HomeMy WebLinkAbout2000-05-09; City Council; 15727; State-Local Fiscal Reform.
5
5
8
. . g
2 A G 5 8
.
AB# a,727
MTG. 5-g-04
DEPT. CM
CITY OF CARLSBAD - AGEtWA BILL
TITLE*
RGst to Give Presentation on State-Local Fiscal
Reform by San Diego Association of Governments
(SANDAG)
DEPT. HD.
RECOMMENDED ACTION:
Receive presentation from SANDAG on the issue of state-local fiscal reform.
ITEM EXPLANATION:
The City Council provides an opportunity for citizens and organizations to have an item
placed on a City Council Agenda by submitting a letter to the City Manager. Attached is a
letter (Exhibit 1) from SANDAG requesting to provide an informational update on the issues
surrounding state-local fiscal reform and the various proposals surrounding this reform.
FISCAL IMPACT:
None
EXHIBITS:
1. Letter to Council Member Finnila from Ken Sulzer, Executive Director of SANDAG,
dated March 31,ZOOO
. ’ - I
March 31,200O
San Diego ASSOCIAX’ION OF
GOVERNMENTS
401 B Street, Suite 800
San Diego, California 92101-4231
(619) 5955300 l Fax (619) 595-5305
http://www.sandag.cog.ca.us
Hon. Ramona Finnila
Councilmember
City of Carlsbad
1200 Carlsbad Village Drive
Carlsbad, CA 92008-1949
Dear Councilmember Finnila:
The SANDAG staff would appreciate the opportunity to speak to your City Council about the
important issue of state-local fiscal reform. The issue soon will be considered by the Legislature.
Our presentation to the City Council would cover the topics discussed at the SANDAG Board
Workshop on March 24, 2000, including the problems related to the current state-local tax
system and reforms being proposed by SANDAG and various statewide organizations,
including the League of California Cities.
As you know, SANDAG is trying to achieve a consensus on a legislative position for the San
Diego region. We need to move fast because the Legislature could take action as early as this
summer.
Again, we ask for your assistance in placing this item on the Council docket at your earliest
convenience. To confirm a date and time or to obtain more information, please call me or Ken
Fabricatore, Project Manager, at 619-595-5320.
Sincerely
/
KENNETH E. SULZER
Executive Director
KS/jm
cc: Hon. Bud Lewis
Hon. Matt Hall
Mr. Ray Patchett
MEMBER AGENCIES: Cities of Carlsbad, Chula Vista, Coronado, Del Mar, El Cajon, Encinitas, Escondido, Imperial Beach, La Mesa, Lemon Grove,
National City, Oceanside, Poway, San Diego, San Marcos, Santee, Solana Beach, Vista, and County of San Diego. ADVISORY/LIAISON MEMBERS: California Department of Transportation, U.S. Department of Defense, S.D. Unified Port District,
S.D. County Water Authority, and TijuanaIBaja California.
. .
i ;
.
I .
D 1
: !
i
i
!
i
t
:
I
i
.
1 c
Summary
SANDAG Fiscal Reform Proposal
1. Constitutional Revenue Protection for Cities and County Governments
l Existing property tax share (plus any return of ERAF property taxes)
l Existing l-cent local sales tax, including situs allocation method
l Larger share of property tax and sales tax in exchange for state subventions (see #2 ):
Vehicle License Fees
Gas Tax
Reimbursement of Homeowners’ Exemption
2. Even Revenue Exchange & Creation of Countywide Tax Base - Existing state subventions to
cities and county governments (vehicle license fees, etc.) would be traded to the state for a
larger share of property taxes and sales taxes (extra %-cent of the state’s existing 5-cent sales
tax rate), creating a new countywide tax base in each county.
The annual growth in the new countywide tax base would be distributed among cities based
on total population, not taxable sales or location of parcels, thus attaching more revenues to
existing and new housing.
3. Revenue Allocation from New Countywide Tax Base - Revenues from the new countywide
tax base would be apportioned by a state agency in accord with constitutional rules:
A. “Hold Harmless” Rule for Base Revenue - Each agency receives a base amount of annual
revenue on an ongoing basis equal to the amount it relinquished to the state as part of the
revenue exchange.
B. Allocation of Annual Tax Increment - Each agency is allocated a share of the annual
revenue growth, or tax increment, as follows:
Cities’ Combined Share of Tax Increment - Equals the same percentage of total revenue
cities received in the base year under the hold harmless rule. The cities’ share is further
divided among individual cities in proportion to total population.
County Government’s Share of Tax Incremenf - Equals the same percentage of total
revenues it received in the base year under the hold harmless rule. Population is not a
factor in determining the county’s share because its revenues support regional services.
Pages 2 and 3 illustrate how the revenues would be distributed among agencies in the San
Diego region. Cities, as well as the county government, would receive a financial return based
on the performance of the regional economy.
4. Financial Relief through ERAF Reversal
SANDAG’s proposal calls for a reversal of the ERAF property tax shift, which totaled over
$215 million in FY 1999. These dollars would go directly back to individual jurisdictions.
Page 1 of 3
SANDAG’s Proposed Revenue Realignment
Impacts on Jurisdictions in the San Diego Region
Assuming Implementation Occurred in FY 1999
(Excludes financial relief related to any reversal of ERAF property tax shift)
I. Even Exchange of Revenues Based on FY 1998 Revenues, Creation of Countywide Tax Base,
and “Hold Harmless” Allocation for FY 1999:
Revenues Retained by the State*
VLF, Gas Tax, & H.O. Exemption
San Diego Region FY 1998 Percent
Cities, Combined $ 140,221,619 46.7%
County of San Diego X0,070,276 53.3%
Total $ 300,291,895 100.0%
Factors used to allocate annual
revenue growth per Step 3, next page
By Jurisdiction:
Carlsbad
Chula Vita
Coronado
De1 Mar
El Cajon
Encinitas
Escondido
Imperial Beach
La Mesa
Lemon Grove
National City
Oceanside
Poway
San Diego
San Marcos
Santee
Solana Beach
Vista
Total Cities
County of San Diego
Total Region
$ 4,321,059 1.4%
9,311,192 3.1%
1845,803 0.6%
336,598 0.1%
5,537,645 1.8%
3,622,922 1.2%
7,120,780 2.4%
1,696,413 0.6%
3,422,349 1.1%
1,503,888 0.5%
3,471,900 1.2%
8,983,692 3.0%
2,825,084 0.9%
74280,255 24.7%
2,891,773 1.0%
3,335,530 1.1%
869,261 0.3%
4845,475 1.6%
$ 140,221,619 46.7%
160,070,276 53.3%
$ 300,291,895 100.0%
Replacement Revenues
New Countywide Tax Base FY 1998
1 /acent Sales Tax
Extra Property Tax Share
Total
By Jurisdiction:
Carlsbad
Chula Vista
Coronado
De1 Mar
El Cajon
Encinitas
Escondido
Imperial Beach
La Mesa
Lemon Grove
National City
Oceanside
Poway
San Diego
San Marcos
Santee
Solana Beach
Vista
Total Cities
County of San Diego
Total Region
$ 142,082,922
158,208,974
$ 300,291,895
47.3%
52.7%
100.0%
FY 1999
Base Amount Percent
$ 4,321,059 1.4%
9,311,192 3.1%
1,845,803 0.6%
336,.598 0.1%
5,537,645 1.8%
3,622,922 1.2%
7,120,780 2.4%
1,696,413 0.6%
3,422,349 1.1%
1,503,888 0.5%
3,471,900 1.2%
8,983,692 3.0%
2,825,084 0.9%
74,280,255 24.7%
2,891,773 1.0%
3,335330 1.1%
869,261 0.3%
4845,475 1.6%
$ 140,221,619 46.7%
160,070,276 53.3%
$ 300,291,895 100.0%
Percent
*Reflects actual FY 1998 revenues from vehicle license fees (VLF), gas tax apportionments, and reimbursement for the
homeowners’ exemption. Source: State Controller. Additional subventions could be included in the revenue exchange.
Page 2 of 3
- -
l
First-Year Growth in New Countywide Tax Base during FY 1999:
New Countywide Tax Base FY 1998 FY 1999
Revenue Increase
Dollars Percent*
1 /Zcent Sales Tax $ 142,082,922 $ 153,334,667 !§ 11,251,746 7.92%
Extra Property Tax Share 158,208,974 170,410,114 12,201,140 7.71%
Total $ 300,291,895 $ 323,744,781 $ 23,452,886 7.81%
Allocation of Revenue Growth - Cities’ Share of 46.7% & County’s Share of 53.3%
based on Respective Shares of Countywide Revenues Retained by the State
(per previous Step 1):
Cities’ Share - 46.7% $ 10,951,350
County’s Share - 53.3% 12,501,536
Total !§ 23,452,886
By Jurisdiction:
Carlsbad
Chula Vista
Coronado
De1 Mar
El Cajon
Encinitas
Escondido
Imperial Beach
La Mesa
Lemon Grove
National City
Oceanside
Poway
San Diego
San Marcos
Santee
Solana Peach
Vista
Total Cities
County of San Diego
Total Region
Revenue Increase Population
FY ‘98- FY ‘99 of Cities
2,396,807 *c
Total
Population
(Jan. 1, ‘99)
77550
166,945
28,715
5,328
95,546
60,426
125,597
28,882
58,655
25,683
54,961
157,869
48,393
1254,281
52,074
57,389
14,152
84,361
2,396,807
Revenue
Increase
Per Capita
$ 4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
4.57
$ 4.57
Revenue Increase
Per Capita
$ 4.57
FY 1999
Revenue
Increase
$ 354937
762,795
131,203
24,344
436,563
276,095
573,870
131,966
268,003
117,349
251,125
721,326
221,114
5,730,987
237,933
262,218
64,662
385.457
$ 10,951,350
12501,536
$ 23,452,886
Based on actual growth rates for local sales tax and city/county combined secured
property tax revenue.
** The County’s share is not allocated based on population because the revenues that the County
would relinquish to the state as part of the revenue realignment are currently used to support
regional services as well as local services in the unincorporated area.
Page 3 of 3
-
_- * J
y’,G:*’ .:,, ‘5,; && .I ,~ x -‘. + i
WHY ‘7REFOI?M OBSCURE SYST
Almost invisible, the state-local tax system
in California is not well understood, even by
people directly involved in the transactions.
Yet, at the local level, the system is crucial to our
ability to manage growth smartly, to provide
enough homes for our residents, to maintain
public services, and to sustain the region’s
resurgent economic performance.
The current tax system is an impediment to
sustainable communities. It restricts the freedom
of local governments to manage their own fiscal
affairs and thereby destabilizes local
governments. It impedes home construction
and encourages cities to compete among
themselves for the weakest contributors to
economic prosperity - retail outlets.
In short, the current tax system adversely
affects how our communities look, and, even
more important, how they work.
FISCAL INSTABILITY:
THE MONEY SHUFFLE
Over the past 20 years, voter-approved tax
limitations have substantially diminished local
government’s fiscal powers, reduced revenues,
and put the state government in charge of
allocating property taxes among local agencies.
State budgetary actions in the early 1980’s
and early 1990’s further reduced local revenues.
Six subventions to cities and counties were
repealed by the state.
Most significantly, the state ordered an
ongoing 25% cut in local government’s
property tax base beginning in fiscal year
1992-93. Each county was required to set up an
Educational Revenue Augmentation Fund
(ERAF) and to deposit into the fund each year
a portion of th e property taxes that otherwise
would have accrued to local governments. The
state uses these revenues to meet its
constitutional obligation to provide a minimum
level of funding for public schools. (See inset on
ERAF discussion on page 21.)
It is not coincidental that the property tax
shifts and the other state takeaways occurred
when they did. The early 1980’s and early 1990’s
were recessionary times in California. Facing
budget deficits, the state tooklocalmoney instead
of cutting its spending or raising state taxes. The
state government has been balancing its own
budget by appropriating local revenues.
The state hasn’t always been a usurper of
local funds. After the passage of Proposition 13
in 1978, the state responded to the sharp cut in
property taxes by shifting property tax revenues
from school districts to local governments and
by assuming a larger share of the responsibility
for funding the public school system.
c
AN EM?
The people of California
are losing control over
the public services
dearest to them because
local governments are
losing the freedom to
manage their own
fiscal affairs.
crunnr: A AfUIEVIYC CI(FAI DCCnDN IN CAN IliECn 3
W H Y REFORM AN OBSCURE SYSTEM?
Also, in recent years, the State Legislature
has acted to offset the losses caused by the ERAF
’ property tax shifts by allocating more money for
local government programs.’ Despite the relief,
most cities and counties remain net losers.* In
addition, unlike the property taxes taken away,
the relief has come with programmatic earmarks,
counties, schools, and special districts. Public
agencies work best for the people when they
cooperate.
Each year, local agencies scurry to make
major changes to their spending plans and
service levels based on the outcome of the state
budgetary process. The unpredictability of
government budgets at the local level disrupts
the delivery of public services and renders local
financing plans for infrastructure unduly
tentative. The instability hardly is conducive to
growthmanagement and sustainable prosperity
in California.
over the years is almost beside the point. The
state’s long-term proclivity to shuffle money
between itself and units of local government
fosters instability for governments throughout
California. It also creates divisions among cities, were fiscally stable.
California’s economy is the aggregate of
local/regional economies, all of which
would perform better if local governments
Balancing the State’s Budget with Local
Revenues During Bad Economic Times
ERAF Property Tax Shifts from Local Agencies
1993,1994 & to the present
Cigarette Tax Revenues
Repeal of subvention to cities and counties, 1992
TrailedMobilehome License Fees
Repeal of subvention to cities and counties, 1992
m
Source: State Board of Equalization and SANDAG.
Business Inventory Exemption
Repeal of reimbursement to local agencies, 1984
Financial Aid to Local Agencies Fund
Repeal of subvention to cities and counties, 1982
Highway Carriers Uniform Business Tax
Repeal of subvention to cities, 1982
Liquor License Fees
Repeal of subvention to cities and counties, 1982
FISCALIZATION
OF LAND USE
Having lost much of their control over tax
rates and revenues, local governments are trying
to regain their fiscal powers through land use
policy. They want new development that
produces taxable sales. They are less interested
in accommodating housing and other non-
commercial projects, even though such projects
may be more beneficial for local residents, the
community, and the region.
Under financial pressure, cities are retreating
from their responsibility for accommodating
the state’s urban population growth. The
California Planning Roundtable put it this way:
“Many local governments have no
incentive to approw much-needed housing
projects - especially affordable housing
projects- because thqaremoney-losers for
the local budget . . While rejecting housing,
citiesand counties haveengaged in destruc-
tive competition for retail development.” 3
As jurisdictions accommodate tax-
producing development, land uses that should
be integrated into each community become
concentrated in separate communities, creating
imbalance in a region or subregion. Some
communities may successfully attract a
disproportionate share of the region’s
commercial development and jobs, while
forcing housing projects into distant suburbs
and rural areas.
The imbalance in the geographic distribution
of shopping opportunities, jobs, and housing
increases and lengthens car trips, adds to traffic
congestion, and degrades air quality. It also
wastes people’s time and money.
Unfortunately, inter-jurisdictional com-
petition for retailers diverts attention and
resources away from other land uses, higher-
paying jobs, and housing opportunities. And
the competition does not even build
California’s or a region’s retail base; private
market forces do that quite independently of
government suasion in response to rising
consumer demand.
*
3 The California Planning Roundtable is a statewide organization of professional planners. The quote is taken from: Restoring the
Balnnce: Mannging Fiscal Zsmes nnrl Lnnd-Use Plaming Decisions iu California, 1997.
Under financial
pressure, cities are
retreating from their
responsibility for
accommodating the
state’s urban
population growth.
SANDAG l ACHIEVING FISCAL REFORM 1% SAN BifGO
Locat land use policy has
emerged as a powerful
revenue-raising tool,
setting the stage for
more frequent conflicts
i I between gouemmental ;’ :. i . . _“‘ money needs and
,. .,l community needs.
W H Y REFORM AN OBSCURE SY§TEM?
Indeed, “fiscalization of land use” leads to
distorted public policy: the health of the
municipal budget is mistaken for the
community’s economic prosperity; retail
development is confused with economic
development; and, the most important
community need - housing - is regarded
as a loser.
The people of California are poorly served
when the pursuit of tax dollars underpins local
decisions about land use and community
development.
UNBEARABLY
COMPLICATED
The complexity of the state-local financial
relationship hinders efforts to reform it. The
general public hardly can be expected to rise in
support of changing an obscure tax system that
ostensibly involves only intergovernmental
relations.
Presumably aware of the broad impacts of
the state-local tax system, the State Legislature
continues its 20-year preoccupation with local
fiscal affairs. The results so far: more rules and
earmarks, greater state control, more money
shifting among units of government, greater
friction among governments, and more
uncertainty in the financing of public facilities
and services for local residents.
A POLICY
PRESCRIPTION
Overcoming or avoiding the problems
outlined above will not be an easy task because
the solutions entail reform of California’s
system of municipal finance. While some feel
changes to Proposition 13 would be helpful, this
constitutional amendment is immensely
popular, and it likely will stay in place.
Another legislative approach would be to
seek a change to the existing situs method for
allocating the local sales tax. However, that
option would face fierce opposition from
California’s largest cities, and the specter of
winners and losers, even among smaller
jurisdictions, would render the proposal
unacceptable to many communities through-
out the state.
Alternatively, California should pursue an
approach to state-local fiscal reform that
conforms to all voter-approved tax initiatives
and keeps all public agencies fiscally whole.
Further, the approach should not only neutralize
the influence of taxable retail sales on land use
decisions but also restore fiscal stability and
local control to local government.
REFORM AND RELIEF
In addition to fiscal reform, most local
governments need financial relief in the form of
additional revenues to pay for public services
and facilities, especially infrastructure
improvements in older, urban neighborhoods.
But, unlike relief, fiscal reform for cities and
counties can be accomplished without raising
taxes or taking money from other
public agencies.
Although this report discusses a couple of
ways to provide financial relief for local agencies,
it emphasizes the need for fundamentah
. :’
“revenue-neutral” reform. Fiscal reform and
financial relief can fit together, but relief without
reform could prove to be a fleeting remedy for
a dysfunctional state-local financial relationship.
Unlike E&et fiscal M&PI -’ ;
for cities and counties
can be accomplished ,’
without raising taxes or
taking money from
other public agencies.
SANDAG l A CHIEVING flSCA1 R EFORW IN SAN DIEGO ?
TOWA 1 I’ I s Y
More than ever, California needs a new
state-local financial relationship-one that
benefits all of our communities and helps create
fiscally stable cities and counties. Such a system
is possible, and it can be created without raising
taxes or changing any voter-approved tax
measure, such as Proposition 13.
A new system should be developed and
predicated on the principles outlined below.
PRINCIPLES
FOR REFORM
Principle One:
Protect Local Revenues
Local government should have con-
stitutionally-protected revenue sources,
including dedicated minimum shares of the
property tax and sales tax.
Local government will never achieve a
modicum of financial security so long as the
state can routinely appropriate local funding
sources as part of the annual budgetary process
in Sacramento. Cities and counties should have
constitutional protection for their most important
revenue sources.
Principle Two:
Simplify & Add Flexibility
The number of revenue sources shared
between state and local government should be
reduced, and the consolidation should produce
larger shares of discretionary property and sales
taxes for local government. The additional share
of sales taxes for local government should be
allocated among local agencies based on
population rather than situs or where the sales
transaction occurs.
That local agencies should have a larger,
protected share of the property tax in lieu of
other state-controlled subventions makes sense
for several reasons. The property tax is assessed,
collected, and appealed locally. Taxpayers
understand the relationship between property
taxes and local services. Furthermore, the
property tax is a stable revenue source.
With greater reliance on property and sales
tax revenues, local agencies would be able to
influence to a larger degree their own financial
destiny through land use and economic policy.
P
The State’s administrative
charge to collect and
send vehicle license fees
(VLF) to cities and
counties: $180 miltiod
I.
i i f :‘
Ii
!
i f f .!
f-
i
i
year...
Why doesn’t the state
simply keep all of the
money from the RF and
give local governments a
larger share of the
property tax
in exchange?
Tax dollars
raised locally
should stay local.
T 0 W A R D A
Principle Three:
Keep Faith with the Voters
Fiscal reform should proceed without
imposing additional burdens on taxpayers and
without changing any voter-approved tax
limitation, including Proposition 13.
The voters of California ultimately will
decide on the fate of any fiscal reform that
proposes constitutional change. They should
not be asked to pay higher taxes for this purpose.
Principle Four:
Keep Fiscally Whole All Units of
Government and Schools
Fiscal reform should not worsen the fiscal
status of local government, state government, or
public schools.
Distinct from tax relief, fundamental reform
of the state-local tax system should be “revenue
neutral,” avoiding reform’s worst enemy -the
specter of winners and losers.
c
N E W S Y S T E M
Principle Five:
Strengthen Growth
Management Incentives
Changes to the tax system should reduce
inter-jurisdictional competition for commercial
development, promote regional cooperation,
and give cities a greater financial incentive to
accommodate new housing demand.
Share of the Local Property Tax
m
State/Schools 35%
Other
Agencies
18%
Cities
13%
State/Schools 52%
Other
Agencies
18%
Cities
11%
Source: State Board of Equalization, Anmal Reports,
FY 1989-90, and FY 1997-98
oh ~TUIFVIMT. FI’CfAl RFFORM IN SAN DIEGO l SANDAG
A new state-local tax system, consistent
with the principles cited above, could be
implemented through constitutional change,
including an even exchange of revenues between
local governments and the state. The elements
of such a system, including dollar impacts, are
illustrated below:
Canstitutional Minimum
Gaearantee of Revenues
Constitutional change should guarantee
local government’s share of the property tax
and sales tax and raise local government’s share
of both. The additional property taxes and sales
taxes could be derived from an even exchange of
revenues with the state (see #2 below). Any
reversal of the ERAF property tax shift should
receive constitutional protection as well, adding
to the minimum guarantee.
Under this approach, the existing l-cent
local sales tax (Bradley-Burns) would continue
to be distributed among agencies based on point-
of-sale, as currently done by the State Board of
Equalization. The only change here would be
constitutional protection of this local revenue
source, including the current sifus allocation
method.
Likewise, the allocation of local
government’s existing shares of the property
tax would remain unchanged. Each city and
county would continue to receive its current
share of property taxes collected from each tax
rate area within its jurisdiction. Again, the only
difference would be a constitutional safeguard
for these existing percentage shares.
Extended Protection:
Exchange of State Controlled
Revenues for Local Dollars
Constitutional reform could provide for an
even exchange of revenue between the state and
local government, as illustrated in the table on
page 12. For example, cities and counties in
California could “cash in” nearly $4.5 billion in
state controlled dollars for an equivalent
amount of dollars in the form of a larger share
of property taxes and sales taxes. While the table
on the-next page shows statewide dollar
amounts, the even exchange of revenues could
be transacted on a county-by-county basis.
. 3 _’ ‘. j’?‘ :. _ 1
Six state subventibns to
local communities have
been repealed since 1382.
Three sizable subventions
are left for local agencies:
I. Vehicle License Fees
2. Gas Tax
3. Rebate for
Homeowners’
Exemption
;5 j f( t ,I 51 .j : :. : -1 _ 1 1
A $4.5 billion trade to
untangle state and local
government finance and
to extend constitutional
protection to more
local dollars.
_-. ,?: 1 4:r
T 0 W A R D A N E W 5 Y S T E M
Example: Statewide Even Exchange of Revenue in Base Year
FY 1999 - 2000
General Fund Revenue:
Annual
Revenue*
Annual
Revenue* For Deposit to:
Larger share of property taxes $ 2,476 Vehicle license fees’ s 3,033 State General Fund
Extra l/2-cent local sales tax
(State’s rate reduced l/2 cent)
Total
$ 1,977
$ 4,453
Gas taxes?
Rebate-
Homeowners’
exemption
1,031 State Highway Account
389 State General Fund
Total $ 4,453
* Based on estimated revenues reported by the State Controller
’ Includes backfill revenues for car tax reduction. Excludes state administrative charges for apportionment to cities and counties. Also excludes county health and welfare realignment revenues of 24.33% of total vehicle license fee revenue.
’ Excludes state administrative charges for apportionments to cities and counties.
From each county, the state could retain
revenues it currently allocates to cities and the
county government, including vehicle license
fees, gas taxes, the reimbursement for the
homeowners’ property tax exemption,4 and
other subventions to local agencies.
In exchange, each county could be allocated
a larger share of the existing state sales tax equal
to % cent. The state’s share of the sales tax
rate would be reduced by I/ cent, leaving un-
changed the combined rate in California, as
shown on page 13.
’ Homeowners would continue to receive the property tax exemption, but the state’s annual reimbursement for the reduction in
local government revenue would be replaced permanently with an additional share of the local property tax.
!1 SAH DIEGO l SANDAG
To balance the revenue exchange, each
county also would receive a larger share of the
property tax. Therefore, counties with a relatively
low level of taxable sales (i.e., lower revenue
from a X-cent sales tax) would receivearelatively
higher proportion of property taxes in order to
keep the revenue swap neutral.
The revenue exchange shown in the table
on page 12 involves only three state
apportionments to local governments.5
However, the swap could be expanded. Local
governments could receive an even larger share
of the property tax in exchange for other state-
controlled taxes and fees, such as California
vehicle code fines, off-highway license fees,
and open space subventions.
Along with existing revenues from the
property tax and sales tax, the new local dollars
(property taxes and sales taxes) would be
constitutionally protected without earmarks or
other complications that reduce the value of
money and give rise to needless bureaucracy.
Current California Sales & Use Tax Rate
& Change under Revenue Exchange
State Sales & Use Tax
State General Fund
-
5.0 cents 4.5 cents
Local Sales & Use Tax (Bradley-Bums)
City & county general funds
Prop. 172 - Local Public Safety Fund
Local public safety programs
State Revenue Fund
For County health & social services
1.0 1.5
0.5 0.5
0.5 0.5
County Transportation Tax
Public transportation 0.25 0.25
Statewide Minimum Tax Rate* 7.25 cents a?
7.25 cents
* Does not include optional local sales tax rates levied by districts in the state
In San Diego County, SANDAG, serving as the Regional Transportation Commission, levies a voter-approved rate of 0.5 cents, raising the total rate to 7.75 cents.
Revenue realignment:
Is not an un-
encumbered, secure
dotlar more valuable
than an uncertain,
restricted dollar?
’
’ A fiscal reform previously proposed by SANDAG included local Transportation Dewlopment Act (TDA) funds (.25-cent sales tax) as part of the revenue exchange.
Because TDA funds have since received constitutional protection for public transit purposes, these dollars have been excluded from the revenue exchange illustrated above.
:ANDAG l RCKIE!!ING FI:CAL iiTF!!Rtl IN ‘IAH DIEGO 13
The revenue exchange
between the state and
local governments
would be transacted
on a dollar-for-dollar
basis in the base year.
T 0 W A R D A
Statewide, the larger share of property taxes
for cities and counties would total nearly $2.5
billion annually, or about three-fourths of the
current ERAF shift from cities and counties to
schools.
The state would replace the property taxes
shifted from schools with additional state aid to
education using revenues acquired from local
governments as part of the revenue exchange.
And this could be accomplished without
reducing the total amount of revenues available
to the state or public schools.
Creation of a Countywide Tax Base
For each county, the local dollars acquired
through the revenue exchange with the state
would be deposited in Local Revenue Fund.
Again, these revenues would include a larger
share of local property taxes for cities and the
county government and proceeds from a portion
of the sales tax (*/ cent) that currently accrues
to the state.
N E W S Y S T E M
The “pooling“ of these revenues on a
countywide basis would make it possible to
equalize the revenue exchange for each city and
the county government.
The revenue exchange between the state
and local governments would be transacted
on a dollar-for-dollar basis in the base year.
Thereafter, the amount of revenue received
by local governments would change as a
function of the new countywide tax base - the
assessed value of property and taxable sales
(%-cent sales tax).
Revenue Allocation from the
Local Revenue Fund
The revenues deposited in each county’s
Local Revenue Fund could be apportioned
among local agencies by a state agency.
Alternatively, local governments in each county
could be given the option to allocate the funds
pursuant to an areawide agreement or joint
exercise of powers.’ In either case, a
constitutional amendment could set the
allocation method for the Local Revenue Fund
as follows:
6 The form and content of such an agreement is outlined in a previous SANDAG publication,
A Propowl ior St&-Local Fiscnl Reform in California, March 1998.
t* :. .,. .’ ‘( b 0. f A !I! 0 I E G 0 l 5 Ad DA G
“Hold Harmless” Rule for Annual Base
Amount of Revenue
This provision would ensure that each
agency receives a base amount of annual revenue
equal to the amount it relinquished to the state
as part of the revenue exchange.
The hold harmless rule would establish
each city‘s and the county government’s
minimum level of annual revenues on an
ongoing basis. In addition to this base amount,
each agency would receive a share of the annual
“tax increment,” or revenue growth from the
countywide tax base created as the result of the
revenue exchange.
Allocation of the Annual
Tax Increment
In each county, cities and the county
government could be allocated a share of the
annual revenue growth, or tax increment, from
the countywide tax base as follows:
County Government’s
Share of Tax Increment
Equal to the same percentage share of total
revenues it received in the base year under the
hold harmless rule.
Cities’ Share
of Tax Increment
Equal to the same percentage share of total
revenues cities received in the base year under
the hold harmless rule. The cities’ share then
could be further allocated among individual
cities on the basis of total population.
In this way, cities that experience relatively
more housing and population growth would
receive more revenue from the countywide tax
base. Both property taxes and sales taxes from
the countywide tax base would support
residential development, providing a greater
incentive for local governments to accommodate
housing. And, over time, the annual tax
increment would grow relative to the size of the
annual base amount of revenues.
Such an approach to revenue sharing from
a countywide tax base could reduce competition
for retail development and promote regional
cooperation in economic development. Cities,
as well as the county government, would receive
a financial return based on the performance of
the regional economy. All jurisdictions would
benefit to the extent the regional tax base
increased as the result of growth in the assessed
value of property and taxable sales.
The “hold harmtest’ rule
would establish each
city’s and the county
government’s minimum
level of annual revenues
on an ongoing basis.
SANDAG l ACHIEVING Fl\Cll REFt?R& lfi 'IAN CIF(;O I5
Local governments also need financial
relief. Having lost revenues and fiscal powers
over the past two decades, local public agencies
are finding it increasingly difficult to meet the
public service demands related to California’s
population and housing growth. The financing
of public services in residential com-
munities, particularly older neighborhoods, is
burdensome because cities receive such a
small share of the local property tax,
averaging only 11% statewide and 13% in the
San Diego region.
While reliance on development impact fees
has offset the cost of new public facilities in
developing areas, the fees do not produce
enough revenue to pay for redevelopment and
infrastructure reinvestment in older, urban
neighborhoods. Further, general tax increases
face an insurmountable hurdle - two-thirds
voter approval.
Financial relief for cities and counties could
take many forms. Following is a brief discussion
of only two proposals that have the potential to
not only increase local revenues but also help
achieve smart growth objectives. Both proposals
would cost the state government money. They
include:
* Full or Partial Reversal of the ERAF
Property Tax Shift, and
d Pooling Existing Sales Taxes and State
Matching Funds
“Reversal of the ERAF” has been a high
legislative priority of local governments ever
since the property tax shift was instituted in
the early 1990’s. (See inset on ERAF discussion
on page 21.1 This legislative proposal would
reduce or terminate the annual shift of
property taxes from local governments to
schools. Ordered by the state legislature, the
initial shift occurred in fiscal year 1992-93
and was increased substantially in following
year, 1993-94.
The annual shift now totals about $3.6
billion statewide, or one in five property tax
dollars. In the San Diego region, the shift is
about $215 million annually and has totaled
over $1.26 billion during the past seven years.
One of the advantages of reversing the
ERAF shift is that it would increase the
amount of property tax revenue that cities
and counties receive from housing
development, helping to neutralize the effects
of the sales tax on land use decisions.
Also, local governments would have more
revenue to pay for needed services in residential
neighborhoods. Moreover, infill housing and
redevt?lopment would yield more public
revenues to pay for infrastructure investment in
older communities.
Proposed ERAF reversal
without constitutional
protection for local
agencies would be more
of the same, not reform.
l J ,, :, i I, :‘J 17
F I N A N C I A L R E L 1 E F
San Diego Region ERAF Property Tax Loss
Combined 7-Year Loss: $1.26 Billion
5195.1 5197.0 $195.01 5195.8 5202.0 5215.3
$200
2 $150
3
5 $100
$50
cm V” 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99
Fiscal Year
Source: County of San Diego, Auditor and Controller’s Office
The state would incur the cost of any full or
partial ERAF reversal. Under the constitution,
the state would have to replace the property tax
dollars with state general fund allocations to
public schools in California.
Importantly, any reversal of ERAF should
come with constitutional assurances that local
governments will be able to keep the revenues.
Otherwise, what should local governments
prudently do with the extra property tax
revenue? Should they program the revenues in
the long-term capital facilities program, or
should they save the money, in the event the
ERAF is later reinstated after the state surplus is
gone and the state encounters budget problems?
Without revenue protection for local
governments, a reversal of ERAF would
perpetuate a fundamental problem: state
manipulation of local revehues and the fiscal
instability it engenders.
POOLING SALES
TAXES AND STATE
MATCHING FUNDS
Under this proposal, local agencies in each
county would have the option to establish a
pool of revenues derived from the growth in
one-half of the existing l-cent local sales tax
(Bradley-Burns) in their jurisdictions.7 The
state would match the dollars in the pool l:l, if
the participating agencies serve an area
coincident with the jurisdiction of the county
or council of governments. This proposal is
similar to a policy option being considered
by the Speaker’s Commission on State/Local
Government Finance.’
Local agencies would create the pool
through a joint powers authority fJI’A>. The
amount of sales tax revenue put into the pool
would not be cumulative, but rather limited to
one-half of the growth in the previous year’s
sales tax revenue in those jurisdictions that
’ This approach should not be confused with the fiscal reform illustrated previously. That example would create countywide tax base consisting of property taxes and an a&tit&al ‘/$-cent local share of the existing state sales tax.
* Assembly Speaker Villaraigosa created this commission in early 1999 to evaluate potential reforms to California’s system of local
government finance. After it completes a series of public hearings, the commission will make recommendations to the Legislature
in early 2000.
- _ . .* r I. * rrn n b1 I ,I c 1 ,I nlfcn . tnunrc
participate in the pool. The sales tax revenues
would be allocated among the participating
agencies based on total population or another
factor to which the agencies agree.
Thestatematching funds would be allocated
among local agencies based on a formula that
recognizes specific policy objectives of both
regional and statewide significance, such as
jobs-housing balance, real income growth,
infrastructure investment in older communities,
and/or the provision of affordable housing.
Working with each JPA, the State Legislature
would define the allocation criteria for the
matching funds.
This proposal would initially cost the state
about $105 million annually assuming growth
in statewide taxable sales of 6%. The amount of
the matching funds would increase over time
with increases in the level of taxable sales
countywide. -’ /. _
.,.
This proposal would do more than provide
financial relief for most local governments. It
also would promote inter-jurisdictional
cooperation in economic development and
growth management, reduce the influence of
sales taxes in land use decisions, and help achieve
smart growth principles of regional and : _*. i
statewide significance. 1 _.;. _‘:. . , ‘, ‘,. ; r--i,. .’ :. r: ,I_(
Example of State Matching Funds for -: I.: ‘
Cities/County Pooling of Local Sales Taxes ,”
Existing l-cent Local Sales Tax
Growth, Assuming 6% Increase
Subtotal
California San Diego Region
$ 3,487,012,000 $ 284,165,843 ‘_
$ 209,220,720 $ 17,049,950 _’
$ 3,696,232,720 $ 301,215,793
Contribution to Revenue Pool
One-Half of Sales Tax Growth* W4,610,360) c&524,975)
Net Amount $ 3,591,622,360 $ 292,690,8X3
Countywide Revenue Pool:
One-Half of Each City’s and the
County’s Sales Tax Growth*
State Matching Funds
Total Revenue Pool
$ 104,610,360 $ 8,524,975
$ 104,610,360 $ 8,524,975
$ 209,2$!,720 $ 17,049,950
Total Revenue
For Local Governments $ 3,800,843,080 $ 309,740,768
* Assumes that sales tax revenues grow by 6.090 annuaily
‘,_
5 A 8 D A i; . j ( H I E :/ j [{ f - : ; ‘- j: 1 ; ‘. ,j 5 ;; :t 19
EDUCATIONAL REVENUE UGMENTATION FUND (ERAF)r
A LONG-STANDING RIFT BETUWEEN
In the early 1990’s, the State Legislature faced large
budget deficits caused by a severe economic downturn in
California. To raise revenue, the Legislature enacted
legislation requiring every county in California to set up
an Educational Revenue Augmentation Fund (ERAF) and
to deposit into the fund each year a portion of the property
taxes that otherwise would have accrued to cities,
counties, special districts, and redevelopment agencies.’
These revenues are used to support school districts.
The property tax shifts from local governments to schools
have reduced, dollar-for-dollar, the amount the state is
required to spend each year for schools under Proposition
98, a constitutional amendment passed by the voters in
1988. Despite its name, the ERAF does not “augment”
school funding: It simply puts the state’s constitutional
obligation to provide a minimum level of school funding
partly on the shoulders of local government.
.1 .“.I, . .._ i.
ERAF PROPERTY TAX ‘_ ‘/‘.
SHIFT TO SCHOOLS .j’, : :‘;:‘;- :. ‘ > .‘_
California
Counties, Cities, & I >.) :i:,, ;; I Other Local Agencies $MJo $a!&: ~~$$g&;; ,: : ;,, I San Diego Region ,,-:I ..‘.’ , ; Counties, Cities, &
Other Local Agencies $63.8
I ,“_ * The statewide total is less than the combined shift in PBS-% .#a?~&* S@S : elements of the orginal shift formulae we* changed W nev*~~~U?k&ed’~~ _i.
Sources: California Legislative Analyst’s Office and Count-y af§~ttie%o, Auditor and Controller.
.I
The ERAF legislation not only helped the state to balance
its budget in the early 1990’s but also contributes to the
current state surplus.
The current fiscal year 1999-2000 is the eighth year in
which the annual ERAF shift has been in force. During the
first seven years of the program, local governments in the
San Diego region have lost over $1.26 billion in local
property taxes. The amount shifted each year increases
with increases in the assessed value of property.
Signed into law in 1999, Assembly Bill 1661 reduces the +=
property tax shift by a small fraction (about 4%) or $150
million annually statewide. The dollars will be returned
to local governments and distributed on the basis of
population.
STATE AND LOCAL GOVERNMENTS-
CONTINUING ERAF DEBATE & COURT RULING
Since their enactment eight years ago, the property tax
shifts have been an unending source of friction between
state and local government. Local governments are
understandably aggravated that, despite the availability of
state surplus money, the Legislature has not overturned
the ERAF legisl$ion. The Legislative Analyst’s Office
characterizes the debate as follows:
“Defenders of the shifts justify the actions as the reversal
of some of the state relief granted to local governments
after Proposition 13. They contend that the state has
mitigated most of the fiscal effect of the property tax shifts
through Proposition 172” and other measures. Local
government officials, on the other hand, argue that the tax
shifts represent a major, unwarranted interference in local
affairs. They contend that the state’s Proposition 13 relief
was intended to be permanent, not contingent on the state
fiscal fortunes and the shift mitigation measures have been
limited in amount and flexibility.” (Legislative Analyst’s
Office, Shifting Gets: Retkinkiq Puoperf~y Tm Shift Relief,
page 2. February 2,1999.)
The controversy persists. Undaunted by previous failures
to overturn ERAF, many local agencies still rank reversal
of the property tax shifts their highest legislative priority.
Local governments have gained some consolation from a
recent court decision.
A Sonoma County court recently ruled that the ERAF
legislation is a violation of the State Constitution’s ban on
unfunded state mandates. The court concluded that, in
effect, the shift of local property taxes forces counties to
accept responsibility for the costs of a program (schools)
which is a responsibility of the state under Proposition 98.
The case likely will move to the higher courts in what
could be a long legal battle.
THE GROWTH MANAGEMENT CONNECTION
In addition to local government’s revenue loss, a major
adverse effect of the ERAF legislation is the reduction in
the amount of property taxes that cities and counties
receive from housing development. The financing of
public serviqes in residential areas is particularly
burdensome because cities receive such a small share of
the local property tax, averaging only 11 percent statewide.
Housing development has become less attractive to local
governments and sales tax producing development more
attractive. Local governments have less revenue to pay
for needed services and infrastructure investment in
residential neighborhoods, especially in older commun-
ities. All of this makes it more difficult to encourage more
compact development in center cities and inner suburbs.
9 Redevelopment agencies were excluded from the ERAF property tax shifts beginning in 1995-96.
‘” Passed by the voters in 1993, Proposition 172 provides for a M- cent statewide sales tax. The state allocates the revenues to cities and counties for local
public safety purposes
CIunlr a “l-u,i,,,*,r rrrl-ti nrrnnu iii <III P.iii -II
A new state-local tax system is crucial to
sustaining economic prosperity, managing
growth, providing services to residents, and
enhancing vital infrastructure in all communities
in the San Diego region, Public agencies and
taxpayers must be able to depend on their local
tax dollars to fund local priorities.
The foregoing illustrations of fiscal reform
and financial relief are not intended to solve all
of the financial challenges facing local
governments in California. But with stable
revenues and different financial incentives, local
governments could begin to move away from
budgetary concerns and toward land use policies
that provide more community balance and better
economic returns.
Fiscal reform and financial relief should
promote cooperation among communities in
economic development and growth man-
agement, reduce the influence of sales
taxes in land use decisions, and help achieve
sound, sustainable growth.
New state laws and constitutional change
will be required to achieve fundamental fiscal
reform. Several forms of this legislation
promoting the ideas discussed here are already
being considered in Sacramento.
Let’s challenge our local and state
representatives to take on this complex issue
that receives too little public attention yet affects
the quality of daily life in California. We need to
impress on them that any attempts at smart growth
for the future are unlikely to succeed without the
kind of fundamental fiscal reform that will stop the
fiscalizafion of Iocal land use decisions.
Let’s urge our representatives, as well as
our business and civic leaders, to find a
comprehensive solution to the problems inherent
in the current state-local financial relationship.