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Home My WebLink AboutMINUTES - 03092004 - D.2 TO: BOARD OF SUPERVISORS CONTRA COSTA FROM: John Sweeten,,County Administrator COUNTY DA March 94) 2004 SUBJECT: 0 Alternative to Governor's January Budget Proposal on Local Property Tax Shift SPECMC REQUEST(S)OR RECOAUKENDATION(S)& BACKGROUND AND JUSTIFICATION RECQMWNDATION SUPPORT,, in concept,, the Legislative Analyst's Office proposed alternative to the Governor's shifting of property taxes from local governments to K-14 Districts, except to the extent that it would result in a p reduction in County general purpose revenue(sales taxes, vehicle license fees, property taxes). BACKGROUNDAREASON(S)FOR RECONS WENDATION As part of his January state budget proposal, Governor Schwarzenegger proposed a permanent shift $1.336 billion of local property taxes to K-14 Districts. Counties would bear the greatest financial burden under this proposal,with 76% of the property tax revenue coming from counties: Counties $909 million Cities $188 million Redevelopment Agencies $135 million Special Districts 1105 miffion TOTAL $1.336 billion In its analysis of the FY 04-05 state budget bill, the Legislative Analyst's Office (LAO) reviews the proposed property tax shift and rejects this proposal. Instead, the LAO states". . . the Legislature should use its authority over this(local property)tax for the overall betterment of local government, not as a State rainy day fund.71) CONTINUED ON ATTACHMENT: YES SIGNATURE: RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF COMMITTEE APPROVE OTHER SIGNATURE(8): ACTION OF BOARD ON MARM C)6 2004 APPROVED AS RECOMMENDED X OTHER X ACCEPM report fromm-the County Administrator regarding, and supported as a working concept,, the Legislative Analyst's Office local goverment budget balancing proposal* Speakers :Rollie Katz, 222 Martinez, Martinez (P.E.U* Local 1) VOTE OF SUPE tVISORS ""0 1 HEREBY CERTIFY THAT THIS IS A UNANIMOUS TRUE AND CORRECT COPY OF AN AYES: NO ACTION TAKEN AND ENTERED 3 ABSENT: ABSTAIN: ON MINUTES OF THE BOARD OF SUPERVISORS ON THE DATE SHOWN. Contact Sara Hofkmn,3311-1090 ATTESTEQbARM.%2DZ......... cc: CAO JOHN- CLERK OF THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR T • BACKG ASON(S)FOR RM.EaCONUAE ATIONAcont'd) The LAO then recommends an alternate budget reduction which also generates $1.336 billion from local government: Counties $200 million Cities $200 million Redevelopment Agencies $320 million Special Districts $400 million Program subventions, $216,million ion TOTAL $1.336 billion The LAO maintains that itsproposed alternative would have fewer negative effects on local government, 0.0 would although, it also constitutes an '�undesirable intrusion into local dancing." Counties and cities Mg permanently lose sales tax, rather than property tax under the LAO's proposal (with the possibility of counties also losing vehicle license fee revenue, if sales tax receipts do not meet target revenue levels), Redevelopment Agencies and Special Districts would still lose property taxes (80%of special district reduction from enterprise districts with revenue raising authority). State subventions for COPS (Citizens' Option for Public Safety), Justice Challenge Grants and the Public Library Foundation would be eliminated in toto. Property Tax is a Local Tax As noted by the LAO, the State Constitution establishes the property tax as a local tax. The State was given authority over allocation of property tax revenues through Proposition 13. The LAO asserts that nothing in the Constitution or the history of Prop 13 suggests that the intent of this delegation of authority by the voters was to allow the State to benefit fiscally from its control of local property taxes. The LAO states that the Legislature should not view the local property tax as a "State" resource, but as a trust fund, with the state acting as a fiduciary. The LAO also states that the administration's proposal is not a budget "solution" in any real sense, since it,, simply transfers fiscal problems from one level of government to another. LAO Recommended Budget Reduction Guidelines Due to the severity of the State's budget shortfall and its current constraints, the LAO acknowledges the"need" for local government to "participate" in the state budget balancing solution. The LAO then proposes guidelines for the Legislature to consider in determining local government budget reductions. These include: 00. 0 0 0 ze reductions to general purpose revenues No- leave past formulas in the past No* allow local control 100, IV mindfiil of effect on land use incentives 10* consider impact on revenue reductions General Purpose Revenues — The LAO notes that general purpose revenues are used to fund local priorities, responding to local colvuriunity needs. Reducing those revenues limits local government's ability to do so. Past Formulas — The LAO notes that the ERAF shift proposed by the Governor in January would have significantly different impacts than the ERAF formula used in the early 1990s: less impact on special districts; continuing impact on redevelopment agencies; and no offsetting revenues for counties (For the 1992-93 property tax shift, counties receive a partial offset through Prop 172 sales tax revenues, although, those are dedicated, not general purpose,, revenues. In FY 03-04, Contra Costa County's estimated ERAF loss is $123 million,while estimated Prop 172 revenues are$59 million). Local Control—The LAO notes that the size and diversity of California makes a"one size fits all" solution to local government budget reductions difficult and concludes that it is best to give local government as much flexibility as possible to meet differing community needs. Land Use Incentives — The LAO notes that the property tax provides 'incentives to local government to encourage a broad range of high value development in their communities rather than focusing just on sales tax generating developments. Revenue Reduction Impact— The LAO recognizes that different local agencies have different responsibilities, authorities and revenue bases,therefore,reductions in property taxes yield very different effects: 2 • Cities and Counties 40M Few and county programs are amenable to user-fee financing and the city Mg Constitution requires,voter or property owner approval to impose/increase local taxes or assessments. in addition many functions, particularly county programs, are subject to state and/or federal mandates. Since counties and older cities are most reliant on the property tax, they would experience the greatest reductions under the Governor's January proposal. Redevelopment Agencies —The LAO cites continuing concerns over the diversion of property taxes to Redevelopment Agencies, to the detriment of K-14 Districts and other local agencies. Currently, as much as 15% of all assessed valuation in California is within a redevelopment project area. The LAO also questions the use of those property tax funds. Non-Enterprise Special Districts — The LAO points out that the 1990 shift excluded many non- enterprise Special Districts, including fire districts, multi-county districts and cemetery districts, which placed the burden of the shift mostly on flood control, library and park/recreation districts. Dependency on the property tax for revenues for these districts varies widely. Therefore,reductions would also vary widely. Enterprise Special Districts Enterprise Special Districts have considerable authority to levy user fees to pay for services. More half of the approximately 1700 of these district in California do not rely on paperty taxes and for those that do,property taxes are only 7%of total revenues. LAO State PL&,et EMosal The LAO's budget proposal would have a considerably lesser impact on Contra Costa County the Governor's proposal: LAO Proposal, $8.138 million' Governor's Proposal: $29.177 million2 Contra Costa County's total e $8.138 million consists of: Oo- $4.138 million sales tax/VLF No- $ .810 mon COPS Oo, $2.788 million juvenile justice *,IV 0- $ .401 mi Ilion Library City and County Sales Tax The LAO proposal would reduce the local agency sales tax rate (Bradley/Burns Sales Tax) from I%to .92%or Minn . The State portion of the sales tax would be increased by an equivalent percentage. The $400 * annually. objective would be to reduce both county and city revenues by$200 million each. However, since most taxable sales occur within incorporated areas, the LAO believes that cities would be hit harder counties. Consequently,they recommend a statutory revision to the existing VLF allocation that would shift some county vehicle license fees to cities to balance out the overall revenue loss. No details are included on how this would be achieved. COPS Juvenile Justice and Library The LAO asserts that, if local government property tax revenues are left whole, then local government. would have the ability to backfill reductions in these specific programs, if local priorities so warranted. Statewide, 0-6-20 these subventions are$216 minion. iion. SRecial District Shift The LAO proposed special district property tax shift would fall almost entirely upon Enterprise Special Districts which, according to the LAO, would have the ability to adjust their fees, if necessary, to recover the lost revenues. 80%of the$400 million would be allocated to Enterprise Special Districts. County boards of supervisors, after public hearing and debate, would be delegated the authority and 0 0 responsibility for revtsmg the share of property taxes received by special districts within their county, provided ICSAC a sitim-ates on fiscal impact. Excludes County Redevelopment Agency and Special District ERAF shift amounts 2.CSAC IS on fiscal*ut Excludes County Redevelopment Agency ERAF shift amount. 3 County boards of supervisors, of public hearing and debate, would be delegated the authority and responsibility for revising the share of property taxes received by special districts within their county, provided that they not(1)reduce a non-enterprise Special District property tax by more than 200/a in any single year or(2) reallocate property taxes so that county-dependent special districts receive increased property tax revenue. KedeveloyEtut ALengj Provertv- Tax Shift The LAO's proposed shift of$320 million of property taxes from redevelopment agencies is approximately 11% of their total property tax revenue. The LAO would allocate a specific district's share based on a sliding scale that takes into account the amount of developed land under redevelopment, affordable housing obligation actions and health and saflay code compliance. No details are provided on implementation of this sliding scale. Conclusion Conceptually, the LAO proposal is much preferable to the Governor's January budget proposal. The `--act on the County's programs and services would be considerably less. The greatest concern is that, like the Governor's proposal, the LAO proposal would be a permanent shift in revenues. There are also concerns about the specifics of the loss of revenue for COPS,juvenile justice and the library. There are implementation issues as well, including delegation of responsibility for distribution of special district property tax shifts to Boards of Supervisors, allocation of Redevelopment Agency losses and calculation of VLF shift amounts. There may be ways of structuring the LAO's proposal which would allow for an equivalent fiscal relief for the State while addressing these concerns. Several subcommittees of CSAC are currently working on these issues. SM9 Consequently, staff recommends that the Board of Supervisors endorse the Legislative Analyst's proposal conceptually, except to the extent that it would result in a permanent reduction of general purpose revenues (sales taxes, propety taxes and vehicle license fees). The County would continue to work through CSAC on these issues, advocating for a state budget that minimizes its negative impact on county services and programs and supports its residents and businesses. 4 Analwis of the LAO ERAF Alternative Eliminate Subvention Programs $216 million COPS Sloo million Juvenile Justice $100 million Public Library Foundation $16 million Special Districts ERAF Shl*TT.- $400 million Redevelopment Agencies ERAF Shift** $320 million Bradley-Burns Reduction: Cities $200 million Bradley-Bums Reduction: Counties $200 million Total $1,336 million *LAO proposes a transition period for the ERAF shift for both nonenterprise and enterprise special districts. 1**LAO proposes a sliding scale ERAF shift amount based on size of redevelopment agency area. lCounty-by-County Impact Sales Tax/VLF County COPS** Juvenile Justice PLIF(Co. Only) Reduction Total Alameda 1,073,194.03 41192t251.63 231,195.00 51593,173.71 11,089,814.37 Alpine 100,700.00 31390.34 544.00 81,198.70 185,833.04 Amador 121,144.00 102,354.60 16,395.00 714,248.94 954,142.54 Butte 262p256.44 589,554.65 94,508.00 1,213,257.01 2pl59,576.10 lCataveras 124,570.00 118,942.04 19.,068.00 688.,286.63 950,866.67 Colusa 1112406.00 55,212.08 0.00 243y%9.05 4107587.13 lContra Costa 810,571.28 2,788,203.18 4019346.001 41137,759.74 81137,880.20 Del Norte* 1169104.00 77j963.78 12,510.00 310,832.12 517,409.90 lEl Dorado 292,532.67 4649980.72 74,656.00 2,647,657.05 3,479,826.43 Fresno 737p493.40 2.,357,994.44 366,264.00 4,1712,325.59 8j1741077.43 Glenn 115,656.00 75,792.28 0.00 338,122.60 529,570.88 Humboldt 176,184.93 3599656.08 571,630.00 1,002,306.57 1,5951,777.58 Imperial 187,362.00 422..923.71 22,100.00 479,804.06 11112,189.77 Inyo 110,632.00 51,471.50 89243.00 370,323.62 540,670.12 Kern 8173,377.01 1,969,492.47 315,731.00 8;233,382.07 11,335,982.54 Kings 178,802.00 381,483.13 61,134.00 560,015.11 1,181,434.24 ILake 135,480.00 171,758.47 27p535.00 792,421.61 1,127,195.08 Lassen 1202228.00 97p927.55 0.00 283j002.60 501,158.15 Los Angeles 7,338p041-74 27,961,788.83 11594t602-00 14.,918,600.80 51,813,033.37 Madera 1791884.42 367.*473.47 58;933.00 1,389y742.86 199%1,033.75 Marin 2489020.64 701,645.97 61,498.00 1,087,938.74 21099p103.35 Mariposa, 110,100.00 48;893.72 7,838.00 472,432.12 639.,263.84 Mendocino 151;052.00 247,1144.47 39,,618.00 1,404,241.35 1.*842.,055.82 Merced 251p550.17 630p757.07 101,111.00 1,539,814.18 21523.,232.42 Modoc 105,404-00 26,156.04 41189.00 62;960.37 198,709.41 Mono 107J12.00 37;,335.75 5..997.001 122;810.03 273p854.78 Source: CSAC,2/27/04 Sales Tax/VLF County COPS** Juvenile Justice PLF(Co. Only) Reduction Total Monterey 395,309.96 1,165,169.68 96,804.00 2,663,042.67 41,320,326.31 Napa* 175,130.00 363;704.87 55v586.00 1,691,712.37 21,286,133.24 Nevada 155,436.00 268,369.11 42,987.00 1,274,540.42 1,741,332.53 Orange 1,887,603.76 8,346,116.79 654,281.00 2,460,866.56 13,348,868.11 Placer 309,363.14 772,170.61 73,823.00 4,269,450.04 51424,806.79 Plumas* 112,080.00 58,476.33 101%9.00 625t240.86 806,766.19 Riverside 11 681,069.31 4,779,046.38 388,409.00 79 481,992.74 14,330,517.43 Sacramento* 1,676,721.01 3,669,803.27 559,593.00 29,189,493.97 35,095,611.25 San Benito 132,592.00 157,776.83 24,566.00 487,616.32 802,551.15 San Bernardino 1,501,434.64 5,136,082.65 510,677.00 5,141,808.85 121290,003.14 San Diego 2y397,198.98 81298p483.94 450,329.00 71404p944.65 18,550,956.57 San Francisco 1,637,363.92 2,218,009.89 355,574.00 42,805,527.01 47,016,474.82 San Joaquin 555,562.68 117189845.59 0.00 4,111,552.04 6j385,960.31 San Luis Obispo* 3103,358.13 717,855.15 103,065.00 2,266,403.61 39397,681.89 San Mateo 515,000.00 21 009,027.74 121,796.00 5,260,198.02 7,906,021.76 Santa Barbara 439,916.65 1,149,590.94 101p367.00 41 257,807.86 5,948,682.45 Santa Clara 1,150,076.39 41847,133.34 182,009.00 1,405,717.97 7,584,936.71 Santa Cruz 351,023.64 727,942.10 92,361.00 2,612,660.97 3,783,987.71 Shasta 199,566.00 482,002.46 77p260.00 928,128.48 1p6869956.94- Sierra 686,956.94Sierra 102,038.00 92862.80 0.00 37p369.92 149,270.72 Siskiyou 125t698.00 124,405.81 19,944.00 197,693.28 467,741.09 Solano 338,418.00 1,154,186.11 162p263.00 6401,411.00 2,295,278.11 Sonoma 499,974.30 1,324,263.42 212,329.00 4,408,262.21 6,444,828.93 Stanislaus 446,488.74 1,349,466.80 216,327.00 5,613,481.04 7,625,763.58 Sutter 1483,184.00 233,260.89 37p372.00 1,225,624.53 1,644,441.42 Tehama 133,370.00 161;545.43 25p918.00 362p517.13 683,350.56 Trinity 107,698.00 37,265.70 51974.00 226,095.37 377,033.07 Tulare 439,717.83 1,0829316.54 133,857.00 2,271,665.11 3,927,556.48 Tuolumne 132,708.00 158,337.21 25t379.00 1,184,873.30 1,501,297.51 Ventura 599p925.11 2;217,729.69 205,075.00 2,658,847.37 5p681,577.18' Yolo 204j964.00 508,130.49 58,529.00 764,268.51 1,535,892.00 Yuba 136;372.00 176,073.45 28,209.00 669,558.61 1,010,213.0-6 Total 33,081,820.93 991,724,999.98 8,615,277.00 200,000,000.00 341,422,097.91 Notes: $275,000 of Juvenile Justice funds are allocated to the Board of Corrections. For simplicity, the$200 million sales tax/VLF allocation was estimated based on sales tax revenue only. Bradley-Burns sales tax data from 2001-02 State Board of Equalization Annual Report. *Del Norte County's PLF allocation is for the library district. Napa City and County receive funds jointly. Plumas and Sierra Counties receive funds jointly. Sacramento City and County receive funds jointly. San Luis Obispo City and County receive funds jointly. Santa Cruz City and County receive funds jointly. **COPS represents the county portion of front-line law enforcement services,district attorney prosecution costs,and sheriffs detention costs. Source: CSAC,2/27/04 Comparison: Governor's Proposed ERAF Shift and LAO Alternative County $1.3 Billion ERAF Shift LAO Alternative* Alameda 5527552355.05 11,089,814.37 Alpine 63;602.28 185,83 3.04 Amador 603,876.59 954,142.54 Butte 31427;402.03 2,159,576.10 Calaveras 936,945.65 9503,866.67 Colusa 473,641.20 410,587.13 Contra Costa 29,176;900.43 811372880-20 Del Norte 3252775.15 5172409.90 El Dorado 31668,677.28 324792826.43 Fresno 15,782,903.49 8,174,077.43 Glenn 533,450.45 529;570.88 Humboldt 2,905,990.62 1,595,777.58 Imperial 22 213,858.18 121127189.77 I nyo 498,258.60 540p670.12 Kern 12,472,847.80 11,335,982.54 Kings 2,294,051.45 11181;434.24 Lake 1,179,920.92 1,127,195.08 Lassen 396,399.08 5012158.15 Los Angeles 289,110,419.09 512813,033.37 Madera 2;0161,070.25 11 996,03 3.75 Marin 5;4282900.64 21099,103.35 Mariposa 247,708.03 639,263.84 Mendocino 2,191,597.56 1,842,055.82 Merced 5,067,746.71 2,523,232.42 Modoc 2052292.75 198,709.41 Mono 512,713.54 273,854.78 Monterey 91243;315.03 4,320,326.31 Napa 31883,218.83 212862133.24 Nevada 2;,300;,234.16 17 741,332.53 Orange 61,866,859.21 13,348,868.11 Placer 7,673,667.79 5;424,806.79 Plumas 407;560.49 806,766.19 Riverside 26,356,606.26 14,330,517.43 Sacramento 353,137,495.93 35,095,611.25 San Benito 831,554.24 802,551.15 San Bernardino 28,825,309.79 12,290,003.14 San Diego 55,342,773.43 18,t550;,956.57 San Francisco 53,407,988.76 47,0161474.82 San Joaquin 173,729,098.27 6;385,960.31 San Luis Obispo 5.v558;,658.36 3,397,681.89 Source: CSAC,2/27/04 f K .y County ,- $1.3 Billion ERAF Shift LAO Alternative* San Mateo 24,248,147.86 7,906,021.76 Santa Barbara 10,762,754.46 5,948,682.45 Santa Clara 59,054,813.81 71584;936.71 Santa Cruz 5,626,458.70 3y783;987.71 Shasta 3;102,9982.60 1;686,956.94 Sierra 80,025.80 149,270.72 Siskiyou 931,957.50 467,741.09 Solan 9,253,834.17 2,295,278.11 Sonoma 12,088,453.92 6,444,828.93 Stanislaus 8,309,950.53 7;6259763.58 Sutter 1;8181757.47 1,644,441.42 Tehama 1,071,522.27 683,350.56 Trinity 1309961.98 3779033.07 Tulare 8,111,549.54 39 927,556.48 Tuolumne 11149,450.46 1;5011297.51 Ventura 16;974,639.65 5,681,577.18 Yolo 41651 t0I 7.91 1,535,892.00 Yuba 1,203,895.99 1,010,213.06 Total 91416251820.00 34104220097.91 'Estimates do not include RDA or special district OW shift amounts. Source: CSAC,2/27/04 Analysis of the 2004-05 Budget Bill ' Legislative Analyst's Office ;r February 2004 Another Property Tax Sholft? C,-;/70U1d the State Shift Property Taxes to Help Solve : . Hovv CouldProposed qhift Be Modified to Reduce Its Negative Effects on Local Governments? ff1.!W4wr(r'i.R'/nnR'.:•.1rJi:wG:.4': F- k f': rnll.'^i R.. L.'r.t - ...... .....i.,'r ...... .. ..i •.. ..... - .. ... .. I-mto" -tf budget pposes to shift$1.3 billion of property taxes from local governments to K-14 jt eutian spending by an equal amount. This proposal raises questions concerning the rile rg�ard .,the property tax. In our view, the Legislature should use its authority over this tax for the rent cif loaf government, not as a state rainy day fund. Accordingly, we recommend the Legislature ", :Oft ' c�sal. • t d V6 ste.7. salItles, WM, e recognize that the Legislature may decide to explore elements of this proposal, OWNL—- otcv�nirg If he Legislature reviews proposals to reduce local taxes, we recommend it consider 77. *'f�rr a d6bfibn' to GE r-a!Purpose Revenues. atonia .in-the Past. i1dntrl. nui ofn` ct on Land Use Incentives. • id x-xqZ c f 1 eve`nue Reductions. � it 0 t1s gcideies, rhe outline an alternative budget reduction. While this alternative also represents an G ! rr ton o ia0c f fln4h' it would-have fewer negative effects. Our alternative includes a: $216 million i In lel aub ettirn $410 million locally determined special district property'tax shift, $320 million ,r0A d . ►rri tax shifter d,$400 million reduction in city and county sales taxes. _ Y....._...... Background California—like most other states in this country—relies extensively on local governments to protect the public, help the needy, educate students, and respond to local concerns. For nearly a century, California's property tax has been reserved for the exclusive use of local governments and has served as the mainstay of local finance. Before passage of Proposition 13, local governments and their residents controlled property tax rates and the distribution of property tax revenues to local agencies. Proposition 13, however, i placed into the California Constitution a maximum rate for nondebt-related property taxes and specified that its revenues are to be allocated to local agencies "according to law." As Figure 1 shows, immediately after Proposition 13's passage, the Legislature established a property tax allocation system that reduced the share of property tax revenues allocated to educational local agencies from a statewide average of 54 percent to 39 percent—and increased the share of property taxes allocated to cities, counties, and special districts. (The state replaced the shifted K-14 district property taxes with increased state funding.) Specific property tax allocation formulas then were assigned to every area of the state, designating the portion of the property tax to be allocated to each local agency serving the area. These property tax allocation shares were based on each agency's proportionate share of property taxes in the mid-1970s and are commonly referred to as "AB 8" shares, after the bill that created this property tax allocation system—Chapter 282, Statutes of 1979 (AB 8, L. Greene). With the exception of several relatively minor changes, the state did not alter these AB 8 shares until the early 1990s. Figura 1 P-roperty Tax Allocation Over Time Percent of Properly;axes Axated to Lam!Agencies o - K-14 Cauntws 50 -_-. __._.__ _ Cities Other Loc ed Ent w 40 -- 30 20 _ 10 gap� 75-78 78-79 81-82 8485 87-88 90-91 93-94 98-97 99-00 02-03 4Rsdev-siopmerit ageneses euxf special+cisticts Smwm Board o4 Emotion. Faced with significant budgetary challenges in 1992 and 1993, the state twice enacted major changes to the state's AB 8 property tax allocation system to direct larger shares of property tax revenues to K-14 districts—and reduce state General Fund spending for education accordingly. These changes reduced noneducational local agencies' share of the property tax from a statewide average of 65 percent to 48 percent. The property taxes shifted to K-14 districts because of the 1990s property tax shift now total about $5 billion. (For context, total property tax revenues in the current year are estimated at $29 billion.) These property tax allocation changes commonly are referred to as "ERAF," after the name of the fund into which the shifted property taxes initially are deposited, the Educational Revenue Augmentation Fund. Administration's Proposal In 2004-05, the administration proposes to redirect to K-14 districts $1.3 billion of property taxes that otherwise would be allocated to cities, counties, special districts, and redevelopment agencies. This shift, if enacted, would bring K-14's share of the property tax to an overall statewide average of 56 percent and would decrease state General Fund education spending by $1.3 billion. Similar to the ERAF shifts in the 1990s, this redirection of property taxes is expected to provide ongoing, growing state fiscal relief. Figure 2 below summarizes the distribution of property tax losses to each group of local agencies under the administration's plan. The largest component of this property tax shift would be from counties. Figure 2 Proposed 2004-05 Local Government Property Tax Shift (Dollars in Millions) Amount Counties $909 Cities 188 Redevelopment agencies 135 Special districts 105 Total $1,336 Detail does not add due to rounding. LAO Assessment The administration's proposal raises significant questions regarding the appropriate role of the state regarding local taxes. The State Constitution establishes the property tax as a local tax. While the state's voters gave the Legislature responsibility to allocate property tax revenues, nothing in the Constitution or the history of Proposition 13 suggests that the intent of this delegation of authority was for the state to benefit fiscally from its control of the property tax—or that the tax should serve as a de facto rainy day fund for state government. The administration's proposal raises further questions regarding the future of the property tax. That is, if the state enacts a third major reduction in city, county, special district, and redevelopment agency property taxes within a dozen years, what would prevent the state from imposing additional reductions in the future—or eliminating noneducational agency property taxes over time? In reviewing proposals to reallocate the property tax, we recommend the Legislature avoid viewing the local property tax as a "state" resource. Rather, we suggest the Legislature approach its authority over property tax allocation with the restraint of a fiduciary: enacting changes to the property tax allocation system only for the overall benefit of local governments and striving to avoid conflicts of interests in carrying out these responsibilities. In addition to these policy concerns relating to the proposed property tax shift, the proposal presents significant practical and immediate problems for local agencies. Simply put, based on their projections of future property tax revenues, local governments made myriad program and financial commitments to their residents, employees, businesses, bondholders, and others. A sudden and major loss in general purpose revenues will disrupt local agency ability to meet these commitments. The administration's proposal is not, therefore, a budget "solution" in any real sense: it is simply a transfer of fiscal problems from one level of government to another. f 1 t Because of these significant policy and practical concerns, we recommend the Legislature reject the administration's proposal to use local taxes to remedy the state's fiscal problems. Guidelines to Consider Given the severity of the state's budget constraints and the difficult choices it faces, we recognize that the Legislature may decide to explore elements of the administration's proposal, despite its evident shortcomings. We also note that the administration has indicated a willingness to consider alternative local government proposals, provided they offer ongoing state fiscal relief. Accordingly, Figure 3 outlines several guidelines for the Legislature to consider as it reviews budget proposals involving local governments revenues. We discuss these guidelines in more detail below. In the following section of this analysis, we outline an alternative local government budget proposal that is more reflective of these guidelines. Figure 3 Guidelines to Consider in Reviewing Proposals to Shift Local Revenues 9 Minimize Reductions to General Purpose Revenues Leave Past Formulas in the Past Allow Local Control Be Mindful of Effect on Land Use Incentives 9 Consider Impact of Revenue Reductions Minimize Reductions to General Purpose Revenues General-purpose revenues, such as the property tax, allow local governments to respond to their community's perceptions of their greatest local needs, a function integral to local governance. State actions to reduce local general-purpose revenues limit local governments' ability to fulfill their commitments and responsibilities to local residents. Accordingly, we suggest that any reduction to local property taxes or other general-purpose revenues be imposed at an amount that is as modest as possible. Leave Past Formulas in the Past Instead of offering a policy rationale regarding how these major local revenue reductions should be imposed across local governments, the administration simply proposes to extend the property tax shift formulas used in the 1990s. (These 1990s methodologies, in turn, were based on property tax formulas dating from the 1970s.) Given the magnitude of this proposal, we believe it would be inadvisable for the Legislature to rubber stamp dated formulas. This is particularly true because, as we explained in our 1999 T publication Shifting Gears: Rethinking Property Tax Shift Relief, the 1990s shift had disparate fiscal effects on local governments, often without any obvious policy rationale. Finally, we note for clarification purposes that the formulas provided by the administration to estimate proposed local agency 2004-05 property tax losses differ notably from the state's intent and decision making in the 1990s. Figure 4 outlines major differences between the administration's formulas and state actions In the 1990s. Figure 4 Major Differences Between Administration's Proposal And 1990s Property Tax Shifts County Reduction/s Much Greater 1. Under the 1992 tax shift, county losses comprised less than half of the total shift from nonredevelopment agencies. (Because the 1990s redevelopment shifts were temporary, analyses of ongoing ERAF liabilities usually exclude them.) 2. In 1993,after accounting for the$1.5 billion in offsetting Proposition 172 revenues, county tax losses also made up less than half the tax losses from nonredevelopment agencies. 3. Under the administration's proposal, however, counties contribute more than three-quarters of the property taxes shifted from agencies other than redevelopment agencies. The administration's formula differs from past state actions because it does not acknowledge the state's actions to mitigate county property tax losses through Proposition 172 revenues. Special District Reduction/s Lower 4. In 1992 and 1993,the state's budget plan expected special districts to shoulder 27 percent of the nonredevelopment agency net tax losses. Because of data inadequacies and technical problems, however, implementation of the special district shifts failed to achieve expected results. 5. Under the administration's plan, special districts make up just 9 percent of nonredevelopment property tax losses.The administration's lower amount reflects actual special district ERAF contributions, rather than the state's intended reduction. Redevelopment Shift is Ongoing 6. Since the 1990s,the state has imposed several limited-tern ERAF obligations on redevelopment agencies, but never for a term greater than two years. 7. Under the administration's proposal, redevelopment agencies contribute to ERAF annually. Allow Local Control In a state as large and diverse as California, it is impossible to reflect each community's needs and interests when making centralized fiscal decisions regarding thousands of local governments. Instead of seeking to design another statewide formula to redirect local taxes, we suggest the Legislature permit at least some degree of local decision making. Allowing local decision making would increase the likelihood that property taxes are allocated to local governments in a manner that best promotes community needs and objectives. Be Mindful of Effects on Land Use Incentives .w Under our governance system, cities and counties have considerable authority over new land developments. These local governments establish general plans for their communities, determine the intensity and purpose by which areas may be developed, and approve permits for individual projects. While cities and counties review many factors when making these decisions, the impact of land development on the fiscal health of the local government is among the higher considerations. Under the state's local finance system, cities and counties typically report that they receive the highest net revenues from retail developments—and that housing and manufacturing developments frequently yield more costs to the local government than tax revenues. These fiscal evaluations of developments have resulted In many cities and counties orienting their land use policies to promote retail over other land uses. While an individual city or county may be "better off' by promoting retail development in their community, this undue focus on retail is undesirable from a state standpoint. We note, for example, that the cost of new manufacturing or housing developments may be increased if a community zones disproportionate amounts of ready-to-develop land for future retail development—and leaves less desirable land for other development purposes. Similarly, developers of manufacturing plants or housing may face higher costs if local agencies require them to pay impact fees, build infrastructure improvements, or modify their plans to alter their development's fiscal effect on local government. From the perspective of overall state economic development, the administration's proposal reduces the local tax that probably has the best local government land use incentives. Specifically, the property tax gives local governments incentives to encourage a broad range of high value development in their community: retail, industrial, office, hotel, or residential. Consider Impact of Revenue Reductions In addition to K-14 districts, California has five other groups of local agencies: counties, cities, "nonenterprise" special districts (districts organized and financed like governmental agencies), "enterprise" special districts (districts organized like a business, usually with the ability to charge fees for services), and redevelopment agencies. Because these local agencies have different responsibilities, authority, and revenue bases, reducing their property taxes would yield very different effects. We urge the Legislature to consider these effects in reviewing any proposal for shifting local government property taxes. City and County PrWram Reductions Likely. Most city and county programs currently financed with property taxes are not amenable to user fee financing. In addition, the Constitution requires voter or property owner approval before a local agency may impose or increase a local tax or assessment. Thus, reductions in city and county property taxes likely will trigger program reductions. Because some local agency programs (particularly county programs) are subject to statutory and other spending requirements, the programs likely to be reduced most due to a property tax shift include: parks and recreation, libraries, public safety and, in some counties, local health programs. The level of program reduction would vary considerably across the state. Because counties and some older cities are heavily reliant upon the property tax, these agencies are likely to impose the deepest reductions. More recently incorporated cities, in contrast, tend to be more reliant upon the sales tax. Similar to the 1990s shift, these cities are less likely to sustain major losses from the proposed property tax shift. FAAN Pt on NonenterpriseSpecial Districts Not Clear. Whsle almost half of these districts rely entirely on other revenue sources (fees, assessments, and payments from other governments) to finance their operations, some districts depend on property taxes for most of their budgets. Under the 1990s shifts, various categories of nonenterprise special districts were partially or fully exempt from the shift (including fire districts, multicounty districts,, and cemetery districts), P lacing the burden of the shift on a narrow group of districts—mostly flood control, library, and park and recreation districts. In addition to these fiscal differences, local perceptions of the of iclency and importance of these districts appears to differ greatly. Because of these factors, it is difficult to project how a property tax shift would affect these agencies. If the shift were structured similarly to 1990s, we assume that there would be significant cuts to flood control, library, and park and recreation programs, possibly offset to some extent through new fees and assessments. On the other hand, if the property tax shift were imposed selectively—on districts with the greatest capacity to raise revenues from alternative sources or districts that had potential for efficiency improvements--a tax shift might have less pronounced effect on governmental services. Enterprise Special Districts Likely to Raise User Charges. Most of the state's approximately 1,300 enterprise special districts provide water or waste disposal services. Enterprise special districts have considerable authority to levy user fees to pay for services. As Figure 5 indicates, based on the most recent data available, more than half of these districts do not receive property tax revenues and those that do rely on property taxes for only 7 percent of their revenues. Given the significant fee authority of enterprise special districts and the nature of the services they provide, we assume that increased user fees would offset a significant portion of a property tax shift. The Constitution does not require local voter approval for increases in water, sewer, and refuse collection service user fees. Figure 6 Enterprise Special District F2001-02 Financial Data (Dtolhars in Millions) Property Taxes Do Not District Receive Receive Water Disposal Number of districts 292 280 Property taxes $173 Total revenues $872 $11566 Property taxes as percent of total revenues 11% Water Number of districts 499 398 Property taxes $193 Total revenues $2,941 $2,908 Property taxes as percent of total revenues 7% others Number of districts 160 61 Property taxes $119 Total revenues $71759 $2,203 Property taxes as percent of total revenues 7% Totals Number of districts 951 739 Property taxes $484 Total revenues $11,573 $6,676 Property taxes as percent of total revenues 7% a Airport,electric,harbor and ports,hospital,transit. Source: Prelimina 2041-02 Data,State Controllers Office. Redevelopment Agencies May Offset Tax tosses Through Project Expansions. U n I i ke other local agencies, redevelopment agencies do not receive a share of the property tax under the AB 8 system. Rather, after a redevelopment agency identifies a "project area" in the community needing redevelopment to eradicate "urban blight," the agency receives most of the annual growth in property taxes from that area. (That is, the existing AB 8 formulas for sharing the property tax are modified for the life of the project. K-14 districts and other local agencies do not receive their usual shares of property tax revenue growth. The state backfills K-14 districts, however, for their property tax losses.) Redevelopment agencies use property taxes—often in conjunction with private developer funds or other governmental resources—to finance capital improvements, land and real estate acquisitions, affordable housing, and planning and marketing programs. In the short term, decreasing redevelopment property taxes likely would result In decreases to all redevelopment activities, with the possible exception of affordable housing (because statutes specify a level of spending on housing). Over the longer term, however, it is likely that redevelopment agencies would increase their efforts to establish or expand redevelopment areas. This is because under current law, cities and counties gain control over a greater amount of property tax revenues when their subordinate redevelopment agencies create redevelopment projects—and this fiscal advantage would increase significantly if city and county property tax shares were reduced as part of a 2004 property tax shift. Over the long term, therefore, a redevelopment property tax shift might be offset by an expansion of redevelopment activity. An Alternative Approach In this section, we outline an alternative budget option involving local finances that reflects the guidelines discussed above. While we acknowledge that this alternative represents an undesirable intrusion into local finance, we think it would have fewer negative effects on local governments and their residents than the administration's proposal. In order to "compare apples with apples," we scaled our alternative so that it would provide $1.3 billion in ongoing state fiscal relief. We note, however, that each element in our alternative, summarized in Figure 6, could be reduced or eliminated, to reduce its particular negative effects on local governments. Figure 6 LAO Alternative: Local Government (in Millions) Component Amount Reduced subventions $216 Special districts 400 Redevelopment agencies 320 Cities 200 Counties 200 State Fiscal Relief $19336 Reduce Restricted Purpose Subventions First To mitigate the impact of the early 1990s property tax shifts and increase funding for local programs, the state established or augmented several restricted-purpose subventions to local governments. While some of these subvention programs were eliminated last year or are scheduled for elimination in the proposed budget, the administration proposes $216 million in 2004-05 for: ■ Citizens' Option for Public Safety (COPS)—$100 million subventions to all cities and counties for local law enforcement. ■ Juvenile Justice Challenge Grants—$100 million in grants to counties to improve juvenile justice programs. ■ Public Library Foundation—$16 million to support local libraries. While these subventions support valuable local activities, we note that local agencies cannot use restricted purpose subventions to meet community needs as flexibly and efficiently as general- purpose revenues. We also note that local communities are acutely aware of their public safety and library needs and historically have used general-purpose revenues to support these programs. Thus, if local government general-purpose revenues are preserved, public safety and library programs likely would receive high consideration for local support. LAO Alternative. Our first guideline recommends the Legislature minimize any reduction to local general-purpose revenues. Accordingly, before acting to shift local property taxes, we recommend the Legislature consider eliminating these restricted purpose subventions. In our alternative, we use all funding from these subvention programs to reduce by $216 million the amount of the property tax shift. (Vile note that in the "Judiciary and Criminal Justice" chapter of the Analysis of the 2004-05 Budget Bill, we suggest alternate uses for two of these subventions in lieu of the Governor's proposal on juvenile justice probation programs.) Give Local Flexibility Over Special District Shift In the 1990s property tax shift, the Legislature enacted statewide formulas that directed county auditors to reduce special district property taxes. Because the state did not allow communities to revise these shift formulas (or change underlying special district AB 8 shares) to reflect local interests, the formulas resulted in greater reductions to valued local government services than otherwise would have been the case. We note, for example, that the 1990s shifts did not allow communities to reconsider the shares of property taxes allocated to enterprise special districts. Because enterprise districts can finance most of their activities through user fees, local communities might have preferred to reduce or eliminate enterprise special district property taxes in order to preserve property tax resources for other local agencies. (Government Code Section 16270, dating from 1978, declares the Legislature's intent that these districts transition to user fee financing.) The 1990s shift formulas also did not give communities an opportunity to reallocate property tax shift amounts, or AB 8 shares, of nonenterprise special districts. This authority would have allowed local communities to preserve funding for their highest priority programs and caused other districts to improve efficiency, consolidate, reduce programs, and/or shift to other forms of financing. LAO Alternative. Our alternative includes a $400 million special district shift. This amount is equivalent to almost an 80 percent reduction to enterprise special district 2004-05 property taxes, or about a 15 percent reduction to all special district property taxes. Consistent with our guidelines, the allocation of this property tax shift would not reflect dated formulas, but would be locally determined. Communities would have full flexibility in the implementation of this reduction. Specifically, the Legislature would establish a special district property tax shift amount for each county. Every county Board of Supervisors, after public hearing and debate, would revise the share of property taxes received by special districts in their county to implement the shift and reallocate property tax resources in a manner that best meets the needs of their county residents. Transition ftilodr Because local communities have had no authority over property tax allocation in more than a quarter century,, we are mindful that such an approach would engender both concerns by special districts and significant public debate. In general, we believe that this result would be a sign of a healthy local democratic process, appropriately debating the allocation of local revenues. Should the Legislature wish to moderate the rate of change resulting from this alternative, it could impose certain limitations on this authority for a defined period. For example., the Legislature could specify that county boards of supervisors may not (1) reduce a nonenterprise special district's property taxes by more than 20 percent in any single year or (2) reallocate property taxes so that county-dependent special districts receive increased property tax revenues. Focus the Redevelopment Shift Over the years,, the Legislature and administration frequently have voiced concerns regarding local agency overextension or misuse of redevelopment powers and the resulting increased state education costs. In an effort to address these long-standing concerns, the Legislature enacted in 1993 Chapter 942 (AB 1290,, Isenberg), clarifying that local agencies may establish redevelopment projects only in areas that meet specific "urban blight" definitions and that redevelopment expenditures must be limited to projects needed to eradicate blight and create affordable housing. Chapter 942 also sought to reduce redevelopment agency subsidies to auto dealerships, large volume retailers, and other sales tax generators. Since enactment of Chapter 942, many concerns regarding local agency use of redevelopment powers have persisted. Cities and counties have expanded redevelopment project areas so much that 15 percent of all assessed valuation in the state is contained within a redevelopment project. In three counties, more than one in five property tax dollars is allocated to redevelopment agencies., instead of K-14 and other local agencies. Redevelopment agencies continue to find ways to subsidize retail developers and auto dealerships. Finally, the Department of Housing and Community Development (HCD) reports that redevelopment agencies frequently spend more than 50 percent of their housing funds on planning and administration, not housing development—and that some agencies undercount funding that should be deposited to housing funds or use the monies for nonhousing purposes. For example, HCD auditors found that Santa Ana redevelopment officials spent three-quarters of their housing funds over a seven-year period on planning and administration and off-site street and sidewalk improvements. Administration Proposal. Although redevelopment agencies receive about 20 percent of the property taxes allocated to local agencies other than K-14 districts, redevelopment property tax shift losses account for only 10 percent of the administration's plan, or $135 million. Because redevelopment's share of the property tax shift is relatively low, other local agencies' shares are commensurately greater. In addition,, because the administration proposes that all redevelopment agencies contribute the same percentage of their property taxes to ERAF,, cities and counties are likely to perceive increased fiscal incentives to create or enlarge redevelopment projects. LAO Aftermtive. Our alternative sets the amount of the redevelopment shift at $320 million., approximately 11 percent of redevelopment 2004-05 property taxes. Setting the shift at a higher amount allows a larger share of the property tax shift to be borne by an agency that has greater ability to offset property tax losses with other revenues than do many cities, counties, and some special districts. In addition,, we would replace the administration's single-percentage redevelopment property tax shift with a sliding scale approach that decreases—on an ongoing basis—city and county incentives to inappropriately expand redevelopment activities. How Would the Sliding Scale Work'7 Under our alternative, agencies that show restraint in their use of redevelopment authority and place little land under redevelopment would sustain little property tax shift. An agency's ERAF obligation would be higher, however,, in any year that it (1) had large amounts of developed land under redevelopment,, (2) did not meet its affordable housing obligations.. and/or (3) failed to comply with redevelopment requirements specified under the Health and Safety Code. Shift Sales Taxes and Reallocate Vehicle License Fee (VLF) Instead As discussed earlier in this document,, the administration's proposal to shift property taxes from cities and counties would (1) worsen the fiscal incentives these agencies face when considering new land uses and (2) place significant burdens on the same property-tax dependent agencies that sustained the greatest losses from the 1990s shifts. In addition,, the administration's proposal for counties to shoulder a large share of the property tax shift would result in deep reductions to county programs because counties have limited ability to offset property tax reductions with other revenues. LAO Afterrative, To mitigate the adverse land use incentives and program reductions that would result from the administration's proposal, our alternative (1) focuses on taxes other than the property tax and (2) minimizes county revenue losses. Specifically, our alternative imposes city and county reductions., totaling $200 million each,, through the following reduction in the local sales tax and reallocation of VLF revenues: • Sales Tax Reduction,, The local agency sales tax rate (referred to as the Bradley Burns" tax) is reduced from 1 percent to .92 percent, or$400 million annually. The state sales tax rate is increased by an equivalent percentage. • VLF Reallocation,, Because most taxable sales occur within incorporated areas, cities would bear a disproportionate share of the $400 million sales tax reduction. City sales tax losses exceeding $200 million would be offset through a statutory revision to the existing VLF allocation formula—shifting some county VLF revenues to cities. Conclusion By shifting to K-14 districts $1.3 billion of property taxes currently allocated to city, county, special districts,, and redevelopment agencies,, the administration's proposal places significant burdens on local agencies as a means of resolving the state's budget difficulties. We think it is inappropriate for the state to reallocate local taxes for the sole purpose of reducing state spending obligations. We also find that the shift would impose considerable fiscal disruptions to local governments and does not,, in any real sense, represent a budget "solution." Accordingly,, we recommend that the Legislature reject the administration's proposal. If the state determines that,, given its fiscal difficulties, local agency funding must play a role in resolving the state's budget crisis,, we recommend the Legislature avoid relying upon the dated property tax shift formulas from the 1990s. Rather,, we recommend the Legislature develop a new approach, consistent with the guidelines outlined in this analysis. In our view, the alternative local government budget reduction outlined above—while still imposing undesirable fiscal effects on local governments--offers significant advantages over the administration's approach. Specifically, our alternative focuses a larger percentage of the property tax losses on those agencies that can offset revenue reductions through user fees or other revenues, if the community so desires. Our alternative also minimizes the loss of general- purpose revenues to cities and counties—and modestly improves the fiscal incentives local agencies face regarding land development and redevelopment. Return to Perspectives and Issues Table of Contents, 2004-05 Budget Analysis Legislative Analyst's Office Alternative to Governor's Local Property Tax Shift Proposal -°---r-- ----�- February 2004 overnor s Property Tax Shift Proposal —� Cities $1$$M Countles _k $909M RDAs - —°-- $135M Special Districts $105M $1336 Billion TOTAL LAO's Alternative . rrrrr�rrr Special Districts RDAs 400M Counties Cities $200M $200M COPS,JJ Library $216M $1.336 Billion TOTAL Board of Supervisors Agenda March 9, 2004 Item D-2 i For Contra Costa County*: Governor's $29.177 mil lion LAO's $ 8.138 million 'Excludes Redevelopment Agency $4.138M Sales Tax/ $401,4 VLF $810,600 $2.788M Library COPS Juvenile Justice ". . . the Legislature should use its authority over this (local property) tax for betterment of local government, not as a State rainy day fund." LAO 2 v Guidelines for Local Budget Reductions • General Purpose Revenues • Past Formulas • Local Control • Land Use Incentives • Impact of Reductions Impact - Cities and Counties • User-Fee Financing Limited • Voter Approval for Taxes/Assessments • State and Federal Mandates PLUS . . . Continued fiscal impact of past State Actions 3 Trial Courts 03-04 County Costs •MOF Payments - Rule 810 $ 11.97 M - Fees&t Fines $ 4.47 M • Direct Payments -Non Rule 810 S 7.40 M $ 23.84 M Impact - Redevelopment Agencies • 15%assessed valuations in RDAs • Questions on use of funds I mpact-Non-Enterprise Special Districts • 1992-93 mostly flood control, library, parks/recreation • Property tax dependency varies 5 Impact - Enterprise --- Special Districts • User Fee Authority • Average 7%of total revenue County Et City Sales Tax A A $200 Million Each -�, � x ��' .�;,�� • I%Bradley Burns Sales Tax op .92% • VLF shift from counties to equalize IJ COPS, Juvenile Justice,, Library $216 Million • Locals can backfill, if a priority • • Redevelopment Agencies $320 Mil lion • 11%of total revenue • Sliding scale - Developed land - Affordable housing - HM code compliance County Redevelopment Agency 03-04 Property Tax Loss- $398,000 Based on $135M Statewide IF LAO cut proportional- $1.18 Million Special District Property Taxes $400 Million • 80%from Enterprise Districts • Board of Supervisors allocation within counties - Max 20%/year from non-enterprise districts - No increases for county-dep.districts 7 Special District Property Taxes Statewide* Contra Costa Enterprise $500 M $ 36.24 M Non-Enterprise $173.96 M TOTAL $2.67 Billion $210.2 M CCC Approx 8%of CA *Guesstimate Both Governor and LAO proposals permanently shift reven es Recommendation SUPPORT in concept LAO proposal excepting to extent reductions are permanent 8