handout detailing some of the differences in the code among independent special districts was distributed.

     Mr. Sullivan noted that the Utah Transit Authority is considered an independent special district even though it is politically accountable because its board is appointed by local governing bodies.
    
    Mr. Howe said that some independent special districts are governed by the creating entity, although it is still a separate political and corporate entity. Mr. Howe noted that many inconsistencies exist in statute concerning special districts.

    For example, he noted the definition of a special district in 17A-1-101. "Special District" means any one of the of the special taxing districts authorized by this title. It is interesting, he said, that special service districts are authorized by this title but that the definition of a special service district in 17A-2-1301 is: "Service District" means a special service district established in the manner provided by this part under Article XIV, Section 8 of the Constitution of Utah.

    Is a special service district a "special district" as defined in 17A-1-101 or is it a special service district as explained in Article XIV, Section 8. If one concludes that special service districts are only authorized by the constitution notwithstanding the statute, then one must reconcile why the language of the constitution uses in its title "special service district" but in its body uses the term "special district." The whole ordeal, he said, is rather sloppy.

    Chair McKeachnie asked roughly how many special districts exist in the state. Mr. Howe said the auditor has identified about 400, recognizing that some districts may not be reporting so the number of special districts may be larger but not smaller. He noted, however, that only independent special districts are included in this number. If one wants to know how many total special districts exist in Utah, both dependent and independent, that number, he surmised, is likely to be more than 500.

    Mr. Howe then provided property tax figures from the state tax commission indicating the percentage of property taxes received by counties, municipalities, school districts, and special districts. In 1995, $1,700,134,000 in property tax was collected. Special districts received nearly eleven percent, municipalities thirteen percent, counties twenty-five percent, and school districts fifty-two percent. Over time, he said, the numbers indicate that while the percentage of property taxes received by counties, municipalities, and school districts all followed similar patterns, the special district percentage has been on a steady increase since 1955. He also noted that these graphs and trends only account for the percentage of property taxes, not other sources of funding such as revenue bonds, and service fees. At times, he said,

it is difficult to determine the distinction between a fee and a tax. It is possible, he said, that a special district could obtain a significant portion of its budget through fees.

    Mr. Linton stated that the commission should not try to define the policy of the constitution by looking at the existing confusion, but that it ought to attempt to establish the proper principles and have the statutes clearly follow them. He also read Article XIV, Section 8, "The Legislature by general statute may authorize ... any county, city, or town to establish special districts within all or any party of the county, city, or town to be governed by the governing authority of the county, city, or town ..." He questioned whether this language authorizes only dependent special districts, not independent special districts, such as special service districts, which are supposedly independent.

    Mr. Howe noted that special service districts also have authority in statute to create other 'dependent districts."

    Rep. Harward said that if the Legislature has the authority to create a special district without relying on Article XIV, Sec. 8, then the provision is of little value.
    
     Chair McKeachnie adjourned the meeting at 5:20 p.m.
    

court declared that the Ripper Clause would be violated if a hospital were built in the district and the bonded indebtedness was invalid because it evaded debt limits.

    Mr. Bob Rees stated that the cities have authority over the health, safety, and welfare issues of its residents. For example, he said, a city can establish a department to handle certain administrative functions, but it cannot delegate its legislative authority to someone else.

    Branch v. Salt Lake County Service Area No. Two, 460 P.2d 814 (1969), held constitutional a County Service Area Act as amended in 1967. It provided for the creation of the Cottonwood Recreational Facility which services were not provided on a county-wide basis. Under Article XIV, Section 3 and 4, the court stated that the service area was not a municipal corporation, according to Lehi City v. Meiling, and was not subject to constitutional debt limits. Justices Callister and Henriod dissented, stating the test was whether county service areas provided local or state services.

    Freeman v. Stewart, 273 P.2d 174 (1954), the court held that the Ripper Clause should not be construed as strictly as some may want.

    Ms. Baskin then posed the question, "What does ArticleXIV, Section 8 mean? She stated that a constitutional enactment is interpreted according to the intent and purpose at the time it was enacted. However, legislative history based on floor debates is not enough to determine its intent. What was the practical and the statutory construction? She noted that Article XIV, Section 8 was voted on, but the title states special service district and the body special district.

    Rep. Harward stated that the words special service district were not present in the heading at the time the Legislature voted on the bill, but that the publisher added them in an effort to summarize. He posed the question, of whether the commission is going to try to determine the appropriate organization of government regarding these kinds of services or is the commission going to try to keep the status quo? He generated this list of question for the commission to consider:

.     What city powers should remain in control of the city, which the Legislature should be prohibited from interfering with?
.     Is equal taxation the appropriate mechanism, or should this be amended?
.     If debt limits are in the constitution, should they be adhered to or eliminated?
.     Is taxation without representation an issue?
.     Should counties be permitted to create a service district that includes part of a city?

    Chair McKeachnie stated that the commission ought to determine a philosophical approach.

    Mr. Linton stated that the commission ought to consider whether the constitution needs to grant authority that is already inherent with the Legislature.

     Mr. Jensen stated that the focus needs to be on Article XIV, Section 8 for redefinition, and clarification, but there is a question where to draw those distinctions.

     Mr. Jones stated that the uniform and equal tax rate seems critical.

    Pres. Beattie stated that had the Legislature been more strict constitutionally, many of the special districts that now exist would have needed to be annexed in order to receive the services. He emphasized that budgets are in jeopardy and special districts need some critical oversight.

     Sen. Nielson suggested that the commission start from scratch, defining special district authority, and amending all special district provision into one section of the constitution. He stated that sometimes, in its zeal to help, the Legislature gets involved where it should not.

    Dr. White spoke in favor of studying, in a broad context, what subdivisions of the state are needed and for what purposes. She said that she is not in favor of destroying existing districts that are performing useful functions, but that there needs to be a general mention of them in the constitution which allows the Legislature oversight, yet affords a workable framework.

    Professor Worthen spoke in favor of eliminating the term "service" from the special district title. He stated he is hesitant to pull everything apart not knowing what comes with it. Assurance that there is a firm and common understanding of terms is needed, he said. It would be irresponsible to not fully study the issues.

    Rep. Harward stated that if the commission does not address this issue, no one will. A philosophical approach on how local government should be structured, is needed and however special districts come out in that debate is fine, but the debate should take place, he said. He suggested that the commission continue its study of the structure of local government, recommend amendments were needed, and move forward.

    Mr. Sullivan spoke in favor of studying special districts under Article XI and clarifying the meaning of special districts and their breadth in Article XIV, Section 8.

     Ms. Allison said that the commission should focus on the big picture and not worry about titles. She said that she is uncomfortable with the lack of accountability that special districts operate under.

     Rep. Bradshaw stated that terms need redefinition. She expressed concern for the

accountability of special districts and the need to address that issue.

    Mr. McKeachnie posed the question whether there really is a problem, and the concern that if the problem cannot be defined, it may not be solvable. He stated that all issues need to be weighed and it should not be assumed that the present situation is all bad.

    Ms. Baskin responded that there are concerns that the statutes need work, terms need to be clarified, accountability measures need to be addressed, the question of how much money special districts spend needs to be answered. Is it really the intent of the state to exempt all special districts from the provisions that apply to cities and counties, she asked.

     Mr. Strong stated that the commission needs to be aware of the competing interests. He noted that the Political Subdivision Interim Committee is studying special districts and their proliferation. He suggested coordinating with that committee.
    
     Vice Chair Alan Sullivan requested staff to prepare draft language for the next meeting that would revise Article XI, Cities and Towns, without new definitions but that would also provide for the creation of special districts or special service districts, whatever we wanted to call them, that would be inclusive of all special districts, with indications of what limitations there are on their creation, whether they are elected or appointed and by whom, and what limitations there ought to be on their operations, debt limitations, just to see what it would look like.

    Rep. Harward agreed.
    
    Mr. Minson stated he would like to be a part of the study process. He stated that special districts are in fact accountable to their constituency.

    Mr. McKeachnie invited Mr. Minson to submit in writing whatever suggestions or recommendations he has before August 1, 1997. He noted the commission's consensus to continue studying this issue.

    Ms. Baskin informed the commission that the Political Subdivision Interim Committee has expressed a desire to meet with the commission in a joint meeting.

    Mr. McKeachnie suggested that Lisa and Jerry make their respective presentations to the Political Subdivision Interim committee and then schedule a joint meeting.

     Chair McKeachnie adjourned the meeting at 12:20 p.m.