LAFCO_October_21_guidelines

State of California
A GUIDE TO THE LAFCO PROCESS
FOR
INCORPORATIONS
Governor’s Office of Planning and Research
October 2003
Gray Davis
GOVERNOR
Tal Finney
INTERIM DIRECTOR

October 2003
LAFCO Incorporation Guidelines
The Governor’s Office of Planning and Research
1400 Tenth Street, Sacramento, CA 95812-3044, 916/322-2318, www.opr.ca.gov
Tal Finney, Interim Director
Development Team:
Toni Symonds - Project Manager, Community Vitalization Unit Director
Terry Roberts - Project Manager, State Clearinghouse Director
Kathryn Winter - Incorporation Task Force Chairperson
Doreen Updike - Administrative Analyst
Julia Ouellette - Administrative Analyst
October 2003

October 2003
The Governor’s Office of Planning and Research (OPR) would like to acknowledge and
thank the members of the Incorporation Task Force for their invaluable assistance in
identifying key issues and for providing input into the development of LAFCO
Incorporation Guidelines.
INCORPORATION TASK FORCE MEMBERS
• Chairperson, Kathryn Winter, Office of Planning and Research (OPR)
• Terry Roberts, Project Manager, State Clearinghouse Director, Office of Planning and
Research (OPR)
• Toni Symonds, Project Manager, Senior Policy Advisor, Office of Planning and Research
(OPR)
• Robert Braitman, Santa Barbara LAFCO
• Greg Brummels, State Controller's Office
• Tim Campbell, Santa Barbara LAFCO
• Christopher Carlisle, Speaker Hertzberg's Office
• Tony Carstens, County of Riverside Executive Office
• Phil Carter, Pacific Municipal Consultants and City of Elk Grove
• William Chiat, County of Santa Barbara
• Cathy Creswell, Department of Housing and Community Development
• Baxter Culver, California State Association of Counties
• Harry Ehrlich, Olivenhain Municipal Water District and California Special District
Association
• Carolina Jimenez-Hogg, Fresno County Planning & Resource Management Department
• Bill Mahoney, Orange County
• Anthony Manzanetti, Kronick, Moskovitz, Tiedemann, & Girard and City Attorney for
the City of Elk Grove
• Jerry McClain, State Controller's Office
• Michael Oliver, City of Oakley
• Michael Ott, San Diego LAFCO
• Catherine Smith, California Special Districts Association
• Chris Tooker, Sacramento LAFCO
• Rita Velasquez, Elk Grove Community Services District
OPR would also like to acknowledge and thank Joyce Crosthwaite, Project Design
Consultants and her excellent consultant team that assisted OPR in the development and
implementation of the extensive public outreach and stakeholder consultation process
and the writing of the final draft of the guidelines. Other members of her team included:
• Dan Miller, Rosenow Spevacek Group
• Charon Browning, SMB Associates
• Robert Ewing, Services Commodities Consulting

OPR Incorporation Guidelines Table of Contents
July 2002 i
TABLE OF CONTENTS
EXECUTIVE SUMMARY............................................................................. 1
I. INTRODUCTION ............................................................................ 3
A. Background of Incorporation Guidelines ........................................... 3
B. Purposes of the Incorporation Guidelines.......................................... 4
C. How to Use the Incorporation Guidelines .......................................... 4
II. GETTING READY: PRE-INITIATION ..................................................... 5
A. Before Incorporation Starts: LAFCO’s Role........................................ 5
B. Before Incorporation Starts: The Proponents’ Role ............................. 6
1. Alternatives to Incorporation................................................... 6
2. Consult with LAFCO .............................................................. 7
a. Assist in Identifying Logical Boundaries ................................. 8
b. Facilitate Early Discussions with Affected Agencies................... 8
3. Use of Consultants...............................................................10
4. Initial Fiscal Feasibility Review ...............................................10
III. INITIATING THE INCORPORATION .................................................... 11
A. Initiation by Petition of Registered Voters .......................................11
B. Initiation by Petition of Landowners...............................................12
C. Initiation by Resolution of an Affected Agency ..................................12
D. Processing of Petitions ...............................................................12
1. Notice of Intent to Circulate a Petition......................................14
2. Form and Content of a Petition or Resolution ..............................14
3. Timing of Petitions ..............................................................15
IV. PREPARING AN INCORPORATION APPLICATION.................................... 16
A. Description of Incorporation Proposal .............................................16
B. Comprehensive Fiscal Analysis (CFA) ..............................................17
C. Service Plan............................................................................18
D. Map and Legal Description of Boundaries .........................................18
E. Sphere of Influence (SOI) and Municipal Service Review .......................19
F. Paying for the Incorporation Application. ........................................20
V. REVIEWING THE APPLICATION: LAFCO STAFF ANALYSIS ........................ 21
A. Preparation of the Comprehensive Fiscal Analysis (CFA).......................21
1. Gather Financial and Service Level Data ....................................23
2. Establish a Service Plan ........................................................24
3. Establish Base Year Costs ......................................................27
4. Calculate Property Tax Transfer ..............................................27
5. Develop Budget Projections ...................................................31
a. Establish Budget Projections: Revenues................................32
i. Base Property Tax Allocation ........................................32
ii. Special District Property Taxes ......................................32
iii. Property Transfer Taxes ..............................................32
iv. Sales Taxes..............................................................33
v. Transient Occupancy Taxes (TOT) ..................................33

July 2002 ii
vi. State Revenues.........................................................33
vii.Franchise Fees..........................................................33
viii. Road Related Revenues............................................33
ix. Transportation Related Local Sales Taxes .........................33
x. Other Revenues ........................................................34
b. Establish Budget Projections: Expenditures ...........................34
c. Determine An Appropriations Limit .....................................35
d. Effective Date and Transition Period ...................................37
e. Financial Feasibility .......................................................39
B. Revenue Neutrality ...................................................................39
1. Background .......................................................................39
2. Revenue Neutrality Process....................................................40
a. General Requirements for Revenue Neutrality........................43
b. Method of Calculation.....................................................43
c. Negotiation Process........................................................46
d. Terms and Conditions .....................................................47
C. Integrating CEQA with the Incorporation Process ...............................47
D. Executive Officer’s Report and Recommendation ...............................49
1. Contents of Report ..............................................................49
2. Distributing the Reports ........................................................50
3. State Controller Review of CFA ...............................................50
VI. COMMISSION HEARING AND DECISION ............................................... 51
A. Hearing Notice.........................................................................51
B. Conflicting Proposals .................................................................51
C. Commission Actions...................................................................52
D. Request for Reconsideration ........................................................55
VII. CONDUCTING THE PROTEST HEARING............................................... 55
VIII. VOTING: THE INCORPORATION ELECTION .......................................... 56
IX. CERTIFING THE ELECTION RESULTS OF THE ELECTION.......................... 56
X. POST INCORPORATION ................................................................. 57
APPENDICES
A. Incorporation Primer
B. Glossary
C. Initial Fiscal Feasibility Spreadsheet
D. Sample Forms
E. Notice to Circulate Petitions
F. Registered Voter Petition
G. Landowner Petition
H. Civil Rights & Environmental Justice Issues
I. Sample City Council Agenda for a New City
J. Sources and Uses of Municipal Funding
K. Incorporation Timeline

July 2002 iii
LIST OF EXHIBITS
1. Example: Incorporation Boundary and Alternative Boundaries .........................9
2. Typical Timeline for Processing Petitions................................................ 13
3. Example: Transfer of Service Responsibility............................................ 26
4. Example: Calculation of Property Tax Transfer ........................................ 29
5. Example: County Property Tax as a Percentage of Revenue Available for
General Purposes ............................................................................ 30
6. Example: Determination of Provisional Appropriations Limit ........................ 36
7. Example: Calculation of Repayment to County......................................... 38
8. Typical Revenue Neutrality Negotiation Process........................................ 42
9. Example: Calculation of Revenue Neutrality Payment ................................ 45
10. Impact of the 2000 Amendments on Findings of Consistency ......................... 54

OPR Incorporation Guidelines
October 2003 1
Executive Summary
The Incorporation Guidelines are a result of legislation signed in 2000, which established
a process for the creation of statewide guidelines. While the Cortese-Knox Act, the law
governing Local Agency Formation Commissions (LAFCOs), had always specified minimum
procedures and requirements for incorporation proposals, there were variations among
the 58 LAFCOs in processing, content and requirements. Many LAFCOs and incorporation
proponents developed a set of “best practices” which, while shared as much as possible,
were not always widely disseminated. The intent of the guidelines is to gather these best
practices and summarize existing legal requirements into minimum statewide guidelines.
The Incorporation Guidelines are advisory and each LAFCO may adopt supplemental
policies and procedures.
One of the biggest challenges to any incorporation proposal is readily available
information. The Incorporation Guidelines provide easy to read information for citizens,
for agencies and for proponents about the incorporation process, its timelines, and likely
costs. A short “Primer” is included in the appendices to the Incorporation Guidelines,
which provides a generalized overview of the entire incorporation process with common
sense suggestions gathered from incorporation veterans. The Primer is short enough for
LAFCOs and incorporation proponents to easily copy, fax and/or email.
However, incorporation is a complex process that must meet legal requirements.
Therefore, the main body of the Incorporation Guidelines provides a step-by-step process,
with hyperlinks to the relevant Government Code Sections, for those groups and
individuals actively engaged in an incorporation. In particular, the Incorporation
Guidelines include detailed information and examples about the type of information that
should be included in the comprehensive fiscal analysis (CFA). The Incorporation
Guidelines also include a suggested process to address the legal requirement of ensuring
that incorporations are “revenue neutral”.
Thorough preparation is essential for an incorporation. The first section of the
Incorporation Guidelines includes recommendations gathered from the workshops and
Task Force meetings for potential incorporation proponents, for LAFCOs, and for other
affected agencies regarding the efforts that must precede initiating an incorporation
proposal. It includes information for proponents about consulting with LAFCO to avoid
potential pitfalls, the use of consultants and investigating alternatives to an
incorporation. LAFCOs are encouraged to begin their preparation for an incorporation
before a proposal is even submitted.
The determination of the possible fiscal feasibility of an incorporation has also been a
challenge. Preparation of a CFA is expensive and if the proposed incorporation is
infeasible, many proponents feel their efforts and money have been wasted. The
Incorporation Guidelines contain a recommended “initial fiscal feasibility review” which
is designed to help incorporation proponents decide whether to continue with an
incorporation effort. The initial fiscal feasibility review only provides a one-year
“snapshot” of some of a community’s financial assets and liabilities—it should never be
used as a basis for a CFA which includes more comprehensive analysis of potential
revenues and expenditures.

October 2003 2
Initiating an incorporation is, in itself, a complex process with tight time limits and
various legal requirements for processing and collecting signatures. The process, legal
requirements and time limits for initiating an incorporation are described in Section III.
As throughout the entire Incorporation Guidelines, hints from incorporation veterans have
been included to help make the initiation process easier.
All incorporation proponents must prepare an application and while the specific
requirements of various LAFCOs differ, there are certain basic requirements for all
incorporation applications. Preparing an application to be submitted to LAFCO also
requires payment of fees and the Incorporation Guidelines, Section IV, includes
information regarding the probable costs of an incorporation application.
The review and analysis by LAFCO staff of an incorporation application is detailed and
exhaustive as required by law. Section V, “Reviewing the Application: LAFCO Staff
Analysis,” contains detailed descriptions of the financial information which needs to be
included in a CFA. This section of the Incorporation Guidelines also includes information
about revenue neutrality, recommends a sample process and discusses what data should
be included (or not) in the ensuing revenue neutrality calculations. Section V also
discusses the environmental review process for an incorporation.
All incorporations must be heard in public hearings and, if approved, must follow a legally
defined process for a Conducting Authority hearing, elections and the final steps in the
creation of a new city. These steps are also described in the last sections of the
Finally, the Incorporation Guidelines also contain some basic information and sources of
help for newly incorporated cities. LAFCO’s involvement in incorporation ends after a
successful election but some information has been included to assist newly incorporated
cities in making a transition to full municipal status. However, new cities should rely on
their legal counsel and staff for more complete and updated information.
The Appendices (Section XI) contain sample forms and notices as well as the Primer.
Existing law requires each LAFCO to adopt written policies and procedures which may
augment and supplement these Incorporation Guidelines. Incorporation proponents are
strongly urged to consult with LAFCO in their own county to get copies of local policies
and procedures.
The Incorporation Guidelines are available in PDF format that contains electronic links to
the appropriate California Government Code sections. Clicking on the links will move the
user to the appropriate section of the Government Code. The entire electronic file
containing the Incorporation Guidelines may overwhelm some email servers. If you
encounter problems downloading the guidelines it is recommended that you contact
LAFCO in their county for a copy of the Incorporation Guidelines or go to your
neighborhood library where computers are generally available for public use.

October 2003 3
I. INTRODUCTION
This section provides the background to the development of the Incorporation Guidelines,
an explanation of their purposes and information about the overall structure and how to
use this document.
A. BACKGROUND OF INCORPORATION GUIDELINES
On September 26, 2000, Governor Gray Davis signed into law AB 2838 (Chapter 761,
Statutes of 2000), authored by Assembly Speaker Robert M. Hertzberg. This legislation,
titled the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000 and
codified as California Government Code Sections 56000 et seq., marked the most
significant reform to local government reorganization law since the 1963 statute that
created Local Agency Formation Commissions (LAFCOs) in each county.
The legislation resulted from the recommendations of the Commission on Local
Governance for the 21st Century, created by 1997 legislation. The Commission's
recommendations were included in its final report, Growth Within Bounds, issued on
January 20, 2000.
Pursuant to the new requirements in Government Code Section 56815.2, the Governor’s
Office of Planning and Research (OPR) was required to convene a task force composed of
representatives of cities, counties, special districts, and local agency formation
commissions for the purpose of creating statewide guidelines for the incorporation
process.
Existing law further specifies that the guidelines serve as minimum statewide guidelines
for the incorporation process. OPR recommends that LAFCO adopt supplemental
policies and procedures that reflect local conditions to further assist the public and
affected agencies in understanding the incorporation process.
The guidelines are required by law to include:
• Information to assist incorporation proponents to understand the incorporation
process, its timelines, and likely costs.
• Direction to affected agencies regarding the type of information that should be
included in the comprehensive fiscal analysis of incorporation, as well as
suggestions for alternative ways to achieve fiscally neutral incorporations.
These guidelines were the result of an extensive public participation process. Three
workshops were held in San Diego, Sacramento and Bakersfield in the fall of 2001 to
gather public input into the content of the Incorporation Guidelines. A draft copy of the
Incorporation Guidelines was posted on the OPR website for a 30-day public review
period. During the public review period, three additional workshops were held in Ukiah,
Tracy and Van Nuys to receive comments from interested parties regarding the draft
document. In addition, an Incorporation Task Force was formed, comprised of members
of LAFCOs, the State Controller, cities, counties, special districts and other interested
parties, to identify key issues and provide input into technical content of the
Incorporation Guidelines. The Task Force met three times and submitted numerous
recommendations that have been incorporated into this document.

October 2003 4
The Incorporation Guidelines reflect the Cortese-Knox-Hertzberg Act and related laws as
were in effect on that date. Since state law may be amended periodically, it is critical
that users of these Guidelines consult with the State of California, OPR, LAFCO staff
and/or legal counsel to ensure that they are aware of the latest amendments to the
relevant Government Code sections. In addition, each LAFCO may have policies,
procedures and regulations that should be consulted before starting any incorporation
effort.
B. PURPOSES OF THE INCORPORATION GUIDELINES
The Incorporation Guidelines are permissive and intended to be used as a framework for
the consistent processing of incorporation proposals by LAFCO, by other affected local
governments and by proponents. They are intended to serve as the minimum statewide
guidelines for the incorporation process. The Guidelines are advisory to LAFCOs in the
review of incorporation proposals (§56815.2) and are consistent with the existing
Government Code.
C. HOW TO USE THE INCORPORATION GUIDELINES
The Incorporation Guidelines are available in hard copy (paper), CD-ROM and PDF format.
The PDF and CD-ROM versions
contain electronic links to the
appropriate California Government
Code sections. Clicking on the links
will move the user to the
appropriate section of the
Government Code. The Guidelines
are organized in the following
manner.
Section I contains the Introduction
including information about the
background, purposes and use of the
Sections II through IX contain a step-by-step guide for processing an incorporation
proposal. It is advised that users of these Guidelines read the entire document first to
gain an understanding of all the steps in incorporation. Government Code sections are
included in parentheses so that readers can refer directly to the appropriate section of
the law. Templates, exhibits and sample forms are provided where appropriate.
Section X contains a brief discussion of the responsibilities of a new city immediately
following incorporation. While LAFCO’s involvement in incorporation generally ends soon
after a successful election, this section has been included to assist newly incorporated
cities in making a transition to full municipal status. However, new cities should rely on
their legal counsel and staff for more complete and updated information.
ACRONYMS USED IN THE GUIDELINES
LAFCO—Local Agency Formation Commission
CFA—Comprehensive Fiscal Analysis
SOI—Sphere of Influence
CEQA—California Environmental Quality Act
Acronyms are both defined in the text of the document
and in a Glossary in Appendix C. These definitions are
provided to assist the reader in understanding the text.
For a complete definition of terms, the reader should
always refer to the definition section (§56010) of the
Cortese-Knox-Hertzberg Act, the law governing LAFCOs,
for complete definitions.

October 2003 5
WRITTEN POLICIES
LAFCO is required to review,
approve/disapprove proposals
for changes of organization and
reorganization consistent with
written policies, procedures
and guidelines adopted by the
Commission (§56375).
Appendices A through G contain a timeline for the incorporation process, the
Incorporation Primer, a Glossary, sample forms and notices, an initial fiscal feasibility
review spreadsheet which can be used by proponents to conduct a preliminary fiscal
review of the proposed incorporation, and an example of an agenda from a new city’s
first city council meeting. If the initial fiscal feasibility review indicates potential
problems, incorporation proponents can use that information as a basis for future
decisions. The initial fiscal feasibility review spreadsheet can be used for a one-year
budget but is not a substitute for a LAFCO application or a comprehensive fiscal analysis
(CFA). CFAs include more detailed and specific revenues/expenditures for multiple years
which are not included in the initial feasibility review spreadsheet. Use of the initial
feasibility review spreadsheet as a CFA may result in inadequate financial information
which can lead to longer processing times at LAFCO and ultimately more expense for
incorporation proponents.
II. GETTING READY: PRE-INITIATION
The work of research and planning before initiating an incorporation is critical to the
process. The following sections include a discussion of pre-initiation steps for LAFCO and
incorporation proponents. OPR recommends that LAFCOs and proponents refer to
Appendix A to review the steps in the overall process and Appendix C to review key terms
used in these Guidelines before getting started.
A. BEFORE INCORPORATION STARTS: LAFCO’S ROLE
In order to ensure a fair and equitable deliberation by
LAFCO on incorporation proposals it is important that
LAFCO adopt policies and procedures prior to the submittal
of any specific incorporation proposal. At a minimum,
LAFCO should take a comprehensive view of its existing
rules related to incorporations, determine whether
modifications are warranted and make the information
available to LAFCO’s Commission, local governments,
special districts and the public. The following is a list of
preparatory activities a LAFCO should consider:
• Review and update LAFCO general policies and procedures which relate to or
affect incorporation.
• Review and update any specific incorporation policies, procedures, and guidelines.
• Establish a standard application form.
• Establish a schedule of fees.
• Establish standards for appropriate incorporation boundaries and alternatives.
• Establish a policy regarding the adoption of the Sphere(s) of Influence.
• Establish a process for triggering LAFCO facilitation in the revenue neutrality
agreement process.

October 2003 6
LAFCO’S ROLE IN AN INCORPORATION
Incorporation proposals are often motivated by
dissatisfaction with the status quo.
One of LAFCO’s roles is to be an intermediary and
facilitator that is required, by law, to identify issues
and to resolve them in an equitable manner.
LAFCO staff must communicate clearly the standard
of review, the requirements, the estimated cost and
the probable timing of an incorporation proposal.
• Review LAFCO’s and the State’s rules and procedures related to financial
contributions to incorporation efforts.
• Identify the County Auditor’s ratio.
The public, in particular, should have access to comprehensive information on the
incorporation process, application forms, requirements, processing times, fee schedules,
standards of review for incorporations and other relevant information.
LAFCO plays several roles in the incorporation process including educating the public on
the incorporation process, facilitating communication between affected local government
parties and community groups and reviewing/approving the proposal. When developing
incorporation policies and procedures LAFCO should address each of these roles.
OPR recommends that LAFCOs consider developing a formal pre-application process
which includes having community members meet early in the process with LAFCO staff to
become better educated on the process and form a cooperative working relationship with
LAFCO.
At a minimum the pre-application process should include the following procedures:
• An internal tracking system to maintain updated information on changes in
incorporation law, contacts with potential incorporation groups/individuals and a
mailing list of potential incorporation proponents.
• Development of an information packet on the incorporation process and
procedures which LAFCO will follow in reviewing the proposal.
• A meeting and consultation among incorporation proponents, LAFCO and affected
local agencies to clarify expectations of the incorporation process.
• A review of the draft application including boundaries, alternative boundaries,
descriptions and other application requirements.
B. BEFORE INCORPORATION STARTS: THE PROPONENTS’ ROLE
1. Alternatives to Incorporation
Approximately 6,500,000 people, or 18%
of California’s population, live in
unincorporated communities. While
these communities vary in size and
character, they have the same range of
challenges that cities face—changes in
the character of their community,
housing/jobs balance, provision of
services, increased traffic and growth.
Sometimes these communities see
incorporation as the only means to acquire the political visibility and credibility to
address their problems and they may be unaware of other alternatives.

October 2003 7
INCORPORATIONS CAN BE EXPENSIVE
Proponents are generally required to
pay for LAFCO fees and staff costs,
consultant costs, preparation of the
CFA, application, map and legal
descriptions as well as environmental
review. It is not unusual for an
incorporation to cost more than
$100,000.
OPR recommends that proponents investigate alternatives to incorporation prior to
initiating an incorporation. As an example, a special district may be a more cost
effective means for obtaining services than incorporation. “Choices for the
Unincorporated Community: A Guide to Local Government Alternatives in California”
(Institute of Governmental Affairs, University of California at Davis, September 1981)
contains a comprehensive discussion of alternatives to incorporations for unincorporated
areas.
Below is an excerpt from “Choices for the Unincorporated Community”. Residents
considering incorporation, should consider the following questions before making a formal
proposal to LAFCO:
• What is the problem, if any, driving the desire for change in the existing
governmental structure? Can the problem be addressed by other means?
• What is the role of the County government in the community? Is the County willing
or able to address the identified problems?
• What is the community’s relationship to other adjacent communities?
• What would the proposed boundaries look like and how would that affect other
agencies and communities?
• What is the past history of local efforts to incorporate?
• How is the community changing?
• What is the community’s capacity for self-governance?
• How are services currently provided and how would they change? Does the area
have the ability to provide municipal level services if incorporated?
• Who is likely to benefit from a change and who is likely to lose?
Once these questions are answered, residents may have a better understanding of why
they want to incorporate and whether incorporation will actually solve the problem(s)
which concern them.
2. Consult with LAFCO
Of all the actions incorporation proponents can take
to help ensure a successful incorporation process,
early and frequent consultation with LAFCO, and
with other affected agencies, such as the County and
special districts, is the most important. Proponents
can often become overwhelmed by the technical,
legal and procedural requirements of incorporation.
LAFCO staff should be available to assist proponents in understanding the process, in
facilitating communication among all the affected agencies and in helping all parties
avoid the most common pitfalls in an incorporation.

October 2003 8
a. Assist in Identifying Logical Boundaries
Developing a logical incorporation boundary is the first and most fundamental step in an
incorporation effort. It is strongly recommended that proponents develop the boundary
in conjunction with LAFCO staff early in the process—even before deciding to move
forward with any incorporation efforts. Developing logical boundaries and alternatives
early in the process with LAFCO staff can save time and money for proponents. See
Exhibit 1, Example: An Incorporation Boundary and Alternative Boundaries.
LAFCO’s policies and procedures on incorporations should include a list of criteria which
LAFCO will use in evaluating boundaries and should reference items such as the existing
boundaries and spheres of influence of existing cities and special districts, flood plains,
communities of interest and the readiness of the area to incorporate.
b. Facilitate Early Discussions with Affected Agencies
LAFCO staff should be available to convene a meeting of representatives from affected
agencies and other interested parties to ensure early input into the proposed
incorporation proposal and boundaries.

October 2003 9
(Not all alternatives are displayed.)
EXHIBIT 1
EXAMPLE: INCORPORATION BOUNDARY
AND ALTERNATIVE BOUNDARIES
RANCHO SANTA MARGARITA
Proposed Incorporation
Boundary
Alternative Boundary #2
Maps Courtesy of Orange County LAFCO
Alternative Boundary #4 Alternative Boundary #6

October 2003 10
3. Use of Consultants
LAFCO is legally responsible for the information in the Executive Officer’s report and
must ensure that it is accurate, complete and objective. LAFCO may need assistance in
meeting those requirements and may contract for an outside consultant. If LAFCO
requires additional assistance, it may require that the proponents pay for the costs of
hiring a consultant. Even if the proponents have already prepared an incorporation
application, LAFCO may need to contract for an independent consultant to verify
information and review the conclusions presented in the application.
Consultants are typically used for a variety of tasks. They may have the comprehensive
and current knowledge of local government financing needed to prepare a CFA, of local
government structure, of LAFCO polices and procedures and of incorporation processes.
Consultants are often responsible for helping in establishing logical boundaries in
conjunction with LAFCO; preparing and developing the CFA including revenue neutrality
negotiations; preparing the application, reports, petitions and other forms as needed;
monitoring the proposal; and providing technical assistance.
The manner in which consultants are used varies but generally matches one of the two
following models:
• LAFCO hires the consultant. The proponents deposit money with LAFCO to cover
consultant costs. The consultant works for and is paid by LAFCO with the funds
deposited by the proponents. Proponents do not have control over the
consultant’s work, timing or end product.
• Incorporation proponents hire the consultant. The consultant works for and is paid
by the proponents. The proponents have more control over the preparation of the
application and related studies.
Both methods can be successful. Proponents should discuss the use of consultants with
LAFCO early in the process.
4. Initial Fiscal Feasibility Review
If proponents decide to take a
closer look at incorporation, it
may be helpful to perform a
preliminary assessment of the
fiscal resources available to a
potential new city. The
preliminary assessment, or initial
fiscal feasibility review, is
designed to help community
groups conduct a quick appraisal
of the potential for incorporation.
An initial fiscal feasibility review spreadsheet, provided in Appendix D, can be used by
incorporation proponents to determine if revenues will be available to support municipal
level services. The initial fiscal feasibility spreadsheet is NOT intended to be used as a
substitute for a CFA. It is only intended to be used as a means to educate proponents
regarding the fiscal potential for incorporation.
PREPARING A CFA
The preparation of a CFA is the legal responsibility of
LAFCO. In practical terms, that means that LAFCO will
determine who prepares the CFA and when the CFA shall be
prepared. It is recommended that proponents discuss the
method of preparation of the CFA with LAFCO prior to
beginning any incorporation efforts. Failure to do so may
result in the processing of the application being delayed and
in additional costs to the proponents. Proponents are
typically required to pay for the costs of the CFA.

October 2003 11
III. INITIATING THE INCORPORATION
The Cortese-Knox-Hertzberg Act requires that areas proposed for incorporation include at
least 500 registered voters (§56043).
The legal process for incorporating a new city can be initiated (§56047), or started, in three
ways. They are:
• Registered Voters: A petition signed by at least 25% of the registered voters residing
in the proposed incorporation area is submitted to LAFCO. The Registrar of Voters
must verify the number of valid signatures on petitions of registered voters.
• Land Owners: A petition signed by at least 25% of the landowners owning at least 25%
of the assessed value of land within the proposed incorporation area. The County
Assessor’s Office must verify the petitions of landowners.
• Legislative Body: The legislative body of an affected agency (§56014) can adopt a
resolution of application. An affected agency is any city, special district or county
which contains territory, including a sphere of influence, within the proposed
incorporation boundaries. If the territory identified in the resolution is within the
boundaries of a city the “incorporation” process would follow under the procedures
for a special reorganization rather than the change of organization process.
Each method of initiation is described in detail in the following sections. Proponents are
encouraged to check with LAFCO regarding local policies, procedures and guidelines.
Sample forms are provided in Appendix E.
A. INITIATION BY PETITION OF REGISTERED VOTERS
Most incorporations are initiated through a registered voter petition. The process of
explaining the goals of an incorporation effort to potential signers of petitions is an
important step in the education of a community about the issues involved in and the purpose
of incorporation. The process of gathering signatures on petitions is also a means of
determining the level of support for incorporation and of gathering feedback from residents.
If the incorporation is to ultimately succeed at the polls, it must have a high degree of
community consensus and the petition effort is part of the process to develop that
consensus.
A registered voter petition for incorporation requires the signatures of not less than 25% of
the total number of registered voters residing in the area to be incorporated (§56764(a)). A
sample petition is included in Appendix E.
Petitions must be prepared and processed in accordance with the legal requirements of the
Cortese-Knox-Hertzberg Act. The legal requirements for the process, form and content of
incorporation petitions are specific and complex. LAFCO’s Executive Officer and LAFCO
legal counsel should review all registered voter petition forms when the proponents file a
“Notice of Intent” (§56700.4) to circulate petitions with LAFCO. This preliminary review can
lessen the possibility that petitions will be rejected for errors after the proponents have
gathered signatures.

October 2003 12
Existing law states that the signatures on an incorporation petition shall be verified by
the elections official of the county and that the costs of verification of the signatures
shall be provided for in the same manner and by the same agencies which bear the costs
of verifying signatures for an initiative petition in the same county (§56383(e)).
Proponents are strongly encouraged to check with LAFCO staff, the county and the
Registrar of Voters in their own county to determine the costs of verification.
LAFCOs may adopt regulations governing contributors, expenditures and other activities
relating to the petition process (§56700.1). Proponents should check with LAFCO about
these regulations prior to circulating petitions.
B. INITIATION BY PETITION OF LANDOWNERS
Incorporations may also be initiated by petition of landowners (§56048). This type of
initiation requires the signatures of not less than 25% of the total number of landowners
who own property valued at a minimum of 25% of the total assessed value of land in the
proposed incorporating area (§56764(b)). Landowner petitions are usually verified by the
County’s Assessor’s Office which uses the most recent assessment rolls (§56708).
However, in some California counties, the Registrar of Voters may verify landowner
petitions as well as registered voter petitions. While infrequently used, this type of
initiation may be more useful when less densely populated communities want to form a
new city.
Except for the type of signatures collected and the agency which verifies the petitions,
the requirements for the form, the content and the processing of an incorporation
initiated by landowners is the same as for registered voters. The incorporation must still
ultimately be voted on in an election and must ensure that it has the support of
registered voters. The proponents among the landowners assume the leadership role in
the incorporation process and are responsible for completion of all application
requirements including the payment of fees.
C. INITIATION BY RESOLUTION OF AN AFFECTED AGENCY
Any affected agency in the area proposed for incorporation may become the applicant by
adopting a Resolution of Application (§56654). The resolution may also be preceded by a
“Notice of Intent” and must include all of the same components as incorporation initiated
by petition except for the signature requirements (§56654(c)). The agency board assumes
the leadership role in the incorporation process and is responsible for completion of all
application requirements including the payment of fees.
D. PROCESSING OF PETITIONS
The following sections explain the processing of petitions initiating incorporation. Exhibit
2 provides a Typical Timeline for Processing Petitions.

October 2003 13
EXHIBIT 2
TYPICAL TIMELINE FOR
PROCESSING INCORPORATION PETITIONS
Notice of Intent to Circulate Petition
(§56700.4)
Date of First Signature on Petition
(§56705(a))
180 days
Date of Last Signature on Petition
(§56705(a), §56706(2))
30 days
(law prohibits more than 60 days)
LAFCO Submits Petition for Verification
(§56706)
Petition Sufficient: Petition Insufficient
LAFCO Issues Certificate of Sufficiency (§56709)
(§56706(a))
INCORPORATION PROPOSAL PROCEEDS Additional Signature Collection
(§56706(2))
15 days
LAFCO Certifies Results
(§56706(c))
Petition Insufficient
PROPOSAL TERMINATED

October 2003 14
COLLECT MORE THAN YOU NEED
In collecting signatures on a petition incorporation proponents
should plan on collecting at least 10% to 15% more signatures
than the minimum requirement to compensate for signatures
found to be invalid. Each circulator of a petition should review
the map of the incorporation area with each signer of the
petition to confirm his/her residence. This helps reduce the
number of invalid signatures.
1. Notice of Intent to Circulate a Petition
Before circulating a petition for incorporation, incorporation proponents must file a
“Notice of Intent” (§56700.4) to circulate a petition or to adopt a Resolution of
Application. Although recommended by OPR, affected local agencies are not required to
circulate a Notice of Intent to LAFCO and other affected and interested agencies prior to
the adoption of the resolution (56654). The Notice of Intent must include the name,
mailing address and signature of the proponents (§56068) and a written statement (not
exceeding 500 words) stating the reasons for the proposed incorporation. The Notice of
Intent must be filed with LAFCO. A sample Notice of Intent form is included in Appendix
E.
Only after filing the Notice of Intent with LAFCO may the petition be circulated. LAFCO’s
Executive Officer is required, upon receiving the Notice of Intent, to notify affected
agencies and jurisdictions (§56658).
2. Form and Content of a Petition or Resolution
The text of a petition or resolution of application is similar for all three types of
initiation. Sample petition forms and notices are
included in Appendix E. The text of a petition or
resolution of application must include the following
(§56700):
• A statement that the proposal is made
pursuant to Government Code Section 56000
et seq.
• A brief statement of the nature of the
proposal and listing of other changes of organization. This could include the
special districts that are proposed for reorganization as a result of the
incorporation, detachment or annexation of territory and or changes in applicable
governmental boundaries.
• A map and description of the proposed incorporation boundaries and alternatives.
• Proposed terms and conditions. Although LAFCO has the ability to add, delete or
modify proposed terms and conditions, the incorporation proponents should
include some terms and conditions to ensure that petitions signers understand the
consequences of incorporation.
• A statement of the
reason(s) for the
proposed incorporation.
A clear statement of the
reasons for incorporation
is critical for the
education of petition
signers.
• A statement as to whether the petition is signed by registered voters or
landowners.
• The names of three proponents who will be the main contacts for the proposal.
REVIEW OF PETITIONS
A petition is a legal document and
must be prepared in accordance with
the requirements of the law. It is
strongly recommended that the
proponents and LAFCO use the
“Notice of Intent” filing as an
opportunity to review the petition to
ensure legal conformance.

October 2003 15
• A request that further proceedings be taken by LAFCO pursuant to the Cortese-
Knox-Hertzberg Act.
• A statement of whether the proposed incorporation is consistent with the spheres
of influence previously adopted by LAFCO.
The petition can also propose a name for the new city or town (§56722), and provisions
for appointment of a city manager and other city officials (§56723).
The form of the petition must provide for each signer's printed name, street address (post
office boxes are not sufficient), signature and the date of signature (§56704). Each signer
of the petition must be either a registered voter or landowner, depending on which type
of petition is being circulated, within the boundaries of the proposed incorporation. For
landowner petitions, each signature must be accompanied by a description of property
owned within the incorporation area, such as an assessor's parcel number.
3. Timing of Petitions
All signatures must be gathered within a six-month (6) period from the date of the first
signature (§56705). Incorporation petitions must be submitted to LAFCO for filing within
60 days of the date of the last signature on the petition. The total number of valid
signatures necessary to meet the 25% requirement for a petition of registered voters will
be established as of the date of the last voter registration report prior to the date of the
first signature on the petition (§56071, §56706) and Election Code 9113-9115). It is
important that incorporation proponents plan the timing of their petition drive carefully
to meet these statutory requirements. Within 30 days after the date a petition is
received by LAFCO, the Executive Officer shall cause the petition to be examined and
shall issue a "Certificate of Sufficiency" or "Notice of Insufficiency" (§56706(a)) after the
results of the examination are received. The County’s Registrar of Voters examines
registered voter petitions to determine the number of valid signatures (§56707).
Landowner petitions are examined based on a comparison of signatures and the "most
recent assessment roll" (§56708).
If the petition is determined to be insufficient based upon the number of signers, LAFCO’s
Executive Officer will notify the proponents by certified mail. The proponents have 15
days after the date of this notice to submit a supplemental petition to LAFCO’s Executive
Officer (§56706(b)(1)). It is important to note that this 15-day period is the only chance
to collect the additional number of required signatures if the original number of
signatures is insufficient.
Within 10 days of the date the supplemental petition is filed, LAFCO’s Executive Officer
will have the petition examined and certify in writing the result of his/her examination.
If the petition is found to be insufficient, it will be filed as a public record "without
prejudice" to any future incorporation effort in the same area (§56709). Without
prejudice means that proponents can begin the process of initiating another incorporation
without waiting a specified period of time.

October 2003 16
IV. PREPARING AN INCORPORATION APPLICATION
Incorporation applications must include a variety of information and studies. LAFCO
should develop and publish a standard list of information which is to be included in the
application. The minimum information (§56652) which must be submitted to LAFCO
includes:
• A petition or resolution of application initiating the proposal;
• A description of the incorporation proposal;
• A map and legal description of the proposed incorporation area.
• The names of the officers or persons, not to exceed three in number, who are to
be furnished with copies of the Executive Officer’s report and who are to be
furnished with mailed notices and copies of the Executive Officer’s report.
LAFCO is also authorized to require other data and information necessary for the analysis
of the application.
While some incorporation applications may also include a CFA, it is strongly recommended
by these guidelines that the preparation of CFAs be started after submittal of an
incorporation application to LAFCO.
The Cortese-Knox-Hertzberg Act’s timelines for submittal of petitions, noticing and other
requirements related to an incorporation application are mandatory. However, the
timelines for review and processing are generally advisory. Proponents should consult
with LAFCO to determine a schedule for processing an incorporation application which
will be consistent with the requirements of the individual LAFCO and the law (§56106).
Subsections (d) and (e) of Section 56652 provide LAFCO’s Commission and its Executive
Officer with the authority to require additional information as needed to process the
incorporation proposal. State law also empowers each LAFCO to adopt additional written
procedures for the evaluation of proposals (§56375(g)). Incorporation proponents are
strongly encouraged to check with LAFCO staff in their county to obtain an application
and to determine if there are specific procedures or policies adopted by that LAFCO
which may affect the incorporation.
A. DESCRIPTION OF INCORPORATION PROPOSAL
Existing law requires each incorporation proposal to include information relative to the
“nature” of the proposal (§56652(b)). OPR recommends that the nature of the proposal
be described in the following manner.

October 2003 17
COMMUNICATION AMONG LOCAL
GOVERNMENT ENTITIES
LAFCOs are encouraged to work
closely with counties and
incorporation proponents to
facilitate the preparation of the
CFA and a revenue neutrality
agreement.
INCORPORATION PROPOSAL
While capturing existing or
accessing new revenues may
be a motivating factor for
proposing incorporation, the
Cortese-Knox-Hertzberg Act
states that incorporations
should not occur primarily for
financial reasons (§56815).
• The reasons for proposing incorporation. The reasons for incorporation vary and
include, but are not limited to: improving local public services; capturing existing or
accessing new revenues to support local services; giving a community local control over
land use planning; creating a locally accountable governing body; and, pursuing local
policy.
• A clear statement of concerns, issues or problems, if any,
with the existing governmental structure.
• Any changes proposed from the way public services are
currently being provided. For example, if the incorporation
proposes the reorganization of special districts as part of the
incorporation, those governmental changes should be
included in the description of the incorporation proposal.
• A brief history of the incorporation area including the
results of any previous incorporation efforts.
• Demographic, geographic and economic data which describe the incorporation area.
This information can be readily obtained from the United States Census Bureau or other
public agencies.
B. TIMING OF THE COMPREHENSIVE FISCAL ANALYSIS (CFA)
Following submission of an incorporation application, LAFCO’s Executive Officer will
prepare, or cause to be prepared by
contract, a CFA and will release that
analysis for public review (§56800).
While some incorporation proponents
may prepare their own CFAs and submit
them to LAFCO with their application,
LAFCO has the ultimate responsibility for
ensuring that the information is
accurate, complete and objective. Some
LAFCOs may require that the proponents
pay for the costs of hiring an independent consultant to verify
or supplement the work of the proponent’s consultant. This
can increase the processing time for incorporations and add to
the costs. OPR recommends that preparation of the CFA not
begin until after a successful initiation of the incorporation
and after submittal of an application to LAFCO.
LAFCOs are encouraged to adopt written policies and
procedures for a pre-initiation review of an incorporation
proposal, preparation of a CFA (§56300(a)), a schedule of
fees and clear and consistent standards of review for a CFA and an incorporation proposal.
LAFCOs are also encouraged to work closely with counties and incorporation proponents to
facilitate the preparation of the CFA and a revenue neutrality agreement. The steps in the
preparation of a CFA are described below under Section V. A, Preparation of the
Comprehensive Fiscal Analysis.
PREPARING A CFA
The preparation of a CFA is the legal responsibility of
LAFCO. In practical terms, that means that LAFCO will
determine who prepares the CFA and when the CFA shall be
prepared. It is recommended that proponents discuss the
method of preparation of the CFA with LAFCO prior to
beginning any incorporation efforts. Failure to do so may
result in the processing of the application being delayed and
in additional costs to the proponents. Proponents are
typically required to pay for the costs of the CFA.

October 2003 18
The CFA becomes a part of the Executive Officer’s Report and is submitted to the Commission
prior to their consideration of the incorporation proposal (§56665).
C. SERVICE PLAN
All incorporation applications must be accompanied by a service plan. A service plan is a
proposal submitted by the incorporation proponents detailing which municipal services, after
incorporation, will be provided by the new city or by other agencies (§56653). A service plan
should include, at a minimum, the following:
• A description of the local public agencies presently serving the area including maps of
service areas;
• The range and level of services currently provided;
• Proposed changes in the governmental structure (e.g., districts proposed to be dissolved
and/or merged with the new city); and
• Increased or decreased range and level of services potentially available in the
community if incorporated and how the difference, if any, will be financed.
D. MAP AND LEGAL DESCRIPTION OF BOUNDARIES
All incorporation applications must include a map and legal description of the proposed
incorporation boundaries including a rationale for the boundaries proposed and a description of
possible boundary alternatives. Since LAFCO has the legal responsibility to consider, among
other items, the effect of the proposed incorporation on the provision of services, its social and
economic impact on the county and proposed city, and its conformity with LAFCO’s policies on
orderly development (GC 56668), incorporation proponents are strongly encouraged to work
with LAFCO staff early in the process to develop a logical incorporation boundary..
OPR recommends that an incorporation boundary recognize other local agencies’ boundaries
and SOIs; include a variety of land uses; consider topography and transportation routes;
WHO PROVIDES WHAT SERVICES AFTER INCORPORATION?
Services Which A New City May Assume
• Law enforcement
• Fire protection and paramedics (some cases)
• Water and sewer (some cases)
• Planning (land use, environmental review,
zoning, building inspection, etc.)
• Public works (streets, engineering, traffic
signals, streetlights, drainage, etc.)
• Local parks and recreation
• Libraries (in some cases)
• Animal control
Services that the County Must Continue to Provide
• Special services (welfare, child protective
services, etc.)
• Health services (medical care, mental health,
public health)
• Criminal justice (courts, prosecution, jails,
probation, etc.)
• Regional parks (in some cases)
• Elections and voters services
• General government (assessor, treasurer,
recorder, tax collector, etc.)
• Planning and environmental services
Special Districts may also be formed and/or expanded to provide a wide variety of serves.

October 2003 19
DETERMINING A NEW SPHERE OF
INFLUENCE
LAFCO may either approve a SOI
for a new city at the time of
LAFCO’s Commission hearing or
delay consideration of the SOI for
up to one year after voter
approval (§56426.5).
recognize communities of interest especially if environmental justice communities may be
affected; and not create islands of unincorporated territory.
Government Code Section §56668(f) states that one factor to be considered when reviewing a
proposal is the “…definiteness and certainty of the boundaries of the territory, the
nonconformance of the boundaries with lines of assessment or ownership, the creation of
islands or corridors of unincorporated territory and other similar matters affecting the
proposed boundaries”. To ensure consistency with this requirement, incorporation applications
should include a metes and bounds legal description. However, individual LAFCOs may require
the preparation of a metes and bounds description at different stages during the process.
Incorporation proponents are responsible for the cost of preparation of both the map and the
metes and bounds legal description. Please refer to Section II, B-2 for a more complete list of
factors which determine a logical incorporation boundary and alternatives.
Existing law requires LAFCO to consider alternative boundaries (§56668). OPR recommends
that incorporation proponents begin consultation with LAFCO as early as possible to reduce the
likelihood of having to pay for the development and analysis of additional boundary
alternatives after the application is filed.
E. SPHERE OF INFLUENCE (SOI) AND MUNICIPAL SERVICE REVIEW
A Sphere of Influence (SOI) is defined as the “…probable physical boundaries and service
area…” (§56076) of an agency. An SOI includes territory not within the corporate limits of the
agency but which is expected to be annexed at some time in
the future. There may be communities or territory closely
connected with a proposed incorporation area which are not
ready to be included in the new city but need to be
acknowledged for future planning. The impacts of
incorporation on the proposed SOI should be considered as
part of the incorporation application and may, although not
required to, be included in the CFA.
It is recommended that incorporation proponents develop a proposed SOI together with the
proposed incorporation boundary and alternatives. LAFCO may either approve a SOI for a new
city at the time of LAFCO’s Commission hearing or postpone consideration of the SOI for up to
one year (§56426.5) after voter approval. One advantage of deferring the SOI decision for the
full year is that the new city council has time to consider the SOI in connection with the new
city’s general plan process.
Beginning in January of 2001, LAFCOs are required to undertake a municipal service review
prior to the adoption or update of an SOI (§56430). Incorporation proponents need to consult
with LAFCO to determine how and when a service review will be prepared for an incorporation
proposal or a newly incorporated city. OPR recommends that LAFCO develop a policy that
clearly states when a service review for an incorporation proposal or a newly incorporated city
will be conducted. The policy should also clearly state when a service review will be prepared
for other agencies whose boundaries or SOIs may change as a result of incorporation.

October 2003 20
LOAN FROM THE STATE
For an incorporation that has been
initiated by a successful petition, LAFCO
(§56383(g)) may forward a request for a
loan from the Controller of the State of
California. The State, not LAFCO, can
approve the loan which then becomes an
obligation of the new city. Repayment of
the loan must be made within 2 years of
the effective date of the incorporation.
F. PAYING FOR THE INCORPORATION APPLICATION.
Fees for incorporation proposals vary and are set by each LAFCO. All LAFCOs should adopt
general fee schedules to allow potential applicants the ability to estimate the potential
incorporation costs.
Incorporation proposals can be charged on an actual cost-recovery basis, on a deposit system,
as a set fee or by other methods. Proponents are required to fund the incorporation effort,
including the costs of LAFCO to develop information and process the application. The cost of
incorporations has ranged from $50,000 to $150,000
based on the experience of several incorporation efforts
over the past 5 years.
Since incorporation is almost always a volunteer effort,
raising the necessary funds can be a challenge. For
incorporation proceedings that have been initiated by a
successful petition, LAFCO may, upon receipt of
substantial proof submitted by the proponents that they
are unable to raise sufficient funds, take no action on
the proposal and forward a written request for a loan to
the Controller of the State of California (§56383(g)). This is a new provision of the Cortese-
Knox-Hertzberg Act. The proponent’s written request should state the amount requested and
should be sufficient to cover incorporation expenses. The written request may also include,
but is not limited to, the following:
• Bank statements of incorporation accounts
• Audit of funds of incorporation accounts
• Affidavits signed by the proponents
• Information as necessary to verify that the incorporation proponents are unable to raise
sufficient funds
LAFCO shall forward the loan request, along with the certification of insufficient funds as
supplied by the proponents, to the State Controller by registered mail. State funds are NOT
automatically granted to an incorporation effort and are subject to availability and other
budgetary limitations of the State. It should be noted that LAFCO has no discretion or
authority over the State funds or incorporation loans; LAFCO’s role is to simply forward the
request and certification to the State Controller for consideration.
If the loan is approved, repayment of the loan shall be made a term and condition of LAFCO
approval and may be included as part of the ballot measure when incorporation goes to the
voters. If the incorporation is successful, the loan shall become a legal obligation of the newly
formed city and shall be shown as an expense in the budget projections of the CFA for the
proposed city. Repayment of the loan must be made within two years of the effective date of
incorporation. If the incorporation proposal is denied by the Commission or defeated at an
election, the loan shall be forgiven.

October 2003 21
V. REVIEWING THE APPLICATION: LAFCO STAFF ANALYSIS
After the incorporation application and fees have been submitted, LAFCO staff will mail a
notice of receipt of the application to all interested and affected agencies and the proponents
(§56658).
LAFCO staff then has 30 days to review the application for completeness. If the application is
considered complete, LAFCO’s Executive Officer will issue a Certificate of Filing (§56651) which
indicates that the application is ready for a public hearing. LAFCO must then set a public
hearing for the incorporation within 90 days. However, if the application is not complete,
LAFCO’s Executive Officer must notify the applicants within 30 days of submittal if the
application is incomplete and must specify those parts of the application which need additional
information (§56658(g)) to be deemed complete.
Once the application is complete, LAFCO staff must analyze the merits of the proposal,
evaluate it for consistency with existing laws and adopted LAFCO policies and procedures,
conduct the environmental review, prepare or cause to be prepared the CFA, complete the
revenue neutrality process and prepare the Executive Officer’s report. As necessary and as
provided in the Cortese-Knox-Hertzberg Act (§56652), LAFCO’s Executive Officer can also
request additional information to process the incorporation application. The staff review may
take up to a year depending on the completeness of application, the complexity of the
proposal and the experience and staffing level of LAFCO.
A. ENVIRONMENTAL JUSTICE CONSIDERATIONS IN INCORPORATIONS
In analyzing the merits of the proposal, LAFCO staff should consider their responsibilities under
federal and state civil rights and environmental justice laws. This chapter describes the
framework for developing an effective review process which reflects the laws and policies
related to civil rights and environmental justice.
Factors that are required to be considered in the review of the proposal and that may have
significant civil rights and environmental justice implications include, among other items,
population, per capita assessed valuation, the need for organized community services including
the present cost and adequacy of existing services and the probably effect of the incorporation
on the area and adjacent areas (§ 56668). Further, LAFCO is required to specifically identify
the effect of the proposed action on social and economic interests in the proposed new city
and the county government structure.
In order for civil rights and environmental justice to be properly considered, OPR recommends
that relevant information collected during municipal service reviews as well as other local
studies on social and economic indicators in the region be used in considering the incorporation
proposal.
In general, federal and state civil rights laws prohibit actions by public entities which
disproportionately affect one category of individuals including, but not limited to, race, creed,
ethnicity, disability, family status, sexual orientation and income.
Environmental justice is defined in state law as the fair treatment of people of all races,
cultures, and incomes with respect to the development, adoption, implementation, and
enforcement of environmental laws, regulations, and policies (GC §65040.12(e)).

October 2003 22
Environmental justice has particular implications for
review of incorporation proposals, as LAFCO will be
considering boundaries and service plans that directly
address who will be included and who will excluded
from the new city and what impact the inclusion and
exclusion will have on the both the residents of the new city
and the surrounding community including those that
may have been historically undeserved and/or
environmentally overburdened.
The 2000 amendments to CKH Act also recognize the potential impact of LAFCO decisions on
environmental justice. (GC §56001):
“Encourage orderly growth and development which are essential to the social, fiscal, and economic
well-being of the state… The Legislature also recognizes that providing housing for persons and
families of all incomes is an important factor in promoting orderly development. Therefore, the
Legislature further finds and declares that this policy should be effected by the logical formation and
modification of the boundaries of local agencies, with a preference granted to accommodating
additional growth within, or through the expansion of, the boundaries of those local agencies which
can best accommodate and provide necessary governmental services and housing for persons and
families of all incomes in the most efficient manner feasible. “
Other sections of these guidelines provide guidance on boundaries, service plans and adoption
of sphere’s of influence. Appendix H includes additional background on LAFCO’s civil rights
and environmental justice responsibilities.
These guidelines include a number of recommendations which encourage broad public
participation and incorporation proposal analysis which would affirmatively support the civil
rights and environmental justice responsibilities of LAFCO including:
• Educate the public on the role of LAFCOs and the incorporation review process.
Appendix A includes a “Primer on Incorporations” that was developed to assist LAFCO
with this purpose.
• Adopt general policies and procedures relative to the undertaking of the review of
incorporation applications. This will avoid any appearance of an unequal review of
some applications.
• Develop and publish a schedule for review and Commission consideration to maximize
the ability of the public to participate in the process.
• Convene stakeholders and facilitate collaborative efforts to address issues and
challenges that are identified during the early consultation with the proposal proponents
which may, ultimately, eliminate the need for the incorporation of a new city.
Consider the impacts of the proposed incorporation across county lines if that would more
appropriately address the community of interest.
• Publish the Draft Executive Director’s Report and provide for a 21-day public review
period before scheduling the report to be considered by LAFCO.
• Hold meetings and public documents in language other than English, where affected
populations are reasonably expected to be non-English speakers.
• Sponsor public workshops prior to the hearing at which the incorporation proposal will
be considered.
Staff and Board Training
OPR recommends that LAFCOs
provide for ongoing training of
staff and board members relative
to the application of federal and
state civil rights statutes that
apply to local government
entities.

October 2003 23
B. PREPARATION OF THE COMPREHENSIVE FISCAL ANALYSIS (CFA)
The CFA (§56800) is a critical part of LAFCO’s Executive Officer's report. It includes several
legally required components and is usually prepared and processed in a series of sequential
steps. Those steps are described in the following sections.
OPR recommends that preparation of the CFA begin after submittal of an application to LAFCO
to ensure that multiple versions of the CFA do not have to be prepared. This will help to keep
costs and preparation time at a minimum.
As previously mentioned, it is important in the preparation of the CFA to have identified
alternative boundary scenarios early in the incorporation process. The early identification of
alternative boundaries will allow greater efficiency in the collection and segregation of related
costs and revenues. Adding or excluding areas can have a significant impact on the CFA, on
revenue neutrality, and on the amount of property tax transfer. The revenue neutrality impact
analysis of the CFA should also incorporate alternative boundary scenarios so that any
agreement on a revenue neutrality mitigation payment plan can be adjusted to reflect the
financial impacts of alternative boundaries.
The CFA must also address revenue neutrality. Incorporations should not occur primarily for
financial reasons (§56815) and, under the Cortese-Knox-Hertzberg Act, should result in a similar
exchange of both revenue and responsibility for service delivery among affected agencies.
Negative financial impacts to affected agencies must be identified and mitigation measures
proposed. A suggested process for determining revenue neutrality impacts and mitigation is
also described in a subsequent section of these Incorporation Guidelines.
1. Gather Financial and Service Level Data
Existing law requires LAFCO to prepare the CFA (§56800) from data provided by affected public
agencies, franchise agencies and the county. Data collection should be coordinated by LAFCO
to ensure that it is efficient and cost-effective.
The data collection begins with a data request letter mailed, generally by LAFCO, to all
agencies with territory within or currently serving the proposed area of incorporation. The
data request letter must also be sent to the county committee
on school district organization and each school district within
the proposed incorporation boundary. The data request letter
should also include a provision that the agency both
acknowledge receipt of the letter within 15 days and that it
respond to the content of the letter within a specified and
reasonable time frame as established by LAFCO’s Executive
Officer (§56658(b)). In the case of state agencies needing to
provide data, the Executive Officer is encouraged to
communicate with the agency to establish a reasonable
timeframe.
In the data request letter, the affected agencies should be asked to verify existing levels of
service, associated costs, and revenues associated with the provision of service(s) to the
proposed incorporation area. This information is used to establish the base year costs and
revenues (§56810).
PLAN AHEAD
Close coordination is critical in
the preparation of a CFA. Often
LAFCO and incorporation
proponents begin working with
agencies and the county a full
year ahead of the submittal of
the application to ensure efficient
timing of data collection.

October 2003 24
Data used for the CFA must be from the most recent fiscal year for which data are available
preceding the issuance of the Certificate of Filing (§56800). When the prior fiscal year data
requested by LAFCO is unavailable, the responses to LAFCO’s data request letters and/or the
CFA shall document the source and methodology of the data used.
Counties end their fiscal year on June 30th
; however, the final financial data may not be
available until August or September due to the length of time needed to assemble and prepare
the financial information. The Executive Officer’s report and CFA must be completed and
heard at a public hearing by LAFCO’s Commission within the same fiscal year or the data must
be updated and/or a new CFA prepared. Therefore, the timing of data collection is critical to
an incorporation. OPR recommends that data request letters be sent to all agencies and
county departments at the start of a fiscal year (July 1) although data may not be available
until August or September. Responses should be received by October or November if the CFA
and LAFCO Executive Officer’s reports are to be completed during the current fiscal year.
If precise cost figures and levels of service are not available or if the reporting agency does not
collect data specific to the proposed incorporation area, the reporting agency must document
the source of information and the method used to extrapolate the data. Projected general
government costs are frequently based on staffing levels, salaries, and associated costs for
cities of similar size. LAFCOs and proponents can use the data gathered from affected
agencies to establish a service plan.
2. Establish a Service Plan
The CFA must analyze the fiscal implications of proposed changes in services (§56810).
Cities can provide services through one of two models. A municipality can be a “full-service”
city which means that it provides all municipal level services (such as fire, police, garbage
collection, water, sewer, etc.) through city employees in departments governed by the city
council. Alternatively, a city can be a contract city, providing many of these services through
contract(s) with service providers such as special districts, the county or private companies
providing contract municipal services. Either model can be successful but has different
impacts on data collection and ultimately on the CFA.
To determine which agencies or county service departments must be contacted to provide
data, it is necessary to know what services are proposed in the service plan to be transferred
to the new city. California cities are required to provide only a limited number of municipal
services, including:
• General legislative functions.
• Land use planning and control over land use and development. (May also be provided by
means of a contract with other entities such as the county or private firms.)
• Law enforcement (May be provided by means of a contract with other entities).
• Animal control (May also be provided by contract).
• Maintenance of public roads and other public property owned by the city. (May also be
provided by means of a contract with other entities such as the county or private firms.)

October 2003 25
The agencies, special districts and/or county departments providing these services should
receive a data request letter.
The following are services that a city may provide and, if it does, then data needs to be
collected to analyze the costs associated with providing these services:
• Fire protection and suppression
• Libraries
• Parks and recreational services
• Street lighting
• Street median maintenance
• Domestic water
• Wastewater treatment and disposal
• Solid waste management
• Flood control
• Social services or community services
Existing law requires any public agency to furnish LAFCO’s Executive Officer with any records
or information that are needed for the preparation of the CFA or Executive Officer’s Report
(§56658(b)(2)).
OPR recommends that all agencies or departments providing these services be sent data
request letters if changes in the provision of services are part of the incorporation proposal.
Time and money can be saved in the data gathering process if LAFCO maintains a consistent
schedule for undertaking municipal service reviews.
Exhibit 3 is a hypothetical example of which services might be transferred to a new city and
would therefore have to be analyzed as part of the CFA.

October 2003 26
EXHIBIT 3
EXAMPLE
TRANSFER OF SERVICE RESPONSIBILITY
Public Service Current Provider
Post-Incorporation
Provider
Level of
Service
Funding Source
Animal Control County
New City (contract
with County
No Change
User Fees,
General Fund
Administrative
Services (§56650-
56668.5)
County New City Likely Increase General Fund
Wastewater Water District Water District No Change
User Fees,
Property Tax
Water Water District Water District No Change
User Fees,
Property Tax
Emergency
Medical
County Fire
District
County Fire District No Change
User Fees, Fire Fund,
Property Tax
Fire Protection
County Fire
District
County Fire District No Change Fire Fund
Drainage/Flood
Control
County
New City (local)
and County Flood
Control District
(regional)
No Change
County Flood Control
Property Tax, General
Fund
Land Use
Regulation
County New City
No Change
(demand-based)
User Fees,
General Fund
Libraries
County Library
District
County Library
District
No Change
District Property
Taxes, Fines and Fees,
State Aid
Building
Inspection
County New City
No Change
(demand-based)
User Fees
Police Protection County
New City (contract
with public agency)
Likely Increase General Fund
Trash Collection
and Disposal
(public)
County (franchise
with private firm)
New City (franchise
with private firm)
No Change User Fees
Road
Maintenance,
Public Works
County New City Likely Increase
Fuel Taxes, General
Fund
Public Transit
County
Transportation
Authority
County
Transportation
Authority
No Change
User Fees, Grants,
Subventions and
Property Taxes
Parks and
Recreation
County Service
Area or
Community
Services District
New City Likely Increase
User Fees, General
Fund
Street Lighting County New City No Change General Fund

October 2003 27
3. Establish Base Year Costs
Once data gathering is complete, LAFCO will develop an estimate of the base year costs
(§56800(a)). Base year costs are the costs to provide municipal level services if the
incorporation area had been a city during the base year. The primary examples of identifiable
base year costs include law enforcement, animal control, public works administration (not
funded by gas tax revenues), code enforcement and the net cost of land use planning and
regulation.
Base year costs are used to determine a base year budget as
well as the property tax revenue transferring to the new
city and ultimately, the new city's ability to provide
adequate municipal services. Base year costs (and
revenues) are also used to calculate revenue neutrality
(§56810).
When determining base year costs, LAFCO must include all
direct and indirect costs associated with the current
provision of existing services in the proposed incorporation
boundary. These costs should reflect the actual or
estimated costs at which the existing level of services could
be provided by the proposed city and should include any
general fund expenditures necessary to support or subsidize
a fee-supported service if the costs of providing the service
are not fully recovered through fees.
LAFCO must identify the costs being transferred to the new
city that will result in an administrative cost reduction to
other agencies. LAFCO should also compare the costs of any existing services to the costs of
services provided in cities with similar populations and geographic size that provide a similar
level and range of services. This may help to determine a reasonable estimate of the costs
expected to be borne by the new city.
Revenues should not be included in the base year budget unless they were realized, received or
collected during the base year. Revenues, which were project-specific or are used to cover,
either partially or wholly, costs are usually not included. These offsetting revenues might
include federal monies used for specific projects. Finally, revenue resulting from development
currently under construction is excluded from the base year costs. For example, a new
commercial development, which would not go on the tax rolls and did not produce sales tax or
user tax revenues until the following fiscal year, would not be included.
4. Calculate Property Tax Transfer
An important component of the CFA is the calculation of the estimated transfer of property tax
from the county and any affected special districts to the new city. The property tax transfer
calculation results in the county and affected special districts transferring property tax
revenues to the new city in proportion to the services responsibilities assumed by the new city.
WHAT IS NOT INCLUDED IN BASE
YEAR COSTS
• Revenues that were not realized,
received or collected during the
base year.
• Project specific revenues, such as
development impact fees.
• Special revenues used to cover
costs such as federal grants or
CDBG funds.
• Revenue from development
currently under construction. For
example, a new commercial
development, which would not go
on the tax rolls and did not
produce sales tax or user tax
revenues until the fiscal year
following the base year, would
not be included.

October 2003 28
The Cortese-Knox-Hertzberg Act (§56810) provides a formula by which a share of the property
taxes is transferred from the county and special districts to a newly incorporated city. The
property tax transfer, or allocation, to the new city is calculated by LAFCO by multiplying the
total net cost of transferred services by the Auditor's ratio, as described below and shown in
Exhibit 4, Calculation of Property Tax Transfer. LAFCO determines the total net cost, based on
information supplied by the county and other affected local agencies as described during data
gathering, of all services to be transferred to the new city.
The total amount of revenue from all 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. The total amount of revenue does not
include revenue (§56810(a-c)) which, by statute, is required
to be used for a special purpose; 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; and
revenue received from the federal government which is
required to be used for a specific purpose. Revenues that
were project specific or were used to either partially or
wholly cover costs for a specific project are also usually not
included.
The total net cost is multiplied by the Auditor’s ratio to produce the base property tax
allocation, or the amount to be transferred to the new city. The Auditor’s ratio is the ratio of
property taxes allocated to the general fund of the county and each affected agency during the
prior fiscal year to all revenues received by the county and affected agencies for general
purposes during the prior fiscal year. The Auditor-Controller of the affected county determines
the ratio.
The Auditor-Controller establishes the ratio each year pursuant to Section 93 of the Revenue
and Taxation Code. Auditor-Controllers from different counties may determine the ratio by
different methods. LAFCO, the county and the proponents should review the methodology of
the Auditor-Controller to determine if the ratio is consistent with existing law and the
recommendations of these guidelines. LAFCO’s Commission uses the Auditor’s ratio and the
net cost of services to determine the amount of property tax revenue to be transferred to the
new city. (See Exhibit 4, Calculation of Property Tax Transfer and Exhibit 5, Example: County
Property Tax as a Percentage of Revenue Available for General Purpose.)
The formula used by LAFCO to determine the base property tax transfer as established in
Government Code Section 56810 is depicted below.
NET COSTS
Net cost includes both direct costs
and overhead (indirect costs) funded
by general-purpose revenues. The
total net cost excludes any portion
of the total costs funded by special
purpose revenue, federal revenues,
and revenues derived from fees,
charges or assessments. Examples
of these revenues include land use
planning fees, building permit fees,
gas tax revenues, landscape and
lighting assessments, and animal
licensing fees.
Total Net Cost of Transferred Services x Auditor’s Ratio = Base Property Tax Allocation

October 2003 29
EXHIBIT 4
CALCULATION OF PROPERTY TAX TRANSFER
A. 2000-01 County Cost Estimates
Net County Cost
Sheriff Department $2,929,347
Animal Control 74,480
Code Enforcement 53,829
Street Lighting 116,878
Total Expenditures – General Fund $3,174,534
B. Transfer of Tax Base
Total Expenditures Subject to Transfer $3,174,534
County Auditor’s Ratio 2000-01 28.84%
Property Tax Base Transferred from County $915,560
C. Calculation of Tax Allocation Factor (TAF)*
Assessed Value (FY 2002/2003) $4,051,833,786
Total Property Tax Collected @1% AV 40,518,338
Property Tax Base Transferred from County $915,560
Tax Allocation Factor 2.26%
EXAMPLE
*Please note that this is a simplified version of the calculation of TAF. This calculation
can be more complex and the tax rate may vary within the new city.

October 2003 30
EXHIBIT 5
COUNTY PROPERTY TAX AS A PERCENTAGE OF REVENUE
AVAILABLE FOR GENERAL PURPOSES
Item
2000-01
Revenues
PROPERTY TAX REVENUE
Current Secured $47,064,968
Current Unsecured 2,489,979
Prior Unsecured 62,117
Supplemental – Secured 791,623
Supplemental – Unsecured 14,107
Penalties & Cost Delinquencies 3,307,826
Airplane 210,462
Timber 95,059
Racehorse 10,381
Total $54,046,522
OTHER GENERAL PURPOSE REVENUE
Redemption Fees $111,446
Deed Fees 2,870
Sales Tax 12,409,401
Property Transfer Fee 1,558,301
AB 1661 – ERAF 1,457,906
Franchise Fee 2,514,174
Interest Income 12,264,030
Commissions 12,175
Rental Income 182,969
Motor Vehicle-In-Lieu 47,845,516
Other State in-lieu taxes 15,469
Tobacco Tax 10,453,426
Homeowners In-Lieu 1,084,732
Williamson Act 5,813,928
State Other 2,837,000
Net Revenue Available for General Purposes $98,563,343
TOTAL GENERAL PURPOSE REVENUES $152,609,865
Property Tax as % of General Purpose Revenues 36.32%
EXAMPLE

October 2003 31
5. Develop Budget Projections
Using the financial data gathered from agencies providing services during the prior fiscal year,
the base year costs/revenues and the property tax transfer as determined by LAFCO, the CFA
must include budget projections for the proposed new city (§56800(a-c)). Budget projections
must include:
• The costs to the proposed city of providing services during the three fiscal years
following incorporation.
• The revenues of the proposed city during the three fiscal years following incorporation.
• The effects of the costs and revenues on any affected local agency during the three
fiscal years following incorporation.
• Any other information needed to make the findings as required for an incorporation
proposal.
Existing law requires budget projections for only the first
three (3) years after incorporation. However, during the
first seven (7) years after incorporation, a city receives
some state revenues based on a formula of three (3) times
the number of registered voters. After the seventh year,
revenues, such as Motor Vehicle In-Lieu fees and State Gas
taxes, are subject to a formula based on the actual
population of the city. The revenues received during the
first seven years after incorporation may represent a
significant but impermanent level of funding for any new
city. A ten-year projection allows for a more accurate
estimate of a new city’s long-term financial feasibility.
Generally, the budget projections should reflect a reasonable cost of living increase or
inflationary factors.
A CFA must also include in its budget projections a transition period budget. A transition
period is the time between the effective date of the incorporation and the date on which the
new city must assume full service responsibility. The effective date is significant because the
flow of revenue to the new city is affected by that date. For example, third quarter sales tax
revenues are generally not received by a city until the end of the fourth quarter. Please refer
to the section site chapter and section on Effective Date for a more complete discussion of this
issue.
During the transition period, the new city receives certain revenues but services are still
provided by the county. This allows the city time to organize its operations in anticipation of
full city-hood. The new city receives certain revenues during this period, such as motor vehicle
in-lieu fees and sales taxes that may allow it to create a fund balance to carry over into the
first full fiscal year. To make this calculation, the CFA needs to assume an effective date and
the length of the transition period. The effective date should be established by LAFCO working
with the incorporation proponents.
TESTING LONG-TERM FINANCIAL
FEASIBILITY
To accurately analyze the long-
term financial feasibility of a
proposed incorporation, OPR
recommends that the CFA provide
budget projections for ten (10)
years to reflect the drop in
revenues collected by the new city
after the state revenues decrease
in the eighth year.

October 2003 32
Finally, the CFA’s budget projections should be presented on a cash basis. New cities must
operate on a cash basis since they have no initial fund balances on which to depend for cash
flow. Further, the cash basis approach provides a more realistic picture of both the year-end
surpluses (or deficits), which will be experienced by the new city. See Appendix G for
information on typical sources and uses of municipal funding.
a. Establish Budget Projections: Revenues
The new city’s general fund and special purpose revenues usually come from a variety of
revenue sources. A CFA, at a minimum, should provide estimates of revenue from the
following revenue sources:
i. Base Property Tax Allocation
As discussed above, the Cortese-Knox-Hertzberg Act provides a formula by which a share of the
property taxes is transferred from the county and other affected local agencies to the new
city. The process requires LAFCO to determine the total net
cost of transferred services based on information supplied by
the affected local agencies, during the prior fiscal year. The
net cost includes both direct and indirect costs funded by the
general fund. The total net cost is multiplied by the Auditor’s
ratio. LAFCO uses the Auditor’s ratio and the net cost of
transferred services to determine the annual amount of
property tax for the new city. The base property tax can
increase each year as allowed per statute and by any change of
ownership and new development.
Besides establishing the maximum property tax rate,
Proposition 13 also limits the rate at which the assessed values
of individual properties may increase. Specifically, the assessed value may increase by an
annual rate of no more than 2% when held in the same ownership, and is increased to market
value at the time of sale. The total property tax collected will increase as property ownership
changes and new development takes place.
ii. Special District Property Taxes
Current property tax revenues of certain special districts that are dissolved (see Service Plan)
or have territory detached as a result of incorporation would be transferred to the new city
upon incorporation. The new city may also receive the current fund balance (reserves) of the
affected dependent special district upon dissolution or a proportionate share of the fund
balance and service liabilities upon detachment of territory from the district. Redevelopment
agencies and Mello-Roos districts may not be affected by incorporations but proponents should
work closely with the county and LAFCO to determine any impacts of incorporation on these
agencies.
iii. Property Transfer Taxes
The amount of Property Transfer Tax received by the new city will depend upon the level of
resale activity and new development within the incorporation area. A conservative annual
property turnover rate should be assumed, based upon information from the county, land
developers, and/or real estate agents in the area.
PROPERTY TAXES
As a result of Proposition 13, the
property tax rate is
constitutionally limited to 1% of
assessed value. Cities must
share the 1% revenue with other
agencies providing services such
as schools, counties and special
districts. On a statewide basis
cities currently receive an
average of 11% of total property
tax revenues. Counties receive -
13%.

October 2003 33
SAMPLE CITY BUDGETS AVAILABLE
FROM LEAGUE OF CALIFORNIA CITIES
Through a joint service of the California
Society of Municipal Finance Officers
(CSFMO) and the League, more than 100
city budgets are available through the
League library. (www.cacities.org)
CSMFO encourages members to develop
budgets that are useful as both a
management and communication tool.
To this end, CSMFO offers a budget
review and awards program that
recognizes city budgets that meet
specific presentation criteria. One copy
of each budget is submitted as a loan
copy for the League library.
Incorporation proponents may be
interested in examining budgets from a
similar region or cities with a
comparable size population.
iv. Sales Taxes
Upon incorporation, the new city will be eligible to
receive a percentage of the sales tax charged on
qualifying retail sales from businesses within the
proposed incorporation area. The estimated sales tax
revenues should be based on data from the State
Board of Equalization.
v. Transient Occupancy Taxes
(TOT)
If the proposed incorporation area contains hotels,
motels or other facilities that provide short-term
and/or overnight accommodations, a similar
amount of TOT revenues previously collected by the
county can be assumed to be available to the new
city to the extent that the new city imposes, at
least initially, a similar level of TOT. This data can be
obtained from the county and is based on the
approved TOT rate, average daily room rates, and
estimated daily occupancy rates.
vi. State Revenues
Upon incorporation, the new city will be eligible to receive Motor Vehicle In-Lieu Fees and off-
highway vehicle license taxes. These revenues are collected by the State’s Department of
Motor Vehicles and allocated to cities on a per capita basis. These revenue sources are based
on three (3) times the number of registered voters during the first seven years after
incorporation. At the beginning of the eighth year, the State will recalculate these revenues
based upon the actual population of the city.
vii. Franchise Fees
Upon incorporation, the new city will receive franchise fees currently paid to the county by the
affected utilities including gas, electric and cable television providers. Additional franchise
fees may also be received from the new city’s solid waste disposal/recycling service if
applicable. The estimated annual franchise fees can be obtained directly from the county or
utilities during the data-gathering phase of the CFA preparation.
viii. Road Related Revenues
A significant portion of road fund revenues are calculated and allocated to cities on a per
capita basis. Similar to other state revenues, road fund revenues are initially based on three
times the registered voter population. In the eighth year following incorporation, these
revenues would be adjusted to account for the actual population rather than three times the
registered voter population. Revenues derived from these gasoline taxes are restricted to use
on road maintenance and improvement.
ix. Transportation Related Local Sales Taxes
Voters in many urban counties impose an additional sales tax levy through a ballot measure to
fund transportation improvements. Apportionment of these sales tax revenues may be based
on a formula using population, miles of public roads and taxable sales.

October 2003 34
x. Other Revenues
Estimates for other revenues can be obtained from the county and include land use related,
planning, permit and inspection fees, motor vehicle code fines and forfeitures, and other
miscellaneous revenues including DMV abandoned vehicle reimbursement, parking fines, non-
planning related charges for services, regulatory fees, applicable parcel taxes and assessments,
and other charges.
b. Establish Budget Projections: Expenditures
In general, the new city’s level of expenditures will be based on the cost of transferred
services currently provided by the county and other local agencies. However existing law does
not provide an exact formula for establishing the first year’s expenditures for a new city.
Budget projections are based on a series of judgment decisions related to other established
cities, past experience and the type and levels of services. In addition, the level of services
provided and the type of provider (either the new city or a contract entity) will impact the
annual projection of cost. OPR recommends that LAFCO clearly identify the assumptions
underlying the projections of costs. These projected costs can also be based on a review of the
budgets of similar sized cities. The types of expenditures usually include:
• General governmental administrative functions such as: city manager, city clerk, city
attorney, and finance director.
• General governmental administrative operations and facilities such as: telephones,
computers, photocopy machines, office space and council meeting location.
• Community development such as land use planning and regulation, permit issuance, and
code enforcement.
• Public safety such as law enforcement, fire protection, emergency medical and animal
control.
• Public works such as street maintenance and repair, street lighting, landscape and park
maintenance, storm drain maintenance and repair, local flood control, and public
facility maintenance and repair.
• Community services such as parks, open space, libraries, cultural arts, senior citizens
and adult and youth recreation programs.
• Non-departmental costs such as lease/rent for office space, utilities, liability insurance
costs, communication and computer expenses, custodial services, and miscellaneous
supplies.
• Water and sewer and other utility services.
• Transition year repayment, is the reimbursement to the county for the net cost of
services provided during the transition year.
A contingency fund based on a percentage of estimated expenditures should be reflected in the
CFA projections to cover unforeseeable expenses. Most cities attempt to reserve a minimum
percentage of the operating budget in unappropriated reserves as prudent fiscal policy. OPR
recommends that a contingency fund in the range of 10-20% of estimated expenditures be
included in the CFA.

October 2003 35
THE GANN LIMIT
Proposition 4, the Gann Initiative approved by the California
voters in 1979, sets a constitutional appropriations limit on
governmental agencies.
The appropriations limit is simply the amount of money that
a governmental agency can spend in a fiscal year. The
appropriations limit is determined provisionally by LAFCO
during the incorporation process.
The voters at the first municipal election held following the
first fiscal year after incorporation set a permanent
appropriations limit. See Section V. (A.5.c) and Exhibit 6
for an example of the calculation for the Gann limit.
It is important to note that the CFA may
show a cumulative funding surplus, but
that funding surplus should not be
directly identified as an operating
reserve. A reasonable unappropriated
reserve fund, in addition to a
contingency fund, is necessary.
Although the preferred level of a reserve
fund can vary and should be based on
the past experience of comparable new
cities, a minimum reserve of at least
10% is recommended. A reserve fund, in
addition to a contingency fund, is
required because:
• A new city has no historical track record on the cost or level of services required to
meet the expectations of the newly incorporated community.
• Unanticipated expenditures could occur due to major disasters, emergencies,
liability claims, and litigation settlements.
• Local finances may be subject to changes based on the State’s budget.
• Changing economic conditions could result in a decrease in general fund revenues.
• Funds may have to be budgeted for non-road-related capital improvement projects. As
the new city grows in staffing and assumes services from the county and outside
contractors, there will be a need for new facilities, vehicles and other major
equipment.
c. Determine An Appropriations Limit
The next step in preparing the CFA is the determination of an appropriations limit for the
proposed city (§56812). LAFCO estimates the amount of revenue anticipated to be received by
the new city in its first full year of operations from the “proceeds of taxes.” These are
revenues from taxes rather than from fees, assessments or service charges.
The second step is adjusting the amount of the “proceeds of taxes” to reflect an increase in
the cost of living and to establish the provisional limit by projecting the second full operating
year costs (including the impact of inflation and population changes). The inflation rate is
assumed to be based on current accepted cost of living indices with an anticipated percentage
population increase. Exhibit 6 depicts a hypothetical example of a calculation of a provisional
appropriations limit.
The new city council shall determine the proposed permanent appropriations limit of the city
that will be submitted to the voters. This limit is based on the amount of revenue actually
received by the new city during the first full fiscal year of operation, adjusted for an increase
in the cost of living and population during the next full fiscal year of operation. The
permanent appropriations limit of the new city shall be set at the first municipal election,
which is held following the first full fiscal year of operation.

October 2003 36
EXHIBIT 6
DETERMINATION OF PROVISIONAL APPROPRIATIONS LIMIT
Proceeds of Taxes*
Property Tax $1,087,018
Sales Tax 3,094,801
Motor Vehicle In Lieu 2,550,481
Property Transfer Tax 337,118
Section 2105 405,810
Section 2106 291,336
Section 2107 545,469
Section 2107.5 6,000
Transportation Sales Taxes 381,810
Subtotal $8,699,843
Interest Earnings 521,991
Total Proceeds of Taxes $9,221,834
Cost of Living Factor 3.00%
Population Growth 1.90%
Provisional Limit $9,673,703
*These are estimates of revenues anticipated during the first full year of incorporation.
EXAMPLE

October 2003 37
d. Effective Date and Transition Period
LAFCOs must establish an effective date of incorporation. The effective date is the date upon
which the new city is deemed organized or incorporated. During the period between the
incorporation election and the effective date, the new city does not have legal standing but
the newly elected city council can meet as a city council-elect. These meetings are primarily
focused on getting organized for the effective date of incorporation. Activities usually include
preparing the required legal documents to be adopted by the new city council on its effective
date, securing a location to conduct city business and hold city council meetings, hiring of key
interim staff, securing of interim insurance coverage and
other administrative activities.
All city council-elect meetings are subject to the Ralph M.
Brown Act. The legislative intent of the Brown Act is that
public agencies conduct their business and make their
decisions in open public meetings. Each board,
commission, committee, or other body of a local agency
created by charter, resolution or formal action of a
legislative body is a legislative body itself and is covered
by the requirements of the Brown Act. This includes the
city council of a newly incorporated city.
On the effective date set by LAFCO (and following a
positive vote in the election), the new city council begins
to organize the new city’s administrative structure at its first meeting by adopting the existing
ordinances of the county. These ordinances will remain in full force for at least 120 days
following incorporation or until the new city council adopts ordinances superseding the county
ordinances, whichever occurs first.
Under State law, the new city does not assume direct responsibility for providing services
during the transition period between the effective date of incorporation and July 1 following
the effective date. The county and other affected agencies continue to provide municipal
level services during the transition period while the new city prepares to take over this
responsibility.
Following the transition period, the new city must provide the services that it is authorized to
provide. The responsibility for police protection, accident investigation, animal control, land
use planning, building and safety, and public streets, among other services, are transferred
from the county and other affected agencies to the new city. The new city is then operational
in all respects.
To ensure equity between costs and revenues for the county during the transition period, the
county can request reimbursement for the net cost of services provided during the transition
period (§57384). If the county requests reimbursement, LAFCO is required to impose it as a
term of approval. The new city has up to five years to reimburse the county for the net cost,
unless waived by the county (See Exhibit 7, Calculation of Repayment To County).
SELECTING AN EFFECTIVE DATE
The effective date of a new city can
significantly impact the cash flow of a
new city. Revenues received on a
quarterly, bi-annual or annual basis
(property and sales taxes and
franchise fees) may be delayed and
not immediately available to a new
city based upon the effective date
and the timely filing of the required
documents to receive these revenues.
It is strongly recommended that
incorporation proponents coordinate
the effective date carefully with
LAFCO, the county and the State.

October 2003 38
EXHIBIT 7
CALCULATION OF REPAYMENT TO COUNTY
A. Expenditures
Sheriff Department $3,200, 977
Gross Cost of Transition Year Services 3,474,062
B. Revenues
Property Tax $915,560
Sales Tax 758,530
Franchise Fees 51,483
Fines and Forfeitures 11,300
Less Transition Year Revenues Received by County 1,736,872
C. Net Transition Repayment Amount 1,737,190
D. Annual Repayment for Five Years $347,438
($1,737,190 ÷ 5)
EXAMPLE

October 2003 39
WAYS TO ACHIEVE REVENUE NEUTRALITY
A broad range of mitigation measures to
achieve revenue neutrality is permitted.
These may include tax sharing agreements,
lump-sum payments, payments over a fixed
period of time, modification of incorporation
boundaries or any other terms which are
acceptable to all the parties involved. A less
than substantially equal exchange of
revenues and expenditures is also possible if
the county and affected agencies agree to it.
Government Code Section 56810 defines net cost of services as:
• The total direct and indirect expenses to the county of providing services;
• Adjusted by any subsequent change in the Consumer Price Index, and
• Less any revenues, which the county retains, that was generated from the formerly
unincorporated territory during the period of time the services were provided by the
county.
e. Financial Feasibility
LAFCO must make a determination that the proposed city is expected to receive revenues
sufficient to provide public services and facilities and ensure reasonable reserves during the
three fiscal years following incorporation. Although it is assumed that it is the intention of all
new cities to improve services, feasibility is best determined by comparing existing costs,
revenues and levels of service to those expected after incorporation.
One of the key issues weighed in the evaluation of incorporation is the proposed city’s fiscal
feasibility and its impact on neighboring cities and communities. “Feasible” is broadly defined
under the Cortese-Knox-Hertzberg Act as capable of being accomplished in a successful manner
within a reasonable period of time, taking into account economic, legal, social and
technological factors (§56038.5).
C. REVENUE NEUTRALITY
In 1992, the State enacted legislation designed to reduce the negative fiscal impact
incorporations can have on counties and other affected agencies, termed "revenue neutrality."
Under the revenue neutrality law (§56815) LAFCO
cannot approve a proposal for incorporation unless it
finds that the amount of revenues the new city
receives from the county and affected agencies after
incorporation would be substantially equal to the
amount of savings the county or the affected
agencies would attain from no longer providing
services to the proposed incorporation area. A broad
range of mitigation measures is permitted as is a
less-than-substantially equal exchange if the county
and affected agencies agree to the transaction.
1. Background
During the 1980s, unincorporated communities with high levels of revenue through sales tax
and property tax were usually the first to successfully incorporate in the Post Proposition 13
period. Because sales and property taxes are generated on a geographic or situs basis, while
municipal and countywide (regional) services are provided on an as-needed basis, it was
possible to “capture” sales and property taxes by incorporating high tax generators into a new
city. Doing so, however, deprived counties of necessary tax revenues, which, prior to the
incorporation, had been available to pay for countywide services.

October 2003 40
After Proposition 13, local agencies could no longer alter the property tax rate to compensate
for lost revenue when a new city incorporated and started receiving sales and other tax
revenue. Other communities in the unincorporated area who had relied on the county to
provide municipal level services found their revenue sources reduced. Counties, facing
revenue losses due to the incorporation, were forced to reduce services simply because there
were no practical alternatives such as raising additional revenue.
The revenue neutrality law was an attempt to make the tax allocation more equitable by
requiring LAFCO to ensure that counties and districts are held harmless from new
incorporations. Counties have dual responsibilities for
services. The County is the provider of law enforcement
services in the unincorporated area. It often provides fire
protection as well. Additionally, it is the county that
provides for the rest of the criminal justice system to all
county residents—services such as the District Attorney,
correctional facilities, Probation, and Public Defender. In
addition, the social services and public health care systems
are almost exclusively provided by counties. These
services are provided regardless of where people live and
are funded by the same revenue stream that previously
could be diverted to an incorporating city. Revenue
neutrality has generally removed the financial incentive
for communities to incorporate as counties do not lose
more revenues over and above the costs associated with
services to be transferred. However, counties may still
have strong financial incentive to facilitate incorporations
especially if there is strong citizen sentiment to create the
new city, the county’s financial base is assured, and the county may avoid the long-term costs
of providing municipal level services to rapidly developing communities.
The incorporation of a new city usually requires additional expenditures for executive staff and
governance cost for which there is no transfer of revenue from the county or district.
Additional revenues that are provided to new cities by the State may offset some of these
costs. Over time, the new city will be able to make land use decisions, reorder fiscal priorities
and otherwise influence the future revenue streams of the city.
Incorporations that have occurred since the passage of the revenue neutral provisions have
generally resulted in additional revenues or terms that are designed to facilitate the new city’s
fiscal health, particularly in the first years following the incorporation.
2. Revenue Neutrality Process
The revenue neutral standard in law (§56815(a)) is: “that any proposal that includes an
incorporation should result in a similar exchange of both revenue and responsibility for service
delivery among the county, the proposed city and other subject agencies”. Section 56815(b)
prohibits LAFCO’s approval of an incorporation proposal unless it finds that revenues and
expenditures are “substantially equal”. Section 56815 thus favors neither the new city nor the
county or district. Section 56815(c)(1) does provide authority for LAFCO to approve a proposal
that is not revenue neutral if both (all) parties agree to the proposal’s fiscal effects.
Funding the New City
Due to the revenue neutrality
provisions in existing law, the new
city may have approximately the
same revenue base to provide
services that the county or district
had prior to incorporation.
If new fees or taxes are included
in the ballot question, approval of
the incorporation may require a
two-thirds vote under Proposition
218.
The financial viability of the
proposed new city is the primary
fundamental question before
LAFCO.

October 2003 41
A revenue neutral process, conducted as a part of an incorporation proceeding, should serve to
bring the parties affected by the incorporation proposal together for the purpose of reaching a
mitigation agreement (if required) that all parties can endorse and will serve as the factual
basis for the findings required by §56815. Even if agreement among the parties regarding fiscal
mitigation cannot be reached, the process will still provide the factual basis for the
development of potential mitigation measures that may be imposed by the Commission. Refer
to Exhibit 8 for an illustration of a Typical Revenue Neutrality Negotiation Process.
The purpose and intent of the revenue neutral policy is to:
• Prescribe the process for data collection, analysis and discussion of the elements
that must be included in a revenue neutral transaction.
• Assist participants in the process to develop proposed terms and conditions that will
meet the standards prescribed in the law and enable LAFCO to make the necessary
findings.
• Help the parties to reach a revenue neutrality agreement through a rational and
predictable process by facilitating the gathering of information from affected parties
or fiscal consultants, providing a forum for negotiations, and guiding LAFCO staff
when serving as an intermediary to resolve conflicts in the negotiations.
• Develop a basis for a default revenue neutral finding/agreement if one is not
forthcoming in the negotiation process.
OPR recommends LAFCOs develop policies for the purpose of implementing revenue neutrality
requirements (§56815). The following process is suggested for determining and resolving the
issue of revenue neutrality. It is intended to be a model only; individual LAFCOs should either
adopt this policy or a revenue neutrality process tailored to unique local conditions. All
revenue neutrality policies should be reviewed by legal counsel to ensure compliance with
existing law and to ensure that any terms and conditions are legally enforceable.

October 2003 42
EXHIBIT 8
TYPICAL REVENUE NEUTRALITY NEGOTIATION
PROCESS
Incorporation Petition Filed
Review Departmental Costs & Revenues
Provided by the County, LAFCO Staff
Reviews & Agrees or Amends
Initiate Comprehensive
Fiscal Analysis
Draft Comprehensive
Fiscal AnalysisConvene Revenue
Neutrality Committee for
Negotiations
No
Agreement
Board of Supervisors &
Chief Petitioners Adopt
Agreement
LAFCO Staff Drafts
Revenue Neutrality Proposal
Public Hearing Draft
Comprehensive Fiscal Analysis
LAFCO Staff Drafts Terms
& Conditions, Staff Report
& Recommendations
LAFCO
Hearing
Agreement
EXAMPLE

October 2003 43
a. General Requirements for Revenue Neutrality
Any proposal that includes incorporation should provide for a similar exchange of both revenue
and responsibility for service delivery among the county, the proposed city, and other affected
agencies. LAFCO may not approve a proposal that includes an incorporation unless it finds that
the following two quantities are substantially equal §56815(b):
• Revenues currently received by the local agency transferring the affected territory that,
but for the operation of revenue neutrality, would accrue to the local agency receiving
the affected territory,
• Expenditures, including direct and indirect expenditures, currently made by the local
agency transferring the affected territory for those services that will be assumed by the
local agency receiving the affected territory.
LAFCO may approve a proposal that includes an incorporation if it finds either of the following:
• The county and all of the subject agencies agree to the proposed transfer (§56815(c)),
or
• The negative fiscal effect has been adequately mitigated by tax sharing agreements,
lump-sum payments, payments over a fixed period of time, or any other terms and
conditions pursuant to §56886.
The terms of a revenue neutrality agreement must be negotiated between the proponents,
county and special district officials in accordance with a policy adopted by the local LAFCO.
The agreement may be in the form of revenue sharing, lump sum payments, payments over a
fixed period of time, or any other term and condition (§56815(c)(2)).
Revenue neutrality negotiations are initiated during the preparation of the CFA. After the
preliminary results of the CFA are compiled, the county, proponents and LAFCO use the
information to structure payments for revenue neutrality. The negotiated terms of the
agreement are then used to create the public hearing draft of the CFA for consideration by
LAFCO during the public hearing on incorporation.
b. Method of Calculation
The calculation of revenue neutrality should be based on the following standards (see Exhibit 9,
Calculation of Revenue Neutrality Payment) and agreements should be negotiated pursuant to
the following policies:
• Revenue neutrality agreements should be based on county costs and revenues for the
most recent prior year for which data are available.
• Only identifiable and recurring revenues and expenditures should be evaluated for
purposes of determining revenue neutrality. Generally, anticipated or projected
revenue growth should not be included.
• Expenditures for services transferred to a new city should be evaluated on a “net cost”
basis. Services funded on a full cost recovery basis (such as building inspection) are by
definition revenue neutral and should not be included in the analysis.

October 2003 44
• Costs of capital improvements are nonrecurring costs and should not be included in the
calculation.
• Countywide costs for regional services and administrative functions including Chief
Administrative Officer, Clerk of the Board, Auditor-Controller, Board of Supervisors and
other administrative functions, which are required to support county governance of both
incorporated and unincorporated areas, should not be included in defining services
transferred to the new city.
• Inflationary factors should not be included in the analysis of revenue neutrality unless
the resulting agreement provides for annual adjustment of mitigation payments based
on actual data.
• Restricted and unrestricted revenues should be evaluated separately. An agency could
pay a portion of its annual revenue neutrality payment with restricted funds if both
agencies agree and a legally enforceable mechanism for payment can be created.

October 2003 45
EXHIBIT 9
CALCULATION OF REVENUE NEUTRALITY PAYMENT
REVENUE NEUTRALITY – GENERAL FUND
Revenues Transferred
Property Taxes $915,560
Sales Tax 2,916,300
Real Property Transfer Tax 111,425
Franchise Fees 582,339
Total Revenues Transferred $4,525,624
Expenses (Net of Rev. Offsets)
Sheriff Department $2,929,347
Total Expenses Transferred $3,174,534
Additional Future Revenues to County 2,289
(Property Tax Administration Fees, .25%)
County Surplus or (Deficit) ($1,348,800)
EXAMPLE

October 2003 46
c. Negotiation Process
The role of LAFCO staff in the revenue neutrality
process is to facilitate discussions and to ensure
compliance with the revenue neutrality requirements.
After completion of the Draft CFA, LAFCO staff should
convene a revenue neutrality negotiating committee
composed of representatives of the county, other
affected agencies and the proponents of the proposed
incorporation during preparation of the CFA. The role
of the revenue neutrality committee is to develop a
mitigation agreement.
Due to the schedule of most incorporations, it is
recommended that the revenue neutrality committee
complete negotiation of the agreement within 90 days;
however, this should remain flexible as long as the
schedule and progress toward an agreement is being
maintained. At the conclusion of the negotiating
period, LAFCO’s Executive Officer will certify that an
agreement has been reached or has not been reached.
If an agreement is reached, ratification will be by
resolution of the County Board of Supervisors and by
letter from the incorporation proponents. The
documents demonstrating an agreement to the provisions should be returned to LAFCO staff for
inclusion in the comprehensive fiscal analysis, staff report and recommendations to be
presented at the public hearing. The terms of the revenue neutrality agreement will also be
included as terms and conditions in LAFCO’s resolution, if the incorporation is approved.
Revenue neutrality agreements should include a description of methodology and assumptions
underlying the terms of the agreement.
It is recommended that agreements which involve revenue neutrality mitigation payments
should establish terms based on the following agreed upon provisions:
• The annual net revenue loss to the county and other affected agencies resulting from
the proposed incorporation.
• The duration of mitigation payments.
• The cumulative revenue neutrality impact based on the annual net revenue loss and the
duration of the mitigation payments, including annual inflationary factors and discount
rates if applied.
• The specific annual mitigation amount to be paid by the new city, including the annual
payment amount, and variations to reflect cash flow, expenditure levels and other
agreed upon variables
• In instances in which the revenue neutrality agreement requires tax sharing between the
new city and the county, payment should be effected as directly from the revenue
source as permitted by State law.
CONSENSUS BUILDING
Understanding the process of negotiation
is critical to a successful revenue
neutrality negotiation process. The
following steps are taken from “Breaking
the Impasse” by Susskind and Cruikshank:
Pre-negotiation
• Get started
• Decide the representatives
• Draft protocols/agenda
• Conduct joint fact-finding
Negotiation
• Invent options for mutual gain
• Produce a written agreement
• Bind parties to the agreement
• Ratify the agreement
Implementation
• Link the agreement to approval
• Monitor
• Create a context for renegotiation

October 2003 47
The effective date of incorporation and the anticipated lead-time for receipt of revenues can
also be considered in revenue neutrality agreements. The effective date should be set to
establish adequate initial account balances for the new city as it assumes service
responsibilities, but should not otherwise conflict with the intent of fiscal neutrality.
Revenue neutrality agreements should also provide for a process of adjustment after
incorporation in order to account for unforeseen economic or legislative events significantly
affecting the flow of local revenue.
If the negotiating parties do not reach agreement, the status of the negotiations should be
referred to LAFCO for discussion of outstanding issues at the first available meeting as
determined by the Executive Officer. If revenue neutrality issues are not resolved, OPR
recommends that LAFCO staff draft proposed terms and conditions dictating revenue neutrality
terms for use in the comprehensive fiscal analysis and for recommendation to LAFCO at its
public hearing.
d. Terms and Conditions
Terms and conditions for implementation of revenue neutrality may include provisions for tax
sharing agreements, lump-sum payments, payments over a fixed period of time, modification
of incorporation boundaries or any other terms and conditions permitted by law (§56815).
The term of mitigation payments may be either ongoing or limited to a specific number of
years. Revenue neutrality agreements that provide for ongoing payments may provide for the
permanent sharing of revenues between the new city and affected agencies if agreed to by the
parties involved and if a means of adjustment after incorporation is included. Any terms and
conditions that mitigate the negative fiscal effect of a proposal that contains incorporation
shall be included in LAFCO’s resolution.
D. INTEGRATING CEQA WITH THE INCORPORATION PROCESS
The Public Resources Code, §21000 et sequitur, also known as the California Environmental
Quality Act (CEQA), requires public agencies to evaluate the potential environmental effects of
their actions. Only discretionary actions that are defined as projects are subject to CEQA. A
project is the whole of an action that has the potential for resulting in either a direct physical
change to the environment, or a reasonably foreseeable indirect physical change to the
environment (CEQA Guidelines §15378). CEQA’s procedural requirements encourage citizen
participation in the environmental review process.
Incorporations are projects subject to CEQA and require environmental review (CEQA
Guidelines §15378). LAFCO, as the lead agency for the environmental review, must prepare
the required documentation and may charge the incorporation proponent (the applicant) fees
to cover costs. The environmental documentation must address the possible environmental
impacts resulting from the incorporation but does not need to speculate on impacts which may
result from unknown future city council actions.
The timing of the environmental review is critical to incorporation and should be started as
soon as possible after submittal of the incorporation application. The environmental review
process must be completed before LAFCO can make a final decision on an incorporation
proposal.

October 2003 48
LAFCO may make one of three environmental determinations with respect to the potential
environmental effects of an incorporation. The project may qualify for an exemption from
CEQA, which requires no further analysis. If an exemption is not appropriate, LAFCO should
prepare an Initial Study to determine whether a Negative Declaration or an Environmental
Impact Report (EIR) must be prepared (CEQA Guidelines §15063). If the project will not result
in potentially significant environmental effects, LAFCO may prepare a Negative Declaration. If
the project has the potential to result in one or more significant environmental effects, an EIR
must be prepared. These three basic determinations are described in more detail below:
• The incorporation is exempt under §15320 of the CEQA Guidelines. A notice of
exemption should be filed with the County Clerk upon approval of the incorporation.
• The incorporation does not have the potential to result in significant environmental
impacts, based on an initial study. If an initial study shows no substantial evidence that
the project may result in significant adverse environmental impacts, LAFCO may prepare
and adopt a negative declaration. A notice of determination must be filed with the
County Clerk upon adoption of the negative declaration and approval of the
incorporation. (CEQA Guidelines Section 15075)
• The incorporation has the potential to result in significant environmental impacts, based
on an initial study. If the initial study shows substantial evidence that the project may
result in significant adverse environmental impacts, the preparation of an environmental
impact report (EIR) is required. A notice of determination must be filed with the County
Clerk upon certification of the final EIR and approval of the incorporation. (CEQA
Guidelines Section 15094)
LAFCO’s environmental determination must be based on the description of the proposed
action. Therefore, the “project description” or the description of the proposed incorporation
will be important in determining whether the incorporation may have a significant effect on
the environment. Characteristics of a project that may lead to significant environmental
effects include:
• The project may lead to a direct physical change in the environment, such as dust,
noise, odors or traffic resulting from construction and operation of facilities.
• The project may lead to indirect physical change in the environment which is not
immediately related to the project but which is caused indirectly by the project, such as
new population growth or air pollution associated with new population growth.
If it is determined that an EIR is required, the EIR must discuss possible mitigation measures
and alternatives to the proposed project, as means of reducing the potential significant
impacts of the proposed incorporation. Therefore, LAFCOs should be prepared to consider
alternatives to the proposed incorporation boundaries as one possible type of project
alternative. This is consistent with LAFCO's responsibility to consider alternative incorporation
boundaries for other reasons (see Section IV.B.).

October 2003 49
CEQA review can add time and cost to the incorporation process. The CEQA statute permits
public agencies to recover costs of CEQA review through fees charged to the project
proponents/applicant. The cost and time for processing a CEQA exemption is negligible. The
cost of preparing a Negative Declaration can range from a few hundred dollars to a few
thousand dollars depending on whether mitigation measures must be developed to completely
eliminate significant effects. A typical Negative Declaration can require up to three to six
months to process. When an EIR is required for a project, preparation and processing time can
be up to a year and costs are difficult to estimate but can be tens of thousands of dollars.
E. EXECUTIVE OFFICER’S REPORT AND RECOMMENDATION
LAFCO’s Executive Officer is required to review the application and prepare a final report on
the incorporation application with recommendations to approve or disapprove the
incorporation (§56665).
1. Contents of Report
The Executive Officer’s report must address, but not be limited to, the following sections:
• Factors which were considered in the review of the proposal (§56668).
• Incorporation Boundaries-- may also establish a sphere of influence.
• Plan for Services.
• Comprehensive Fiscal Analysis.
• Terms and Conditions.
• Recommended findings.
• Recommended determinations.
LAFCO must specify the terms and conditions which result from the revenue neutrality
negotiations (§56886) and other special circumstances. These terms and conditions may
include, but are not limited to, the following:
• Continuation of services following incorporation.
• Payments and taxes required by changes in service responsibilities or for revenue
neutrality.
• Disposition of money, property and rights of use, such as water or utility capacity rights.
• Disposition of special district responsibilities, district governing boards and employees.
• The effective date of incorporation.

October 2003 50
2. Distributing the Report
Existing law states that the Executive Officer’s report must be completed and distributed not
less than five (5) days prior to the date of LAFCO’s commission's hearing (§56665). However,
this is the minimum amount of time the Executive Officer’s report must be made available.
OPR recommends that the Executive Officer’s report be made available at the same time the
notice of public hearing is published (§56154) or 21 days before the hearing.
The Executive Officer is required to notify all interested parties that the incorporation report is
available for public review by publishing notice in a newspaper of general circulation serving
the proposed incorporation area and by mailing notice to all affected agencies, the proponents
and all persons who have filed a written request for notification (§56150 and §56160). The
notice shall specify the locations where the report can be reviewed and the time period in
which the State Controller’s review can be requested.
3. State Controller Review of CFA
Any interested person or agency may request a review of the CFA by the Office of the State
Controller. This request must be made within 30 days from the date that LAFCO’s Executive
Officer provides notice that the Executive Officer’s report is complete and available for public
review (§56801). The request by an interested person or agency must specify, in writing, any
element of the comprehensive fiscal analysis that the State Controller is requested to review
and the reasons the State Controller is requested to review each element.
LAFCO’s Executive Officer should, in consultation with the State Controller’s office, prepare an
estimate of the cost of the review and deliver the estimate to the requesting individual or
agency. This estimate should include the charges by the State Controller, LAFCO staff costs,
and costs for any consultants required to assist the State Controller with the review. The
individual or agency requesting the review will be asked to deposit the estimated cost of the
analysis with LAFCO’s Executive Officer.
After a request for review has been made and the appropriate deposit has been submitted to
LAFCO, the Executive Officer shall contract with the State Controller for review of the CFA.
The contract should specify the elements to be reviewed and the estimated cost of the review.
Prior to executing the contract, the parties requesting the review must deposit with LAFCO’s
Executive Officer, the total estimated cost of conducting the review. If the State Controller
identifies a need for an additional deposit prior to executing the contract, the party or parties
requesting the review shall be notified and will be responsible for depositing the additional
amount with LAFCO’s Executive Officer. The State Controller will not proceed with the review
until sufficient funds are deposited to cover all costs.
Within 45 days of receiving the CFA (§56801(c)), the State Controller is required to issue a
report to LAFCO’s Executive Officer regarding the accuracy and reliability of the information,
methodologies, and documentation in the CFA. Time limits imposed upon LAFCO by the
Cortese-Knox-Hertzberg Act shall be tolled while the State Controller conducts its review and
prepares its report.

October 2003 51
VI. COMMISSION HEARING AND DECISION
When an application for incorporation is deemed complete, LAFCO’s Executive Officer will
issue a certificate of filing, with a copy to the proponents’ (§56651), specifying the date of
LAFCO’s hearing on the proposal. The public hearing must be set within 90 days of the
issuance of the certificate of filing.
A. HEARING NOTICE
All meetings must meet the legal requirements for public notice. Notice of the hearing must
be sent to the proponents, the county, affected agencies and those requesting a mailed notice
in writing. Notice must also be given in all the following ways:
• Notice given in electronic format on LAFCO’s website (§56150); and
• Notice posted on or near the doors of the meeting room (§56158) at least 21 days prior
to the date of the hearing (§56159); and
• Notice published in one or more newspapers of general circulation (§56153) at least 21
days prior to the date of the hearing (§56154); and
• Notice mailed to affected and interested parties at least 21 days prior to the date of the
hearing (§56156 and §56157).
To the extent a proposed incorporation becomes
controversial, multiple public hearings may need
to be held. OPR recommends that LAFCOs hold
at least one public hearing in the community
proposing incorporation to allow residents a
convenient opportunity to provide input.
LAFCO’s hearing may be continued but may not
be postponed more than 70 days from the date
specified in the original public hearing notice. Prior to any continuance of the incorporation
hearing, LAFCO must give the proponents an opportunity to address any potential impacts or
hardships on the incorporation effort that may result from a delay. The Commission is required
to consider the potential impacts on the incorporation proponents prior to making a decision on
the duration of any continuance (§56666(c)).
B. CONFLICTING PROPOSALS
If two or more incorporation proposals pending before LAFCO conflict or are in any way
inconsistent with one another (as determined by LAFCO), LAFCO may determine the relative
priority for hearing the proposals (§56655). However, in the absence of a determination by
LAFCO, priority is given to the proposal first filed with LAFCO.
NOTICE REQUIREMENTS
LAFCO is NOT required to mail a notice to all
residents living within the incorporation
boundaries. Residents may request, in writing,
to be placed on the appropriate mailing list for
notices of incorporation hearings and/or
distribution of incorporation reports. LAFCO
may charge for distribution of incorporation
reports or notices.

October 2003 52
C. COMMISSION ACTIONS
At the conclusion of the public hearing, but no later than 35 days after the hearing, LAFCO is
required to adopt a resolution that states LAFCO’s determination on the incorporation
proposal. LAFCO may approve, approve with conditions or disapprove the plan for
incorporation (§56880).
When considering an incorporation proposal, LAFCO is required to consider the following
factors (§56668):
• The population, population density, and potential for growth.
• The need for organized community services, and effect on adequacy of services.
• The effect of the proposal on adjacent areas and local government structure.
• The conformity of the proposal with adopted LAFCO policies and priorities.
• The effect of the proposal on integrity of agricultural lands.
• The definiteness and certainty of the proposed physical boundaries.
• Consistency with county General Plan and specific plans.
• The sphere of influence of any affected local agency.
• The comments of any affected agency.
• The ability of the new city to provide services, including sufficiency of revenues.
• Timely availability of adequate water supplies.
• The extent to which the proposal helps achieve its allocation of regional housing needs.
• Comments from land owners.
• Any information relating to existing land use designations.
Incorporation proposals which would result in certain conditions are prohibited by law,
including incorporations which would result in unincorporated islands (§56744) and annexation
of land within a Farmland Security Zone (see exceptions, (§56749).
If LAFCO approves or conditionally approves the proposal, the resolution must contain certain
information including (§57100):
• A statement of the type of change of organization or reorganization being acted on.
• A description of the exterior boundaries of the territory for each change of organization
or reorganization approved by the commission.
• The name or names of any new or consolidated city or district.
• All of the terms and conditions upon the change of organization or reorganization
approved by the Commission.
• The reasons for the change of organization or reorganization.

October 2003 53
• A statement as to whether the regular county assessment roll or another assessment roll
will be utilized.
• A statement that the affected territory will or will not be taxed for existing general
bond indebtedness of any agency.
• Any other matters that the Commission deems material.
If LAFCO approves or conditionally approves the proposal, the resolution must also contain
certain findings (§56720 and §56815) including:
• The proposed incorporation is consistent with the intent of the Cortese-Knox-Hertzberg
Act (see Exhibit 10).
• The Commission has reviewed the spheres of influence of the affected local agencies
and the incorporation is consistent with those spheres of influence.
• The Commission has reviewed the CFA and State Controller’s Report, if any.
• The Commission has reviewed the Executive Officer's report and recommendation and
the testimony presented at its public hearing.
• The proposed city is expected to receive revenues sufficient to provide public services
and facilities and a reasonable reserve during the three fiscal years following
incorporation.
Finally, if LAFCO approves or conditionally approves the proposal, the resolution must also do
the following (§56881):
• Make the findings and determinations pursuant to §56375 including the determination of
property tax revenue to be exchanged by the affected local agencies.
• Determine that public service costs are likely to be less than or substantially similar to
the costs of alternative means of providing the service (only applies if the incorporation
proposal was initiated by the Commission pursuant to §56375 [a]).
• Determine that the proposal promotes public access and accountability for community
services needs and financial resources (only applies if the incorporation proposal was
initiated by the Commission pursuant to §56375 [a]).
• Assign a temporary name, if no name has otherwise been assigned to the affected
territory.
• Initiate protest proceedings (see Section VII below).
After the Commission takes action, the Executive Officer must mail a copy of the resolution to
the proponents and to each affected local agency whose boundaries would be changed by the
proposal. Clerical errors or mistakes in the resolution may be corrected by the Executive
Officer without Commission action (§56883).
If the proposal is denied, no similar proposal for incorporation involving the same or
substantially the same area shall be initiated for at least one year after the date of adoption of
the resolution terminating proceedings (§56884). However, the Commission has the authority
to waive this restriction if found to be detrimental to the public interest.

October 2003 54
EXHIBIT 10
IMPACT OF THE 2000 AMENDMENTS ON FINDINGS OF CONSISTENCY
When a LAFCO considers an application for incorporation, LAFCO must make a number of findings (§56720),
including that the proposed incorporation is consistent the intent of the Cortese-Knox-Hertzberg Act.
Amendments to the Act in 2000 (AB 2838, Chapter 761, Statutes of 2000) have modified and strengthened
the link between approval of proposed incorporations and orderly development. AB 2838 added more
specificity to the purpose of the Act by amending several intent and procedural sections including
Government Code Sections 56001, 56301 and 56300.
MORE DEFINITION TO ORDERLY GROWTH AND THE ROLE OF LAFCO
While promoting orderly development has always been a fundamental purpose of LAFCO, the 2000
amendments added emphasis by stating that: the provision of affordable housing, discouraging sprawl,
preserving open space and prime agricultural lands and efficiently extending government services are all
important elements of promoting orderly development.
Further, the 2000 amendments included provisions that state that a preference should be granted to
accommodating additional growth within or through the expansion of the boundaries of those agencies which
can best accommodate and provide necessary governmental services and housing to persons and families of
all incomes.
Historically, the impact of a proposed incorporation on the future development of housing affordable to
lower income households did not necessarily come into question when a LAFCO was considering an
application for incorporation.
The support for protecting prime agricultural lands was also enhanced in the 2000 amendments through the
inclusion of language which states that one of the purposes of LAFCO is to preserve prime agricultural lands
(56301).
The Act still directs LAFCO to guide development away from existing prime agricultural lands unless the
development would promote the planned, orderly efficient development of the area (§56377). In practice,
this could mean that once one farm was converted to residential or commercial purposes other adjacent or
nearby areas could also be included in incorporation proposals with the clear intent that ultimately these
lands would very likely be converted to non-agricultural uses.
Although the 2000 amendments did not change §56377, the new purpose and intent language emphasizes the
responsibility of LAFCO to consider the preservation of prime agricultural land.
WRITTEN POLICIES
The 2000 amendments also require LAFCO to establish written policies and procedures that encourage and
provide planned and well-ordered, efficient urban development patterns. Prior to these amendments,
LAFCO was only directed to establish policies with no requirement that they be written or be implemented
through specific procedures. This new requirement for written policies and accompanying procedures may
challenge some LAFCOs as it will take some consensus building to draft and adopt language which a
Commission can support.
OPR recommends that LAFCOs do not postpone the review and adoption of its policies and procedures on
incorporations until a proposal is before the Commission. Fair and equitable procedures are best developed
in the absence of a specific application. A LAFCO may want to review the incorporation policies and
procedures of other LAFCOs as part of its consideration and approval process.
IMPACT OF 2000 AMENDMENTS
The requirement for written policies and procedures coupled with the changes to the purposes of LAFCO and
definition of orderly growth will impact the deliberative process of the Commission. In some cases, the
Executive Officer’s report will be more extensive than the Commission may have previously seen.
Findings of consistency of the proposed incorporation with the adopted policies and procedures will
also increase the areas in which LAFCO’s decision is open to legal challenge. The Commission, in the
exercise of its legislative authority is generally protected from challenges related to the specific
content of the decision. Commissions are however, open to procedural challenges. To the extent that
a LAFCO previously operated under unwritten policies and procedures, LAFCO will now be evaluated on
how well it follows its own process.

October 2003 55
D. REQUEST FOR RECONSIDERATION
Any person or affected agency may file a written request with LAFCO’s Executive Officer
requesting reconsideration of any resolution approving incorporation. The request must
comply with the provisions of §56895 and policies adopted by LAFCO. There may be a fee
for filing the reconsideration request.
The request must state the specific change requested and what new or different facts or
applicable new law warrant the reconsideration. The request must be filed within 30
days of the adoption of a resolution by LAFCO.
If LAFCO receives a request for reconsideration, it shall not take any further action on the
incorporation proposal until LAFCO Commission acts on the request. The Executive
Officer must place the request on the agenda of the next LAFCO hearing for which public
notice can be provided, to receive oral and written testimony. The hearing may be
continued from time to time but the continuance shall not exceed 35 days from the date
in the original public hearing notice. The person or agency that filed the request may
withdraw it at any time prior to the conclusion of LAFCO’s hearing.
At the conclusion of its consideration, LAFCO Commission may approve or disapprove with
or without amendment, wholly, partially, or conditionally, the request. The
determination of LAFCO is final and conclusive. No person or agency shall make any
further request for the same change or a substantially similar change, as determined by
LAFCO.
VII.CONDUCTING THE PROTEST HEARING
A conducting authority has the responsibility to hold a public hearing to count protests
received for an incorporation proposal. LAFCO is designated by law as the "conducting
authority" for city incorporations. LAFCO Commission may delegate its conducting
authority function to LAFCO’s Executive Officer (§57000(c)).
Within 35 days following the adoption of the Commission’s resolution of approval and
reconsideration period (§57002), LAFCO must issue a "Notice of Hearing" scheduling the
date for the conducting authority protest hearing on the incorporation. The notice must
be provided in all of the following three ways (§57025):
1) Publication in a newspaper of general circulation in the incorporating area
(§56153). The publication must occur at least 21 days prior to the hearing date
(§56154).
2) Posting of a notice on or near the doors of the meeting room or on any official
bulletin board (§56158). The notice must be posted at least 21 days prior to the
hearing (§56159).
3) Direct mailing to each affected city, county, district, proponents, landowners and
to persons requesting special notice. The mailed notice must be sent by first class
and deposited in the US mail at least 21 days prior to the hearing date (§56155 and
§56157).

October 2003 56
The purpose of the hearing is to collect and count written protest from registered voters
within the incorporating area. LAFCO, acting as the conducting authority, does not have
the discretion to modify the incorporation proposal or to terminate incorporation
proceedings without sufficient protest being recorded. LAFCO’s conducting authority
hearing may be continued for up to 60 days.
Within 30 days of the conclusion of the hearing, the Commission shall make a finding
regarding the value of the written protests and take one of the following actions
(§57077):
• Terminate the proceedings if a majority protest exists (§57078); or
• Call an election on the question of incorporation if there is no majority protest.
Following the protest determination, the County Registrar of Voters begins the process of
preparing the incorporation for a vote at the next general election unless a special
election is requested and approved by LAFCO. If proceedings are terminated by majority
protest, no substantially similar proposal for the same territory may be filed within two
years of the date of adoption of the resolution terminating proceedings (§57090).
However, the Commission may waive this restriction if found to be detrimental to the
public interest.
VIII. VOTING: THE INCORPORATION ELECTION
Elections for incorporation are usually placed on the ballot of the next general election.
Incorporation elections are considered county elections for the purpose of administering
the Election Code and the Political Reform Act. If a special election is requested, the
incorporation proponents may be required to pay for the costs of the special election. If
the incorporation is successful, the new city will be liable for payment of election costs
(§57150(b)). In the event the issue fails, the county absorbs the election costs.
LAFCO’s Executive Officer must draft an impartial analysis (§56898) of the incorporation
issue for inclusion in the incorporation ballot. The Commission may review the text of
the impartial analysis and approve or modify it, if the Commission has instituted a review
procedure. The review must be completed in sufficient time to consider and approve or
modify the analysis and submit the analysis to the officials conducting the election, not
later than the last day for submitting rebuttal arguments.
Existing law specifies how the ballot language is required to be stated beginning with
Government Code §57133 including identification of terms and conditions which may have
the effect of imposing or increasing liability for payment of taxes, assessments or service
charges.
IX. CERTIFYING THE ELECTION RESULTS
Following an incorporation election, the County Board of Supervisors is required to certify
the election results by adoption of a resolution and must forward a copy to LAFCO. If the
election approves the incorporation, LAFCO staff must prepare a "Certificate of
Completion", which signals the end of the incorporation process (§57178).

October 2003 57
LEAGUE OF CALIFORNIA CITIES
It may seem for a brief moment after the incorporation results certify the creation of your new city that
the hard work is over. Fortunately, it has just begun—fortunately because shepherding a new city through
its formative stages is a rewarding and exciting endeavor, one that will shape the character and direction
of the city for years to come. The purpose of this publication is to make this process easier by providing
practical advice and guidance to new city officials as to what must typically be accomplished during the
periods immediately prior to and following the first council meeting. Newly elected officials in a new city
often feel somewhat at a loss as to what to do immediately following the election; this manual is intended
to provide pragmatic step-by-step assistance so that new officials can devote their time not to trying to
reinvent the wheel, but to consideration of the important issues facing them… It is critical that council
members have a basic understanding of conflict of interest laws…After the city is officially incorporated,
all meetings of the city council are to be open and public in accordance with the Brown Act…Action of a
city council can be taken only at duly convened public council meetings, at a place designated by
ordinance…before the city can undertake to approve any discretionary project, it must review the possible
environmental impact of the project pursuant to the California Environmental Quality Act…..
From “A Guide For New Incorporated Cities” League of California Cities, March 1986.
If the incorporation is disapproved by majority vote, the Commission must execute a
“Certificate of Termination” (§57179). No substantially similar proposal for the same
territory may be filed within two (2) years of the adoption of the Certificate of
Termination (§57090).
The effective date of the new city should have been identified as part of the Commission
resolution of approval. The Commission has exclusive authority to set the incorporation
effective date (§57202). The Executive Officer must record the Certificate of Completion
with County Recorder's office within 90 days of the election (§57203).
X. POST INCORPORATION
After incorporation, LAFCO’s work is complete. However, the work of the new city has
just begun.
Appendix F is an example of an agenda for the first meeting of a newly incorporated city.
This is only an example; all newly incorporated cities should seek legal advice regarding
the requirements for a newly incorporated city and newly elected city council.
OPR recommends that all new cities contact the League of California Cities, which offers
several publications, classes and workshops for new city councils. It is also recommended
that all LAFCOs obtain a copy of the League of California Cities publication, “A Guide For
New Incorporated Cities” (March 1986) for distribution to newly incorporated city
councils.

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