BILL ANALYSIS                                                                                                                                                                                                    

                            Senator Dave Cox, Chair

          BILL NO:  SB 85                      HEARING:  2/10/10
          AUTHOR:  Cogdill                     FISCAL:  Yes
          VERSION:  10/26/09                   CONSULTANT:   
                        PROPERTY TAX SHIFTS TO COUNTIES


          Prior to voters' approval of Proposition 13 (1978), local  
          governments set their own property tax rates.  Proposition  
          13 capped the rate of ad valorem taxes on real property at  
          1%, cutting statewide property tax revenues by 57%, and  
          required the Legislature to allocate the remaining property  
          tax revenues.

                                   Proposed Law
          I.   Negative bailout counties  .  The Legislature responded  
          to the cut in property tax revenues by bailing out local  
          governments with $858 million in block grants; $436 million  
          went to the counties (SB 154, Rodda, 1978).  The  
          Legislature also cut counties' payments for health and  
          welfare programs by $1 billion. 

          In 1979, the Legislature permanently restructured the  
          allocation of property taxes (AB 8, L. Greene, 1979).  AB 8  
          shifted some of the schools' property tax revenues to local  
          agencies and replaced the schools' losses with increased  
          subventions from the State General Fund.  The AB 8 formula  
          shifted additional property taxes to counties in an amount  
          equal to their 1978-79 block grants, plus a portion of Aid  
          to Families with Dependent Children (AFDC) costs not  
          covered by the state buyout, minus the new state grants for  
          county health services.  This three-part package was  
          intended to provide proportionate bailout to all counties.

          For six counties (Alpine, Lassen, Mariposa, Plumas,  
          Stanislaus, and Trinity), the state grants for health  
          services exceeded their 1978-79 block grants plus the  
          adjustment for AFDC costs.  Consequently, rather than  
          shifting additional property tax revenue  from  schools to  
          these counties, these counties shifted property tax revenue  


          SB 85 -- 10/26/09 -- Page 2

           to  schools.  In these so-called "negative bailout  
          counties," property tax revenues were  reduced  rather than  
          augmented to balance the relatively larger health and  
          welfare payments.

          In 1982, the State Department of Finance discovered that  
          the six counties had not been shifting their "negative  
          bailout" amounts to schools.  The Legislature forgave the  
          past $5.5 million miscalculations, clarified that some  
          counties would receive a "negative bailout" amount, and  
          required counties to shift their "negative bailout" amounts  
          in future years (AB 2162, Condit, 1983).

          Since 1983, Stanislaus County has transferred more than $52  
          million in "negative bailout" to the schools.  Its  
          "negative bailout" amount increases annually as property  
          tax revenues grow.  Stanislaus County officials argue that  
          the "negative bailout" payments are an unintended  
          consequence of AB 8 because the Legislature wanted to  
          relieve the fiscal pressures on counties, not increase  
          them.  County officials want the Legislature to freeze the  
          growth in counties' "negative bailout" payments.

          For the 2011-12 fiscal year, Senate Bill 85 requires the  
          county auditor of a negative sum county, when determining  
          the reduction of property tax revenues to the county, to  
          apply a reduction amount equal to the lesser of either:
                 The reduction amount that was determined for the  
               2010-11 fiscal year, or 
                 The reduction amount that is determined for the  
               2011-12 fiscal year.  

          For the 2012-13 fiscal year, Senate Bill 85 requires the  
          reduction amount to be the lesser of either:
                 The reduction amount that was determined for the  
               2011-12 fiscal year, or 
                 The reduction amount that is determined for the  
               2012-13 fiscal year.  

          For the 2013-14 fiscal year and each fiscal year  
          thereafter, Senate Bill 85 requires the reduction amount to  
          be the amount applied for the immediately preceding fiscal  

          II.   County equity  .  The Legislature responded to the  


          SB 85 -- 10/26/09 -- Page 3

          passage of Proposition 13 by allocating property tax  
          revenues to counties, cities, special districts, and school  
          districts based on each agency's pro rata share of the  
          property taxes collected within a county in the three  
          fiscal years prior to 1978-79 (SB 154, Rodda, 1978).  For  
          example, a county government that had a low property tax  
          rate before Proposition 13 received a small share of the  
          remaining property tax revenues.  The Legislature  
          permanently restructured the allocation of property taxes  
          in 1979 (AB 8, L. Greene, 1979).  

          Two changes to property tax allocations since AB 8 have  
          significantly affected local governments.  In the  
          mid-1980s, legislators ordered counties to shift some of  
          their property tax revenues to the cities that either never  
          levied a property tax before Proposition 13 or levied only  
          low property tax rates (the so-called no- and low-property  
          tax cities).  In response to state budget deficits in the  
          early 1990s, the Legislature reduced State General Fund  
          spending on education by shifting property taxes from  
          counties, cities, and special districts to schools (the  
          so-called ERAF shifts).

          Local governments' shares of property tax revenues vary  
          significantly.  In 2006-07, counties received an average  
          17% share of local property taxes, but Alpine County  
          received 62% and Orange County received only 7%.    

          Last year, the Legislature increased Orange County's share  
          of property tax revenues by giving the County $35 million  
          of property tax revenues from the County's non-basic-aid  
          schools in the 2009-10 fiscal year and $50 million in each  
          fiscal year thereafter (SB 8xxx, Ducheny, 2009).  The State  
          General Fund backfills the amount shifted from the schools.  
           Other counties that receive low property tax allocations  
          want the Legislature to draw upon the State General Fund to  
          increase their property tax shares. 

          Senate Bill 85 requires a county auditor to increase a  
          qualified county's property tax allocation by the "county  
          equity amount" by proportionally decreasing the amount of  
          property taxes allocated to the county's Education Revenue  
          Augmentation Fund (ERAF).  If the ERAF property tax  
          revenues are insufficient to cover the full "county equity  
          amount," the remainder comes from the property tax revenues  
          of school districts within the county that are neither  


          SB 85 -- 10/26/09 -- Page 4

          excess tax school entities nor community college districts.

          Senate Bill 85 defines "county equity amount" as $100,000  
          in the 2011-12 fiscal year, and $200,000 in the 2012-13  
          fiscal year and each fiscal year thereafter.  The bill  
          defines "qualified county" as the county that, of all the  
          counties in the state, was allocated the second lowest  
          percentage of total countywide and less than countywide ad  
          valorem property tax revenue for the 2006-07 fiscal year.   
          (Yolo County meets this definition.)

          Senate Bill 85 declares that no reimbursement of state  
          mandated local costs is required because offsetting savings  
          to local agencies or school districts will result in no net  
          costs to the local agencies or school districts.


          1.   Cap the losses and end the inequity  .  When the  
          Legislature bailed out local agencies after Proposition 13,  
          six counties lost property tax revenues under the new state  
          formulas.  In the 1990s, when the Legislature shifted $3.4  
          billion in property taxes to schools, many lawmakers  
          justified the ERAF shifts as a way to reclaim those state  
          bailout payments.  Every county took a fiscal hit, even the  
          six counties that never received additional property tax  
          revenues.  Not only are these six counties making "negative  
          bailout" payments, they lose money because of the ERAF  
          shifts.  The negative bailout counties want to limit their  
          future losses.  SB 85 caps the six counties' "negative  
          bailout" payments near their current levels.  Legislative  
          reallocations of local property tax revenues also created  
          wide disparities in the shares that counties receive.   
          These relative shares reflect a county's property tax  
          revenues in three years before Proposition 13.  In other  
          words, 35-year old political decisions and fiscal choices  
          still drive today's property tax allocations.  SB 85  
          responds to this inequity by providing Yolo County with  
          more state funding.

          2.   Fair's fair  .  To temper Proposition 13's revenue  
          losses, the Legislature gave counties a three-part package:  
          an AFDC buyout, a state grant for health services, and an  
          increased share of property tax revenues.  That bailout  
          package provided equal relief to all counties.  In six  


          SB 85 -- 10/26/09 -- Page 5

          counties, the state's new health grants were so large that  
          they offset the other aid.  The AFDC buyout and health  
          grants still exist, although they've changed form.  The  
          Committee may wish to consider why legislators should  
          change one piece of the package to benefit six counties  
          when the original package was fair to all counties.

          3.   Disparate shares, disparate needs  .  The extreme  
          variation in counties' property tax shares seems to demand  
          adjustments in counties with low shares to create more  
          uniformity.  But the reality is that different counties pay  
          for different services and different levels of the same  
          service because each county is different.  Counties provide  
          mixes of services that vary widely depending upon the  
          services provided by cities and special districts,  
          redevelopment activities, and each county's unique  
          economic, geographic, and demographic characteristics.   
          Simply because Yolo County receives the second-lowest share  
          of property taxes, SB 85 increases Yolo's share of property  
          tax revenues without accounting for its relative need for  
          that funding.  How can legislators make changes to one side  
          of the ledger without examining other factors?

          4.   Zero-sum game  .  Reallocating property tax revenues  
          produces winners and losers; for every winner there must be  
          an equal loser.  By capping the negative bailout amounts,  
          SB 85 makes winners out of the six "negative bailout  
          counties," which will benefit from the growth in property  
          tax revenues in future years.  SB 85 also means that the  
          schools in those counties will not benefit from that  
          property tax revenue growth.  One fiscal loser will be the  
          State General Fund, which must backfill the property tax  
          revenues that the schools won't get.  School districts in  
          which local property taxes equal or exceed the districts'  
          revenue limits (the so-called "basic aid" districts) will  
          also be fiscal losers because the State General Fund will  
          not fully backfill their lost property taxes.  Among the  
          six negative bailout counties, Alpine County and Plumas  
          County have basic aid school districts.  The annual cost to  
          the State General Fund and these basic aid school districts  
          will grow in the future as property tax revenues grow.

          5.   Test one, test two  .  SB 85 draws on the State General  
          Fund by reallocating property taxes from ERAF (in Yolo  
          county) and from school districts that are not excess tax  
          school entities (in the six negative bailout counties plus  


          SB 85 -- 10/26/09 -- Page 6

          Yolo County).  Under the "Test 2" requirements of  
          Proposition 98, the state must backfill these property tax  
          revenues.  Proposition 98's requirements affect schools  
          differently during a year in which "Test 1" applies.  In a  
          "Test 1" year, the backfill of property tax shifts, such as  
          those proposed in SB 85, will not draw upon the State  
          General Fund, but instead will reduce the amount of  
          statewide categorical education program funding that would  
          otherwise be available.  The Committee may wish to consider  
          whether SB 85 should include language similar to the  
          provision in last year's Ducheny bill that prevents the  
          reallocation of property tax revenues from reducing the  
          state's obligation to fund schools. 

          6.   Next in line  ?  Last year's Ducheny bill created a new  
          permanent $50 million State General Fund subsidy for Orange  
          County.  SB 85 provides hundreds of thousands of dollars  
          annually to Yolo County, which received a 9% share of  
          property taxes.  Next in line are San Bernardino County  
          (10%), and Butte, Riverside, and Stanislaus Counties (11%).  
           The Committee may wish to consider whether SB 85 lays the  
          groundwork for future State General Fund subsidies to  

          7.   Pay later  .  SB 85 delays its effects on the State  
          General Fund until next year.  In 2011, Governor  
          Schwarzenegger and many legislators will no longer hold  
          their current offices.  The Committee may wish to consider  
          whether today's elected officials should push the fiscal  
          effects of SB 85 onto their successors' shoulders.

          8.   Try, try again  .  SB 85 is not the six counties' first  
          attempt to cap their "negative bailout payments."  Since  
          1996, the Legislature has considered at least seven similar  
          bills.  The most recent was SB 684 (Cogdill, 2009), which  
          died in the Assembly Appropriations Committee.  Since 1996,  
          the Legislature has also considered at least ten bills to  
          increase counties' share of property tax allocations.  The  
          most recent bills include last year's Ducheny bill and SB  
          547 (Correa, 2007), which died in the Senate Appropriations  

          9.   Legislative history  .  SB 85 originally expressed the  
          Legislature's intent to enact statutory changes relating to  
          the Budget Act of 2009.  The September 4, 2009 amendments  
          deleted the bill's contents and substituted language  


          SB 85 -- 10/26/09 -- Page 7

          relating to the "negative bailout" counties.  After  
          subsequent amendments added language relating to Yolo  
          County's subsidy, the Assembly passed SB 85 on September  
          11, 2009.  However, the bill was later returned to the  
          Assembly for further action and was amended again on  
          October 26, 2009.  The Assembly passed SB 85 for a second  
          time on January 27, 2010.  Because portions of SB 85 were  
          never heard in the Senate, the Senate Rules Committee  
          referred the amended bill under Senate Rule 29.10 to the  
          Senate Local Government Committee for a hearing on the  
          Assembly's amendments.  At its February 10 hearing, the  
          Committee has four choices:
                 Send the bill back to the Senate Floor,  
               recommending concurrence.
                 Send the bill back to the Senate Floor,  
               recommending nonconcurrence.
                 Send the bill back to the Senate Floor, without  
                 Hold the bill.

                                 Assembly Actions  

          Assembly Appropriations Committee:15-0
          Assembly Floor:               77-1
          Assembly Floor:               71-0

                        Support and Opposition  (2/4/10)

           Support  :  Stanislaus County, Yolo County, California State  
          Association of Counties, and Regional Council of Rural  

           Opposition  :  Unknown.