Commission Meeting #5 Minutes

1. Call to Order/Introductions:
Chairperson David Abel called the meeting to order at approximately 10:20 a.m.

In attendance:
David Abel
Carl Anthony
Rubin Barrales
Bob Foster
Joel Fox
Norman King
John Maltbie
Sunne Wright McPeak
Rich Morrison
Chuck Nathanson
Jean Ross
Kevin Scott
Steven Szalay
Elaine Trevino


Host Welcome: Kathryn Strehl of the hosting Lockheed-Martin Missiles and Space Corporation gave a concise description of the nature of the firm’s business. Lockheed-Martin now has consolidated the aerospace activities of more than 20 well-known firms all over the country. The Sunnyvale facility is one of its largest, currently employing some 5,800. Ms. Strehl described the company’s attempt to move another 1,000 from the Delaware Valley in Pennsylvania that was unsuccessful because of high housing costs in the Silicon Valley area where the Sunnyvale facility is located. According to Strehl, too many key employees refused to relocate under the adverse quality of life circumstances they would have faced in California. This was an appropriate segue to the regular meeting business.

2. Presentation: Financing Municipal Government: Town Manager of the nearby City of Los Gatos David Knapp spoke about the fiscal issues facing a small city in California over the last 20 years or so. He noted that the constraints have become more severe over time, especially since the ERAF shift of revenues from local government to the State in the early ‘90s to pay for public education during the recession. Coinciding with the loss of revenues has been an increase in the cost of services. The outcome has been that Los Gatos and other similarly sized municipalities have been forced to cut back and discontinue some services they used to provide. Mr. Knapp cited animal control as being one of them. Los Gatos has contracted this service out to the local Humane Society. But another crisis is looming as the Society has notified the City that it lacks the shelter capacity to hold animals in its shelters the extra days now required to comply with a recent change in State law.

Mr. Knapp went on to note that the State’s taking of property taxes instead of sales taxes from locals has impacted statewide policy objectives. Because of the cost of providing services to residential developments, the supply of new housing has been constricted and housing costs have risen. Second, the much-discussed fiscalization of land use (aka "Store Wars") has taken place. Mr. Knapp opined that fiscal decisions should be based on statewide policy goals, not who has the most lobbying influence.

Next, Mr. Knapp mentioned the 1998 State action to cut the Vehicle License Fee (VLF). Because historically and statutorily this fee has brought considerable revenue to local government, this action is especially harmful to locals when taken on top of the ERAF shift. Knapp noted that the amount of money it represents to Los Gatos is the annual cost of operating its libraries. He added that the fate of the city’s libraries was awaiting this year’s State Budget (which as of this writing proposed to include a one-time "make whole" payment to local governments relative to the VLF cut).

Mr. Knapp stated that the cumulative fiscal situation forces small cities to be extremely realistic about what they can afford. He opined that, in general, this is not necessarily a bad thing. Furthermore, he noted that in the Silicon Valley area it has led to the formation of Joint Venture: Silicon Valley Network, the public/private policy consortium that has been working on planning and fiscal issues in the area for several years. He predicted that Joint Venture would release a set of fiscal reform proposals in the 1999-2000 fiscal year. These proposals will likely reflect the need to adjust government’s fiscal structure to the new realities of how the economy functions. They also will look at the alignment of fiscal policy with State and public policy objectives.

Commission Chair Abel asked Mr. Knapp what "points of tension" he thought existed in the effort to develop fiscal reform proposals. Knapp replied by first citing the current requirement for a 2/3 vote to approve infrastructure bonds. He then noted the local disparity between the 200,000 new jobs and 60,000 new housing units generated in recent years and the pressure this has placed on housing affordability and transportation. He described the situation as a "self-limiter" on economic growth. He opined that, with approximately 20% of the voters opposed to any measure that generates revenue for government spending, it is difficult to win approval for street improvement and other transportation infrastructure bonds.

Commissioner Maltbie raised the issue of county jail booking fees and how they relate to both the local government fiscal situation and the crime rate. Commissioner King noted that the County Sheriff in many counties does not have to pay this fee.

Commissioner Fox raised the issue of taxing commerce conducted via the Internet. Mr. Knapp said that there "should be something, but it has to be rational, constrained and reliable." He expressed the fear that local sales tax revenues will be lost when purchases shift from local retail to the Internet. He said that the revenues would either have to be replaced or services reduced.

Commissioner Morrison asked how best to encourage regional cooperation in addressing these issues. Mr. Knapp said that Joint Venture would be suggesting a test mechanism for sharing locally derived revenues in its package of proposals.

Commission Chair Abel then asked Mr. Knapp what he thought the Speaker’s Commission should recommend to the legislature. The reply was, first, more fiscal autonomy and discretion at the local level, because all services are local and local officials and the local public are better equipped to make the decisions. He added that, however, some issues, such as affordable housing and professional licensing, would continue to require some state policy and administrative direction. Knapp’s second offering was that at least some restrictions should be removed on how certain revenues are spent at the local level.

Mr. Abel followed up by noting that the Commission has heard pretty much the same complaints and suggestions from presenters and testifiers from all over the state and asked why the fiscal problems have been so difficult to solve. Mr. Knapp answered that a combination of political and technical impediments exists. He added that it seems as if lobbying determines the outcome of these debates, not the pursuit of broad goals and policy objectives.

Commissioner Maltbie asked if Los Gatos constituents were asking for more services or more cuts. Mr. Knapp replied that government tends to concentrate benefits and diffuse costs. He opined that the limitations on revenues actually help local government to resist special interest spending requests.

Commissioner Fox followed up by asking if whether a return of the ERAF property tax shift to locals would provide enough revenues to address local needs. Knapp said that Los Gatos has adjusted its expectations by economizing, but that things like the VLF raid continue to create uncertainty and that causes ongoing problems for local government. He offered that the property tax is a better, more reliable source of local revenue because it carries with it a nexus between the value of property and the value of services. With sales taxes, locals either have boom or bust years. During his time in Los Gatos, Knapp said, he has not been able to discern what an "average" sales tax receipt year would be. Commissioner King then opined that different city managers would say different things because some cities get more sales or property taxes than others do.

Commissioner Nathanson asked how best to impact the affordable housing issue. Knapp frankly replied that neighborhoods tend to dislike increased density adjacent to them and that this is a built-in force militating against creation of affordable housing. He noted the conundrum the state faces in dealing with both density and sprawl, both of which have become "dirty words" in the planning lexicon. He also noted that long time residents tend to cite the costs they have to bear for new housing density as one reason they oppose it. But, with Proposition 13 property tax ceilings and the proliferation of fees added to new development, it is the new residents themselves who tend to pay the public cost of supporting their own new units.

Commissioner Maltbie then asked about creating a system that would provide locals with a portion of the State income tax. Knapp replied that in 1974, when he was working for the City of San Diego, this proposal surfaced and met with a poor reception among elected officials and others.

Commissioner Ross asked about how large and small cities’ situations could be compared and contrasted. Mr. Knapp referred to the terms, "local identity" and "local autonomy." He explained that small towns are more cohesive, with a higher percentage of residents tending more to stay for a long time. However, he added, other factors can come into play, such as urban design and lot size. He noted that Los Gatos and Saratoga are immediately adjacent but Los Gatos has smaller lots, with neighbors coming into contact with each other more often than happens in Saratoga. The greater sense of isolation among residents in Saratoga has contributed to more conflict among the city’s residents and policymakers.

Mr. Abel continued by asking what structural changes Knapp would recommend. Knapp called for a higher level of predictability in the level of revenue available to local governments as well as the number of services they are mandated to provide by the State.

State Library staffer and Speaker’s Commission consultant Dean Misczynski asked if his description of local government as "fiscal shock absorbers" for the State was accurate. Mr. Knapp said generally it was, but that the VLF cut represented the inverse. Instead of the State taking money from the locals in bad times and giving it to them in good times, the VLF cut was an example of taking it from them in good times.


3. Discussion: Commission Mission and Problem Statement, draft #2: Commissioner Abel led off this segment by noting the Commission’s original desire to approve the mission and problem statement in Sacramento at the June 23 meeting. Dean Misczynski carried on by summarizing the new draft of the Mission and Problem Statement. This document was revised by Commission consultant Fred Silva after an initial review and discussion that took place at meeting #4 in San Diego in April. The mission was described as follows:

"Improve the quality of life and foster healthy communities by increasing community control over resources used for community services. Establish a fiscal structure that is neutral to growth and development policies. Clarify the roles and responsibilities of state and local government."

The problem was worded as follows:

"Due to increasing state control of local resources, the ability of citizens to influence the quantity and quality of public services close to home has been diminished. Although the citizen’s ability to vote on local taxes has increased in recent years, a significant portion of the resources used for local services are under the control of state government. The current system of financing local services has created inequities among those who pay for services and runs counter to balanced economic growth. This situation is made worse by the often-confused relationship between the state and local governments."

The statement went on to describe four components to the problem: 1) Local governments have limited flexibility to respond to local priorities; 2) the local tax structure has narrowed and does not foster balanced growth and a healthy economy; 3) Local revenue measures often treat similar taxpayers differently; 4) The assignment of program responsibilities between the state and local governments is not clear.

An addendum to the statement included a set of "Guiding Principles," dealing with A) "State/Local Relations," B) "Financing Local Services," C) "Strengthening the Home Rule provisions of the State Constitution," and D) "Establishing a local fiscal system that is neutral to growth and development decisions."

Mr. Misczynski commented that he felt two of the Guiding Principles were key. He cited the second one in the State/Local Relations section, "Ensure that the entity responsible for providing the service has the ability to organize, administer and finance the service." He also referred to the second item in the Financing Local Services section, "Provide a constitutionally protected revenue base for financing local services." He then turned the floor over to Bay Area Regional Co-Chair Sunne Wright McPeak who presided over the ensuing discussion.

Commissioner King suggested that delineated problem number three, dealing with treating similar taxpayers differently, needed to take into account the concept of equity. He described the Inland Empire city of Moreno Valley, whose population has grown by 1,500% since 1980. The community has been a key location for affordable single-family homes in Southern California. Mr. King said the growth was made fiscally feasible by the imposition of a utility tax. He noted that wealthier communities are less likely to need such a tax to fund services and thus have no incentive to approve affordable housing. He said that the VLF is critical for less wealthy communities and that we would not tolerate a difference in sales tax rates comparable to the differences in per parcel property taxes under the current system.

Commissioner King then mentioned problem number four, dealing with state and local program responsibilities. He suggested that the Commission should emphasize the public’s need to understand the system better so they could make their officials accountable. He also pointed to the lack of recognition of the "leakage" of revenues, such as the declining gas tax receipts and the impact of Internet transactions. State income tax does not suffer appreciable leakage and, as other revenue streams decline, stands to become a more dominant source of money.

Commissioner Barrales pointed out the need to consider the issue of establishing relative certainty both for taxpayers and local government. He went on to challenge the concept "neutral to growth" that appears both in the delineated problems and the Guiding Principles. He suggested that there might be a compelling public interest in encouraging some kinds of growth, and that this interest is likely to differ from community to community. Mr. Barrales expressed a desire to place some extra emphasis on the need for balanced growth and a healthy economy.

Commissioner Ross stated that the Commission, or someone, would need to provide the public with some basic education on government finances (i.e., where the money comes from and where it goes). Also, she opined that it would be difficult to adjust the current inequities without also adjusting which constituencies win and lose in a system in which the revenue pot was not somehow increasing. She pointed to Guiding Principle A4 (local flexibility), suggesting it is problematic because allowing local flexibility also allows local irresponsibility. Ms. Ross noted the inclination of some cities to export their homelessness problems across the boundary line. She also stated that some California counties are spending all of their CalWorks (welfare reform job program) money and others are sitting on it, unwilling to spend it even if it is not really theirs and they cannot use it for anything else.

Commissioner Ross also discussed B2 (protected revenue base), noting that counties tend to have more programmatic pockets to pick and that programs for low income residents would likely be the first to suffer when it was time to cut back or make difficult choices.

Commissioner Scott criticized the draft, characterizing it as too long and lacking in crispness. He also felt it avoided a necessary focus on government finance and placed too much attention on quality of life issues. He suggested reconceptualizing the mission statement accordingly.

Commissioner Szalay disagreed with Commissioner Scott’s suggestion to start afresh, but agreed that the statement lacked crispness. He argued that the inclusion of quality of life concepts was crucial because the whole point of government ultimately boils down to providing quality of life.

Mr. Szalay went on to note that Guiding Principle B (financing local services) probably erred in focusing on education, since it could be argued that the current method of funding education makes it no longer a local service. He suggested that schools could perhaps be funded with revenues other than those from the property tax and that there are not enough property tax revenues to fund all local services.

Commissioner McPeak asked about the nature of the "common bond" that fueled the discussion. She felt that it should not just be trying to establish peace between local and state government. It should also include trying to serve people and improve their quality of life. At issue is how financial relationships relate to quality of life.

Ms. McPeak offered that revenue sources should be predictable, sufficient and stable. She added that the issue of accountability needed to be "front and center" and opined that schools should stay on the property tax, but that multiple revenue sources are needed to allow for fluctuations in any one of them. She suggested the need to establish a threshold base for property-related services.

Commissioner Morrison opined that a basic determination should be made on a finance system based on how it effects the economy, the environment and social equity. He stated that any system of regional cooperation should be neutral or pro-community growth and expressed his own preference for neutrality.

Commissioner Anthony asked what neutrality meant regarding growth and development. He wondered if a democratic society could survive if 99% of its people don’t understand the tax system. Regarding the mission statement, he suggested focusing on the actual mission paragraph and using the rest as a supporting document.

Commissioner Fox pointed to delineated problem three (treating taxpayers differently) and stated that the implicit assumption that the public does not accept the current system may not be correct. He offered that the entire paragraph could be expendable except for its reference to commercial property and how existing owners benefit from the current system.

Commissioner King suggested that local government should move toward the establishment of performance standards for the purpose of increasing accountability. He also felt that there should be a mention of infrastructure as it relates to the local level and that there should be communication with the Governor’s Task Force on Infrastructure. Further, he suggested building in a phasing-in aspect in the Commission’s proposals, since it was impractical and politically infeasible to do everything at once. He also suggested not prejudging incentives at this point, since the Commission might later decide to include them.

Commissioner Szalay reinforced Mr. King’s comment on performance standards, saying that measuring performance is a key part of accountability. Discussing Guiding Principle A (state/local relationship), he suggested moving toward a bilateral, equal relationship. Counties and the State should enter into bilateral agreements incorporating administrative flexibility and State oversight.

Commissioner McPeak expanded that notion into a tri-lateral one, including counties, the federal government and the State. She said tri-lateral partnering was preferable to block granting.

Mr. Szalay agreed, saying that the tri-lateral model was the future of human services in California. He opined that we must get beyond the notion of intense oversight on a program by program basis.

Commissioner Scott added some further concerns with the mission and problem statement. He said the current discussion suggested a lack of agreement on key assumptions appearing in the statement – neutrality on growth, for example. He asked if the Commission was ready to undertake the realignment of government responsibilities. Mr. Scott wondered whether, if the Commission identified some solutions, the solutions would lead back to the set of problems outlined in the statement.

Commissioner Nathanson stated that, while they all may be valid, the statement appeared to contain too many agendas and asked if it would even be possible to narrow the list down effectively.

Commissioner Trevino mentioned delineated problem one, local flexibility, stating that the lack of it is crucial. She also supported the idea of performance standards. Ms. Trevino suggested that elected officials, in addition to the public, needed to better understand the system. She also underscored the validity of a system that was neutral on growth, pointing to high vacancy rates in central cities because the current system skewed toward outward growth.

Commissioner Ross suggested that the Commission’s desired outcome will impact the content of the mission and problem statement. She noted that an existing nostalgia for California’s so-called golden age overlooked the fact that different people viewed the era differently and that fiscal problems predated the passage of Proposition 13. Commissioner Fox chimed in by reminding the Commission that the U.S. Constitutional Convention was called to fix fiscal problems written into the Articles of Confederation but ended up being the vehicle for a whole new Constitution.

Commissioner Morrison suggested that trying to finalize the mission and problem statement in June could lead to a flawed document. More effort will lead to clarity. Commissioner Szalay said the Commission might need a facilitator and an altered schedule, since the problems being discussed appear to be legitimate based on presentations and testimony heard to date. Commissioner Maltbie reminded everyone that the extra time simply might not be available due to legislative and other constraints.

Commissioner McPeak replied by saying that the Commission Chair envisioned the statement as a working document. It should identify the mission and problems, then lay out challenges to the mission and establish principles. She noted that draft two mixes in solutions. She added that the Commission should try to meet its schedule but avoid making bad decisions in the process.

Commissioner Morrison noted that a clearly focused mission and problem statement would narrow the range of solutions. Commissioner Scott agreed, saying that reaching agreement on the statement would allow the Commission to move quickly toward recommendations. Commissioner Anthony suggested trying to frame the statement as closely and as quickly as possible while remaining open to revisiting it as necessary.

Commissioner Nathanson stated that the current draft reflected at least some of the work of the California Constitutional Revision Commission and that some of the current Commission members come from different perspectives. He cited a dichotomy between "regionalists" and "tax and revenue" people.

Commissioner McPeak suggested working on a third draft, distributing it in advance to the Commission before the June meeting. She also proposed creation of a sub-committee to work on it and nominated Mr. Nathanson to sit on it. She asked him, as a self-admitted regionalist, what issues he thought were important.

Commissioner Nathanson replied that the current statement already includes the important stuff but also reflects tensions, unresolved issues and ambiguities.

Commissioner Barrales endeavored to identify the issues. He pointed again to certainty for taxpayers and local government and added flexibility for local government and incentives for balanced growth.

Commissioner Scott suggested a way to re-organize the statement. The lead should identify why the Commission is taking on fiscal reform. The second section should describe the problems. The third section should identify objectives and constraints. He also asked which levels of government the Commission was empowered to address: State, local, county, school, special districts?

Mr. Szalay suggested adding accountability to Commissioner Barrales’ list of issues. He also wanted to include outcomes in this section, including the accountability of service providers, the nexus between revenues and the services being offered, and accountability to the public (performance standards).

Mr. Fox identified himself as more of a minimalist and suggested the statement should simply be a preamble to the solutions that would be offered in another context.

Commissioner Anthony said there is a polarization in California around issues of race and class and that isolated populations need to be engaged in this process. He supported inclusion of a regional model if it addressed ways of cooperating. He also noted a need to acknowledge how the current system encourages the waste of natural resources.

Ms. McPeak reiterated her comment that the Commission’s vision needed to go beyond advocating a political balance between State and local government. She again pointed to the need to look at quality of life in the broadest sense, what we use government for. She then asked for volunteers to join Mr. Nathanson on the mission statement sub-committee. Commissioners Anthony, King, Morrison, Scott and Szalay joined Commissioner Nathanson. Their goal would be to lay out the mission, note the problems and assumptions and lay out a set of principles. Solutions should not be included. The sub-committee would communicate in whatever ways were most convenient and, in conjunction with staff, develop a third draft that could be circulated to the Commission by approximately June 16.

4. Presentation: The New California Economy: Presenter Steven Levy of the Center for the Study of the California Economy began his comments by noting that quality of life is ultimately an economic issue and that addressing growth problems (i.e., sprawl and decentralization) addresses resource (environmental) problems. He added that these problems cannot be addressed without the involvement of government but doing so probably also requires other mechanisms as well.

Commissioner Scott inquired about the role of racism and classism in these issues and Mr. Levy replied that there seems to be one. He went on to say that this related to a "demand-side" problem facing communities, asking why anybody would want to live in underfunded communities with poorly maintained infrastructure, poor schools, and so forth. Mr. Levy then related this to the sprawl issue by suggesting there probably is no way to resolve service provision problems without more revenue. Thus, it will be difficult to attract more density to communities facing shortfalls.

Commissioner Scott argued that this conclusion ignores the fact that per capita taxes for city finances are higher in big cities than in smaller communities, including some perceived to be better able to afford superior services. Levy responded by saying that many cities have found or created mechanisms to work around Proposition 13 constraints, wondering aloud whether those mechanisms are good or bad. The bottom line, he added, was not the tax level but whether cities can provide the level of service that attracts and retains residents.

Commissioner Fox asked if some of the problems could be solved through privatization or other alternative forms of service provision. Mr. Levy said that there are two major issues that seem not to get resolved at commissions such as this one. First is the ideological debate about how government should operate, whether it should be trusted and what can be done to make it function better. Second is the confusion among the public about how the economy and population growth work. This lack of understanding allows people, and communities, to think they can opt out of dealing with this or that problem because they don’t see the inter-connectedness.

Commissioner Ross commented that the fiscal system encourages people to opt out. She cited the difficulty older cities have winning approval for school bonds while the suburbs use developer fees or Mello-Roos bonds to finance school construction. Commissioner King argued that those fees and bonds impose the same kind of cost on property owners that a school construction bond would. Commissioner Scott countered by noting that the fees and Mello-Roos expenses become part of a mortgage that can be financed as part of the purchase, while the other bond expense simply gets added to annual property taxes. In other words, it’s more noticeable and thus more easily objected to.

Mr. Levy clarified that by using the term "opting out," he did not mean that people move but rather that they vote against absorbing impacts. Commissioner Ross replied that some people do move. They accept a longer commute to get better schools, for example. Commissioner Szalay asserted that local governments opt out too, sometimes deflecting services to neighboring jurisdictions. Commissioner Anthony added that some people, in those neighboring jurisdictions, for example, do not have the option of opting out. He then noted that the cost of an unsafe community could be loss of opportunity. In the case of poor or unsafe schools, children suffer, possibly for life. He acknowledged that such costs are sometimes difficult to quantify.

Commissioner Scott asked why somebody in a wealthy, relatively insulated community such as Woodside would care about the loss of opportunity or inability to opt out in East Palo Alto. Commissioner Morrison suggested that the people who are prevented from living in one community become part of the freeway congestion that people from many communities must endure. Mr. Levy added that if conditions hurt the economy, that could hurt Woodside too.

Commissioner McPeak mentioned that, during her two decades in public life, she has seen many people who did not care about these problems until their children or parents came to live with them because of the unavailability of affordable housing. She offered an anecdote about a Sierra Club activist who has been converted to a more regional mode of thinking as a result of her own family’s experiences. McPeak then opined that people can suffer the long-term consequences of their decisions but they should not be able to benefit from the burdens they impose on others.

Commissioner Fox redirected the discussion slightly by inquiring about what constituted a "region" in the context of these discussions. Levy replied that economists view regions as technical constructs. A region can be a "commuting area" or an air quality district "air shed." Commissioner McPeak opined that a region begins with a geographical definition and becomes an economic region, such as a "labor area." She offered that there are about a dozen distinct economic regions in California. Mr. Levy further refined the concept by noting that local now means regional. Walnut Creek is connected to Palo Alto but not to Los Angeles.

Commissioner King raised the question of transportation costs, suggesting that there seemed to be an assumption that higher density reduces congestion. He suggested that "congestion pricing" - toll roads, higher parking rates and so forth - may be more effective and more quickly implemented. Levy replied that transportation is beset with problems because we do not apply market forces to solutions. Just because people adapt to congestion does not mean it’s a good solution.

Commissioner Nathanson noted that many people associate greater density with higher levels of congestion and this drives their opposition to density increases. But, he added, if density gets high enough, people are forced to begin changing their habits and modes and the traditional California pattern is broken. He then asked about the effect of providing better services to areas with more density. Mr. Levy replied that it had not been systematically tried or studied but that it should be. The allocation of bond revenues, he said, continues to be as much based on politics as it is on need and merit.

Commissioner McPeak pointed out that, with the housing shortage in California, no matter where new projects are built there is demand for them. This includes the inner city. The difference we notice tends to be political and economic, since affordability remains an issue.

Commissioner Anthony then asked what the fiscal consequences of using land for things like parking lots and strip malls might be, noting that some uses could be considered "squandering." Commissioner King said even parking lots could become productive if the price of using them reflected the market and the value of the land. He opined that this would impact congestion, design, air quality and additional issues.

Mr. Levy closed his comments by posing a question: Does the Commission think that existing tax policy creates a disincentive to housing? If the answer is "yes," Levy said it is a more important concern than fighting over Wal-Marts. If the answer is "no," the Commission should be able to explain why.

Commissioner Scott, perhaps overlooking such facts as the City of Los Angeles’ expenditure of more than $100 million on government "fix-it" consultants in the last six years, asked why we haven’t yet figured out how to let people make money fixing government.

The meeting was adjourned at approximately 2:30 p.m.

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