November 29, 1999
The Sky Room, Burbank-Glendale-Pasadena Airport
1. Call to Order/Introductions: Chairperson David Abel called the meeting to order at approximately 10:10 a.m.
2. Welcome: Commission Chair David Abel welcomed the Commission to Burbank and outlined the groups challenge for the day: to once again try to bring closure to its discussions of preliminary recommendations.
3. Public Testimony: Dan Silver, Endangered Habitats League, opened by expressing conditional support for item 3b. on the agenda, the regional pool concept. He noted that including moderate income housing production in the criteria for gaining priority in accessing pool funds. Mr. Silver offered transit-oriented development as an alternative incentive to consider, stating that it would serve the goal of encouraging improved jobs/housing balance.
4. Public Testimony: Jean Heinl, Californians United for Redevelopment, mentioned a policy in the state of Michigan creating "Renaissance Zones." She said these have been used to revitalize certain urban communities, noting that business personal income, property, utility and other taxes are waived within the zones. Commissioners noted that these resembled enterprise zones as we understand them in California.
5. Ken Farfsing, City Manager, City of Signal Hill: Mr. Farfsing presented valuable testimony, raising questions about the practical impacts of the Commissions core proposals on every level of government in California. In a spoken and written presentation, he provided an overview of Signal Hills fiscal history and condition.
The City Manager noted that the proposed swap, if confined to Signal Hills sales and property taxes, would leave the community $2.7 million short. He predicted that 43 other cities in Los Angeles County and 330 cities statewide would be in similar straits. Farfsing added that, in the wake of 20 years of adjusting to the current fiscal imbalance and the impact of local political preferences, some communities have committed to, and become comfortable with, distributions of land uses that are deemed undesirable in the swap concept. He predicted that they would resist the idea. He noted that Signal Hill has accepted the role of being a job center in its sub-region.
Commissioner Whiteside replied that the Commission needed to not be judgemental about the current condition of city finances. She noted that a number of cities have reacted to their circumstances and made do while decrying those circumstances at the same time.
Farfsing also expressed concerns with the pool concept, comparing it to the situation in Los Angeles County wherein the City and County of Los Angeles dominate the activities of the Metropolitan Transportation Authority (MTA) and smaller cities feel short-changed.
Regarding the proposal to focus on affordable housing and the "fair share" housing formula inherent in the pool concept, Farfsing commented on the difficulties cities currently face in trying to get their housing plans certified by the State Department of Housing and Community Development (HCD). HCD, he said, is difficult to deal with and could be a major stumbling block in fair implementation of the pool.
Farfsing asked a series of questions:
In the ensuing discussion, the questions were substantially answered:
The discussion also covered Signal Hills city finances and housing policies. Mr. Farfsing explained that Signal Hill was managing its finances fairly well without resorting to utility taxes and by deferring a lot of maintenance of streets and other public infrastructure. For housing, he noted an expected growth of about 3-4,000 residents living in new units, about 60% of which would probably be single-family homes. Because Signal Hills public transit needs are largely met by Long Beach Transit buses, it is difficult for the city to aggressively promote a transit-oriented housing policy. He noted that they were working to convert some obsolete strip commercial areas along major thoroughfares into mixed use areas including multi-family housing, as well as rehabilitating existing housing stock.
Commissioner Scott mentioned new accounting requirements for local jurisdictions that will require a more complete listing of assets and debts and asked how it will impact cities. Mr. Farfsing acknowledged that it will probably prove to be a reality check that will encourage cities to set more money aside to pay for services and maintenance.
Mr. Farfsings final admonition to the Commission was to urge that information be provided to local governments regarding the fiscal impact of the swap on their finances so they could understand the proposal and, possibly, become comfortable with it.
6. General Discussion and Deliberation: Fiscal Reform Options Agenda: Commission Chair Abel called for a discussion of the Reform Options Agenda prepared by staff. What follows are some key points discussed and then the latest summary of actions taken and matters remaining for future determination.
Commissioner Whiteside asked fellow commissioners if counties and cities viewed the swap and pool concepts positively. Commissioner Szalay said yes from the county perspective, but that other ideas should also be considered. Commissioner Stenbakken said that cities viewed the swap favorably and liked the pool except for the idea of using growth on sales taxes to fund the pool. He suggested looking at ERAF refunds or existing _-cent sales taxing authority as possible sources for the pool. He noted that the swap itself would be a monumental change in Californias fiscal policy.
Commissioner Whiteside replied that the Commissions original goals included increasing accountability and transparency (the ability of the public to understand how their tax dollars were being used). She said that if the complexity of the proposals is obscuring those goals, there had best be other benefits to compensate.
Responding to a concern expressed by Commissioner Nathanson and Commissioner Maltbie that the proposals provided enough financial incentive for local jurisdictions to accept more housing, Commissioner Anthony reminded everyone that the pool was intended for that purpose. He said he would like to see evidence that social justice and equity issues were being addressed and requested that an equity analysis of these fiscal proposals be included in the materials being developed. Commissioner Arteaga later reiterated this suggestion, supported by Commissioner Szalay.
Commissioner Fox expressed his ability to support the swap concept, while mentioning the possible impact of e-commerce on it in the future. He said he had problems with the pool because of its complexity and because he wasnt sure the public would support the focus on housing as a policy priority. Commissioner Allgood also noted the importance of e-commerce and urged that some mention of its potential impact be included in the Commissions report to the legislature. He then asked about how these complex proposals were going to be explained to the public. Commission Chair Abel played an unfinished video that attempts to deal with that and the Commissioner discussed its contents.
Commissioner McPeak noted that the video communicated well to decision makers and seemed to focus on Proposition 13. She reminded everyone that the point was not to reform Prop. 13 but to address its unintended consequences. Commissioner Fox agreed, but said that this could not be accomplished without some reference to the Proposition.
Ms. McPeak added that she felt the swap is significant but not sufficient to accomplish the Commissions goals. Mr. Brownstein, representing Commissioner Dean, agreed. McPeak added that the pool is meant to address both regionalism and fiscalization of land use. She went on to say that neither the swap or pool should be expected to pay for all services because those funds never have. She said the swap improves the balance and alignment of revenues to responsibilities.
Referring to school funding, Ms. McPeak also brought up the proposal presented in October by Bill Whiteneck to pool school property taxes by county and allocate them on a per student basis while holding basic aid districts harmless. She wondered if this idea was compatible with the Commissions pooling concept. Ms. OMalley felt that it would be and that it might provide school officials with an increased comfort level in the face of the swap.
Commissioner Ross noted that about 70% of State assistance goes to local governments with the rest going to schools. She opined that it is not desirable for schools to "go off" local funds. She said she had concerns about the structure of the swap and felt it could lock in deficiencies in social service funding created by the ERAF shift in the early 90s.
The Commission then began making motions, discussing and voting on the agendized fiscal reform items. The following is a summary of those actions:
Agenda Item # 3a Swap a portion of the locally levied sales tax for an equivalent amount of the property tax.
Objective: Neutralize the effects of the local sales tax on local land use decisions by reducing the reliance on the sales tax and increasing reliance on 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. 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 either school or community college districts. The state, using the new revenue from the .5% of the sales tax, would backfill the school or community college districts through the state aid system.
Implementation: Hold each city and county harmless for the loss of the sales tax by replacing an equivalent amount of property tax. The property tax allocation for each city and county would work as follows:
1) The 1% property tax is currently levied countywide and allocated to agencies within the county by statute. Under this proposal the county and each city would be allocated the amount of property tax it received in the prior year, augmented with the amount of the sales tax that it lost. This action would have the effect of changing each city and county's share of the property tax since the relative shares of the property tax among the jurisdictions receiving the tax would change. The city or county share would go up and the school and/or community college districts' share would go down.
2) Each year thereafter, the city and the county would receive the amount they received in the prior year (the adjustment for the sales tax swap is now in the base property tax) plus a share of the property tax that is attributable to the growth in assessed value within their jurisdiction (see remaining issue).
3) The property tax would be shifted from either K-12 school districts or community college districts. The reduction in property tax going to these districts would be replaced with an equivalent amount in state aid. Within each county the K-12 school share of the property tax would be allocated on a per student basis. The "basic aid" districts (those school districts that receive a minor amount of state aid and receive most of their funding from the property tax) would be held harmless for the change from a situs based property tax to one where the schools share of the countywide property tax is distributed on a per student basis to school districts within the county.
Remaining Issues: Allocating the property tax growth.
There are several options to allocating the growth in the property tax.
1. The pro rata shares of the property tax of each jurisdiction would determine the share of the growth. This is consistent with existing law. For example, if a city received 15% of the property tax it would receive 15% of the growth.
2. The growth could be allocated to the city depending on the services provided. (Refer to the attachment submitted by Mike Coleman.) For example, a city that provided a full range of municipal services would receive a larger share of the property tax than a city that has some services provided by a special district receiving a share of the property tax.
3. The growth could be allocated based on the type of new development. (Commission discussion.) For example, a larger share of the growth in the property tax attributable to new residential construction could be allocated to the city providing services to those new residences.
4. In order to provide for greater equity a per capita cap could be placed on the amount of property tax allocated after the swap. The amount of property tax over the cap could be reallocated to cities that are at the lower end of the distribution.
Additional discussion: Commissioner Szalay noted that, in discussing providing services, the issue of at what service level remains pertinent.
Motion: Commissioner King. Vote: unanimous with Scott and Ross abstaining.
Agenda Item #3b Pooling the growth of the remaining .5% 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: Revenue equal to _ of the growth in revenue from .5 % local sales tax will go into the pool each year.
Status: General agreement on the following (but no official disposition item continued for further discussion):
1) The pooled revenue going to each jurisdiction can be used for any purpose at the jurisdictions discretion.
2) Ordinarily, the minimum area for a pool is a county. A larger or smaller area could be a pool if approved by a majority of the cities with a majority of the population in the affected jurisdiction(s). A specific pool could be established in an area less that the county with the agreement of affected agencies if it does so through the formation of a council of governments or the utilization of an existing council of governments.
Remaining issues to be discussed:
1. Criteria for distribution of the pool.
3) Specific land use decisions made by the local government. These decisions could include higher residential densities and more compact development.
4) Increasing the supply of low and moderate-income housing.
5) Progress toward "fair share" of the regions demand for low and moderate-income housing.
6) A statutory formula that considers the level of per capita revenue received by the local agency.
2. Provide additional resources to the pool.
a. Additional state matching funding under specific circumstances, including pooling the growth at the regional level, increasing the supply of low and moderate income housing.
b. Allow a portion of the growth to accumulate so that the pool will grow larger over time.
c. Use other local revenue growth for the pool, including a portion of the growth in the property tax.
Additional discussion: Commissioner King felt that focusing solely on housing wouldnt fly politically. He added that the Commission did not have to specify the governing body for the pool and that the regional governing body should be able to decide which regional purposes should be emphasized. Commissioner McPeak disagreed, preferring explicit criteria, as did Commissioner Anthony. Several Commissioners felt the amount in the pool was insufficient to incentivize. Commissioner Perez noted that the pool is good because it establishes small incentives for a regional approach and creates cross-jurisdictional accountability. He suggested that high-value job creation might also become a criterion. Commissioner Stenbakken urged that, if specific criteria were to be part of the pool, the State had to commit to being decisive so it wasnt a repeat of the fair share housing experience. Commissioner Harrington said that just referring to smart growth would not produce jobs/housing balance and better job creation, then he noted the importance of regional balancing to achieve balanced growth. Mr. Brownstein noted that housing remains important because its absence is the primary manifestation of fiscalization. Commissioner Ross suggested dumping the swap and instead placing half of the sales tax into the pool. Commissioner Morrison summarized the areas of agreement and disagreement (see above). Commissioner Anthony underscored the utility of the pool as an instrument to counteract inequities. Fred Silva, of the Public Policy Institute of California, reminded the Commission that the pool concept does not include a lot of money (about $60 million), so they needed to either narrow their objectives or enlarge the pool. Commissioner Foster asked if the size of the pool was really an issue, and Commission Chair Abel said it was.
Motion: Commissioner Morrison. Amended to accept consensus on certain issues and form sub-committee to continue discussion.
Vote: Motion approved with Scott, Fox and Maltbie voting "no."
Agenda Item #3c Replace the existing Vehicle License Fee subvention with a subvention that will grow with employment and income growth.
Objective: Establish a state subvention for local government services that replaces the Vehicle License Fee subvention that will help equalize the finance base of local services and facilitate economic development and environmentally sustainable growth.
Proposal: As the state reduces the Vehicle License Fee and replaces it with a subvention funded from the state general fund, the state has an opportunity to adjust the allocation rules to adopt incentives for activities of state interest. The current allocation of the VLF is made on a per capita basis. The future growth could be allocated based on a combination of factors: population, wage and salary growth, personal income, employment growth, and the provision of low and moderate-income housing.
Implementation Issues: 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 would lose funds during the transition. 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.
Status: Not Recommended
Additional discussion: Commissioner Whiteside felt that if the language of this item no longer linked it to the State Income Tax, then its whole point was undermined. Commissioner Harrington, referring to Commissioner Stenbakkens concerns about funding the pool, suggested looking at the Income Tax as a possible source for that.
Motion: Commissioner Whiteside. Vote: Unanimous.
Agenda Item #3d The state/county relationship - The Compact Model
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, bilaterally written compact that would spell out roles, responsibilities, duties, work programs, finances, community outcomes, performance indicators, and evaluation systems. For each state program where the county acts as an agent of the state a compact would cover the program. (See Attachments)
Additional discussion: Commissioner Fox asked if this proposal violated the States unfunded mandate law.
Motion: Commissioner Stenbakken. Vote: Unanimous.
Agenda Item #3e The 1992 and 1993 Property Shift
Objective: Increase the amount of discretionary revenue for county and city services.
Proposal: Conduct an accounting of the fiscal relief to local governments provided since the property tax (ERAF) shift.
Status: Approved in concept.
Additional discussion: Commissioner Fox noted that, since the Prop. 13 other sources of revenue have been created, leading to the Proposition 218 regulation of assessments. Commissioner Szalay stated that this item assumes ERAF offsets of up to $1.4 billion annually. Fred Silva noted that the world has changed since the ERAF shift and that the criminal justice tax and trial court funding needed to be factored in.
Motion: Commissioner Stenbakken. Vote: Motion approved with Scott and Fox voting "no," and Perez abstaining.
Agenda Item #3f Revise the existing .5 per cent countywide sales tax authority
Objective: Provide for a constitutionally-protected revenue source for countywide programs.
Proposal: The existing .5% "transactions and use" taxing authority would be moved into the constitution so that voters, upon their approval, would have the assurance that the resultant revenues could not be used to supplant state spending. The allocation of proceeds of the tax could be based on local agreement.
Additional discussion: Commissioner Whiteside suggested that this be a Constitutional Amendment.
Motion: Commissioner Szalay. Vote: Unanimous.
Agenda Item #3g Property Tax Allocation reporting requirement
Objective: Increase public understanding of which local agencies receive the property tax and for what the revenues are used.
Proposal: Require the county auditor to report annually the amount and relative share of the property tax revenues for each agency receiving them in the county.
Additional discussion: Commissioner King opined that dealing with equity issues required knowing where the money goes. He suggested that the State Controller would be responsible for collecting data. Commissioner Fox suggested being thorough, including Redevelopment Agencies, COGs and other entities.
Motion: Commissioner King. Vote: Unanimous.
Agenda Item #3h Sales tax on the Internet and catalogue sales
Objective: Apply the sales tax to retail activities transacted via catalogues and the Internet.
Proposal: Urge the state to pursue these revenues (see attached memo from Norm King).
Status: Not Recommended
Additional discussion: Commissioner Barrales and Commissioner Harrington said that going after Internet sales taxes provided controversy without benefit. Commissioner Allgood felt that the existing retail sector would support such a move. Several commissioners felt it would distract from the Commissions primary goals. Commissioner Szalay reminded everyone that the issue is fundamentally a federal one, at least as far as the Internet goes. Commissioner King opined that the issue is administrative, not legal, and that it is relevant to the Commissions work.
Motion: Commissioner Allgood. Vote: Motion disapproved by voice vote.
Agenda Item # 3i County budgets
Objective: Within county budgets, distinguish countywide services from "urban service" responsibilities for unincorporated areas of the county.
Proposal: Urge the Legislature to encourage counties to investigate the implementation of county budgets that, to the extent feasible, distinguish the role of the county in providing countywide services from its "urban service" responsibilities for unincorporated areas of the county.
Status: Continued for further discussion
Additional discussion: Commissioner Maltbie felt that accomplishing this would be very difficult. Commisisoner King disagreed.
Motion: Commissioner King. Vote: Deferred. Commissioner King asked to provide new clarifying language.
Agenda Item # 3j Gas tax revenues
Objective: Stabilizing the gas tax to keep pace with inflation and/or miles driven.
Proposal: Urge the state legislature to study the most efficient and reasonable methods to stabilize the revenue from the gas tax within the current rate structure.
Status: Continued for further discussion.
Additional discussion: Commissioner King clarified that he was suggestion the matter be studied, not done.
Motion: Commissioner King. Vote: Deferred.
Agenda Item #3k Enhance local government Home Rule
Objective: Provide constitutional protection to locally levied taxes.
Proposal: Enhance the "municipal affairs" provision of the state constitution by protecting locally levied taxes, including the property tax, from being redistributed by the state.
Status: Approved in concept and continued for further discussion of final language.
Additional discussion: Commissioner Stenbakken suggested including this in the Constitutional Amendment package.
Motion: Commissioner Stenbakken. Vote: Unanimous, with a request for final language to be prepared for consideration at next meeting.
Agenda Item #3l 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. (See memo from Norm King)
Status: Not recommended
Additional discussion: Commmissioner Scott asked which taxes would be affected. Commissioner Maltbie suggested allowing each jurisdiction to set its own threshholds. Commissioner Fox opined that this would be an amendment to Prop. 13 and would lead to a loss of local control since 50% items would end up being the only ones proposed for inclusion on the ballot. Commissioner Allgood stated he was against allowing a majority vote to require a super-majority vote in the future. Commissioner Whiteside urged that the Commissions final report discuss the issue.
Motion: Commissioner Scott. Vote: Motion disapproved by voice vote.
Agenda Item #3m Require the development of performance measure for local services
Objective: Insure that citizens are able to measure in a systematic way the efficiency and results (the "outcomes") of the efforts of local agencies to provide services.
Proposal: Require all local agencies to develop (via a public process) performance measures for their community and a system for the community to evaluate the agency's performance based on outcomes.
Additional discussion: Several commissioners felt this was related to the previously adopted "compact model." Commissioner Morrison felt the motion should include reference to performance measures being based on outcomes. Commissioner Stenbakken agreed, adding that there should be a way for the community to evaluate outcomes. Commissioner McPeak urged public involvement in creating and evaluating the performance standards. Commissioner King suggested that the State should form a task force to suggest methods for evaluating performance and outcomes. Ms. OMalley mentioned that this and some other agenda items could be construed as reimbursable State mandates. Commissioner Scott wondered how this approach could be applied to some troubled public agencies such as the Los Angeles Unified School District. Commissioners Allgood and Barrales felt that outside oversight was needed. Commissioner McPeak felt that accountability is not a mandate but rather a review of public trust. She said that this process would materially change the relationship between the public and government.
Motion: Commissioner Anthony. Vote: Unanimous.
Agenda Item #3n 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:
Status: Continue for further discussion.
Additional discussion: Commissioner Morrison felt that these now relate most strongly to the pool concept. Commissioner Anthony felt that these are important issues that only the State can take on effectively. Commissioner King opined that transportation is inextricably related. Commissioner Whiteside said that all of the states fiscal problems stem from an inability to deal with land use issues head on. Commissioner Allgood suggested that smart growth is not yet a resonant issue for much of the public. Commissioner Morrison suggested combining these with the pool concept for discussion by the sub-committee.
Motion: Commissioner Morrison. Vote: Unanimous.
The Commission determined that, in order to better understand the issues relating to the pool concept, a sub-committee of the Commission should convene in San Francisco on Monday, December 6 at 4 p.m. to review those issues. Commission Chair Abel appointed Commissioners Morrison, Stenbakken, McPeak, Whiteside, Szalay, Maltbie, Perez, Harrington, Anthony and Fox to this sub-committee. The meeting was set for the Bay Area Council conference room at 200 Pine Street.
Commissioner Szalay noted that the California State Association of Counties had asked legislative leadership to form an Assembly/Senate Joint Committee on Fiscal Reform to handle these issues in the upcoming session.
The meeting was adjourned at approximately 3:05 p.m.
Speaker's Commission on State/Local Government Finance