Speaker's Commission
State Seal

Commission Meeting #10 Minutes

October 27, 1999
Senate Committee Room 4203, State Capitol

    1. Call to Order/Introductions: Chairperson David Abel called the meeting to order at approximately 10:10 a.m.

      In attendance:
      David Abel
      David Allgood
      Carl Anthony
      Luis Arteaga
      Terry Brennand (for Dean Tipps)
      Bob Brownstein (for Amy Dean)
      Martha Davis
      Robert Foster
      Joel Fox
      Lee Harrington
      John Hunter (for Gary Hunt)
      Norman King
      Lily Lee
      Hon. John Longville
      John Maltbie
      Sunne Wright McPeak
      Rich Morrison
      Chuck Nathanson
      Jean Ross
      Dwight Stenbakken
      Steven Szalay
      Carol Whiteside

    2. Welcome: Commission Chair David Abel welcomed the Commission back to the Capitol and outlined the group’s challenge for the day: to try to bring closure to its discussions of preliminary recommendations.

    3. Presentation: Perspectives on Taxes in California: David Doerr, Chief Tax Consultant, California Taxpayers Association, spent some time discussing the tax and economic situation in California, noting that, despite the complaints of government entities at all levels, revenues are up thanks to a prosperous economy. With regard to reform efforts, Mr. Doerr’s underlying premise was that any changes to the system should be a "zero sum game." In other words, reforms should not be cloaking tax increases.

    Mr. Doerr referred to school funding, asserting that the Vehicle License Fee (VLF) subvention being provided to local governments by the State should instead go to schools, while property tax revenues currently routed to schools could then go the cities and counties. He noted that the schools have been "stiffed" for 50 years on VLF revenues.

    Mr. Doerr added that the Commission’s concept of swapping half of the sales tax revenue for an equal amount of property tax revenues was one part of addressing the fiscalization of land use issue. He cautioned that the sales tax is a locally collected tax, so the State may not be able to simple reallocate the revenues under existing law. Doerr did advocate redesigning the system to better relate property tax revenues to the property upon which they’re collected.

    At this point, Mr. Doerr was joined by Jonathan Coupal, Executive Director of the Howard Jarvis Taxpayers Association. Opining that local control is desirable and that his association had opposed the ERAF shift in 1992, Coupal commented briefly on the Commission’s three-point proposal.

    Regarding the swap, he said that the Jarvis Taxpayers did not have an objection to it and that it could be handled by statute without going to the voters. As for the concept of pooling the growth in sales taxes on a regional basis, he acknowledged its value but noted that administration of the pool would run contrary to efforts to simplify the tax system because it could require the creation of a new local agency with all the attendant accountability concerns.

    Turning to the third proposal, the permanent general fund subvention to local government, Coupal said that Jarvis Taxpayers had no position. He added their concern that such a use of income tax and other general fund revenues might open the door to allowing local government to levy an income tax

    Mr. Doerr then referred to another issue before the Commission, that of whether special taxes should be subject to a majority vote instead of a two-thirds vote while general taxes should be subject to two-thirds instead of majority. He said the threshold issue was determining which taxes qualify as "general" and which ones as "special." In his opinion, the gauge should be how the tax is raised, not, as is currently the case, how it’s spent. Accordingly, the sales tax would be a general tax while nearly everything else is a special tax. This would affect the scope and impact of the Commission’s proposal. Mr. Coupal added that he felt the two-thirds vote requirement enhances local control by placing more power over taxation in the hands of individuals.

    Commissioner Stenbakken then asked Mr. Doerr how he felt the sales for property tax swap would affect fiscalization. Doerr replied that any broader distribution of sales tax revenues would reduce the competition between communities for revenue generating uses. Commissioner Morrison asked about the impact of the pool. Mr. Coupal likened it to a proposal put forth in 1998 by the San Diego Association of Governments (which can be accessed via the Commission’s website). He also wondered aloud whether or not the local governments would be able to come to reasonable agreement as to how best to administer and distribute the pooled funds.

    Mr. Doerr added that the pool concept was similar to his aforementioned suggestion that the VLF subvention should be swapped for property taxes between schools and local governments. Commissioner McPeak asked how special districts would fit into this proposal, and whether fire and police services are property-related. Mr. Coupal said that, as defined by Proposition 218, fire and police are not property-related because they are by nature diverse functions. For example, fire departments have medical functions.

    Commissioner Szalay asked how Coupal and Doerr felt about the ERAF shift now, as it has been modified by partial mitigations. Doerr replied that the VLF subvention has provided locals with a lot of general purpose revenues and non-specific State funding for mandates. To get additional monies, he offered, the locals should make a case to their voters.

    Commissioner King stated that the State may need to minimize the impact of fiscal reform on the local entities who stand to lose revenues or lose revenue increases or else reform could fail politically. Doerr opined that taking money from the State to support locals in effect takes it from the schools, since Proposition 98 has typically functioned as a ceiling, not a floor. So schools would stand to lose in the long run. King replied that, if the current system is hurting the overall economy, reform may be necessary to reduce the current number of losers in terms of revenues.

    Commissioner Harrington asked if giving locals more property taxes would motivate them to further grow property values. Doerr felt that it wouldn’t change things all that much, but that it would help a bit. He stated that Proposition 13 causes property taxes to be "counter-cyclical."

    4. Presentation: Fiscal Reform in the Legislature: Assemblymember John Longville (D-Rialto), an ex officio member of the Commission, got up to discuss how reform was seen in the Capitol. As a longtime local government elected official, he noted that he brought fiscal reform with him as an issue when he joined the Assembly but colleagues warned him that he was wasting his time to try to get money back for locals. But, he noted, the current State Budget includes discretionary money for locals for the first time in a long time.

    Mr. Longville said there was no reason to expect the various reform efforts going on to be a "magic be-all and end-all" but that there is clearly a window of opportunity to make progress that hasn’t existed in prior years. A majority of the Assemblymembers are former local government officials. The economy continues to be strong, providing a revenue cushion to work with. He noted that the latest estimates peg State revenues $400 million higher than Budget projections.

    Longville added that the current feeling of fiscal comfort many local jurisdictions feel because of the economy and higher sales tax revenues should not cause locals to be too invested in the status quo. The economy is cyclical, and revenues will eventually go down again. No matter where in the cycle, he said, local governments should have more authority over their revenues and more revenues to spend locally. He referred humorously to a syndrome sometimes known as "Dome-itus." "This is the situation in which those who come to work under the Capitol Dome suddenly become more intelligent," he said, noting that he didn’t feel it had affected him yet; he still feels a need to give more money to local government.

    Regarding the various reform proposals floating around, he predicted that many of them will end up in legislative proposals in the next session, including those presented by Assemblymember Torlakson to the Commission in September. He was open to the general vs. special vote threshold switch being discussed, as well as having a portion of the income tax going to locals.

    Longville described all three of the Commission’s primary proposals as constructive without committing to their political viability. He said the diverse make-up of the Commission probably would increase their viability in the political arena. His bottom line was that there should be greater equity, no additional complexity and political workability.

    Commissioner Allgood asked if there were a way to incentivize "smart growth behavior." Mr. Longville predicted that there would be a lot of resistance to such efforts at both the local and State levels. He went on to suggest that one such incentive would be to combine a per capita distribution of revenues with a bonus based on the number of people who lived and worked in the same county. Allgood replied that, in large counties such as Los Angeles and San Bernardino, this would not necessarily constitute an incentive.

    Commissioner McPeak noted that a fundamental realignment of basic service provision would also be helpful. Longville agreed. He noted that disparities have grown in the last 20 years and that tweaking existing, inequitable formulas might not be a useful exercise. Simply adjusting the ERAF shift just reinforces the current winners and losers. McPeak asked if shifting responsibilities downward, along with funding, would help. Mr. Longville noted that Richard Nixon had advocated that once upon a time. He added that it was nonetheless a good idea, since trying to impose one scheme on a statewide basis was almost sure to fail. Allowing locals to innovate would increases the odds of success.

    Commissioner Abel quoted from a Los Angeles Times editorial on tax reform published the day of this meeting and asked Mr. Longville if 2000 could be the year for fiscal reform. Longville opined that it was possible despite the complexity of the issues because public confidence in government continues to be undermined under the current system. He added that the common practice of specifically ear-marking funds for certain uses is often counter-productive. Locals spend a huge amount of creativity and productivity finding ways to access money instead of using it to better serve constituents. Commissioner Fox then commented that this opinion appeared to contradict the desire to switch the majority vote requirement from general taxes over to special taxes.

    5. Presentation: Local Governance in the 21st Century – Another Perspective: San Diego Mayor Susan Golding, chair of the Commission on Local Governance for the 21st Century, appeared to provide additional perspectives on the work of her commission as well as that of this one.

    According to Mayor Golding, both the public and the media do not know who’s responsible for what when it comes to contemporary government. Nonetheless there is a widespread impression that both local officials and the quality of government have deteriorated. Trust has dissipated. Government needs to be more transparent, more understandable, so that people understand where responsibility lies. She opined that whatever political cost would be required to fix this problem would be worth the expense.

    Regarding the Commission’s key proposals, she felt that the swap could impact fiscalization but that it would have less impact in large jurisdictions for whom any one land use decision did not affect a significant portion of the jurisdiction’s budget. Mayor Golding noted that a large city such as San Diego has a diverse revenue base.

    Regarding the pool, Mayor Golding felt that the negotiations on administering and distributing pool revenues could be problematic. Any jobs/housing balance proposals would raise the issue of how people prefer to make their live/work decisions. She added that the pool shouldn’t be structured in a way that would hurt economic growth or be too complicated. Prioritizing allocations will be difficult. The preference for affordable housing expressed by some Commissioners would need major subsidies to achieve or else it would be punitive. Likewise, proposals to shift services from one level to another would carry with them a need for reliable funding.

    She went on to point out that AB8 has not been a fair formula over time. It has not worked for many jurisdictions, and winners and losers cannot even be broken down easily by size. For example, San Francisco has done well, while San Diego has not. She suggested that efforts to redress the imbalances might best be implemented over 10-15 years to make them more politically workable.

    Mayor Golding mentioned that redefining the State/local relationship is crucial because locals currently have inadequate resources and unclear ability to solve problems. But to provide more discretion, funds must accompany it: send money and flexibility, or let locals keep more money and remove the strings that have been attached over the years.

    Discussing growth policy, the mayor suggested caution. This is an important area for locals, one in which they have considerable discretion even now. Transportation, on the other hand, involves more regional and State involvement. She urged that any incentives for better decision making be suitably attractive.

    Referring back to past discussions on Redevelopment agencies, Mayor Golding noted that they can foster urbanization of a useful sort. She noted that both commercial activities and many housing units had been brought to downtown San Diego using Redevelopment.

    Summing up her views, Mayor Golding said any policies imposed upon revenue distribution must be accompanied by revenues sufficient to motivate local governments to follow them.

    Irwin Mussen, representing Commissioner Anthony, asked Mayor Golding if she felt that existing Councils of Governments (COGs) were trustworthy decision makers for the pools. He also asked whether distributing income tax revenues to cities was desirable. The Mayor replied that, because COG officials are not directly elected to the COG, giving them that power in that context would be problematic. She felt that the organizational structure of COGs would have to change to make them viable in the role. She added that San Diego voters had passed a sales tax for roadway construction and created a specific body to administer the revenue.

    Commissioner Nathanson followed by asking if it would be viable to directly elect a regional agency. The Mayor said it would increase direct accountability, but it didn’t address all of the attendant problems. She then referred to the San Francisco structure in which the city and county governments have been merged and wondered whether there was a population level that should trigger such a merger. She felt that San Diego and Los Angeles were potential candidates.

    The mayor went on to note that Senator Steve Peace has proposed regional transportation and infrastructure agencies that would address some of the aforementioned remaining problems. She noted that some agencies are now superfluous, so the whole question of creating new agencies should be approached cautiously.

    Commissioner Maltbie asked if a contractual relationship would facilitate State/local cooperation in meeting service mandates. The mayor felt it would help by establishing clearer lines of responsibility and fiscal obligation. Mayor Golding then closed her testimony by stating that a "big vision" may draw more political opposition but it is the only one that accomplishes anything.

    6. Discussion: Preliminary Fiscal Reform Proposals: Fred Silva of the Public Policy Institute of California was joined by independent education consultant Bill Whiteneck, Marianne O’Malley of the Legislative Analyst’s Office, consultant Michael Coleman and Jennifer Swenson of the California Research Bureau to lead the Commission through a discussion of the preliminary reform proposals.

    Mr. Silva used his memorandum, "Policy Options Agenda" (attached to this Synopsis), as a starting point. He mentioned the constant tension that exists between having the State mandate a structure and letting locals decide that structure. He added that the policy options represent a modification of the existing AB8 system.

    Silva then introduced education consultant Bill Whiteneck, who talked about some ideas relating to school finance. He began by suggesting that community colleges and county offices of education no longer receive property tax revenues. He noted that one-half cent of sales tax revenues (approximately $2 billion annually) was roughly equal to the amount they received from property taxes and said such a trade-out could be accomplished statutorily.

    Whiteneck went on to recommend eliminating the situs basis for distribution to K-12 of property tax growth and instead distribute it on a per pupil basis, which would simplify the process. He said this should be done while holding "Basic Aid" districts harmless. He added a suggestion that school districts be allowed to raise local revenues to supplement their Proposition 98 payouts from the State. This would assuage their concern over losing high-growth property tax revenues and would require a Constitutional amendment (and approval of the voters).

    Mr. Whiteneck argued that these proposals would simplify and rationalize the school funding process in California and, though they might well be opposed by entities comfortable with the current system, they were worth pursuing over time.

    Responding to a question from Commissioner McPeak, Whiteneck said that Basic Aid for school districts comes from property tax revenues. Some Basic Aid districts end up getting considerably more revenue from situs distributions. The State formula could be changed to create an average within each county. He added that this could be done within the confines of the Serrano court decision requiring rough equality in school district funding. In reply to Commissioner Stenbakken’s question, Whiteneck also added that he was not advocating any change to the method by which the State funds capital expenditures for schools.

    Michael Coleman then discussed aspects of the Commission’s main issue areas. He expressed a need to revise and improve the AB 8 property tax allocation system. He noted that this would require an infusion of some State resources. And, he said, meaningful reform must deal with the fragmentation of local governance and finance.

    Mr. Coleman said that the proposed regional pool of sales tax revenue growth provides an opportunity to address equity issues that have ballooned since 1978. He suggested consideration of establishing a minimum apportionment within Tax Rate Areas so that each jurisdiction would know it was at least getting a certain amount of property tax revenues each year.

    Coleman noted that the current situation has made it difficult for locals to respond to changing needs and priorities in their communities. He suggested that governance and fiscal decisions be consolidated to general purpose local agencies (cities and counties), who would then determine the best way to deliver a service (including contracting through a special district) and allocate resources according to local public service priorities and needs. This would eliminate some fragmentation and provide local flexibility at the same time.

    Mr. Silva then re-started the more general conversation by asking what the objective of the Commission’s property tax-for-sales tax swap would be beyond providing a fiscal incentive to locals. Commissioner King noted that the swap does not deal with the equity issues raised by Mr. Coleman. He suggested that the State needs to look at the total revenue situation by gathering statewide data on equity and commissioning additional review and recommendations.

    Mr. Mussen asked if the Commission’s proposals have been analyzed for their potential impact on equity. Mr. Silva replied that cities that have seen a decline in sales tax revenues (primarily big cities) would likely benefit by a swap for property tax revenues. Commissioner Whiteside opined that it would be difficult to do fiscal reform without addressing equity issues. Mr. Silva reminded the Commission that equity could best be assessed by looking at all three of the Commission’s primary proposals. The third proposal, the permanent backfill to replace the disappearing Vehicle License Fee, provides flexibility for creating priorities and incentives.

    Commissioner Foster referred to those priorities and incentives when he suggested looking at the difference between basing decisions on employment and basing them on wages. Silva replied that wages are definitely a better indicator of economic condition. He said the State has an interest in creating high value employment. Ms. O’Malley added that the State also has an interest in providing housing and that the VLF distribution on a per capita basis tends to reward housing production.

    Commissioner McPeak asked if there were data available that looks at the property tax value of new employment development. Mr. Silva said it was at arm’s length. He noted that new commercial construction tends to be assessed only once over a long period of time due to low ownership turnover. Residential property, on the other hand, is reassessed more often and definitely adds value to the property tax rolls when it’s sold.

    Bob Brownstein, representing Commissioner Dean, offered that local jurisdictions do not need a bigger share of revenues to prefer higher paying job creation, because such jobs tend to have lower service costs associated with them, excluding infrastructure. An infrastructure subsidy, however, would be a major incentive. He added that the City of San Jose, where he was the finance director under former mayor Commissioner Susan Hammer, lost about $125 million a year on its housing stock via service costs during his tenure. Mr. Silva replied that this has always been a problem, leading to per capita revenue distributions in addition to situs distributions.

    Commissioner Maltbie queried whether low income communities could be rewarded (in the pool criteria) for the low income housing they already have in addition to that which they produce. Commissioner King noted that the swap would cause counties and cities to continue to have a shrinking portion of a growing pie, which is why the VLF subvention has been so helpful to them.

    Commissioner Allgood asked if there is a mechanism in the property tax that encourages density. Mr. Silva said there is not. Mr. Mussen noted that a reward/punishment approach fits the pool concept best.

    Commission Chair Abel then suggested that the Commission begin looking at focused proposals so that a set of preliminary proposals could be formulated. Mr. Silva mentioned that the pool concept hadn’t really been discussed yet, so it was not yet time for decision making.

    Mr. Brownstein led off the pool discussion by asserting a strong preference that the production of very low housing should be the leading, if not the only, criteria for prioritizing distribution of the pool. It is the most difficult item for locals to deal with and needs the most incentives. Furthermore, he said, it doesn’t contribute to sprawl because it’s built almost exclusively in urban areas. Low income renters have been among the biggest victims of the current system.

    Commissioner Morrison said that regions should be the focal point of the pool. He supported Mayor Golding’s suggestion that the regions themselves should decide how to deal with the pool, but he felt they needed some guiding points such as housing and transit-oriented development. Commissioner McPeak added that the Commission was not the right vehicle for implementing smart growth policy, but she agreed that the pool was useful for dampening fiscalization and felt that some kind of formula for how it should be distributed would be in order. She mentioned federal affordable housing guidelines (very low meaning up to 50% of the median income, low meaning up to 80%, moderate meaning up to 120%) and noted that the market focus on moderate income housing contributed to bad land use patterns.

    Commission Chair Abel opined that the Commission did not have to be so specific in the details of its recommendations because they were likely to be debated at length by the legislature anyway. Commissioner King noted that the fact that the pool is not "new money" would make it difficult to mandate to locals how it’s used. He also said that, in Southern California, using housing as an incentive ran the risk of sending more money to sprawl areas on the urban fringe. This is where the most of the relatively affordable housing is being built at present.

    Mr. Abel then polled the Commission on their attitudes about structuring the pool.

    Commissioner Nathanson said that discretion could be provided around smart growth principles. He noted that the state of Minnesota gives money to locals to build infrastructure so they won’t have to obtain as much of it via developer exactions. He suggested that the pool concept should include guidance as to who would best make the decisions, but that imposing a rigid formula would preclude flexibility and home rule. Commissioner Stenbakken agreed that generality and a decision making structure would be the best end products of the process of designing the pool concept.

    Commissioner Fox stated that accountability to taxpayers is a crucial point. He is less worried about the impact of a formula. He noted that the City of Torrance pays the second largest amount of taxes to the Los Angeles County Metropolitan Transportation Authority (MTA) and is not directly represented on the MTA board.

    Terry Brennand, representing Commissioner Tipps, suggested that service delivery should be considered along with affordable housing in the criteria. He felt that cities and counties that willfully provide inadequate services should not be rewarded with extra funds.

    Commissioner Whiteside felt that regions should self-define, noting that Councils of Governments (COGs) don’t always function well, especially the ones confined to a single county or less. Commission Chair Abel offered that the old Constitutional Revision Commission recommended that a regional decision making body should be made up of local elected officials and that any fiscal plan they developed should be submitted to the voters.

    Commissioner Szalay opined that the governance aspects of the pool should be specified. He suggested proportional representation for agencies that currently deal with sales taxes and noted his acceptance of the Revision Commission’s approach. Additionally, creating a list of distribution criteria for the body to deal with would also be acceptable.

    Commissioner Nathanson mentioned that COG members tend to represent their cities but rarely act on behalf of the region based on regional priorities. Stenbakken disagreed, noting that there are regional entities that function well. Mr. Brennand reminded everyone that forming a new entity would create another bureaucracy and that he almost preferred directly electing people to a regional entity.

    Commissioner Ross said that the proposal predominantly address cities and their issues but that counties got hurt the most by the ERAF shift. She expressed concern that the social services that have been ceded to counties are not a strong enough part of the equation here. Commissioner Davis replied that concerns regarding fiscalization should be kept separate from what could be done to help counties.

    Mr. Mussen opined that housing could be covered via a regional plan approach, with substantive input from disadvantaged communities. On behalf of Commissioner Anthony, he suggested that the regional decision making body should have to adopt some kind of affordable housing element as part of the pool criteria.

    After Fred Silva noted that cities currently get only the percentage of sales tax growth that occurs within their city boundaries, Marianne O’Malley provided some examples of sales tax growth and asked if the Commission wanted a countywide allocation of that growth.

    Michael Coleman suggested that the simplest methodology would look at sales tax growth on a countywide basis, allowing each city to receive only the growth taking place within that city. Commissioner Szalay opined that assessed value growth within a given jurisdiction produced the biggest incentive.

    Commission Chair Abel asked the group if going into the level of detail they were discussing was really necessary. Both Commissioners Fox and Ross said it was in order to present a coherent proposal that could garner support.

    Bob Brownstein asked if cities would be penalized by the pool formula. Mr. Silva answered "no." Commissioner Whiteside said that "real world" examples of the pool’s impact on local finances would be needed to sell the idea. She asked for 5-year projections.

    Commissioner Stenbakken suggest that remaining general would be acceptable once it was determined which items would be left to local discretion. He advocated specificity on the property tax structure.

    Commissioner McPeak noted that the set of proposals being considered required that the State would backfill property tax revenues taken away from the schools. She mentioned also that the Commission’s swap and Mr. Whiteneck’s proposals did not seem compatible. Mr. Silva replied that, because the property tax is a countywide tax, you could do both, and Mr. Whiteneck added that they were compatible if there’s enough property tax money in the county.

    Commissioner Ross asked Mr. Whiteneck how education advocates were reacting to these proposals. He stated that education funding now is taking a share of the property tax nearly equal to what it was taking before Proposition 13. He added that advocates would want to see that the share and growth they get under Proposition 98 would continue to be met.

    Mr. Abel then polled the Commission on finalizing a preliminary proposal based on the three main recommendations in the discussion memo (see below). He received an inconclusive response with regard to the swap, with more Commissioners asking for more information on its fiscal impacts than the number willing to make a choice.

    The group then expressed a leaning toward recommending the pool concept, but there were widespread misgivings about going forward without having more consensus on governance and administrative issues relating to the funds.

    Regarding the use of State general fund monies to permanently replace the VLF subvention, there was some support but also some questions, especially regarding its potential impact on so-called "non-Prop. 98 monies" in the State Budget.

The Commission decided to postpone its scheduled November 9 meeting in Los Angeles to November 29, venue to be determined. In place of the November 9 meeting, several members decided to hold informal discussions about the details of the proposals and report back to the full Commission on the 29th. The meeting scheduled for December 7 in San Francisco remains on track.

Commissioners King and Szalay submitted memoranda containing discussion items for the next meeting

There were no requests for public comment.

The meeting was adjourned at approximately 3:05 p.m.

October 27, 1999
Sacramento, California

A. Guiding Concepts

    1. The local finance system should facilitate state, regional and local conservation and development policies as well as finance local and regional services.

    2. In order to avoid being dependent on one revenue source, local governments should derive their revenues from a diversity of sources, including property tax, sales tax and general purpose state subventions (financed from the personal income tax).

    3. The finance base for local and regional services should be a constitutionally protected, stable, and reliable and be sufficient to assure basic services.

B. Fiscal Components

    1. Swap a portion of the sales tax for an equivalent amount of the property tax.

    Objective: This element would meet the objective of reducing the reliance on the sales tax and increase a city or counties interest in residential and manufacturing land uses since a city would receive a larger share of the property tax.

    Proposal: Within each county, the county and each city would swap a portion of the locally levied sales tax for an equal amount of the property tax. For example, the locally levied 1% sales tax rate would be reduced to .5% and the state rate would be raised by .5%. An equal amount of property tax would be shifted from school districts. The state, using the new revenue from the .5% of the sales tax, would back fill the school districts through the state school aid system.

    Implementation Issues: Some cities may not have sufficient property tax within the city to make up for the loss of sales tax.

    Choice #1 - Nobody loses, keep the current property tax allocation. Hold each city harmless for the loss of sales tax. Since the state will receive half of the city's sales tax, the state can subveen funds to the cities with insufficient property tax to make up for the lost sales tax.

    Choice #2 - Nobody loses, repeal AB 8 and start over. Revise the property tax allocation system so that new property tax allocation shares are developed and assign all cities the amount of property tax received in the prior year plus the amount of sales tax shifted to the state. All future growth would be allocated on a situs basis (see item #4 under additional issues).

    2. Within each county (or multi county), pool a portion of the growth in the local sales tax.

    Objective: Establish a pool of resources that are derived from local retail activity and allocate it to local agencies based on a formula that recognizes specific policy objectives.

    Proposal: A countywide pool would be established which would receive one half of the growth in the remaining local .05% sales tax. The proceeds from the pool would be allocated to each city and county annually. Options for prioritizing the allocation could include the following:

    • The percentage share of the number of housing units constructed for low and moderate income families (family income at 60% of median).
    • Improvements in overall jobs/housing balance.
    • Coordinated services (services provided by more than one agency).
    • Population.

    A multi county agreement would be authorized but would require agreement of the participating counties and cities.

    To the extent that the sales tax pool is meeting a state purpose such as encouraging low and moderate income housing, these funds could be used to match state programs funds.

    3. Dedicate a percentage of the state income tax into a special fund for city and countywide and unincorporated service.

    Objective: Establish a state subvention for local government services that replaces the Vehicle License Fee subvention that will equalize the finance base of local services and facilitate economic development and environmentally sustainable growth.

    Proposal: Local government should receive a share of the state personal income tax as a means of equalizing the finance base for local services. The allocation could be based on a combination of factors: population, personal income, employment growth, and the provision of low and moderate-income housing. This provision would replace the provision in current law that reimburses local agencies that would otherwise have lost revenues due to the reductions in the Vehicle License Fee. The implementation of this proposal would include a phase in as the VLF is phased out. Additionally, a hold harmless provision would be included so that no local agency lost funds during the transition.

    Implementation Issues: To the extent that cities and counties are held harmless over any loss of revenue from the VLF, only the growth in the new subvention would be subject to a new allocation. For example, in the first year of the new income tax based subvention the allocation would be made on a per capita basis. For each year thereafter the growth could be allocated on the basis of an established criteria such as employment, personal income or housing conditions.

C. Additional Issues

    1. The state/county relationship

    Objective: Establish a new state/county relationship that would clearly define the responsibilities of the state and counties as agents of the state.

    Proposal: Adopt a "Compact Model" for the state county relationship. Each state/county partnership service program would be governed by a common bilateral, written compact that would spell-out roles, responsibilities, duties, work programs, finances, community outcomes, performance indicators, and evaluation systems. In each state program where the county acts as an agent of the state a compact would cover the program.

    2. Enhance local government Home Rule

    Objective: Provide constitutional protection to locally levied taxes.

    Proposal: Enhance the "municipal affairs" provision of the constitution by protecting locally levied taxes including the property tax from being redistributed by the state.

    3. Vote requirements for local taxes

    Objective: Revise the vote requirements for local taxes.

    Proposal: Reverse the current vote requirements for general and special taxes. Require that a local tax levied for a specific purpose (special tax) would be approved by a majority vote. Include education as a specific purpose (special tax). A tax levied for an unspecified purpose (general tax) would be approved by a two/thirds vote.

    4. Require the development of performance measure for local services

    Objective: Insure that citizens are able to measure in a systematic way the outputs for the local agencies that provide services.

    Proposal: Require all local agencies to develop performance measures and a system of evaluating performance.

    5. Property tax allocation - local governments and school districts

    Objective: Make the property tax more transparent by connecting the taxpayer with the entity that spends the funds.


      a) Establish a new property tax allocation system that provides a tax rate for each entity that receives a portion of the property tax. The tax rate for K-12 schools would apply countywide and each property would pay the same "rate" for K-12 schools. The amount would be allocated on a per student basis to school districts within each county. All other governmental entities receiving a share of the property tax would have a tax rate that would apply to all of the assessed value within the jurisdiction of the entity. In this way each local agency would receive a portion of the growth in assessed value within their jurisdiction. The school share of the growth would be based on the growth of assessed value countywide. (Note: In order to retain the existing funding level from some school districts, a hold-harmless provision will need to be funded from state sources).

      b) A second approach would be to "split" the tax roll for allocation purposes. For example, an increase the amount of property tax generated by industrial and residential development allocated to general-purpose governments. In effect the state could split the shares of the property tax among local agencies and schools according to the use of land.

    6. Growth Policy Components

    Objective: Establish state objectives for the local and regional planning and development regulatory process.

    Proposal: Revise the local and regional planning process to incorporate the following elements:

    • Adopt state-level guidelines reflecting smart growth principles should be placed in statute.
    • Local general plans should be linked to regional plans.
    • Priority in the allocation of state infrastructure resources that affect growth and development should be given to rebuilding older urban areas. Transportation expenditure priority should be given to multi modal and non-automobile alternatives.
    • Development should be concentrated in existing urban areas.
    • Communities should include their "fair share" of affordable housing determined on a regional basis.
    • Regional and local communities have a responsibility to protect environmental quality, biological diversity and open space.

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Speaker's Commission on State/Local Government Finance
in collaboration with the
Metropolitan Forum Project
811 West Seventh Street, Suite 900
Los Angeles, CA 90017
(213) 629-9019