BILL ANALYSIS SENATE COMMITTEE ON BUDGET AND FISCAL REVIEW Denise Moreno Ducheny, Chair Bill No: SB 845 Author: Committee on Budget and Fiscal Review As Amended: March 18, 2010 Consultant: Brian Annis Fiscal: Yes Hearing Date: April 12, 2010 Subject : Local Government. Summary : This bill would amend statute to fully implement the local-government reform provisions of Senate Constitutional Amendment 19 (SCA 19). This bill, SCA 19, and SB 844, constitute a state and local government reform package that is sponsored by the group California Forward. Among the provisions of this bill, are implementation requirements related to constitutional changes in SCA 19 in the areas of local government planning and accountability, and new local government revenue authority. Background : Budget and Local Government Reform. There have been numerous proposals to reform the budget and State/local government relationships over the past decades. Historical reform efforts include, but are not limited to the following: Pilot Projects on performance budgeting in four State departments starting in 1993 by then Governor Pete Wilson. Recommendations by the California Constitution Revision Commission that convened from 1994 to 1996 at the direction of statute and made various recommendations regarding the State budget process and alignment of programs between State and local governments. Recommendations by the California Citizens Budget Commission in 1998 that proposed statutory and constitutional changes to the budget process, including reducing the vote requirement for the State budget to a majority vote. Recommendations in the Governor's 2004 California -1- Performance Review regarding the State budget process, including a recommendation to adopt a biennial budget and a performance-based budgeting system. Reforms implemented in recent years include: Proposition 58 which was passed by voters in 2004 requires that the State enact a balanced budget and provides for mid-year actions in the event that the budget falls out of balance. Proposition 58 also established a special budget reserve called the Budget Stabilization Account and prohibited borrowing to cover budget deficits. Proposition 1A which was passed by the voters in 2004 and reduced the State's authority over local finances by restricting the State from reducing or altering the allocation of local sales tax rates. Proposition 1A also restricted the State from shifting property taxes from local government to schools or community colleges and does not allow the State to decrease vehicle license fee revenues to local government without providing replacement funding. Proposition 1A allows the state to redirect local property tax revenue to schools for state General Fund relief only twice in a consecutive ten year period. The redirection is considered a loan which must be repaid within three years with no second redirect allowed until the first is repaid. California Forward Organization. California Forward is an organization that was created by California Common Cause, the Center for Governmental Studies, the New California Network, and the Commonwealth Club of California's Voices for Reform Project in March 2008. The organization's main goal is to contribute to improving the quality of life for all Californians by creating a more responsive, representative, and cost-effective government. This organization is funded by the following foundations: the California Endowment, the Evelyn and Walter Haas Jr. Fund, the William and Flora Hewlett Foundation, the James Irvine Foundation, and the David and Lucile Packard Foundation. California Forward started in 2008 a process of consultation and engagement with the public and community leaders regarding a government reform agenda. They have -2- made hundreds of presentations, consulted with hundreds of community leaders, conducted focus groups and public opinion research in the development of a reform agenda that includes budget process reform and local government reform. California Forward submitted to the Attorney General ballot initiatives to implement the reform aimed at the November 2010 ballot. Local Authority to Impose Sales and Use Taxes. Currently, local governments have the authority to increase sales and use taxes to support local programs up to certain maximum levels defined in state law. The constitution sets voter approval thresholds depending on how the tax proceeds would be used. If the tax would be directed to a special or designated purpose, such as transportation improvements, the tax requires approval by two-thirds of local voters. If the tax would be directed to general purposes, the tax requires approval by a majority of voters. Proposed Law: Countywide Strategic Action Plans. This bill specifies the process for local governments to create a Countywide Strategic Action Plan, and describes the required components of the plan, including the following. The plan would begin with a majority vote of the county board of supervisors to initiate the development of the plan. The plan is discretionary - it is not a local mandate. The plan would be developed through a public process and require that the county consult with local agencies responsible for services such as education, public safety, and public health. The plan would include a declaration of community goals and desired outcomes, as well as an inventory of existing programs, and assessment of their effectiveness, and an inventory of the state agencies whose cooperation and assistance is necessary to implement the plan. The plan would include strategies for addressing goals, problems and inefficiencies identified in the plan, and a mechanism for measuring the progress toward these goals. The plan may include a plan to expend new revenue from a locally-imposed sales tax increase, should that tax be forwarded to voters and approved by a majority vote (see -3- below for further explanation of the local tax authority). The completed plan would be adopted by a county board of supervisors. New Local Tax Authority. In a county where a Countywide Strategic Action Plan is approved, the associated constitutional amendment would allow a county to increase the sales and use tax by up to 1-cent with a majority vote of the electorate. The new tax authority would work as follows: For a county that adopts a Countywide Strategic Action Plan that includes new sales tax revenue, the county board of supervisors may, by a simple majority vote, place before the voters a measure to increase the sales and use tax in that county by up to one cent. The tax increase would require a majority vote of the people for implementation. Fifty percent of revenue raised from the new tax would go to school districts within the county on the basis of each school district's average daily attendance. The county could alternatively redirect other tax revenue, such as property tax, to schools instead, but the net new funding for schools would have to equal an amount equivalent to 50 percent of the new tax revenue. The new funds directed to schools could not be considered in calculating the state's portion of the school district's revenue limit funding. The state would be prohibited from reducing subventions to the participating local government agencies in response to any tax approved pursuant to this measure and the related constitutional amendments. An approved sales and use tax increase would remain in place for 10 years, unless a county board of supervisors agreed to dissolve or amend the plan earlier. The county board of supervisors may vote to extend the tax for additional 10-year periods, but any extension would require a new vote of the electorate. Provisions Dependent on Enactment of related Constitutional Amendment. The provisions of this bill are dependent on a voter approval of the related constitutional amendment. Fiscal Effect : -4- Direct Fiscal Effects. If the new local sales tax authority was maximized - if voters in all counties approved a full 1-cent sales tax increase - approximately $5 billion in new annual revenues would be created for local government expenditures. Half of the new revenue would augment school funding and the rest would be allocated to local governments within a county on the basis of the Countywide Strategic Action Plan. Source : California Forward Support : Organizational Endorsements for SB 845: AARP State Building and Construction Trades Council of California Sierra Business Council Monterey County Business Council San Joaquin County Business Council Fresno Business Council Greenlining Institute California Church IMPACT Yolo County Board of Supervisors San Gabriel Valley Economic Partnership California Alliance of Child and Family Services Kern County Taxpayers Association Progressive Christians Uniting WELL Network Organizational Endorsements for the California Forward 2010 Reform Principles: Inland Empire Economic Partnership Orange County Business Council San Carlos Chamber of Commerce California Senior Advocates League San Francisco Chamber of Commerce California La Raza Lawyers Association Individuals: Jane Affonso, Redondo Beach Ernest and Hannah Biberstein, Davis Jerry Brown, Chatsworth -5- Margaret Fertschneider, Atascadero Elaine Holder, San Luis Obispo Jeanette McNeely, San Jose Merilie Robertson, Canoga Park Dennis Quirin, Oakland Opposed : California Taxpayers'Association Mayor Joe Esquiel, On behalf of the Lakewood City Council Staff Comments : 1. The Countywide Strategic Action Plan would provide a new forum for local governments to work together to develop strategies to achieve common community goals. It would track progress toward those goals, which may improve performance management at the local level. Since the County Strategic Action Plan would not be a local mandate, some counties may choose not to participate. However, if a county board of supervisors was interested in pursuing the new sales tax authority, the plan would need to be completed. 2. The new tax authority in the proposed constitutional amendment and this measure would make it easier for county voters to approve an increase in the sales tax compared to the existing two-thirds vote requirement in the Constitution for special taxes. The Legislative Analyst examined 2004 local sales tax measures and found that votes approved one-third of them. If the voter approval threshold for these taxes had been 50 percent, instead of 67 percent, another one-third would have been approved. Based on past behavior of local governments and local voters, it is unlikely the tax increase would be implemented in all counties, and where implemented, it might not be set at the maximum 1-cent level. New local tax revenue might be expected to be more in the range of $1 billion instead of the maximum of $5 billion. -6-