Synopsis

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

In attendance:

David Abel
Carl Anthony
Luis Arteaga
Ruben Barrales
Terry Brennand (for Dean Tipps)
Martha Davis
Robert Foster
Joel Fox
Lee Harrington
Lily Lee
John Maltbie
Sunne Wright McPeak
Rich Morrison
Chuck Nathanson
Jean Ross
Dwight Stenbakken
Steven Szalay
Carol Whiteside

2. Welcome (in order of appearance):

Hon. Robert Hertzberg, Chair, Assembly Rules Committee, welcomed the Commission back to the Capitol. He discussed the importance of the Commission's efforts and thanked the members. Mr. Hertzberg said that the Commission's recommendations would be given full consideration. He also mentioned his own work on governance issues, including his bill that led to the formation of the Commission on Local Governance for the 21st Century, and the need to address them from a long-term perspective.

Assembly Speaker Antonio R. Villaraigosa later appeared to thank the Commissioners for the year's worth of effort they'd invested in this project. He recounted some of the concerns that led to the formation of the Commission and pointed to author/journalist Peter Schrag's book, Paradise Lost, as a specific inspiration. He said that the Commission could expect its report to precipitate a legislative process that would begin in 2000, probably with the formation of a Joint Assembly/Senate Committee on Fiscal Reform. Various Commissioners then offered short comments to the Speaker about the process and the issues upon which they'd been working.

Hon. John Longville, Chair, Assembly Local Government Committee, kicked off the post-lunch session by adding his thanks to the Commission and talking briefly about the politics of fiscal reform in the upcoming legislative session.

3. Discussion: Reform Options and Impacts:

Commission Chair Abel introduced Fred Silva of the Public Policy Institute of California, who has been advising the Commission, to report on the work done to date on formulating a package of fiscal reforms. This work is reflected in the addendum memo attached to this synopsis. He noted that the remaining issues included the "Regional Pool," the endorsement of a Smart Growth policy and advocating Constitutional protection for "Home Rule Powers."

Chairperson Abel stated his intention to ask the Commission to re-visit already-approved proposals in the context of being sections of the Commission's final report then called for discussion.

Commissioner Whiteside noted that she had asked for and received a memo and chart from the California Research Bureau comparing the levels of service expenditures between different local jurisdictions in California. Commissioner Anthony mentioned his intention to suggest amendments to the "Guiding Concepts" that have been part of the Commission's prospective set of proposals. These amendments would relate to social equity issues.

Terry Brennand, representing absent Commissioner Tipps, suggested bifurcating further consideration of the Guiding Concepts from that of the actual proposals. He commented that the swap concept did not appear strong enough to alter future behavior (in the realm of land use decision making) adequately while it might jeopardize future funding for public education. He noted that the Service Employees International Union, for whom he and Mr. Tipps work, is very supportive of the proposal to complete the paying back of the ERAF shift, preferring it to happen sooner rather than later.

Commissioner Stenbakken referred to Ms. Whiteside's memo and opined that the Guiding Concepts might be an inappropriate venue to bring up the issue of equity of services. Commissioner Szalay offered that the California State Association of Counties offered that his organization felt that the deliberative process had led to some dissatisfaction with the some aspects of the results but that the package as a whole was acceptable.

Commissioner Whiteside then moved adoption of the "fiscal group" of proposals (Items I.A.1-4 in the attached "Summary of Commission Actions" memo), with Commissioner Szalay seconding. Voting was deferred temporarily.

Marianne O'Malley then made a brief presentation on the impact of fiscal reform proposals on State finances, as requested by members of the Commission (agenda item 3A). She began by saying that fiscal analysts are often unable to offer conclusive advice on the fiscal impact of a proposal. She reiterated the common understanding that the California economy is in good shape.

Referring to a Legislative Analyst's report issued in November 1999, Ms. O'Malley predicted a year-end reserve of $2.6 billion, or 4% of the General Fund. Since the release of the report, the economy has performed even better and noted that a mid-February follow-up report likely would be more positive. This predicts the availability of funds for additional spending without affecting existing spending levels.

Looking at the repayment of the ERAF shift covered in Proposal I.A.2, she said the repayment trigger would probably be activated each year at least through fiscal year 2005, with a total cost to the General Fund of more than $1 billion.

Regarding the swap, she noted that the LAO November report predicts that sales tax growth will outstrip property tax growth in FY2000 and then they will be roughly equal in the years through FY2005. If e-commerce continues to grow, she noted, it could change this forecast over the long term if the federal and state governments do not come to some agreement about taxing remote sales that would allow the State to collect sales taxes from these transactions.

Responding to inquiries from Commissioner Harrington, Ms. O'Malley noted that the LAO forecast deviates from others' opinions that property tax revenue growth will be superior to that of sales taxes. The California Research Bureau has reviewed historic trends and concluded that property tax revenues have grown faster by an average of about 1.5% per annum. Under the swap, this would provide local governments with a total of about $40 million the first year, growing to about $200 million in FY2005. She termed this as "probably not significant" in terms of its impact on the State or local governments in the near term. She also predicted it was unlikely that the swap would have a direct effect on the calculation of the Proposition 98 minimum guarantee for education funding, though it could impact non-Proposition 98 programs.

Ms. O'Malley concluded by noting that the Commission's proposals are general enough that it is difficult to determine their fiscal effect. She mentioned the State/county compact, reporting requirements and the regional pool. She also noted that reporting requirements, to the extent that they force counties or cities to gear up to report data they haven't normally compiled, could constitute a reimbursable State mandate.

Terry Brennand then asked the Commission consultants if they felt the swap will have a real impact on the fiscalization of land use. He opined that the schools feel that it would pick away at their funding base just as they are finally being made whole again after a number of years of under-funding. Fred Silva replied that the impact on fiscalization was difficult to ascertain analytically because it will depend on local decision making. He acknowledged that the swap would not solve everyone's problems.

Commissioner McPeak, a former Contra Costa County Supervisor, commented that local officials definitely make land use choices based on revenue prospects. She said the swap proposal addresses both the rhetoric and the stated concern regarding fiscalization. Adding the Smart Growth element would further impact decision making. She reminded the Commission of previous discussions during which they concluded that, in the panoply of fiscal reform, the swap is "necessary but not sufficient." In other words, it is a step that does not solve the entire problem but without which the entire problem cannot be solved.

Dean Misczynski of the California Research Bureau added that most local jurisdictions do cost/revenue studies regarding land uses, usually concluding that retail is beneficial to the balance sheet and housing is not. He said the swap goes in the right direction to ameliorate this conclusion but agreed that an impact study would be very helpful. Commissioner Ross asked if fiscalization has gotten worse since the ERAF shift. Mr. Misczynski stated that the studies have shown that it has.

Commissioner Nathanson offered that it can be shown that fiscalization has also hurt the creation of industrial space. He said this is definitely the case in his home community, San Diego. Commissioner Harrington agreed, noting that the percentage of industrial space in the land use mix is 1/3 that of other urban areas in the U.S. and predicted that the swap would have a beneficial impact. Commissioner Maltbie added that traditional downtowns have been hurt by "big box" and mall development. He predicted that the swap would begin to "tip the scale back." Commissioner Davis added that, in the effort to spur reinvestment in communities, we need to see if the swap will help.

Commissioner Arteaga commented that the citizen engagement aspect of the Commission's proposals (not part of section I.A.) are also crucial. He opined that the swap is not enough by itself to change behavior and that educating and involving the public is also necessary. Commissioner Whiteside added that the Commission and others have discussed bolder, more radical proposals and that the swap is just a first step in addressing California's fiscal problems.

Commissioner Barrales called the question and the motion approving section I.A. was approved with Commissioner Ross and Terry Brennand abstaining.

The Commission then moved on to section I.B. on accountability.

Commissioner McPeak mentioned item 2, the compact model, noting that it is intended to provide greater clarity and flexibility in leading to desired and measurable service provision outcomes. It is meant to acknowledge the differences between jurisdictions around the state. She added that the fiscal reform dialogue too often sounds like a debate about "rearranging the deck chairs" but that accountability provisions can change that. Requiring accountability and identifying desired outcomes makes the concept of establishing compacts feasible.

Commissioner Ross asked how compacts would function vis-à-vis existing statutory codes protecting low income programs and services. Commissioner Maltbie said that those standards would have to remain in place because counties should not be able to opt-in or opt-out or providing such services. That stated, Mr. Maltbie went on to say that the concept could be critical to making it clear to the average citizen how government is supposed to work and who is responsible for what. Furthermore, counties have been "jerked around" by fluctuations in State funding and a compact would stabilize and strengthen their ability to perform on their obligations.

Commissioner Szalay referred to uniformity, predictability and accountability as being the benefits of the compact, noting that the current guidelines and statutes are crucial benchmarks. Commissioner Whiteside related the compact to the notion of performance standards and added that requiring them of the State is an important aspect of the accountability package.

Mr. Brennand relayed that SEIU is concerned about the compact proposal based on how counties have reacted to State funding cuts. The union does not want counties to be able to negotiate lower levels of services or subvert existing codes. It would be comfortable with the notion of finding a way to reward counties with enhanced funding when they go "above and beyond" and innovate. Commissioner Maltbie said he had no conceptual problem with that idea. He also predicted that the State would negotiate in good faith if it has the understanding that it would have to provide a service if counties were not to provide it.

Commissioner Szalay suggested that the compact proposal should be kept as a general framework so that current regulations would not be undermined. Commissioner Fox mentioned item 4, the auditing of property tax allocations, asking that the Commission make sure that Redevelopment Agencies are included. Mr. Silva replied that they are. Mr. Brennand asked about item 3, which calls for counties to spell out "urban services" in their budgets. He wondered why cities should not be required to do this too. Mr. Maltbie replied that the concern was with how countywide property taxes are allocated.

Commissioner Szalay then moved approval of the accountability package, with Commissioner Whiteside seconding. The motion was approved with Mr. Brennand abstaining.

Chairman Abel asked David Booher of the California Council on Environment and Economic Balance to comment once more on the accountability package. Booher called it impressive. He said that governmental accountability is widely viewed as a fundamental issue and that adoption of these recommendations would be a big step forward for California.

The Commission then moved on to section II, "Matters recommended for further study and action by the legislature and the governor."

Commissioner Anthony mentioned some modest, but important, wording changes he was proposing for item 1, the Equity Impact Assessment concept he had brought to the Commission. He asked for "gathering of public revenues" to be added to the item's "objective." The Commission was amenable to this.

Referring to the landmark court decision requiring roughly equal funding for school districts, Commissioner Fox asked if this section could create a "Serrano-like" problem for cities. Commissioner Whiteside replied that that was one reason the item was proposed for further study and not as a firm recommendation. She opined that the goal was not to undo local control. She added that the changing economy is creating greater disparities in local expenditures. Commissioner Ross noted that public transportation should be part of the consideration, given its importance to the poor. Mr. Anthony agreed.

Commissioner Szalay noted that every time an issue comes up involving revenues, the equity issue is raised. He felt it is important that it remain a part of the discussion. Commissioner Harrington said it was also imperative to see what the State can do to ensure equity instead focusing only on local jurisdictions. The Chair asked if perhaps the language should be changed to reflect a higher level of abstraction and address expressed concerns. Mr. Anthony said he was willing to accept that as long as the essence remained.

Mr. Silva suggested that item II.3, regarding the gas tax, should be amended to refer to transportation revenues. The Commission agreed. The Commission then adopted this section by acclamation.

The Commission then took up section III, "remaining issues," including the regional pool, Smart Growth policies and Home Rule provisions.

Commissioner Morrison stated that the Commission so far had "solved yesterday's problems" but hadn't dealt with the problems of the next 20 years. He opined that California is not ready for the impact of information age commerce. Chairman Abel read revised language for the section "goal" that he and Mr. Morrison had worked on between meetings (see addendum). Commissioner Whiteside opined that how the state deals with land use is as important, or more important than any of the other issues being discussed. She suggested that the Smart Growth principles come before the regional pool in the final report. After Commissioner McPeak noted that the regional pool concept presupposes that there is a Smart Growth policy that local jurisdictions would follow in order to tap into the pool, the Commission agreed to reversing the order.

Commissioner Ross said that the reversal was desirable but opined that the pool concept was obtuse and difficult to explain to lay persons. Commissioner Davis commented that it nonetheless was important both to encouraging regional cooperation and injection the concept of regionalized revenues into the fiscal system. Ms. Ross replied that perhaps it would be best presented in a very general form so that problematic details didn't get in the way.

Commissioner Stenbakken agreed with Ms. Davis that the pool of resources for regional issues is the key element. He opined that the concept has been improving steadily as it has been refined by the Commission. Commissioner Fox expressed his feeling that the pool represents good and important intentions. However, he agreed with Commissioner Ross that it lacked "transparency" and did not clarify how government works. He also felt that the positioning of Councils of Government (COGs) as decision makers was unsupportable due to their distance from the voters. He reminded Commissioners that he had circulated a proposal to change the state's county structure to reflect a more regional concept. He also noted that, even if the pool proposal is being presented as a starting point for further legislative debate and discussion, he felt it contained too many flaws to be the appropriate one.

Commissioner Szalay of CSAC agreed that, as currently funded, counties indeed need reform. But he noted that this does not obviate the need for a local service provider. He suggested adding language to the item (now changed to III.A.2) noting that the model presented was simply one example of how a pool might be structured.

Commissioner Anthony acknowledged the importance of the transparency and governance issues raised by Ms. Ross and Mr. Fox. But, he added, the connection between the fiscal structure and Smart Growth as well as creating a regional mechanism are also consistent with the Commission's stated intentions.

Commissioner Harrington noted that there has, of late, been a move toward more accountability at the COG level. COG members are accepting the goal of minimizing fights across city lines and the pool proposal will help move that discussion. He then offered an amendment to item III.A.1, the Smart Growth principles, suggesting the removal of the word "smart" because of its provocative potential.

Mr. Morrison, the primary driving force behind the pool and Smart Growth items, accepted Mr. Szalay's "for example" suggestion as a friendly amendment. He said he also could accept dropping "smart" and agreed that accountability at the decision making level was important. He stated that the nomenclature was far less important than the concept and he would be thrilled if some legislator was willing to take the concept far enough that what it was called was a meaningful issue.

Commissioner Nathanson underscored the importance of the pool as an implementation tool for the Growth Principles. He joined Mr. Morrison in accepting the pool as proposed as a starting point. He then asked if the Joint Committee mentioned by Speaker Villaraigosa earlier in the meeting might be a way of burying the fiscal reform issues. Mr. Silva, a State Capitol veteran, explained that it was not because the proposals needed a place to go for initial discussion and that a permanent Joint Committee is the most appropriate venue.

Mr. Nathanson then reminded the Commission that the pool's implicit stumbling block has always been how to distribute the money. Mr. Silva suggested that the item could be amended to make it clear that there was a concern about governance issues. He noted that the changing of the centuries had been a time when California revisited basic governance issues before and that it might be appropriate to suggest that it be done again. Mr. Nathanson then added that it was important to remember that the Commission has not been considering the pool and regional issues to be peripheral. Rather, they have been viewed as key fiscal issues.

Commissioner Anthony cautioned against dropping "smart" too hastily. Chairman Abel suggested some revising and review at the February meeting. Commissioner Whiteside worried that this would provide an opportunity to drop the idea. Mr. Abel suggested approval in concept with new wording to be considered at the next meeting.

Mr. Morrison moved the Growth policies to unanimous approval. The pool was approved in concept with Commissioners Ross and Fox voting no and Mr. Brennand abstaining. The final pool language was to be reviewed in February.

Mr. Silva then introduced item III.B.1, "enhancing local government home rule powers."

Fundamentally, he noted, it was a question of what sort of power a community has that it does not have to go to the State for. Because this item recommends a Constitutional amendment and invokes some complex notions, several Commissioners raised questions that could not be answered as the meeting was winding down. Chairman Abel asked Commissioner Stenbakken to lead between-meeting dialogue on the issue so that the Commission could conclude its discussion in February.

4. Presentation: Senator Steve Peace:

Returning for the first time since he appeared before the Commission in July 1999, Senator Steve Peace provided his latest thoughts about fiscal reform in the legislature. He noted that the Commission proposals would be extraordinarily helpful in moving the legislature in the direction of needed changes. But, echoing the comments of Commissioner Whiteside, he noted that the represent more of a starting point than an "endgame." To stop with them would be a mistake. He suggested that the kinds of reforms ultimately needed would impact the quality of life in California through mid-century.

Senator Peace once again noted the deleterious impact of sales tax dependency on government finance. He opined that reforms need to go beyond transferring that dependency to the State level. The Senator urged that advocates level with the public that sales taxes are the most expensive and regressive taxes we impose, not the least because they are not deductible from income taxes. He said also that sales taxes undermine the job base.

Mr. Peace insisted that California should not view fiscal reform as a fight between local and State government, or between locals, schools, special districts, the State, and so forth. Rather, he said, it addresses a situation that currently impoverishes the people by diminishing their net income. He expressed his desire to minimize the burden on citizens and partner with them to make sure they get the benefits of the fiscal system.

Pointedly, the Senator referred to Proposition 13 as "the problem," likening it to a "drug dealer" draining the life out of a community. He said he believed that its authors, the late Howard Jarvis and the late Paul Gann, would be leading the reform charge were they to be alive today. He added that Prop. 13's legacy is that homeowners are being gouged, paying a disproportionate share of the total property tax bill. When sales taxes are overlaid on top of that, he said, families are carrying the highest percentage of the tax burden they ever have in the history of the state.

Peace noted that the business community recognizes the impact of these inequities on the shortfall of money for infrastructure needs. He said that property owners are the principal beneficiaries of infrastructure, not sales taxpayers. He said he would accept higher property taxes in exchange for lower sales taxes any day because the former could be deducted from the income tax.

He also predicted that high sales tax states will be in trouble in the e-commerce era. "We're in the greatest economic expansion in history, yet sales tax revenues are flat," he said.

Commission Chair Abel asked if the State was more likely to be able to resolve the e-commerce/sales tax issue than local governments. Peace replied that locals need independence as well as responsibility. He suggested that the debate needs to include a discussion of where California's fiscal situation was prior to the passage of Prop. 13, what was good and what was bad. He reiterated a belief confirmed during his fiscal hearings in early 1999, that politicians are not keeping up with the public and that the public is ready to discuss the aftermath of Prop. 13. That being said, he reminded the Commission that no one wants to go back to the era when people were being taxed out of their homes.

Senator Peace boldly stated that he feels there can be a 10% net decrease of taxes while overall revenues could still rise. This would involve obtaining more revenues from commercial property taxes (without going to a split roll) while reducing residential rates. He predicted that there would be legislation or a ballot measure addressing this concept by 2002.

Commissioner Fox, a long-time leader in the Howard Jarvis Taxpayers Association, aggressively challenged the Senator's strong words about Proposition 13. He then asked how the Senator's tax restructuring concept would control property taxes if, as he predicts, sales taxes diminish. In reply, Peace referred to a bill sponsored by the California Business Roundtable regarding sales taxes and infrastructure finance. The Senator wanted to use that bill to change incentives so that the economy would continue growing. He predicted that increased income tax revenues would more than offset sales tax losses and pre-empt the need to raise property taxes.

Acknowledging that the Senator has proposed novel regional governance approaches for San Diego, Commissioner Nathanson reminded him that regional governance problems have been difficult for the Commission to resolve. Commissioner Anthony added that restructuring of the tax system needed to provide help to urban areas. Senator Peace replied that how regional decisions are made is intrinsic to how the tax structure will be dealt with.

5. Public Testimony:

Lenny Goldberg, California Tax Reform Association: Mr. Goldberg, long time Executive Director of the CTRA, noted that if Proposition 217 had passed in November 1996, the pre-recession income tax rates for wealthy Californians would have been restored and there would be more money in the system. He went on to argue against a "zero-sum" solution to fiscal problems, stating that they couldn't be solved equitably without more available dollars.

Goldberg went on to say that California under-relies on property taxes when it over-relies on sales taxes. The percentage of property tax as a part of the whole revenue system is currently at its historic low. He added that the property tax does not collect on windfall economic profits that are due to external factors.

Mr. Goldberg then mentioned commercial real estate partnerships as a key example of a loophole in the current system. Commercial property is rarely sold names are simply changed on the title as people or entities buy in or sell out and the tax system thus does not have a chance to re-evaluate the property taxes owed based on a transaction. He noted that former Senator Quentin Kopp proposed a bill in 1991 to create a formula for determining when ownership actually changes and urged legislators to consider pursuing the matter again. He opined that the business community would be willing to pay more commercial property tax if it felt it knew where the money was going.

Mr. Goldberg concluded by saying that cumulative demands for infrastructure and education spending appear to be leading more and more people in California to address fiscal and tax issues.

6. Ken Farfsing, City Manager, City of Signal Hill: Mr. Farfsing returned for a third time before the Commission. He opened by asking that the Commission be very clear in its final report which of its recommendations are for immediate action and which are for further study. He also asked that equity issues be discussed in full so as to provide a guidepost for future discourse.

Mr. Farfsing distributed a testimony memo containing comments on Commission proposals. Its key findings were that the sales tax/property tax swap would harm cities whose sales tax revenue growth typically outstrips its property tax revenue growth. It went on to say that the swap would not permit cities to recoup prior infrastructure investments made to support business growth. The memo provided an example of how this would be the case in Signal Hill over a seven-year period. It also expressed concern about the swap's impact on city debt if existing "sales tax notes" were not factored into the equation.

The City Manager suggested that phasing the swap in over a period of five years might be a way to ameliorate its impact on the cities he was referring to. He urged that prior agreements, such as the aforementioned sales tax notes, be honored.

Commissioner Anthony asked how many communities would be impacted in the manner described by Mr. Farfsing. Farfsing opined that perhaps 50% of California's cities have equality between sales and property taxes. Ms. O'Malley noted that some communities property tax revenues are low because they are poor, while others appear to have low property taxes because they have placed a lot of commercial land into Redevelopment Areas. Commissioner Ross added that land use decisions and reduced property turnover slowed down property tax growth. Mr. Misczynski concluded by citing statistics that indicate that about 90 California cities could experience reduced revenue growth in the swap while approximately 400 would enjoy increased revenue growth.

Commission Chair Abel led a brief discussion about scheduling the next Commission meeting. Wednesday, February 2 was chosen, with a location in Sacramento to be determined by staff. (Scheduling exigencies later forced a change to February 23.)

Commissioner McPeak offered a final comment on the proposed Joint Committee process discussed earlier. She wondered if all the issues being covered by the Commission should be lumped together and sent to this committee, noting that the Speaker had mentioned using the committee as a vehicle for the main issues. She felt the growth-related issues should perhaps be reviewed elsewhere before being merged with the fiscal.

The meeting was adjourned at approximately 3 p.m.

No. 1:

Guiding Concepts

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

In order to avoid dependence 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.

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

Increase the transparency of state and local government.

I. Preliminary Proposal

A. Adopted Fiscal Provisions

Goal: Revise the current fiscal incentives in local land use decisions and increase the amount of discretionary revenue available for community and countywide services.

1. 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 in order to create a fiscal incentive for balanced land uses.

Proposal: Within each county, the county and each city would swap a portion of their locally levied sales tax with the state 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 K-14 entities (sources of these funds could come from ERAF, K-12 districts, community colleges, superintendents of schools, and/or county boards of education). The state, using the new revenue from the .5% of the sales tax, would backfill educational programs 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:

a. 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 educational agencies' share would go down.

b. 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. 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.

c. The property tax would be shifted from educational agencies. 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.

2. Settlement for the 1992-93 and 1993-94 Property tax shift

Objective: Increase the amount of discretionary revenue for countywide and other local government services.

Proposal: Return $1 billion of property taxes to counties, cities and special districts from the Education Revenue Augmentation Fund in each county or other State sources over time in annual installments of not less than $100 million, provided that the growth in any year of per capita non-proposition 98 general fund revenue exceeds the statewide consumer price index for the prior year. Property tax revenue would be returned in the same proportion in which it was taken.

3. Place the existing Vehicle License Fee subvention in the constitution.

Objective: Insure the continuance of the Vehicle License Fee per capita subvention after the VLF has been reduced.

Proposal: Existing law requires the state to replace the reduced fee revenue with other state resources. Create a constitutional obligation on the part of the state to maintain the per capita subvention and replace the revenue lost due to the reduction in the Vehicle License Fee.

4. Place the existing .5 per cent countywide sales tax authority in the constitution.

Objective: Provide for a constitutionally protected revenue source for countywide and community services.

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.

B. Adopted Accountability Provisions

Goal: Increase the transparency of government by introducing performance measures into state and local government decision-making and by clarifying the state/county relationship so that roles and responsibilities are clearly understood.

1. 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 state and 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. The state should establish a similar system of performance measures to assist in the annual budget process as well as part of a continuing policy evaluation process.

2. Establish a new model for the state county relationship

Objective: Clearly define the responsibilities of the state and the counties when the county is acting as an agent of the state.

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

3. Revise the County budget requirements in order for the public to distinguish the various roles of county government.

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.

4. Property Tax Allocation reporting requirement

Objective: Increase public understanding of how the property tax finances municipal services.

Proposal: Require the county auditor to report annually the amount and relative share of the property tax revenues for each agency in a manner that will increase the understanding on the part of the public of how municipal services are financed and how the shares of the property tax are distributed to cities, counties, special districts and school districts.

II. Recommended for further study and action by the legislature and the governor

1. Equity Impact Assessment

Objective: Ensure that reforms in the state and local finance system deal with existing and future equity issues in the gathering of public revenues and the distribution of resources throughout the regions in the state.

Proposal: In order for reforms in the local finance system to improve the imbalance in the financing of local services the equity issues must be addressed. Finance reforms should:

a. Create incentives for the development and maintenance of communities and regions to improve living standards, economic vitality, environmental protection, and assessable, efficient and effective governance for all their residents and workers.

b. Allocate public resources according to community need and correct imbalances in funding of local governments with respect to cities and counties with inadequate funding and "low social health" and low tax bases.

c. Reduce the gap between the "haves" and the "have-nots" and avoid exacerbating the gaps among population sectors.

2. Equity implementation measures

Objective: Understand to impacts on low-income communities of the recommendations of the Speaker's Commission and other state policies that affect the distribution of public resources.

Proposal: Provide an "Equity Impact Assessment" of proposals for state local finance reform.

3. Review the structure of transportation funding

Objective: Understand the inability of the current revenue structure to finance the state's current and future transportation needs.

Proposal: The legislature and the governor should undertake a study of the most efficient and reasonable way in which to finance the state transportation system, including methods to stabilize the revenue stream from the gas tax at its present rate.

III. Regional growth and development policy

Goal: Initiate a joint legislative and executive branch process for the development of state, regional and local growth and development policies and a governance structure that connects fiscal powers with roles and responsibilities. This process must recognize the importance of regions as economic forces and that preservation of environmental resources within those regions is essential to the well being of the state as well as insuring that equity considerations are a central part of this process.

1. Develop a set of state regional and local "smart growth" polices to guide the development and conservation of the state.

Objective: Revise the local planning and land use decision-making process by instituting regional and state growth and development policies that embrace the three factors of sustainable development - Economy, Environment and Equity.

Proposal: Adopt in state law a "smart growth" policy as the environmentally preferred alternative for local land use decisions. At a minimum, a statewide "smart growth" policy objective should be sustainable development characterized by the interrelationship of economic, environmental and equity issues. State development policy would include the following.

1. Maintain a healthy economy by promoting higher value job opportunities for people in each region.

2. Accommodate housing, both supply and affordability, within each region or sub region to match population and job growth.

3. Encourage efficient land use (which includes promoting strategies such as higher densities around transit hubs to establish transit villages, mixed-income and mixed-use projects, walkable 24-hour communities, recycling of "brownfields" and "grayfields," and "smart" conversion of closed military bases).

4. Require local general plans, which should include involvement at the neighborhood level, be linked to regional plans.

5. Protect vital and valuable ecosystems and natural habitats.

6. Conserve natural resources and preserve environmental assets.

7. Protect and conserve prime and unique farmlands.

8. Invest in infrastructure to ensure mobility and quality of life, especially in existing urban areas.

9. Reduce dependency on single-occupant-vehicle trips.

10. Reduce poverty and promote greater equity.

2. Establish a pool of resources at the regional or sub regional level that will encourage and facilitate regional decision-making.

Objective: Establish a pool of resources that is allocated to local jurisdictions based on a formula that recognizes specific policy objectives.

Proposal: The state establish a policy goal that each region is to strive to create (a) higher value job opportunities and (b) housing that accommodates all income levels, and that the jobs and housing be in proximity to each other. In achieving this policy goal, regions are to be guided by "smart growth" principles. Regions are required to develop performance standards and develop strategies to achieve the policy goal, establish performance standards and measures to tract progress, and report progress annually to the residents of the region.

Following is a model for implementing such a pool developed by members of the Commission. It does not represent the only methodology for accomplishing the objective.

Significant features

a. 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) and the county. 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.

b. If the pool area is coincident with Council of Governments (COG), a combination of COGs or two or more counties, the state will match the pool on a one to one basis.

c. The goal, after including the state match should be approximately $500 million each year.

d. Regions are to develop criteria for local government jurisdictions to share the pool. The regions shall oversee the distribution of the pool based on adopted performance standards.

e. The pool concept would sunset after 10 years and must be reauthorized by the voters.

Implementation: Within each region of the state a pool of funds would be created and could be derived from a variety of sources.

a. The pooled revenue going to each jurisdiction can be used for any purpose at the jurisdiction's discretion.

b. One half of the growth of the 1/2% locally levied sales tax (after the sales tax/property tax swap). The amount allocated to the pool could be done annually so that the sales tax base of the local agency will grow or a smaller percentage of the growth could go into the pool with the increase being cumulative so that the pool would grow faster.

c. Proceeds of the currently authorized 1/2 % countywide sales tax levied at the county level, but with the proceeds flowing to the pool rather than the jurisdiction with the site of the sale.

d. A portion of the property tax that is currently allocated to schools. The amount allocated to the pool would be replaced with state revenue.

e. A portion of the growth in the state income tax generated within the region.

IV. Still to be considered by the Commission

Goal: Provide constitutional protection to locally levied taxes and strengthen the home rule provisions of the constitution.

1. Enhance local government home rule powers

Objective: Establish a constitutional standard to assist the courts in distinguishing when a matter is within the sphere of local control and provide constitutional protection for locally levied taxes.

Proposal: Enhance the "municipal affairs" provision of the state constitution and protect locally levied taxes, including the property tax, from being redistributed by the state. The proposal contains the following elements.

A. Taxes that are locally levied, including the remaining general purpose 1/2 % locally levied sales tax, the 1/4% sales tax dedicated to transportation would be constitutionally protected, all other taxes that are locally levied and the state allocated property tax would be constitutionally protected.

B. Revise the state mandate reimbursement provisions of the constitution to consider the impact of state mandated local programs the local fiscal structure.

C. Revise the home rule provision of the constitution to include a standard for reviewing a challenge to an action of a city that had adopted a charter. Actions of the city would be presumed to be valid unless:

1. The action had significant extraterritorial effects

2. The policy interest in statewide uniformity outweighs the ordinary predisposition toward local control and

3. Statewide uniformity is essential and critical to advance an important state policy.

No. 2

Michael Coleman, Consultant to the League of California Cities and a regular witness before the Commission, prepared a memo for the League's Fiscal Reform Task Force reviewing the swap proposal. Commissioners Stenbakken submitted it to the Commission for the record.

The basic premise of the memo was that the impacts on individual cities would depend largely on three factors:

1. the growth rate of taxable sales in the jurisdiction

2. the growth in real property values as assessed for taxation

3. the presence and size of a Redevelopment Area in the city that captures property tax increment.

Coleman concluded that a substantial majority of California cities would see immediate financial benefits from the swap compared to the status quo and that the finances of all cities and countries would be improved in the long run.

No. 3

Roger Dunstan, of the California State Library, responded by memo and charts to a request from Commissioner Whiteside for information on city service expenditures. The information provided focused on police, fire, parks and recreation, and library services provided either by city employees, by contract with other agencies, or by other jurisdictions altogether. The information was gathered from the State Controller's records. Commissioner Whiteside requested that the memo be placed in the Commission record.

The memo served to demonstrate the wide range of levels of services provided by different cities throughout the state. The information underscored a point several Commissioners previously had made, that different jurisdictions would react to fiscal reform and government accountability proposals based at least partly upon the level of services they already provide. It also showed that there was no consistent correlation between how the cities choose to provide a service (city employee vs. contracting out, for example) and the level it chooses to provide.