BILL ANALYSIS SENATE LOCAL GOVERNMENT COMMITTEE BILL NO: AB 1955 HEARING: 8/12/10 AUTHOR: De La Torre FISCAL: Yes VERSION: 8/10/10 CONSULTANT: Detwiler CITY OFFICIALS' COMPENSATION (URGENCY) Existing Law General law cities may pay salaries to their council members, using a statutory schedule based on population: Up to and including 35,000 residents$300 a month Over 35,000 and up to and including 50,000$400 a month Over 50,000 and up to and including 75,000$500 a month Over 75,000 and up to and including 150,000$600 a month Over 150,000 and up to and including 250,000$800 a month Over 250,000 residents $1,000 a month By ordinance, a city council can increase its salaries beyond these statutory amounts, but a raise can't exceed 5% a year since the last increase. State law prohibits automatic salary increases. With majority-voter approval, city council members can receive higher or lower salaries than the statute prescribes. Unless specifically authorized by state law, general law cities can't provide higher compensation for their council members' service on other commissions, committees, boards, or authorities. Some state laws limit the compensation that city council members can receive when they serve on other bodies. For example, if a city council in a city with less than 200,000 residents appoints itself as the community redevelopment agency, state law limits the council members' compensation to $30 a meeting for a maximum of four meetings a month. However, if another statute allows compensation, but does not set an amount, state law limits the maximum amount to $150 a month. These statutory limits on general law cities do not apply to what a city can provide its council members for retirement, health and welfare, and federal social security benefits, if the city pays the same benefits for its employees. These statutory limits do not apply to the reimbursement of council members' actual and necessary AB 1955 -- 8/10/10 -- Page 2 expenses (AB 11, De La Torre, 2005). General law cities --- like all local agencies, except school districts --- must adopt written policies that control their reimbursements for expenses. In addition, if a local agency compensates its governing body or key staff, those local officials must receive ethics training every two years (AB 1234, Salinas, 2005). The California Constitution allows cities to adopt local charters with majority-voter approval. The Constitution allows charter cities to control their own municipal affairs. Relying on the municipal affairs doctrine, the 119 charter cities can set their city council members' compensation. Background Adopted in November 2005, the City of Bell's charter limits council members' compensation for service as council members to the amounts that general law cities of similar populations can receive under state law. With an estimated 38,867 city residents in 2010, Bell's council members could receive $400 a month under the statutory schedule which applies to cities that have more than 35,000 residents and up to and including 50,000 residents. Newspaper articles report that Bell's city council members receive salaries that total $1,800 annually for their council service. At $150 a month, those salaries are below the statutory schedule for similarly sized cities. However, these same reports say that most of Bell's city council members also received annually: $18,895 for serving on the Public Financing Authority. $18,895 for serving on the Surplus Property Authority. $18,895 for serving on the City Housing Authority. $18,895 for serving on the Planning Commission. $720 for serving on the Community Redevelopment Agency. Because Bell is a charter city, its city council does not have to follow the limits set by the 2005 De La Torre bill. Proposed Law AB 1955 -- 8/10/10 -- Page 3 I. Excess compensation cities . General law cities must follow the compensation limits set by state law, but charter cities can use their constitutional authority to control municipal affairs to set their own compensation. Assembly Bill 1955 defines an "excess compensation city" as any city, including a charter city, that compensates any city council member in excess of the amounts set by state law. However, if a city charter specifies that council members must devote their entire time to their council duties, that city is outside the definition. If a city's mayor is independently elected, a city can show that the mayor's additional compensation is provided by ordinance or charter. If the Attorney General determines that a city is an "excess compensation city," AB 1955 requires the Attorney General to notify the city council and provide a hearing. At the hearing, the city can demonstrate that it is not an "excess compensation city" by showing that it is in compliance with the statutory compensation limits. The city can show that the voters approved higher salaries or that the salary increases are not more than the 5% increases allowed by state law. If, after the hearing, the Attorney General determines that the city has failed to demonstrate that it is not an "excess compensation city," AB 1955 requires the Attorney General to notify the city, the Franchise Tax Board, and the city's redevelopment agency. If a city later complies with the statutory compensation limits, it may ask the Attorney General to be relieved of its status as an "excess compensation city." If the Attorney General agrees, AB 1955 requires the Attorney General to notify the city, the Franchise Tax Board, and the city's redevelopment agency of this change in status. When notified by the Attorney General that its city is an "excess compensation city," AB 1955 prohibits a redevelopment agency from: Adopting new or amending existing redevelopment plans. Issuing bonds, notes, interim certificates, debentures, or other obligations. Encumbering funds or spending money, except for seven specified types of existing obligations and AB 1955 -- 8/10/10 -- Page 4 debts. AB 1955 imposes an additional 50% tax on the gross income of city council members in an "excess surplus city" for income that exceeds the compensation amounts set by state law. The state personal income tax provisions relating to credits, filing status and recomputation of income tax brackets, and joint returns do not apply to this additional tax. II. Open meetings . Current law requires the governing bodies of all local agencies, including school districts, to ratify their executive employees' contracts of employment in open session and reflect those decisions in their minutes. This requirement applies to superintendents, deputy superintendents, assistant superintendents, associate superintendents, community college presidents, community college vice presidents, community college deputy vice presidents, general managers, city managers, county administrators, or similar chief administrative or executive officers. Copies of these employment contracts and settlement agreements must be publicly available (SB 1996, Hart, 1992). The Ralph M. Brown Act requires local agencies' meetings to be "open and public," with specific exceptions. For example, a local agency's legislative body may meet in closed session to consider the appointment, employment, evaluation, discipline, or dismissal of an employee unless the employee requests a public session. However, the Brown Act prohibits local officials from taking final action in a closed session on an unrepresented employee's compensation. Assembly Bill 1955 declares that all individual contracts of employment with an employee who is or will be employed by and report directly to the local agency's legislative body must be ratified in open session of the legislative body. At least seven days before ratification, the legislative body must disclose contract information, including the employee's name, the position, the total amount of salary, benefits, retirement, and any other compensation. AB 1955 requires the local agency to disclose this information in a publicly accessible location and on the agency's Internet Web site, if it maintains one. Consistent with these requirements, AB 1955 declares that final actions on the compensation of unrepresented AB 1955 -- 8/10/10 -- Page 5 employees who are or will be employed by and report directly to the local agency's legislative body must occur in open session. III. Legislative declarations . In addition to its substantive provisions, Assembly Bill 1955 declares that the disclosure of officers and employees' compensation is an issue of statewide concern and not a municipal affair; its provisions apply to charter cities. AB 1955 also contains legislative declarations in support of the bill's urgency clause. Comments 1. Truth and consequences . This summer's controversy over the compensation that the City of Bell paid to its council members and employees caused many legislators to ask how the 480 cities set their salaries, determine benefits, and reimburse costs. Bell's adoption of a city charter in 2005 gave it constitutional control over its municipal affairs, including the compensation paid to the council members. When it was a general law city, Bell had to comply with the statutes that restrict council members' compensation, but as a charter city it can avoid those statewide limits. AB 1955 does not stop Bell --- or any other charter city --- from compensating its city council with whatever amounts are warranted by local conditions and circumstances. However, charter cities that pay more than what state law allows for general law cities trigger the AB 1955's two consequences. City council members must pay a higher personal income tax rate on their excess compensation. Redevelopment officials in an excess compensation city can't use create new or expand existing redevelopment projects, can't create new redevelopment debt, and can't spend redevelopment money except to meet obligations. While the Legislature can't stop charter cities from making unwise compensation decisions, AB 1955 creates consequences that may deter them. 2. Home rule . Because of the constitutional municipal affairs doctrine, charter cities answer to their own voters and not to the California Legislature. When the 2005 De La Torre bill set limits on what the general law cities can pay their council members, legislators knew that those reforms would not apply to the charter cities. Some say AB 1955 -- 8/10/10 -- Page 6 that Sacramento is in no position to tell communities how to run their local governments. Because cities are closer to the people than the Legislature and the Governor, compensation decisions belong at the local level. Instead of poking into local politics, legislators should let a community's voters control their elected officials. That's why the constitutional home rule provision exists. 3. Not inconsequential . While AB 1955 doesn't prevent cities from paying high salaries to their council members, two consequences occur if cities exceed the limits that apply to general law cities --- the city's redevelopment agency can't engage in new activities and the council members pay a 50% personal income tax rate on their excess income. Because California's personal income tax laws don't distinguish among the sources of income, this tax consequence is unusual. Nevertheless, the concept is similar to the so-called "AIG bonus tax" that the U.S. House of Representatives passed in March; a 90% tax rate on individual's earnings above $250,000 that came from a company which had received more than $5 billion in federal bailout aid. The Committee may wish to consider whether the redevelopment and income tax consequences in AB 1955 will be adequate to deter the salaries that the bill wants to discourage. Instead of (or in addition to) those consequences, the Committee may wish to consider: Canceling enterprise zone benefits within the excess compensation cities. Directing the State Board of Equalization to stop collecting sales taxes on behalf of the excess compensation cities. Directing the State Board of Equalization to slow down sales tax revenue payments to the excess compensation cities from quarterly to annually. Prohibiting the excess compensation cities from using state statutes to impose special taxes, benefit assessments, and property-related fees, forcing them to rely solely on their municipal affairs powers. 4. Cities and other agencies . The compensation provisions of AB 1955 apply only to cities, not to counties or special districts. That approach reflects how those other agencies' set their governing boards' compensation. The California Constitution requires county supervisors in general law counties to set their own compensation by referendable ordinances, without any statutory schedule. AB 1955 -- 8/10/10 -- Page 7 Charter counties must provide for the supervisors' compensation in their charters. Nearly all of the state laws that govern special districts avoid monthly salaries for their governing boards, instead allowing only stipends for each meeting or day of service. Nevertheless, the Brown Act amendments in AB 1955 apply to all local agencies: cities, counties, special districts, and school districts. 5. Recalibration needed . The statutory schedule for compensating general law city councils hasn't budged since 1984, the last time that legislators adjusted the amounts for inflation. But many general law cities pay their council members more than the amounts listed in state law. That's possible because the statute gives general law cities two ways to pay more than the statutory schedule. First , a city council can adopt an ordinance that increases its salary, provided that the raise doesn't exceed 5% a year since the last pay hike. Like all city ordinances, an ordinance raising city council salaries is referendable. Second , a city's voters can raise (or lower) their city council members' salaries. Like general law cities, some charter cities may pay their council members more than the statutory schedule appears to allow. To avoid an "excess compensation city" designation under AB 1955, a charter city with higher salaries will need to produce a paper trail showing how its compensation fits within the adjustments that state law already permits for general law cities. 6. Cat and mouse . The Legislature passed the 2005 reforms for general law cities after learning how the Huntington Park City Council appointed itself to several highly compensated boards and commissions. Although the council members received modest salaries for their city council service, they used statutory loopholes to pay themselves large stipends and salaries for serving on the other boards and commissions. For example, Huntington Park's community development commission's monthly salaries were 16 times the maximum amount of what the statute allowed for a redevelopment agency's stipends. The 2005 legislation put an end to those practices, but Bell has apparently used its charter city status to avoid the statewide limits. Legislators should be vigilant and watch how cities react to consequences created by AB 1955. AB 1955 -- 8/10/10 -- Page 8 7. Related bill . AB 1955 is not the only measure that legislators will consider after learning about Bell's compensation practices. Senator Correa intends to amend his SB 501 on the Assembly Floor and insert new language that requires local officials to disclose their salaries, benefits, reimbursement payments, and other perquisites. The Assembly Local Government Committee is likely to hear SB 501 during the week of August 16. The Senate Local Government Committee will hear the Correa bill when it returns to the Senate for concurrence in the Assembly amendments. 8. Legislative history . AB 1955 failed to pass the Senate Local Government Committee on June 30 by the vote of 1-3. At that time, the bill would have amended the statutes prohibiting public officials from holding incompatible offices. The author did not request reconsideration of the failed bill; June 30 was the Committee's final regular hearing for the 2009-10 legislative session. During July, however, newspaper accounts appeared regarding the City of Bell's compensation decisions. In response, the author amended AB 1955 on August 10. With the appropriate rule waivers, the Committee can grant reconsideration and then hear the amended bill on August 12. Assembly Actions Not relevant to the August 10 version of the bill. Support and Opposition (8/10/10) Support : Unknown. Opposition : Unknown.