Speaker's Commission
State Seal

State Officials Focus On Local Finance But 'Fix' May Be Complicated

By Paul Shigley, California Planning and Development Report (June 1999)

The complex financial relationships among taxpayers, local governments and the state are receiving more study than at any time since the 1978 passage of Proposition 13. But "fixing" local government finance is turning out to be exceedingly complex and may require the approval of voters.

Lawmakers threw a couple hundred million dollars worth of bones to local government with the $81 billion 1999-2000 state budget. But many people have their eyes focused on a state constitutional amendment that could appear on a 2000 ballot. The measure might cap a 1993 property tax shift, make structural changes to local government finance, and possibly even alter the existing method of allocating sales tax revenue.

However, no one knows for sure because drafting the constitutional amendment had not begun as of late June, said Debbie Beltram, an aide to Senate Budget Committee Chairman Steve Peace (D-El Cajon), who has taken the leading role. Peace, who conducted local government finance hearings around the state earlier this year, and others were awaiting Gov. Gray Davis's action on the local government portion of the state budget.

"We have to wait and see what the local government pieces look like. Then it will be a leadership discussion on who's going to carry it and what's going to be included," Beltram said of the constitutional amendment. Peace has assured Davis that he will not move forward with a constitutional amendment that Davis opposes, she added.

While city and county officials continue to howl about getting shortchanged, the state budget adopted by lawmakers did slow the protest. The budget earmarks $220 million for cities, counties and special districts, but it makes no structural reforms. Most importantly, the Educational Revenue Augmentation Fund (ERAF)--which sifted property taxes from counties and cities to schools--remains unchanged.

"It's certainly not everything we dreamed it would be, but it's a first step," David Jones, a lobbyist for the League of California Cities, said of the budget. "Our real hope in this budget is the promise of real reforms and real protections of our revenues in the future...Having us live under the threat of a future property tax shift does not make sense. We're desperately seeking protection from future lawmakers."

The California State Association of Counties also tried to put a happy face on the budget. For the fist time, the budget contains local relief partially based on ERAF losses, CSAC noted. "CSAC is encouraged by the Legislature's action to move local government finance to the forefront," Executive Director Steven Szalay wrote after the budget passed.

The budget approved by lawmakers provides one-time subventions to local government in the following forms: $75 million to cities and counties based on population; $75 million to cities, counties and special districts in proportion to ERAF losses; $50 million for jail booking fees cities are forced to pay counties; and $20 million for libraries.

However, counties annually lose $1 billion because of ERAF, even with backfills such as Proposition 172 money for public safety. Cities lose $427 million a year and special districts are out $284 million. Thus, the one-time subventions amount to about 10% of what local government would have received without ERAF and subsequent backfills.

For example, the Bay Area city of San Carlos will receive about $79,000 in property tax subventions and $30,000 for booking fees, Assistant City Manager Brian Moura said. However, ERAF costs the city about $750,000 annually.

Shopping Malls and Big Boxes

The advent of ERAF in 1993 only exacerbated what some observers call the "fiscalization of land use." When Proposition 13 eliminated the ability of City Councils and Boards of Supervisors to raise property tax by fixing tax rates statewide, local entities started aggressively pursuing sales tax generators at the expense of other development. Local government also began issuing bonds--some riskier than others--to help developers of desirable projects, jacked up impact fees and created various assessment districts. With ERAF cutting further into the property tax base, sales tax became even more important.

Land-use decision-makers need a different set of rewards than now exists, said Jones, of the League of California Cities. "Give local government the incentives to do the right things for the long-term health of this state," he said. The emphasis should be on high-paying jobs, not retail outlets, he said.

But, Jones noted, the pursuit of sales tax is not always reduced to approving a Wal-Mart on the edge of town to the dismay of downtown's mom and pop merchants. Business to business sales can generate a big amount of sales tax, as it does in Silicon Valley, he said.

Among the entities considering state and local fiscal reform is the Commission on Local Governance of the 21st Century. The governor and Legislature appointed the commission late last year to examine the Cortese-Knox Local Government Reorganization Act of 1985, which guides Local Agency Formation Commissions. But the 21st Century commission has learned that dividing up the money may be the biggest factor in drawing jurisdictional lines.

According to Ben Williams, the commission's executive director, several themes have emerged from testimony during hearings around the state, among them, the obstacle posed by revenue-neutrality.

The 1992 revenue-neutrality law requires new cities to make counties fiscally whole. Revenue-neutrality, which arose because of county's fiscal plight, means communities that would like to incorporate would have to give property and/or sales tax revenue to the county for things like public health, welfare, elections and jails--thus decreasing the would-be city's funding for local law enforcement, parks and community planning that likely forced the incorporation effort.

"The cities feel the counties are trying to hold them up to save money. But the counties make a valid point--most of a county's costs continue after an area incorporates," Williams said. Another common sentiment heard at commission hearings regards the missing connection between responsibility to provide a service and the ability to raise revenue for the service, Williams said. Also, local government leaders complain that the state has replaced discretionary property tax revenues with money that has strings, such as Proposition 172 sales taxes for public safety.

Top of the Agenda

Theories vary as to why local government finance has become a hot topic, but most people agree rapidly rising states revenues, and vocal campaigns from cities and counties are factors.

"We hear about it at every meeting either directly or indirectly," Williams said.

It is not much of an exaggeration to say that everyone has a committee or task force examining local government finance. About 10 major efforts are underway, and various reports and recommendations are due during the last half of the year. Among the major groups in action is Williams' 21st Century commission, the State Municipal Reform Advisory Team appointed by Controller Kathleen Connell, Assembly Speaker Antonio Villaraigosa's Commission on State and Local Government, and the California Governance Consensus Project.

The Legislative Analyst's Office focused attention on the issues when it issued a report in February called "Shifting Gears: Rethinking Property Tax Shift Relief." More than anything, the LAO report emphasized the complexity of the problem and the need for an overhaul. The Legislature appears to have ignored, at least for now, the LAO's bottom line. "We recommend the Legislature reject the notion of mitigating each local government's losses," the report stated. "Instead, we recommend the Legislature use any relief funds to help transform California's system of local government finance into one that reflects modern needs and preferences of local communities."

A broad structural change appears likely to take the form of the constitutional amendment on next year's ballot. But packaging the amendment for voters will be "very difficult," Williams warned. "It's not clear that the voters think that there is a problem."

Jones, from the League of California Cities, said support from the business community--and some sort of tax reduction--will be necessary to interest voters in this arcane subject.

Contacts: Ben Williams, Commission on Local Governance in the 21st Century, (916) 322-9908. David Jones, League of California Cities, (916) 658-8200. Debbie Beltram, Sen. Steve Peace's office, (916) 445-6767. Brian Moura, City of San Carlos, (650) 802-4210

[ top of page ]

Home | About the Commission | Commissioner Biographies
News | Press Coverage | Testimony | Agendas
Meeting Schedules | Minutes | Links

Speaker's Commission on State/Local Government Finance
in collaboration with the
Metropolitan Forum Project
811 West Seventh Street, Suite 900
Los Angeles, CA 90017
(213) 629-9019