Commission Meeting #3 Minutes

March 24, 1999
James Irvine Foundation, San Francisco

Synopsis

1. Call to Order/Introductions: The meeting was called to order at approximately 10:35 a.m. by Chairperson David Abel.

In attendance:

David Abel
David Allgood
Carl Anthony
Rubin Barrales
Martha Davis
Amy Dean
Bob Foster
Joel Fox
Linda Griego
Lee Harrington
Gary Hunt
Norman King
Lily Lee
John Maltbie
Sunne Wright McPeak
Chuck Nathanson
Randy Parraz
John A. Pérez
Jean Ross
Dwight Stenbakken
Steven Szalay
Elaine Trevino
Carol Whiteside

Absent:

Luis Arteaga
Ed Avila
Alan Bersin
Ed Blakely
Susan Hammer
William Hauck
Rich Morrison
Kevin Scott
Dean C. Tipps
Christopher Townsend
Ron Unz

2. Host Welcome: Nick Bollman of the hosting Irvine Foundation was unavailable to appear, so the Commission instead enjoyed the Bay view from the 25th floor windows.

3. Organizational Business: The Synopsis of meeting #2 was redistributed to those in attendance and the Commission later approved them as presented without comment. Discussion of the Mission Statement was deferred. Meeting #4 was set for Wednesday, April 28, in San Diego. School finance was set as a featured topic Discussion of subsequent meetings revolved around the location and topics for the May meeting. After initially pointing for Sacramento, a later suggestion was to hold it in Oakland and include housing as a topic. David Myers provided a brief update on the evolving web page at http://speaker.metroforum.org, which now features Real Player video highlights of past Commission meetings plus a variety of other information. Mr. Myers took photos of many of the Commission members over the course of the meeting for use at the website.

4. Presentation: Matrix of Proposals: Fred Silva of the Public Policy Institute of California (PPIC), who is consulting for the Commission, presented a two-page memo with a list he had compiled of various fiscal reform projects currently underway. He added that he would create a matrix comparing the focus and scope of these projects in time for the April meeting. Commissioner Barrales noted that there was a remarkable amount of activity going on. Commissioner Fox inquired about how the Commission could sample public opinion on these issues. Mr. Silva referred to polling data that Mark Baldassare of PPIC had recently completed and offered to obtain it for the Commission. Commissioner Whiteside asked how the various projects listed in the memo compared. Mr. Silva noted that that would be a focus of the April matrix.

5. Presentation and Introduction: Commissioner Anthony, attending his first meeting as a member, described his work with the Urban Habitat Program of San Francisco, noting its focus on environmental justice, economic justice, affordable housing, and fair share distribution of government resources, as well as its interest in developing the concept of metropolitan revenue sharing.

6. Presentation: Post Proposition 13 Patterns of State/Local Revenues: Michael Shires of PPIC discussed the findings of his recently published study, "Patterns in California Government Revenues Since Proposition 13." The study focused on revenues, not expenditures. Shires noted that control over both revenues and expenditures has moved away from local government in the last 20 years, but that the State's level of "self-controlled" revenues has remained fairly constant during that period. Cities have declined from 65% self-controlled (hotel taxes, business licenses, etc.) in 1978 to 42% in 1996. Counties have declined from 50% to 20%. These declines were attributed to slight rises at the State level and a rise at the Federal level.

Commissioner Szalay noted that the mix of services is an important factor for counties. He also stated that if counties had revenue-raising authority, many would probably impose county-wide utility taxes. Commissioner McPeak said she felt that there had been a net loss of control to the State Constitution, not merely to the State. She mentioned that all the revenues of independent districts were included in Shires' county revenue figures, so it should be noted that counties have even less discretionary revenues than the figures might lead one to believe. Commissioner Ross asked how much county revenue goes to health care and policy mandates such as the "three strikes" law. Shires noted that county hospitals were not included in his study.

Mr. Shires went on to discuss the whole question of discretion over revenues. He said there had been a slight decline at the State level, a major decline (from 65% to 30%) at the county level, a slight decline at the city level, a slight increase at the special district level, a modest decrease for schools and a slight decrease for higher education.

Some other points Mr. Shires made included the fact that counties have become less dependent on taxes and more dependent on intergovernmental transfers and enterprise revenues (hotel taxes, etc.); cities' tax revenues have been fairly constant and enterprise revenues up, but intergovernmental transfers (primarily by way of Federal revenue sharing, which was phased out) are down; special districts have seen taxes decline while intergovernmental transfers have increased.

Commissioner Hunt asked if this meant a reduction in cities' complaints about revenue adequacy. Shires said that for some it did and for some it didn't. The aggregate analysis in his study did not differentiate the high sales tax receipt cities from the low ones. Hunt also asked if cities had more flexibility. Shires said they do; they have more access to revenues and smaller geographical areas to cover.

Commissioner King stated that the State allocates up to four times more funding to some cities than others and that a measure of equity must be developed. Commissioner Whiteside noted that the aggregate figures in the study did not demonstrate the differing local abilities to cope with reduced revenues or the poorer economic performance of some municipalities. Under the current system, she said, the rich get richer and the poor get poorer.

Mr. Shires wondered aloud if AB8, the 1978 bill that helped implement Proposition 13 by freezing the revenue return to locals at the rates that existed then, was the right model for 1999. He said cities have the ability to generate additional taxes, which the counties cannot. On aggregate, cities are looking less to sales taxes, though certain cities depend on sales taxes a lot.

Commissioner Szalay mentioned that counties do have the ability to raise fees for specific services but that these revenues are not discretionary and many of them are restricted. Commissioner Harrington commented that the impact of over-dependence on sales taxes hits hardest in built-out cities where there is not as much room for new development. He also noted that when a municipality in Southern California does have discretionary land use decisions to make, the tendency is to go for a sales tax-generating use almost every time.

Shires concluded by noting that there have been significant changes in overall state and local fiscal relationships in the last 20 years. There has been decreasing local control of revenues, fewer discretionary revenues and a changing profile of how revenues are generated. The implication of this is that there is increased uncertainty at the local level about resources streams, increased vulnerability of local government to State-level budget cycles, and decreased emphasis on taxes and an increased reliance on nearly every other type of public revenue. He said that some argue that the overall loss of fiscal autonomy has alienated voters from the electoral process at the local level because local officials are no longer accountable for crucial fiscal decisions.

Commissioner Nathanson asked if the quality of local elected officials had, then, declined along with this loss of autonomy. Commissioner McPeak said that polls done in 1997 showed that voters wanted more government accountability if revenues were going to be increased. She also commented that focusing reform efforts solely on process would have the effect of "rearranging the deck chairs on the Titanic." A focus on outcomes must also be a part of the effort because solely focusing on process diffuses accountability.

Commissioner Fox asked if any new revenue raising powers have been created since the passage of Proposition 13. Mr. Shires pointed to the utility users tax. Commissioner Fox then referred to the courts' "Serrano decision" regarding equalization of funding for school districts and noted that it should be part of any discussion about the disconnect between voters and elected officials.

7. Presentation: Cracks in the Local Fiscal Foundation: Marianne O'Malley of the Legislative Analyst's Office discussed the foundation of local finance and how this local fiscal foundation has evolved over the last couple of decades.

In reviewing the three major sources of local government general purpose revenues (the property tax, sales tax and vehicle license fee), she noted that:

• Property taxes form the biggest piece of the revenue pie and California's tax rate is lower than many other parts of the country.
• Local governments in other states are generally less reliant on sales taxes.
• The Vehicle License Fee (VLF) is based on the concept of taxing wealth, and the VLF tax increases in rough proportion to the value of the automobile.

Overall, the she indicated that this base of local general purpose revenues has some positive attributes. Specifically, the revenues are broad-based, stable during recessions and easy to administer.

Ms. O'Malley went on to describe three weaknesses in the current system. First, she pointed to the lack of local fiscal control. Decentralized government, based on local control, allows differentiation in that a community is able to determine the level of fiscal responsibility it is willing to assume without imposing that level on others. Ms. O'Malley said that local control links the "privilege of spending with the pain of taxation," creating more accountability. Currently, local government and their communities have essentially no control over the rate, the calculation of the tax base, or the allocation of most local general purpose revenues. With the property tax allocation having been frozen in the '70s, residents have no control and little knowledge over the allocation of property tax revenues. She noted that currently 52% of property taxes goes to schools, 19% goes to counties, 11% goes to cities and 18% goes to other local entities.

She next noted that the current revenue system does not promote broad economic growth. Rather, it provides undue incentives for retail development.

Finally, Ms. O'Malley opined that equity and efficiency in the tax system is vital to its political acceptance and is important to promoting a healthy business climate throughout the state. She noted that California taxes expenditures unevenly - for example, California taxes the sale of most retail goods, but does not tax the purchase of most services or good purchased over the Internet.

She also noted that taxing properties based on their acquisition values can result in owners of similar properties paying very different levels of property taxes. In the case of residential properties, Ms. O'Malley said that there were arguments "on both sides" of this issue. Taxation based on acquisition value may discourage owners from moving and be perceived as "unfair." On the other hand, it may encourage neighborhood stability, provide security to the home owners, and be less "unfair" when the tax level is considered across the lifetime of the owner. For non-residential property taxes, however, Ms. O'Malley indicated that the use of acquisition value as the basis for property taxation has different ramifications. The higher level of taxes charged to new businesses can be a barrier to entry into the marketplace - and there appears to be less philosophic rational for taxing older business properties less than new properties.

Ms. O'Malley pointed out some predicaments for fiscal reform: a top heavy structure is hard to reform, there is little public understanding of the system or the problems, and interest in reform is deep but doesn't involve a large number of people ("a mile deep but an inch wide…").

She then offered some provocative ideas for reform: decentralize the allocation of property tax revenues, give local governments the power to set the rate of one broad-based tax at the local level, re-orient fiscal incentives for development, assess business property at market rate, and let counties impose the VLT.

Commissioner Nathanson then asked an only partly-rhetorical question: how has it come to pass that some school districts get more property tax dollars without appreciably increasing the school's overall funding level? O'Malley responded by suggesting that the increase has been illusory to a degree, with
additional local property taxes being offset by reduced State funding.

8. Presentation: The Need for Competitive Industrial Sites: Commissioner Harrington made an impromptu presentation on the state of industrial activity in Los Angeles County and its relation to the fiscalization of land use and other fiscal reform issues. He began by noting that the county has lost some 200,000 jobs since the beginning of the '90s recession.

Mr. Harrington stated that counties surrounding Los Angeles have increased their industrial capacity by three times compared to L.A. County. The latter is not keeping up with demand and is threatened with not being able to preserve its existing capacity. Manufacturing square-footage is dwindling and almost all new space being developed is for warehouses. If it wasn't for the apparel industry, the county would be in an even worse position. Even so, the apparel industry's wages are low and the industry don't boost the economy as much as it could.

The Commissioner went on to assert that there needs to be new "class A" industrial space, thoughtfully planned. It hasn't been coming to pass due to the dependence on retail sales for taxes. Perhaps cities need to get a share of State income taxes resulting from industrial development.

Commissioner McPeak added that this presentation underscored important principles. First, the alignment of the state/local finance scheme needs to support economic prosperity. Second, accountability needs to be aligned with revenue; if a local government approves a beneficial land use, it should receive at least some of the resulting revenue.

Commissioner Nathanson asked what would change decision making? Commissioner Harrington replied that cities need to be incentivized by, for example, reallocating the property or income taxes. In order to attract high value business to the urban core new tools are necessary, such as master plans and revitalization or enterprise zones. Creation of good jobs is the basic goal.

9. Presentation: Land Use and the California Economy: Economist/researcher Steven Levy made an impromptu presentation from the floor regarding his well-received report, "Land Use and the California Economy," published in 1998 by Californians and the Land. Mr. Levy noted that quality of life is right behind education as a location determinant for residents and businesses. It leads directly to a "pro cities" strategy.

The question remains, according to Levy, how to convince middle class families to live in cities. A key is improved education and adequate revenue for services and infrastructure. Commission Chair Abel noted that the Governor's new Infrastructure Task Force is charged with addressing this linkage, both for purposes of improving the economy and quality of life.

10. Presentation: The Urban Habitats Program: Commissioner Anthony offered a brief overview of his work. He said that, instead of investment increasing, it is poverty that is increasing in inner city neighborhoods and beginning to spread to suburbs. He noted that 35 out of 100 Bay Area communities have insufficient tax bases and that the top 25% of the income population gets the lion's share of services, creating a "favored quarter."

The Commissioner added that environmental groups, blue collar workers and inner city residents need to work together to overcome a polarization that has taken place. Bringing residents of stabilized, mature suburbs into the dialogue is a key to building bridges and stemming the tide of disinvestment. Mr. Anthony suggested revenue sharing at the city level, pointing to Minneapolis/St. Paul, Minnesota, as a possible model. The goal is creation of a regional pool of commercial/industrial tax base, distributed based on the inverse of the disparity between communities. Instead of continuing to approach these issues in a disconnected fashion, the fiscal structure should support cooperation and collaboration.

Commissioner Stenbakken suggested that, in addition to looking at Minneapolis/St. Paul, the Commission should also review revenue sharing approaches being tried in Washington and Indiana. Commissioner Hunt suggested that the group needs to remain focused on its core tasks even as it discusses related issues such as housing. Mr. Anthony added that the Commission needs to encourage participation in the process.

Commissioner McPeak said she agreed that the system needed to be adjusted so that some meaningful land use decisions could be done locally. She suggested that there would be more legislative sympathy for change if calls for the ERAF "correction" could be linked with desirable outcomes such as housing production.

Commissioner King said that in the Inland Empire, dispersed, suburban growth has not dampened diversity. He added that, however, "smart pricing" is a key part of "smart growth." He suggested that subsidizing transportation, from rail projects to road-building, encourages dispersion. Commissioner Nathanson asserted that any such policies raised questions of equity, since not all commuters can afford to live in the city.

11. Presentation: Sharing Resources and Responsibilities: Redwood City Superintendent of Schools Ron Crates stated his belief that government entities need to share resources. Among them he listed time, money, people, value, accountability, high standards, collaboration and partnerships. A challenge is to identify opportunities for fairness and balance and for levels of government to work together.

Superintendent Crates emphasized local control in communities, improved results and revenue enhancement. He noted that, in 1978, 11 cents of every public school dollar was earmarked by the state; now that figure is 40 cents. This has led to centralized control, disenfranchisement of the voters, lack of community engagement and discouragement of entrepreneurial spirit and creativity.

He went on to suggest linking revenue to results, stating that communities need to be engaged in achieving improvements. Too often, he said, communities have been falling into the trap of thinking that "the students don't look like me." Instead, we should be embracing financial incentives to share resources, focusing on improved performance.

Mr. Crates said that over the period from 1987 to 1997, California's per pupil investment has declined by 1%, despite the increased number of actual dollars spent. Proposition 98 has inadvertently become a ceiling, not a floor, and has had a negative impact on counties and cities too.

Mr. Crates itemized California's rankings: It is 41st in per pupil spending, 47th in revenue for schools per $1,000.00 of income, and 51st in guidance counseling and students per librarian, even as the state is 13th in per capita personal income and 18th in tax revenues. He opined that our investment in K-12 education is an embarrassment and that student performance is also embarrassingly low, adding that the public was not going to authorize increasing the investment (and taxing themselves to do so) unless it can be tied to improved results.

Commissioner Maltbie suggested that this linkage should be a straightforward one between per pupil spending and educational performance. The Superintendent noted that his district in Redwood City has $500-1,500 less to spend per pupil than districts surrounding it. He said most districts are comparable, but a few are not. Large districts such as Los Angeles Unified define the average. He also noted that motivating employees to bring about improvements is difficult without having the resources to improve pay and working conditions. He said he also loses teachers to high housing costs.

Commissioner Ross opined that some fiscal reform remedies could hurt education funding and that it would be difficult to fulfill all needs in a revenue neutral world. Commissioner Allgood asked what the role of collective bargaining is in the effort to improve results. Mr. Crates responded by referring to the difficulty in identifying shared interests, which he believes should be improving working conditions and employee quality of life at the same time as improving performance.

Commission Chair Abel suggested that Proposition 13 removed some of the incentive for shared interest. Crates replied by noting that the state of Texas has no collective bargaining and that its local school districts have the power to tax. Commissioner Harrington stated that school funding problems were going to be difficult to solve playing a zero-sum game. Commissioner Nathanson said that zero-sum is being realistic; the question is what can be done with the same or less revenue and more discretion? Superintendent Crates said that school districts would be able to set their own priorities but that this would not be enough.

Commissioner Hunt offered the opinion that if there is more accountability, the revenue would follow. He asked why the unions aren't "stepping up," suggesting that they had not played a constructive role in processing the Governor's recent education reform package of legislation. Superintendent Crates said that both Propositions 13 and 98 inhibit increasing revenues based on results. He asked whether we would be willing to invest more money in public education and give more local control to schools showing improved results. Without it, he said, we don't have the incentive for agreeing upon shared interests.

Commissioner Pérez noted that it is not easy to measure productivity in the educational field because of the number of changing variables. He noted a need for equitable evaluative tools to avoid inequities. Mr. Crates concurred but said these tools are almost impossible to create. He felt we cannot use the measurement problem as an excuse for not moving ahead.

Commissioner Anthony added that he felt this same problem applies to the business sector in holding it accountable in reducing the disparities of income in society and for supporting schools. Commissioner McPeak asserted that there are many responsible businesses. She then spoke of how some district contracts made improvements difficult and that administrative inflexibilities breed inefficiencies and help create the impression that money is being wasted. She advocated an increased role for counties in creating priorities and flexibilities in public education. Commissioner Parraz suggested that the teachers' unions should join this discussion at the next meeting in San Diego.

Commission Chair Abel introduced a new twist by noting that his experience on the LAUSD Proposition BB oversight committee had shown him that agencies are competing with each other for scarce land for facilities and that this is inadvertently driving the price of those facilities up for all agencies in Los Angeles. Commissioner Trevino added that education doesn't work well in conjunction with job training in locations where unemployment is high. Unless there are available jobs, Federal JTPA funds are not accessible and the effort collapses in on itself.

Mr. Crates also distributed a publication of EdSource called "How California Compares - Indicators and Implications for Our Public Schools."

12. Presentation: Housing Adequacy and Fiscal Reform: Richard Lyons of the California Homebuilders Association reported on some findings of his group. California is consistently meeting less than 50% of new housing needs annually, which makes the state one of the most unaffordable places to live in the United States with a $209,000 median home price: we are 48th in home ownership rates.

Lyons asserted that we need to encourage housing construction in areas of high job growth and employment and that a stabilized local government revenue base would encourage this. He added that inadequate infrastructure runs up home prices by incentivizing local decision makers to burden new development with the cost of infrastructure, such as schools and main sewer lines, that serve the entire community.

Commissioner Griego raised the question of sprawl and asked why we don't use more of the infrastructure we've already paid for. Mr. Lyons replied that sprawl is a function of poor planning and poor locations. He said builders respond to the market and that they would build in cities if it was financially feasible (referring to building costs and availability of insurance) and the politics weren't an insurmountable obstacle. Commissioner Allgood suggested the Commission hear more about the Playa Vista project in Los Angeles, where many of the questions surrounding infill development, infrastructure and local politics are being played out.

Commissioner Anthony asked if the obstacles meant that rental housing would play a larger role. Commissioner Hunt suggested that ownership should be a goal for everybody and that urban densities, better schools and improved public safety are part of the formula for avoiding sprawl.

Bill Cerna of the Bay Area Homebuilders Association picked up the presentation at this point, describing the linkage between taxable sales and new housing units in San Francisco, San Mateo, Alameda and Contra Costa counties. He said that the data belied the common assumption that housing doesn't pay its own way, because new households provide new customers. The correlation is stronger in high growth areas, where more sales taxes are being generated.

Commissioner Harrington asked if the lack of sites for new retail in slow growth communities also played a role. Commissioner Ross asked if the data was broken down by cities, so that the linkage between new housing and new retail could be factored in. Mr. Cerna reported that the data did not break out that detail. Commission Maltbie suggested that it could be just a few high growth cities within the high growth counties that were driving the correlation.

Audience member Tim Frank of the Sierra Club acknowledged that homebuilders are definitely part of the answer to sprawl. But, he stated, we should use land efficiently, with a link between location choice and the costs associated with it. Commissioner Davis added that the maintenance of existing infrastructure needs to be more seriously considered. Mr. Cerna replied that, given the jobs/housing imbalance and apparent consumer product preferences, engineering choices is difficult. Commissioner Nathanson offered an example of how new homeowners in the San Diego area who had been charged special fees for infrastructure as part of their home costs turned around and voted against a special library fee that would have helped other parts of town.

The meeting was adjourned at approximately 3:40 p.m.

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