BILL ANALYSIS SENATE LOCAL GOVERNMENT COMMITTEE Senator Dave Cox, Chair BILL NO: SB 85 HEARING: 2/10/10 AUTHOR: Cogdill FISCAL: Yes VERSION: 10/26/09 CONSULTANT: Weinberger PROPERTY TAX SHIFTS TO COUNTIES Background 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 year. 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. Comments 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 counties. 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 Committee. 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 recommendation. 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 Counties. Opposition : Unknown.