Speaker's Commission on State / Local Government Finance

Cities Entwined In Money War

By Dan Walters, The Sacramento Bee (Published June 9, 1999)

California cities, like other property tax-dependent local governments, were clobbered by voters' passage of Proposition 13 in 1978, which sharply reduced levies on homes and other real estate.

Cities shared in the "bailout" that the state hastily extended to schools and local governments, but over the next decade city officials overhauled their financial underpinnings.

Special taxes and fees for services were imposed, and cities competed fiercely for auto malls, shopping centers and other commercial development that generate sales taxes.

By the late 1980s, cities considered themselves out of the woods financially and, just as importantly, free of the annual wrangles over state aid that consumed counties and school districts. It was, however, a short-lived and hollow sense of well-being.

When California was clobbered by recession in the early 1990s, city officials saw a flattening, and even decline, in their property and sales tax revenues and learned very quickly that they were not nearly as independent as they thought. Looking around for pots of money with which to balance the state's budget, Gov. Pete Wilson and lawmakers found surpluses in city coffers and indirectly tapped them.

Some methods state officials used to siphon money were relatively small, such as requiring cities to pay counties "booking fees" to place prisoners in jails and thereby allowing the state to reduce its aid to counties. But some were huge, such as the multibillion-dollar shift of property taxes from cities, counties and special districts to schools, which allowed the state to reduce its education spending. Voters hit cities, meanwhile, with a ballot measure that made it more difficult for them to raise local taxes.

As the 1990s draw to a close, cities are complaining every bit as loudly as counties about their financial plight. And they find themselves in the thick of this year's Capitol wars over how to spend a $4 billion-plus state surplus, most of which results from that recession-spawned property tax shift.

Lobbyists for the League of California Cities and individual cities are trying to persuade Wilson's successor, Gray Davis, to begin rolling back the property tax shift so that they can benefit from the surge of new construction, most of which occurs inside cities.

Meanwhile, they're trying to head off a Republican push to speed up reduction of the state-collected property tax on cars whose proceeds go to local governments. And they're confronting a move inside the committee writing a final state budget to choke off a controversial program under which the state pays cities to report on business licenses so that the state can go after licensees who don't pay state business taxes. The current version of the budget would remove all of the state payments, responding to complaints that state tax collectors have been too aggressive.

No matter what happens this year, the next couple of years could be decisive in determining the future of municipal finances in California.

A ballot measure that would eliminate the car tax may be headed for next year's ballot, while city officials work on their own measure that would protect city finances, much as 1988's Proposition 98 shields school money from legislative fiddling.

But as they contemplate ballot wars, city officials are also raising alarms about a bill that has cleared the Assembly and is pending in the Senate. A direct outgrowth of the bitter car tax wars, the Republican-sponsored bill would indirectly prohibit city officials from forming a political action committee to conduct ballot measure campaigns next year.

DAN WALTERS' column appears daily except Saturday. Mail: P.O. Box 15779, Sacramento, 95852; phone: (916) 321-1195; fax: (916) 444-7838; e-mail: dwalters@sacbee.com

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