California Code, Public Resources Code - PRC § 9972

Whenever any territory in the district is included in a city by reason of incorporation or annexation, that territory may be excluded from the district upon the effective date of its inclusion in the city, subject only to compliance by the district with the requirements of Chapter 8 (commencing with Section 54900) of Part 1 of Division 2 of Title 5 of the Government Code.

Upon the exclusion of such territory, all unencumbered funds standing to the credit of the area upon the date of its exclusion shall be divided between the city and the district in proportion to the assessed value of real property of the territory excluded and the portion remaining.  For the purpose of this section, “unencumbered funds” means a sum of money consisting of uncollected taxes, including taxes levied and collected for the territory on property withdrawn after the date of exclusion, and other uncollected amounts belonging to or due such territory, that is in excess of an amount sufficient to pay all claims and accounts against the territory.

In the event the district has indebtedness evidenced by bonds and the indebtedness is outstanding and owing on the date of exclusion, the property within any territory excluded from the district shall remain liable for assessment and payment of its pro rata share of the tax therefor.