SPEAKER'S COMMISSION ON STATE AND LOCAL GOVERNMENT FINANCE

Summary of Commission Actions
As of January 5, 2000(1/6/00 draft)

Guiding Concepts

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

2. 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.

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

4. 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 considers 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.