Commission Meeting #3 Minutes
April 28, 1999
San Diego Association of Governments, San Diego
1. Call to Order/Introductions: The meeting was called to order at approximately 10:20 a.m. by Chairperson David Abel.
Dean C. Tipps
2. Host Welcome: Len Fabricatore of the hosting San Diego Association of Governments (SanDAG) welcomed the Commission and briefly outlined SanDAG's "A Proposal for State-Local Fiscal Reform in California." This report had been distributed to all Commissioners in advance of the meeting (and a summary of it may also be reviewed via the Metropolitan Forum Project's website at http://www.dnet.org/metro/new/finally.html). According to Mr. Fabricatore, the basics of the proposal are to increase the authority of regional agencies to allocate resources currently allocated by the State, to Constitutionally guarantee local control over locally levied taxes, to exchange State-earmarked revenue for general purpose revenue, to increase the amount of property tax revenue going to local government, and to transfer an additional 1% of sales tax revenues from the State to local government.
Various Commissioners commented upon the presentation or asked questions. Commissioner Ross asked about SanDAG's emphasis on local flexibility and noted that the State's 1998 reduction of the Vehicle License Fee (VLF) impacted that. Commissioner Szalay asked about how fully the proposals had been discussed and embraced locally. Mr. Fabricatore said there was some consensus but that local governments tended to focus on obtaining more funds from the State, including at least a partial ERAF reimbursement.
Commissioner Fox complimented SanDAG, noting that its proposals respected the role of California voters in the fiscal reform process. Commissioner Nathanson noted that the proposals did not directly address equity concerns, and Commissioner Harrington asked whether SanDAG had considered revenue enhancements and fiscalization of land use issues.
3. Presentation: Financing K-12 Education/Governance and Finance: former Chief Committee Consultant to the Senate Education Committee Bill Whiteneck discussed the basic relationships between how our school systems are governed and how they are financed. He opened with an emphatic statement that elementary and secondary education is a primary interest of State government in California. He went on to note the difficulties of reconciling the needs of school districts of widely varying sizes. California has eight districts with more than 50,000 students each contrasting with some 300 districts enrolling a total of only 1% of the state's student population. Some of these districts have student populations numbering in the hundreds.
Mr. Whiteneck went on to note that the State provides 58% of the school funding in California, with an additional 2% coming from the lottery. Of those dollars, 57% is general aid that districts can spend as they choose. The other 43% is earmarked by the State. Whiteneck noted that in 1978, 89% had been general aid and only 11% earmarked. This drift toward earmarking explains why schools have tended to defer such discretionary spending items as facilities maintenance and raises and reduce spending on personnel, libraries, certain curricula and extra-curricular activities. Whiteneck added that the categorical dollars have been used to enhance special education and bring about class-size reduction, and he wondered aloud whether school districts would have reduced class sizes left to their own discretion. He summed up the State legislature's attitude as being "when there's lots of money, we know best how it should be spent; when there's a shortage of money, you know best how to cut expenditures."
Mr. Whiteneck also discussed "Basic Aid Districts" and the impact of the Supreme Court's Serrano decision calling for equalized funding for school districts. He noted that there 51 Basic Aid Districts that only receive $120 per student from the State because they receive enough local property tax revenues to be adequately funded under Serrano. He added that court settlements stemming from Serrano have allowed for some discrepancies in funding between districts. Currently, the discrepancy between per pupil funding can be as high as $335 between districts and they are still considered to be in compliance with Serrano. Whiteneck said that the settlements turned funding equalization from a legal matter to a political one.
Whiteneck went on to say that, because of the political nature of school finance, changes in policy may well prove to be lousy politics. He described school districts as having ceased to be policy entities and become spending agencies. The loss of discretion has changed the character of school governance.
Mr. Whiteneck suggested revisiting the school finance recommendations of the California Constitutional Revision Commission, including accountability, authority for revenue-raising ability under certain controlled circumstances, and separating community college districts and county offices of education from property tax educational funding. He also mentioned reducing the number of special purpose funding categories and giving school districts more discretion.
4. Presentation: Financing K-12 Education/Reform: education consultant John Mockler opened by asking whether education finance reform is about increasing taxes or redistributing existing revenues. He noted that it is about deciding how we choose to spend what we have, how much to we "extract" (tax) and who gets to make the decisions. He added that education reforms start with good intentions but often end up tending to favor one group over another.
Mockler noted that school spending in California has declined from 5.7% of total personal income in 1972-73 to 3.7% in 1998-99. As California has become richer, it appears to have decided that educating its children is less of a priority. In 1972-73, the State established a school spending limit six years in advance of the passage of Proposition 13 and thus the quality of education began to decline as a result of what was felt to be a "positive reform" at the time. Then the Serrano decision created the greatest transfer of wealth from cities to the suburbs in state history.
Mr. Mockler added that State control of education spending decisions has resulted in a situation where schools don't get as much of the same dollar as they would if it were locally controlled. He said that the largest increases in funding under Proposition 98 have gone to child care, pre-school and special education. Everything else has declined. Referring to the larger question of increasing local control via fiscal reform, Mockler suggested that schools needed to be included in any proposals.
Responding to the presentations of both Mr. Whiteneck and Mr. Mockler, Commissioner Hauck noted that the large number of school districts with fewer than 1,000 students creates administrative and funding inefficiencies. Commissioner King brought up the relationship of property taxes used for schools and those used for services. He asserted that the State is subsidizing counties that short-change urban services and that high property tax counties get less State aid but can better afford to provide services.
Commissioner Fox stated that he didn't think the legal aspects of Serrano are completely dormant. He asked if allowing districts to institute their own revenue-raising options would increase inequities and re-invoke Serrano. Mr. Whiteneck replied that caps on those revenue-raising options (such as a cap at 10% over the statewide average) and excluding the 51 Basic Aid Districts could address that. He suggested the need for reform of both finance and governance and that Propositions 13 and 98 would have to be on the table along with reform proposals.
Commissioner Fox further noted that, for all the talk about unintended consequences of Proposition 13, there has been an unintended consequence of Proposition 98, asking whether the budget-making politicians ever allowed education spending to exceed the Prop. 98 minimum. Mr. Mockler said it had happened once and appeared to be happening again this year. He added that since Prop. 98, we have tended to focus on numerical equity without focusing on realistic equity: some students need more investment than others.
Commissioner Abel asked how the current school finance structure deals with high growth areas. Mr. Whiteneck replied that the Basic Aid Districts will do fine because, if their needs increase, the State will increase their per pupil allocation. Another issue, he added, was whether that allocation is adequate in general. Commissioner Bersin noted that we tend to deal with big issues only during crises and wondered how school finance reform could be placed on the table before then. Mr. Mockler noted that we can always accomplish little things, but the more we do that, the worse the overall situation gets. In order to accomplish big things, we cannot afford to split off constituencies. Mr. Whiteneck added that a lack of clarity in terms of political will and who possesses adequate political capital makes it difficult to chart a course.
Commissioner Whiteside mentioned vouchers and charter schools and noted that the latter can conceivably escape some of the categorical requirements placed on public schools. Mr. Mockler said they are "whiter, richer and less rigorously regulated." They receive public funds but don't have to provide certain programs or curricula. Mr. Whiteneck noted that permitting charter schools to be controlled by entities other than local school districts could lead to a loss of accountability. Regarding vouchers Mr. Mockler said that 7.9% of students already go to non-public schools and are thus no longer a burden to taxpayers. Introducing vouchers would mean that taxpayers would then pay for part or all of their school costs, and that money would have to come from increased taxes or cuts in public school funds. He added that polling has shown that the public supports vouchers as long as private schools must accept all applicants. Once people learn that private schools can refuse to admit certain students, support for vouchers drops off.
Commissioner Hauck concluded by noting that the State hasn't reconciled its relationships with school districts, special districts or local government in general. He noted that the legislature wants to have it both ways: "We won't get out of the way and neither will we take responsibility."
5. Presentation: Financing K-12 Education/School District View: Henry Hurley of the San Diego School District expressed the view that, no matter what the original source of the money, the State controls the amount received by public school districts in California. He reiterated comments made earlier that the funding of special education programs has become a very big categorical item in district spending, along with K-3 class size reduction.
Mr. Hurley added that the necessity for school districts to wait for the State Budget to be approved every year put a crimp in fiscal planning. He suggested consideration of multi-year funding for schools in order to provide some stability.
6. Organizational Business: Commission consultant Fred Silva of the Public Policy Institute of California distributed a draft "Mission and Problem Statement" for preliminary discussion along with a revised, simplified matrix of fiscal reform proposals from the California Constitution Revision Commission, the Legislative Analyst, the Business Higher Education Forum, the California Business Roundtable, the California Council for Environmental and Economic Balance and the aforementioned San Diego Association of Governments. He noted that the matrix would be updated for future discussion.
The draft Mission and Problem Statement, dated 4/26/99, was worded as follows:
"The Mission: Increase citizen and local government control over local taxation and local services, including schools, while neutralizing the fiscal incentives for particular land use choices and achieve a local tax structure that will complement economic growth.
"The Problem: Over the last 20 years the ability of citizens to influence the quantity and quality of public services close to home has been diminished. The current system of financing local services has created inequities among those who pay for services and runs counter to balanced economic growth. As a consequence, the citizens of California are losing control over the public services that affect the health and well being of their communities. In addition, the tax base for supporting those services ins influenced by fiscal incentives which may distort local growth and development decisions. This situation is made worse by the often-confused relationship between the state and local governments."
The document adds a list of four components to the Problem: "Local governments have limited flexibility to respond to local priorities; there are few incentives to foster balanced growth and a healthy economy; local revenue measures often treat similar taxpayers unevenly; the assignment of program responsibilities between the state and local governments is not clear."
The Commissioners engaged in a spirited discussion about the draft document. Commissioner Tipps suggested that it needed to be more general so that it did not limit the Commission's ability to seek solutions. He said that complementing economic growth was not the only goal, but that improving quality of life and fostering healthy communities should also be part of the Mission. Commissioner Allgood added that the sustainability of the economic growth must also be part of the equation.
Commissioner Whiteside called for more specificity on how local control could be increased. She noted that citizens already have a lot of influence through the initiative process. Commissioner Fox opined that citizen influence has increased over the last 20 years and said he felt that the Problem Statement needed some work. Barry Sedlek, monitoring the meeting for Commissioner Bob Foster, asked that the Commission not forget unfunded mandates in its considerations.
Commissioner Stenbakken stated that the document should not make the sales tax out to be inherently evil. The problem, he noted, is its predominance in the local finance mix. He asked that the negative role of the sales tax be de-emphasized slightly in the language. Commissioner Ross said that the lack of other tools is what makes the sales tax a problem.
Commissioner King suggested that the statement regarding inequities was too narrow and that agencies should be included. He also noted the lack of recognition that there could be revenue "leakage" in the system because some tax revenues, such as the gas tax impacted by fuel efficiency, could decline. Commissioner Whiteside noted that mention of local control should be accompanied by a reference to accountability. Commissioner Fox called for language protecting taxpayer influence on decisions. Citing Adam Smith, he noted that some feel that certainty is more important than equity.
Commissioner Szalay said that the document should note that the limited tax base applies to all services, not just countywide services. Commissioner Tipps noted that the current system contains the wrong kind of incentives, not too few incentives. He added that the Commission might want to focus on revenue neutrality. Commissioner Ross mentioned the importance of an "ability to pay" concept, with no one entity having to bear a disproportionate share of the fiscal burden.
7. Presentation: The Community College View: Dr. Jerome Hunter, president of San Diego City College, appeared to discuss the place of community colleges in the education finance picture. He asserted that the passage of Proposition 13 caused community colleges to cease to be a local priority in favor of being a State funding matter. This has led to decisions being made based on the availability of resources instead of educational needs.
Dr. Hunter said that community colleges need to be part of the picture if California moves toward re-granting local revenue-raising authority and lowering the vote threshold from 2/3 down to a simple majority. He noted that 78% of future increases in post-secondary education enrollment will occur at community colleges, yet they only receive about 1/3 of the total bond monies approved for higher education. Dr. Hunter went on to describe his campus as the most diverse community college in the second largest community college district in California, with an average student age of 29.
After Dr. Hunter's comment about the vote threshold for education bond measures, Commissioner Fox commented that the 2/3-vote requirement is 120 years old in California.
8. Presentation: The Municipal View of Fiscal Reform: Former San Diego City Manager Jack McGrory, now the president and CEO of Price Enterprises (a San Diego-based development firm), offered some thoughts on what he learned working in municipal government in the post-Proposition 13 era. During his tenure San Diego had to deal with both the recession and the ERAF shift of the early '90s. McGrory also noted that the passage of Proposition 218, requiring a vote of the electorate for every assessment, immediately preceded the lowering of San Diego's bond rating from triple-A to double-A. He alleged that this cost the city $10 million and constituted a back-door tax increase.
Mr. McGrory went on to describe cities as having become "wards of the State" and advocated some protection being written into the State Constitution. He also decried the fiscalization of land use and described a battle that San Diego won over Chula Vista by luring big retailers to a location on the San Diego side of the boundary between the two jurisdictions. McGrory offered one simple method of dealing with this problem: freeze current revenue levels and implement a growth formula. He also noted that cities have been finding creative ways to circumvent the 2/3-vote requirement, such as leased revenue bonds.
Mr. McGrory had several comments about the political aspects of fiscal reform. He criticized the 2/3-vote as giving each opponent of tax and bond measures, in essence, two votes to each supporter's one. He suggested that Proposition 218 was not an appropriate statewide doctrine, that local communities should be able to determine how they want to handle the approval of assessments and taxes. He also advocated the prohibition of paid signature gathering for initiatives.
McGrory then discussed "smart growth," asserting that the only effective growth manager is the economy. He also stated that smart growth will be impossible without local governance reform, including the regionalization of planning and decisionmaking. He suggested that economic incentives will also be required, such as a regional allocation of sales and property tax revenues. He offered¼% of the sales tax as an example of a sum that could be allocated regionally.
Mr. McGrory concluded by opining that the economic potential of California is largely untapped because of fiscal imbalances.
Several Commissioners responded to this provocative presentation. Commissioner Harrington suggested that, to achieve a regional approach, both local incentives and a plan for recycling old properties would be needed. Commissioner King suggested involving the business community more in fiscal reform and infrastructure discussions because it has so much at stake. Mr. McGrory agreed but noted that the business community in San Diego had failed to get involved in such basic issues as water rates and transportation and highway planning during his time in City Hall.
Commissioner Szalay mentioned fiscal incentives as being necessary to bring about reform. Commissioner Parraz asked if McGrory thought the public feels a sense of urgency about fiscal issues and offered his own opinion that it should.
9. Testimony: Joe Raguso of the San Diego Regional Technology Association appeared to discuss the perspective of the high-tech business community. He noted that California is showing other states how not to accomplish economic growth and that fiscal issues are a large part of that.
Mr. Raguso listed several issues of note that contribute to this problem. First he pointed to the allocation of land uses that increases the cost of housing. He pointed to an over-dependence on automobiles. He mentioned the "bar bell society," with an abundance of highly-skilled, highly-educated people on one end of the economy, a surfeit of under-skilled, under-educated service workers on the other, and a shrinking middle.
Raguso also talked about how small companies are disadvantaged by the current conditions in that they cannot afford to compete with larger firms to attract good employees. This is critical because small firms train workers and become a conduit for them into industry. These firms also tend to be parts and component suppliers to large companies, so it is important that they be able to attract good talent. He stated that today's system "kills the seed corn" of the economy.
Raguso closed by encouraging the Commission to think "outside the box" and offered a provocative example of what he meant by asking why we have both city and county government in California.
Commissioner Abel noted that high-tech businesses have heretofore been relatively uninvolved in fiscal reform and asked how that could be changed. Raguso agreed and suggested that some kind of carrot-and-stick approach was probably necessary to get businesses to go beyond the short-term in their fiscal thinking.
Commissioner Fox noted that the high-tech industries argue for a moratorium on taxing Internet commerce and wondered aloud if this needed to change. Raguso suggested that the high-tech industries might consider a different stance if they felt the tax revenues were being used in such a way (education, for example) that utlimately benefitted them. Commissioner Allgood replied that Silicon Valley should not be treated differently than other business communities. He said they should be less self-serving and that all taxpayers sometimes pay taxes for things from which they do not benefit directly.
Commissioner Allgood went on to ask if high-tech was willing to accept more development density as a means to address housing and congestion problems. Mr. Raguso responded that some people accept it to gain more support for their infrastructure and amenity needs. Commissioner Szalay said that the mix of services and public agency responsibility should also be factored in. He referred to polling that says citizens don't care who provides public services as long as they are provided.
10. Testimony: Donald Cohen of the Center on Policy Initiatives (CPI) brought a grass roots perspective to the Commission. He distributed a report called "Prosperity and Poverty in the New Economy" and noted that poverty has almost doubled in San Diego County in recent years. He asserted that fiscal policy can be a powerful weapon in improving peoples' lives and that policymakers should set high standards and consider the impact of what they do on the whole economy, not just the successful players in it.
Mr. Cohen went on to advocate increasing the standard of living from the bottom up and creating a broader constituency for reform. He suggested that more interests needed to be represented in the dialogue and that people needed to be able to evaluate current policy vs. recommended policy to determine their self-interest.
Commissioner Abel asked how best to grow the fiscal reform constituency in San Diego. Mr. Cohen said it couldn't be done by simply lengthening the mailing list. He advocated a process of engagement with community institutions such as churches, schools and community groups.
Referring to the CPI report, Commissioner King asked questions about its income disparity analysis. Commissioner Arteaga raised the issue of involving the media in the effort to broaden the constituency for fiscal reform.
11. Discussion: Moving to broader topics, Commissioner Whiteside suggested that an analysis of why current fiscal policy will not serve California well would be helpful to the Commission's work. Commissioner Allgood encouraged linkages with the other commissions working on governance and infrastructure issues.
Commissioner Nathanson raised the question of whether the Commission was ready to begin discussing its "endgame strategy" yet. He said there was a need to begin discussing what the Commission planned to recommend to the legislature. Commissioner Szalay agreed and urged regular discussion of both endgame and interim strategies. Commissioner Nathanson added that discussion of strategies for "marketing" fiscal reform could not wait for the Commission's recommendations to be ready and that there was a need to work on outreach immediately.
Commissioner Arteaga suggested looking at polling that has been done, noting that people tend to think one thing when the reality might be completely different. Commissioner Bersin noted that many opinion leaders in the state cannot articulate on fiscal reform issues. He noted that the possibility that current fiscal reformers, including the Commission, would fail to broaden the audience is a problem. He advocated defining tasks in measured, achievable increments and reducing the scope of the work so that it could be grasped by the public.
Commissioner Fox closed the discussion by asking about the relationship between the Commission and the current Speaker Emeritus of the Assembly who created it; if there is a change in Assembly leadership, would the Commission still be able to function? Jim Bickhart of the Speaker's staff commented that that was not a settled issue but that the Commission's charge was to finish its work by approximately the end of 1999 so it would be less likely to be a problem.
The meeting was adjourned at approximately 3:15 p.m.
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