BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 900| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 900 Author: De Leon (D), et al Amended: 8/27/10 in Senate Vote: 27 - Urgency SENATE LOCAL GOVERNMENT COMMITTEE : 4-0, 8/30/10 AYES: Aanestad, Kehoe, DeSaulnier, Price NO VOTE RECORDED: Vacancy ASSEMBLY FLOOR : Not relevant SUBJECT : Property taxation: City of Bell: refunds for overpayment SOURCE : State Controller John Chiang DIGEST : This bill prohibits the current law governing the allocation of property tax revenue attributable to a rate in excess of the maximum allowable rate from applying to the City of Bell and the County of Los Angeles in 2007-2008, 2008-2009, and 2009-2010. ANALYSIS : Proposition 13 (1978) limited property tax rates to 1%, cutting statewide property tax revenues by 57%. The power to allocate the remaining property tax revenues became the Legislature's duty. The Legislature responded by allocating property tax revenues to counties, cities, special districts, and school districts based on each agency's pro rata share of the CONTINUED AB 900 Page 2 property taxes collected within a county in the three fiscal years prior to 1978-79 (SB 154, Rodda, 1978). In 1979, the Legislature permanently restructured the allocation of property taxes, using SB 154's property tax allocations as a base (AB 8, L. Greene, 1979). The 1% limit on property tax rates did not apply to ad valorem property taxes or special assessments needed to pay the interest and redemption charges on any indebtedness approved by voters before July 1, 1978. In its 1982 decision in Carman v. Alvord , the California Supreme Court ruled that extraordinary property tax rates (outside the usual 1% ad valorem rate) imposed to fund employee pension systems approved by the voters before July 1, 1978 are valid under Proposition 13. In response to confusion over how local officials used their extraordinary property tax rates when calculating property tax allocations under AB 8, the Legislature imposed a temporary moratorium on property tax rates for indebtedness other than bonds (AB 377, Roos, 1983) and directed the Legislative Analyst's Office to study local agencies' extraordinary property tax rates. In 1985, the Legislature made the moratorium on extraordinary property tax rates permanent (AB 13, Roos, 1985). The Roos bill froze extraordinary tax rates for pensions approved by voters before Proposition 13 at their 1982-83 levels. To enforce this limit, the Legislature required a county auditor to reduce a local agency's basic property tax allocation by one dollar for every dollar of property tax revenue that the agency received from a property tax rate that exceeded statutory limits. The property tax revenues subtracted from an agency's allocation are then reallocated to school districts within the agency's jurisdiction in proportion to average daily attendance. This bill prohibits the current law governing the allocation of property tax revenue attributable to a rate in excess of the maximum allowable rate from applying to the City of Bell and the County of Los Angeles in 2007-2008, 2008-2009, and 2009-2010. This bill requires the City of Bell to pay the County of CONTINUED AB 900 Page 3 Los Angeles, by December 31, 2010, an amount equal to the amount of excess ad valorem property tax collected in 2007-2008, 2008-2009, and 2009-2010, including interest calculated at the average rate earned by the City of Bell on its idle funds during those years. This bill requires the County of Los Angeles to refund the amount it receives from the City of Bell to any property taxpayers of the City of Bell who overpaid, in a manner generally consistent with the County of Los Angeles tax refund practices. This bill requires the City of Bell to reimburse the county for the actual and reasonable costs of administering the bill's provisions, including applicable administrative and overhead costs as permitted by federal standards. If the County is unable to locate a taxpayer to make a refund by December 31, 2011, the bill requires the amounts remaining from the amounts paid by the City to the County to be allocated to elementary, high school, and unified school districts as provided under current law. Comments For over two decades, since the passage of the 1985 Roos bill which limited extraordinary property tax rates, the City of Bell levied an extraordinary tax rate of 0.187554% to pay for the City's pension obligations. In 2007, Bell officials began raising this extraordinary property tax rate above the limit imposed by state law, levying rates of 0.237554% in 2007-08, 0.257554% in 2008-09, and 0.277554% in 2009-10. The additional taxes cost property owners in the City approximately $2.9 million over those three years. This bill promptly corrects this injustice by returning the unlawfully obtained property tax revenues, with accrued interest, directly to those taxpayers who paid the excessive amounts. Under current law, the Los Angeles County Auditor must reallocate the $2.9 million that the City of Bell overcharged taxpayers from the City's property tax allocation to local school districts. In most years, under the provisions of Proposition 98, the additional property tax revenues to school districts would offset State General CONTINUED AB 900 Page 4 Fund spending in those school districts on a dollar-for-dollar basis. By providing property tax refunds directly to taxpayers, and allocating only the unpaid refund amounts to local schools, this bill significantly reduces these potential General Fund savings. The 1985 Roos legislation tried to deter local officials from levying excessive extraordinary property tax rates by requiring county auditors to reduce local agencies' basic property tax allocations by a dollar for every dollar it raised from rates in excess of statutory limits. It is unlikely that the Legislature imagined that Bell, or any other local agency, would disregard this deterrent and collect excess property taxes that would be automatically offset against its base allocation. Because Bell did, the Legislature must now confront the question of whether reallocating the property tax revenues to local school districts is the fairest way to return the money to a community. The California Constitution prohibits special legislation when a general law can apply. This bill contains findings and declarations explaining the need for legislation that applies only to the City of Bell. Related Legislation This bill is not the Legislature's only response to the City of Bell's fiscal decisions and practices which became public this summer. There are at least five other bills, including: SB 501 (Correa) which is pending on the Assembly Floor. AB 192 (Gatto) which is in the Senate Rules Committee for re-referral. AB 194 (Torrico) which is in the Senate Rules Committee for re-referral. AB 827 (De La Torre) which the Committee will also hear on August 30. AB 1955 (De La Torre) which the Committee passed on August 12. AB 2064 (Huber) which is in the Senate Rules Committee for re-referral. CONTINUED AB 900 Page 5 FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes SUPPORT : (Verified 8/30/10) State Controller John Chiang (source) County of Los Angeles Howard Jarvis Taxpayers Association ARGUMENTS IN SUPPORT : The State Controller's Office, the sponsor of the bill, has determined that for years the City of Bell had charged property taxes at rates higher than allowed by State law. Property owners in the city paid an estimated $3 million in extra taxes over the past three years. The Controller's auditors discovered that Bell's City Council began raising property tax rates in 2007 to pay for pension obligations, even though State law caps those taxes at the rate used in fiscal year 1983-84. Property taxpayers saw their assessments for pension obligations rise almost 50 percent from 2007 to 2010. The Controller states that he has instructed the County to reduce the property tax rates as quickly as possible. The lower rates would deliver an estimated $250 in annual savings for a property worth $275,000. Unfortunately, existing state law prohibits the overpayments from being returned to the property owners who were victimized by the Bell City Council. This bill will rectify that problem. AGB:nl 8/30/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED