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TO BE PUBLISHED IN THE OFFICIAL REPORTS
 

OFFICE OF THE ATTORNEY GENERAL
 

State of California
 

JOHN K. VAN DE KAMP
 

Attorney General
 

:

 OPINION :

 : No. 88-603

 of :

 : SEPTEMBER 15, 1988

 JOHN K. VAN DE KAMP : 

Attorney General : 

:

 RODNEY O. LILYQUIST :

 Deputy Attorney General : 

: 

THE HONORABLE WILLIAM A. CRAVEN, MEMBER OF THE CALIFORNIA 

SENATE, has requested an opinion on the following question: 

In calculating the allocation of property tax revenues when a city incorporates but 

does not assume all service responsibilities for its territory, are the calculations to include (1) funds 

carried over to the prior fiscal year from a previous year or (2) funds derived from charges for 

licenses, permits, and such services as law enforcement services furnished under contract to other 

governmental agencies? 

CONCLUSION 

In calculating the allocation of property tax revenues when a city incorporates but 

does not assume all service responsibilities for its territory, the calculations are not to include (1) 

funds carried over to the prior fiscal year from a previous year or (2) funds derived from charges for 

licenses, permits, and such services as law enforcement services furnished under contract to other 

governmental agencies where the charges are levied specifically to offset the cost of the particular 

services and do not exceed the cost reasonably borne in providing the services. 

ANALYSIS 

Since the addition of article XIII A to the Constitution in 1978, the distribution of 

property tax revenues to cities, counties, and special districts has been subject to and controlled by 

a statutory allocation formula. (See Rev. & Tax. Code, §§ 93-100; Amador Valley Joint Union High 

Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 218; American Canyon Fire Protection 
 

 

Dist. v. County of Napa (1983) 141 Cal.App.3d 100, 105-106; 70 Ops.Cal.Atty.Gen. 87, 88 (1987).) 

While many factors are considered in the property tax distribution calculations, the 

Legislature has given particular attention to the amount of services furnished by each local agency 

to the area generating the property taxes.1

 When these service responsibilities are transferred from 

one governmental agency to another, such as when a new city incorporates and assumes the service 

responsibilities for its area, the amount of property tax revenues received by the affected agencies 

also changes under the Legislature's allocation formula. 

The question presented for resolution concerns the incorporation of a city that does 

not assume responsibility for all services previously furnished to its territory. The county and 

special districts will continue to provide a limited number of services to the area. Government Code 

section 568422

 governs the transfer of property tax revenues in such circumstances. It provides in 

part: 

"(a) If the proposal includes the incorporation of a city, as defined in Section 

56043, or the formation of a district, as defined in Section 2215 of the Revenue and 

Taxation Code, the commission shall determine the amount of property tax revenue 

to be exchanged by the affected local agency pursuant to this section. 

"(b) The commission shall notify the county auditor of the proposal and the 

services which the new jurisdiction proposes to assume within the area, and identify 

for the auditor the existing service providers within the area subject to the proposal. 

"(c) If the proposal would not transfer all of an affected agency's service 

responsibilities to the proposed city or district, the commission and the county 

auditor shall do all of the following: 

"(1) The county auditor shall determine the proportion that the amount of 

property tax revenue derived by each affected local agency pursuant to subdivision 

(b) of Section 93 of the Revenue and Taxation Code bears to the total amount of 

revenue from all sources, available for general purposes, received by each affected 

local agency in the prior fiscal year. For purposes of making this determination and 

the determination required by paragraph (3), 'total amount of revenue from all 

1

For a particular area, such services as police and fire protection, water, sewage disposal, road 

maintenance, street lighting, trash collection, and mosquito abatement, as well as the operation 

of such facilities as a bus system, parks, flood control projects, cemeteries, airports, libraries, and 

swimming pools may be divided among a county, city, and several special districts. (See, e.g., 

Gov. Code, § 61600; Health & Saf. Code, § 4113; Pub. Resources Code, § 5782.2; Wat. Code, § 

35401.) 

2

All references hereafter to the Government Code are by section number only. 

2. 88-603
 
 

sources available for general purposes' means the total amount of revenue which an 

affected local agency may use on a discretionary basis for any purpose and does not 

include any of the following: 

"(A) Revenue which, by statute, is required to be used for a specific purpose. 

"(B) Revenue from fees, charges, or assessments which are levied to 

specifically offset the cost of particular services and do not exceed the cost 

reasonably borne in providing these services. 

"(C) Revenue received from the federal government which is required to be 

used for a specific purpose. 

"(2) The commission shall determine, based on information submitted by 

each affected local agency, an amount equal to the total net cost to each affected 

local agency during the prior fiscal year of providing those services which the new 

jurisdiction will assume within the area subject to the proposal. For purposes of this 

paragraph, 'total net cost' means the total cost which was funded by general purpose 

revenues of the affected local agency and excludes any portion of the total cost 

which was funded by any revenues of that agency which are specified in 

subparagraphs (A), (B), and (C) of paragraph (1). 

"(3) The commission shall multiply the amount determined pursuant to 

paragraph (2) for each affected local agency by the corresponding proportion 

determined pursuant to paragraph (1) to derive the amount of property tax revenue 

used to provide services by each affected local agency during the prior fiscal year 

within the area subject to the proposal. 

" . . . . . . . . . . . . . . . . . . . . . 

"(e) The executive officer shall notify the auditor of the amount determined 

pursuant to paragraph (3) of subdivision (c) . . . at the time the executive officer 

records a certificate of completion pursuant to Section 57203 for any proposal 

described in subdivision (a), and the auditor shall transfer that amount to the new 

jurisdiction." (Emphases added.)3 

3

The "commission" is the local agency formation commission established for the county.

 Revenue and Taxation Code section 93, subdivision (b) states: "A county shall levy an ad 

valorem property tax on taxable assessed property," with the revenue "distributed . . . . to local 

agencies, school districts, county superintendents of schools, and community college districts in 

accordance with the provisions of the Government Code." 

3. 88-603
 
The question is: are the calculations of section 56842 to include (1) funds carried over to the prior 

fiscal year from a previous year or (2) funds derived from charges for licenses, permits, and such 

services as law enforcement services furnished under contract to other governmental agencies? We 

conclude that they are not. 

In analyzing section 56842, we first note that cities, counties, and special districts are 

able to obtain funds from a variety of sources other than property taxes. Indeed, because article XIII 

A of the Constitution places a limitation upon the collection of property taxes, the Legislature has 

encouraged local governments to seek alternative methods of financing their community services. 

(See § 16270; Marin Hospital Dist. v. Rothman (1983) 139 Cal.App.3d 495, 499-500; 70 

Ops.Cal.Atty.Gen. 87, 88 (1987).) Besides receiving grants from the federal government and the 

state, local agencies may generate revenues from such sources as regulatory fees, user charges, 

special assessments, and special taxes. (See §§ 25210.77a, 26400, 54985; San Marcos Water Dist. 

v. San Marcos Unified School Dist. (1986) 42 Cal.3d 154, 160-165; J. W. Jones Companies v. City 

of San Diego (1984) 157 Cal.App.3d 745, 752-757; Mills v. County of Trinity (1980) 108 

Cal.App.3d 656, 659-660; Dare v. Lakeport City Council (1970) 12 Cal.App.3d 864, 868-869; 70 

Ops.Cal.Atty.Gen. 153, 155-156 (1987); 70 Ops.Cal.Atty.Gen. 87, 88 (1987).) 

Although the calculations of section 56842 govern the transfer of property tax 

revenues from one local agency to another, they are based in part upon the receipt of other types of 

revenues available to fund the services to be transferred. When this formula language was 

incorporated into the provisions of section 56842 in 1986 (Stats. 1986, ch. 956, § 1), the report of 

the Senate Local Government Committee explained its operation and effect as follows: 

"When a new city or special district takes over all the service responsibilities 

of an existing local agency, Assembly Bill 672 requires the local agency formation 

commission (LAFCO) to request the county auditor to determine the property tax 

revenues generated by the existing agency. AB 672 then requires the county auditor 

to transfer that amount to the new city or district. 

"When a new city or special district takes over some but not all of an existing 

local agency's services, AB 672 requires the county auditor to determine the 

relationship between the existing agency's property tax revenues and its total general 

purpose revenues. LAFCO then determines the total net cost of each service which 

the new city or district will assume. Then LAFCO multiplies the net cost by the 

property tax ratio to determine how much property tax revenue will go to the new 

city or district. The bill requires the county auditor to transfer that amount to the 

new city or district." 

4. 88-603
 
 

 

 

 

The section 56842 formula may be described in the following terms: 

(1) (2) (3)

 tax receipts 

general revenue 

receipts 

x 

cost of

services

transferred 

=

 taxes to be

 transferred 

If, for example, general revenues were received by a special district in the amount of $1,000,000 

during the prior fiscal year, of which $600,000 constituted property tax receipts, and its net cost of 

services to be assumed by the new city was $100,000 for the prior fiscal year, $60,000 in property 

tax revenues would be transferred from the special district to the new city. The calculations would 

be:

 $600,000 x $100,000 = $60,000

 $1,000,000 

If the total general revenue receipts had been larger, such as $1,200,000, the property tax revenue 

proportion would be reduced and accordingly a lesser amount in taxes would be transferred. The 

calculations would be:

 $600,000 x $100,000 = $50,000

 $1,200,000 

It is apparent that the new city will not require as much in property taxes if general 

revenues are readily available from other sources. The affected transferring agency, on the other 

hand, will no longer need those property taxes previously used to fund the transferred services. 

Of particular significance is the fact that excluded from the calculations of section 

56842 are funds required under state or federal law to be used for a specific purpose and funds 

received to offset certain costs of various services. These revenues will continue to be received by 

the transferring agency or begin to be received by the new city to the extent each furnishes the 

specified services. Neither is thus pertinent to a determination of what property tax revenues should 

be transferred between the two entities. 

A. Carry-Over Funds 

The first part of the question concerns funds that have been carried over to the prior 

fiscal year from a previous fiscal year. Do these funds constitute "revenue . . . received . . . in the 

prior fiscal year"? 

A common definition of "revenue" is "the annual or periodical yield of taxes, excises, 

customs, duties, and other sources of income that a nation, state, or municipality collects and 

receives into the treasury for public use." (Webster's New Internat. Dict. (3d ed. 1971) p. 1942.) 

5. 88-603
 
It is a source or sources of payment, consideration, or income. (See §§ 23800, 26400.) To "receive" 

is "to take possession or delivery of . . . to take in . . . acquire." (Webster's, supra, p. 1894.) On the 

other hand, to "carry over" funds is "to hold over . . . for another season" or to carry forward that 

which has already been received. (Id. at p. 344.) 

Under these definitions of the terms used by the Legislature, the carry-over funds 

here do not constitute revenue received in the prior fiscal year. It was in the year previous to the 

prior fiscal year that they were received and delivered into the treasury for a public purpose. We 

find no basis for counting them twice as a source of payment; they were merely being retained for 

an additional time period, waiting to be appropriated. We are directed to interpret the words of a 

statute by "giving them their usual and ordinary meaning." (Committee of Seven Thousand v. 

Superior Court (1988) 45 Cal.3d 491, 501; Schmidt v. Superior Court (1987) 43 Cal.3d 1060, 1065-

1066; Young v. Haines (1986) 41 Cal.3d 883, 897.) 

This construction of section 56842 is also consistent with other legislative acts 

indicating that revenues are "received" only once and thereafter are retained in reserve, designated 

to a specific reserve, transferred to a different account, or appropriated. (See §§ 29085, 29086, 

29092, 29124, 29125, 29126.1, 29130.) "[E]very statute should be construed with reference to the 

whole system of law of which it is a part, so that all may be harmonized and have effect." (Moore 

v. Panish (1982) 32 Cal.3d 535, 541.) 

Including carry-over funds in the section 56842 calculations would not provide the 

new city with sufficient property tax revenues to finance the services transferred. The city would 

not have accumulated carry-over funds to finance the services. Instead it must look to new sources 

of revenue. The statutory formula contemplates that the city will have the same general authority 

to generate funds as the transferring agency. Carry-over funds do not meet the test of ready 

availability. 

It should be noted that the formula contained in section 56842 restricts consideration 

of the tax receipts as well as the general revenue receipts to those of the prior fiscal year. This 

provides consistency and bases the calculations on the most recent experience in financing the 

services in question. To include carry-over funds in the general revenue receipts category would 

open up the fraction denominator of the formula while the numerator remained restricted. 

Uniformity would be lost, and more remote and additional periods would be considered that failed 

to reflect the current ability of either the transferring agency or the city to generate funds. 

Finally, our conclusion effectuates the purpose of section 56842 as expressed in 

subdivision (c)(3): "to derive the amount of property tax revenue used to provide services . . . during 

the prior fiscal year within the area." The Legislature has used a collective approach in determining 

the amount of tax receipts and general revenue receipts used to fund the particular services. Such 

formula eliminates extraordinary situations and instead focuses on the general manner in which the 

transferring agency did (and the new city presumably will be able to) generate funds to finance the 

services. Again, carry-over funds have no place in such calculations. We follow the primary rule 

of statutory construction "to ascertain and effectuate legislative intent." (People v. Woodhead 

6. 88-603
 
 

(1987) 43 Cal.3d 1002, 1007; People v. Jeffers (1987) 43 Cal.3d 984, 993; People v. Overstreet 

(1986) 42 Cal.3d 891, 895.) 

We thus conclude in answer to the first part of the question that in calculating the 

allocation of property tax revenues when a city incorporates but does not assume all service 

responsibilities for its territory, the calculations are not to include funds carried over to the prior 

fiscal year from a previous year. 

B. Charges For Licenses, Permits, and Services 

The second part of the question concerns charges for licenses, permits, and such 

services as law enforcement services furnished under contract to other governmental agencies. Are 

these included in or excluded from the section 56842 calculations? We conclude that they are 

excluded to the extent they did not exceed the cost reasonably borne in providing the particular 

services. 

These charges were "received by each affected local agency in the prior fiscal year." 

We believe that they were also "available for general purposes" and used "on a discretionary basis 

for any purpose." The fact that the charges were generated by particular activities does not mean 

that they were required to be segregated by the affected agency and used only to fund the same kinds 

of activities that generated them. Here neither the state nor the federal government has required by 

statute that the charges were to be used for a specific purpose. The sources of the charges did not 

limit the local agency's ability to spend the moneys received as it chose. 

While these charges would thus meet the general test for inclusion in the section 

56842 calculations, the Legislature has also specified certain exclusions.4 The exclusion applicable 

here is for "fees, charges, or assessments which are levied to specifically offset the cost of particular 

services and do not exceed the cost reasonably borne in providing these services." (§ 56842, subd. 

(c)(1)(B).) 

The term "levied" has different meanings depending upon its context. (See 

Huntington Park Redevelopment Agency v. Martin (1985) 38 Cal.3d 100, 106-107; People v. 

Schwartz (1947) 31 Cal.2d 59, 63-64; Hayne v. San Francisco (1917) 174 Cal. 185, 196; Bell 

Community Redevelopment Agency v. Woosley (1985) 169 Cal.App.3d 24, 32; Alpha Beta Acme 

Markets, Inc. v. City of Whittier (1968) 262 Cal.App.2d 16, 21-22; Fahey v. City Council (1962) 

208 Cal.App.2d 667, 677-679; McDonald v. Richards (1926) 79 Cal.App.1, 7.) It may refer to the 

legislative act of setting the amount to be collected (Wardell v. State of California (1947) 29 Cal.2d 

639, 642-643; People v. Mahoney (1939) 13 Cal.2d 729, 735-736; Fahey v. City Council, supra, 208 

4

"The Legislature has power to prescribe legal definitions of its own language, and when an 

act passed by the Legislature embodies a definition it is binding on the courts." (In re Marriage 

of Stephens (1984) 156 Cal.App.3d 909, 913.) We accordingly follow the definitions in section 

56842 that are applicable to its terms. 

7. 88-603
 
Cal.App.2d 667, 677-679; Smith v. Byer (1960) 179 Cal.App.2d 118, 121) or the ministerial act of 

collecting the amount previously determined (Hayne v. San Francisco, supra, 174 Cal. 185, 195-196; 

Alpha Beta Acme Markets, Inc. v. City of Whittier, supra, 262 Cal.App.2d 16, 22; McDonald v. 

Richards, supra, 79 Cal.App. 1, 7-8). Usually what is being levied is referred to as a "tax" (see City 

of Burbank v. Metropolitan Water District (1960) 180 Cal.App.2d 451, 459), but fees and charges 

for services furnished may also be referred to as being levied (see § 54985; Dare v. Lakeport City 

Council (1970) 12 Cal.App.3d 864, 868-869). 

Here section 56842 refers to "[r]evenue from fees, charges, or assessments which are 

levied . . ." as an exception to "revenue from all sources . . . received by each effected local agency 

in the prior fiscal year." In such context, accordingly, the term "levied" would include the 

administrative collection function of receiving the money into the public treasury. (See People ex 

rel. Happell v. Sischo (1943) 23 Cal.2d 478, 493; County of Fresno v. Malmstrom (1979) 94 

Cal.App.3d 974, 979.) 

In order to be excluded from the calculations, the license, permit, and service charges 

must be "levied to specifically offset the cost of the particular services" and "not exceed the cost 

reasonably borne in providing these services." With respect to license and permit charges, we 

believe that the term "services" would appropriately cover those services associated with the license 

or permit being issued, such as administering, regulating, and enforcing the licensing or permit 

program. (See United Business Com. v. City of San Diego (1979) 91 Cal.App.3d 156, 165-167.) 

In this regard, we note that whether charges "exceed the cost reasonably borne in 

providing the services" is significant not only for applying the provisions of section 56842 but also 

for purposes of the tax limitations of article XIII A of the Constitution (see Pennell v. City of San 

Jose (1986) 42 Cal.3d 365, 374-375; Terminal Plaza Corp. v. City and County of San Francisco 

(1986) 177 Cal.App.3d 892, 906-907; Briarwood Properties, Ltd. v. City of Los Angeles (1985) 171 

Cal.App.3d 1020, 1021-1032; Beaumont Investors v. Beaumont-Cherry Valley Water Dist. (1985) 

165 Cal.App.3d 227, 234; Mills v. County of Trinity (1980) 108 Cal.App.3d 656, 662-663) and the 

government spending limitations of article XIII B of the Constitution (see Huntington Park 

Redevelopment Agency v. Martin, supra, 38 Cal.3d 100, 107; County of Placer v. Corin (1980) 113 

Cal.App.3d 443, 451-452). In keeping with these constitutional limitations, the Legislature has 

specifically authorized local governments to levy charges in various situations if the charges are 

limited to covering the costs incurred. (See, e.g., § 54985 ["in the amount reasonably necessary to 

recover the cost of providing any product or service or the cost of enforcing any regulation for which 

the fee or charge is levied"].) 

Since a local government may also exercise a revenue raising power without regard 

to the specific service costs involved (see The Pines v. City of Santa Monica (1981) 29 Cal.3d 656, 

660-663; United Business Com. v. City of San Diego, supra, 91 Cal.App.3d 156, 165-169; 70 

Ops.Cal.Atty.Gen. 153, 155-156 (1987)), the determination of whether a particular charge is limited 

to the reimbursement of costs incurred would depend upon the facts of each case. Normally courts 

have looked to the language of the ordinance imposing the fee and to cost analysis reports and 

studies prepared by government officials in concluding that a particular fee is for cost 

8. 88-603
 
reimbursement or revenue raising purposes. (See United Business Com. v. City of San Diego, supra, 

91 Cal.App.3d 156, 165-168; Oakland Raiders v. City of Berkeley (1976) 65 Cal.App.3d 623, 627; 

Watson v. County of Merced (1969) 274 Cal.App.2d 263, 268; Arnke v. City of Berkeley (1960) 

185 Cal.App.2d 842, 847.) 

With respect to revenues received pursuant to a contract for services, the existence 

of the contract would not itself preclude the charges from being "levied" (set and collected) for 

purposes of section 56842. While the contract could conceivably produce "excess revenue" over 

the costs of the services provided, we note that certain statutory restrictions may be applicable to 

prevent such a consequence. Section 51350, for example, states in part: 

"A county which provides services through its appropriate departments, 

boards, commissions, officers or employees, to any city pursuant to contract or as 

authorized by law, shall charge the city all those costs which are incurred in 

providing the services so contracted or authorized. A county shall not charge a city 

contracting for a particular service, either as a direct or an indirect overhead charge, 

any portion of those costs which are attributable to services made available to all 

portions of the county, as determined by resolution of the board of supervisors, or 

which are general overhead costs of operation of the county government. General 

overhead costs, for the purpose of this section, are those costs which a county would 

incur regardless of whether or not it provided a service under contract to a city."

 The same considerations in determining the costs incurred would thus be applicable for contract 

services as for license and permit programs. 

Our conclusion that license, permit, and contract service charges are excludable from 

the section 56842 calculations helps facilitate an equitable transfer of property tax revenues. An 

affected agency that is able to offset its costs of issuing licenses and permits and furnishing contract 

services does not need property tax revenues to fund such activities. By following the same 

practices, the new city would not need property tax revenues for performing these activities. Hence, 

neither local government would have claim to include these funds in the section 56842 calculations. 

To the extent that the charges exceed the reasonable costs of the governmental activities that 

produce them, they would properly be included in "the total amount of revenue from all sources, 

available for general purposes." Such circumstances would mean that a lesser amount of property 

taxes would be transferred to the new city--the affected agency would retain a greater share of the 

property taxes (having lost a possible source of generating excess revenues) and the city would 

obtain a lesser share of them (having gained a possible source of generating excess revenues). 

In answer to the second part of the question, therefore, we conclude that in 

calculating the allocation of property tax revenues when a city incorporates but does not assume all 

service responsibilities for its territory, the calculations do not include funds derived from charges 

for licenses, permits, and such services as law enforcement services furnished under contract to other 

governmental agencies where the charges are levied to specifically offset the cost of the particular 

services and do not exceed the cost reasonably borne in providing the services. 

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10. 88-603