BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 946 HEARING: 8/24/11
AUTHOR: Butler FISCAL: Yes
VERSION: 8/16/11 TAX LEVY: No
CONSULTANT: Grinnell
PROPERTY TAX ADMINISTRATION LOAN PROGRAM (URGENCY)
Reenacts the State-County Property Tax Assistance Loan
Program.
Background and Existing Law
The California Constitution and state laws control the
method of assessing the property tax, calculating the base,
setting the rate, and allocating revenue. However, county
governments administer the property tax system: assessors'
value property, tax collectors issue bills and collect
revenues, and auditors allocate revenues to local agencies
and school districts. Counties may recover their costs
from administering the property tax from cities, special
districts, and redevelopment agencies, but not from
schools.
While the state never directly receives property tax
revenues, it indirectly relies on local property taxes to
meet its education finance commitments. State and local
agencies combine to fund California K-12 schools and
community colleges, first relying on local property taxes,
then allocating general state revenues to meet minimum
amounts determined by the Serrano series of cases, Serrano
v. Priest (1971) (5 Cal.3d 584), Serrano v. Priest (1976)
(18 Cal.3d 728), and Serrano v. Priest (1977) (20 Cal.3d
25), and higher revenue limits set by Proposition 98
(1988). Because local property taxes are the first source
of revenue for schools, more property tax revenue reduces
state general fund obligations to fund schools. The state
does not fund basic aid school districts, where local
property taxes meet or exceed the revenue limit.
Proposition 98 contains three tests to determine the
minimum amount that the state general fund spends on
education. In test two and test three years, additional
AB 946 (Butler) - 8/16/11 -- Page 2
property tax revenues relieve pressure on the state general
fund by reducing the state's obligation to fund education.
However, in test one year, local property tax revenues are
irrelevant because the state must spend a minimum of 41% of
its budget for that purpose regardless. The Department of
Finance estimates that the state will be in test one in
2010-11 for the first time since the fiscal year following
the initiative's enactment.
In 1995, the Legislature enacted the State-County Property
Tax Administration Loan Program to ensure that counties
have sufficient resources in the assessor's office to
assess the value of properties, and therefore generate
property tax revenue (AB 818, Vasconcellos). Additionally,
county assessors' offices had been subject to severe budget
cuts resulting from the Legislature shifting property tax
revenues from counties to the Education Revenue
Augmentation Fund in the 1992-93 and 1993-94 fiscal years,
and didn't have the resources to assess all property that
had recently been newly constructed or changed ownership.
The Department of Finance administered the program, which
provided loans in specified amounts to counties for fiscal
years 1995-96 until 2001-02. Counties repaid them at the
end of the year out of the enhanced revenues produced by
the additional assessment resources provided by the loans.
In 2002, the Legislature replaced the loan program with a
grant program (AB 589, Wesson, 2001). In 2004-05, the
Department of Finance issued grants worth $59.8 million for
the 53 participating counties. The Legislature did not
fund the grant program in 2005-06 and 2006-07, after which
it became inoperative. The California Assessors'
Association wants to reenact the loan program.
Proposed Law
Assembly Bill 946 resuscitates the State-County Property
Tax Assistance Loan Program, with many of the procedures
and restrictions that guided the previous program. The
measure specifies maximum loan amounts for each county
based on its share of the state's total assessed valuation,
for a total allowable loan amount of $50 million statewide;
counties may receive half of the maximum amount for loans
made between January 1, 2012 and June 30, 2012. Funds
appropriated must enhance the property tax administration
program, and cannot supplant current funding. Any funds
AB 946 (Butler) - 8/16/11 -- Page 3
provided do not affect property tax administration costs
that require reimbursement from other local agencies.
To participate, an assessor must recommend, and the county
board of supervisors must enact a resolution indicating,
participation in the program by February 1st of the fiscal
year in which it is to first apply. Assessors must consult
with the county tax collector, and any other county agency
directly involved with property tax administration to
discuss the needs of the program for the duration of the
contractual agreement prior to making the recommendation.
Counties must repay loans by June 30th of the fiscal year
following the year the state loans funds when the state
allocates funds pursuant to test two, when the general fund
has normal to strong growth, or test three, when general
fund revenues grow slowly or fall, of Proposition 98. In
test one year, the loan amount is carried over to, and
repaid in the next fiscal year that the state falls under
test two or three. Counties may request, and the Director
of Finance may grant, one one-year extension.
Participating counties must enter into a contract with the
Department of Finance that contains:
The loan amount, as determined by the Director of
Finance.
Repayment provisions, including intercepting
vehicle license fee (VLF) revenues.
Proposed uses of the loan proceeds, including new
positions and automation costs.
An agreement to provide a report to the Department
of Finance by March 31 of the fiscal year in which the
loan is made projecting the impact of increased
funding in the current and subsequent fiscal year.
An agreement to provide an audit report to the
Department of Finance by October 1st of the fiscal
year following the year in which the loan is made
detailing the county's basis for satisfying the terms
of the loan agreement.
An agreement to use the funds for the purposes
stated, and to return any amount diverted to
unapproved uses.
The Department of Finance shall consider the following when
determining whether counties have satisfied the terms and
repaid the loans:
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County performance as indicated by the Board of
Equalization's assessment practices survey.
Performance measures adopted by the California
Assessors Association.
Reduction of assessment appeals and Proposition 8
declines in value.
County compliance with mandatory audits.
Reduction of backlogs in new construction, changes
in ownership, and supplemental roll.
Other measures as determined by the Director of
Finance.
The Director of Finance must notify the Controller of any
participating county that fails to comply with the terms of
the agreement, including the loan repayment. Upon the
Director's notice, the Controller shall allocate to the
general fund VLF money credited to the participating county
that fails to comply.
Counties may establish tracking systems in which they
assign work or function numbers to each appraisal or
administrative activity. The system should provide
statistical data on the number of production units
performed by each employee and the positive or negative
change in assessed value attributable to the activities
performed by each employee. The Board of Equalization must
assist the Department of Finance to evaluate contracts.
The California Assessors' Association must provide a report
to the Senate Committee on Budget and Fiscal Review, and
the Assembly Committee on Budget a report summarizing
individual county reports by December 1, 2013.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . The author states, "During this
challenging fiscal time in our State, we should do
everything we can to support the collection of all funds
owed to the state. This bill represents a small investment
towards the economic recovery for our state."
2. Assessing assessors . AB 946 reenacts the now-defunct
property tax administration loan program in the hopes that
AB 946 (Butler) - 8/16/11 -- Page 5
additional funds will help assessors clear workload
backlogs. According to the Assessors' Association, $455
million was invested in property tax administration between
1996 through 2005 and generated $5.64 billion in property
tax revenue. However, the return on investment today may
be much less today than when the state last funded the
program; instead of rising property values, assessed
valuation statewide declined in the last two years for the
first time. Value-losing foreclosures and short sales
comprise at least half of all real estate transactions
statewide. Instead of funding reassessments during a real
estate boom, resulting in revenue coming in more quickly,
assessors today will likely use assistance funds to grant
more downward reassessments, including those required by
Proposition 8 (1978), although funds will also be used to
defend against assessment appeals. The steps would benefit
taxpayers; however, they would likely result in revenue
losses earlier than would happen but for the program, and
therefore an increased state obligation under Proposition
98 if test one is not operative. However, the California
Assessors Association offers estimates from the Counties of
Los Angeles, Orange, Riverside, San Diego, and Santa Clara
showing that a loan program could accelerate $100 million
of the state's share.
Additionally, the California Taxpayers' Association
questions the transparency of the program, and seeks
amendments to require counties to produce and verify data
above and beyond the measure's current requirements. The
Committee may wish to consider whether the time is right to
reinvigorate this program.
3. Rise Lazarus ! Property taxes fund public services for
all levels of government in California. Charged with
valuing all property in the state, assessors benefit
agencies other than the county for which they work because
when assessors value property, the property taxes
ultimately paid are allocated to the many other entities
lawfully entitled to them. However, unlike cities and
special districts, the state and school districts get a
benefit without paying for it, presenting the classic "free
rider program." Additionally, county boards of supervisors
have significantly cut assessors' offices due to fiscal
stress, increasing backlogs, and hamstringing assessors
from performing their legally-required duties to timely
assess property. Taxpayers have increasingly filed appeals
AB 946 (Butler) - 8/16/11 -- Page 6
challenging valuations due to the recent market downturn,
but assessors have fewer resources to defend against them,
leading to additional revenue losses.
AB 946 resurrects a program with a good track record to
help assessors through these hard fiscal times. The
measure doesn't go so far as to require the state or
schools to pay their way, instead allowing the Department
of Finance to make loans to assessors under the maxim that
it takes money to make money. The state's loan has
rock-solid security: if the county can't pay back the
money, the state can take back that county's VLF revenues
as security. AB 946 may present a rate example of a
"win-win" opportunity.
4. Being Testy . Proposition 98 (1988) is a cornerstone of
California's public finance system because it calculates
the state's obligation to fund K-12 schools and community
colleges. The Department of Finance and the Legislature
determine which test applies according to complex formulas
and revenue calculations of the year-over-year growth of
general fund revenues and per capita income. Generally,
good economic times mean the state is in test two, while
bad years mean that the state is in test three. Test one
kicks in based on a combination of moderate economic growth
and past funding levels for education. While in 2005 the
Legislative Analyst said that test one was "not likely to
be operative anytime in the near future," test one will
determine education funding this year, and may do so for
the indefinite future. Additionally, while the Department
of Finance estimates which test applies as part of the
Governor's Budget each January, they don't ultimately know
which test applies until they tabulate all the relevant
revenue, which doesn't take place until much later. The
test that ultimately applies can be different than the one
estimated in the budget after revenues are compared to
projections. In recent years, the Legislature has
determined the test by statute.
AB 946's interactions with Proposition 98 are problematic.
First, the measure allows the Department of Finance to make
loans and counties to spend loan proceeds during test one
years, and delays repayment until test two and three years.
Counties could invest in personnel and technology that
provide enhanced revenue in future years, but the benefit
to the state cannot be easily quantified given the
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uncertainty of Proposition 98, and may not result in any
benefit if test one rules in future years. Second, the
Department of Finance may have difficulty ensuring that
loans deliver a cost-benefit target for the state without
knowing which test applies. The Committee may wish to
consider delaying reenacting this program until the state
receives a direct benefit.
5. Push and pull . The previous program only benefitted
those counties in which additional property tax revenue
will reduce the amount of general fund apportionments to
schools; those with exclusively basic aid school districts
were ineligible because the state didn't fiscally benefit
when property tax revenues grew. Eligibility ended when
additional revenues allocated to schools ceased to reduce
general fund obligations. AB 946 deletes this provision,
defaulting to the maximum loan amounts, and leaving program
design questions, such as basic aid eligibility issues and
the overall cost-effectiveness calculation of the loans, to
the Department of Finance. While the balance between
legislative direction and administrative implementation is
as old as the Madisonian Model itself, does the Legislature
want to prioritize loans to counties according to any
criteria, such as the level of deferred work, taxpayer
benefits, or prospects for increased revenue, or set
specific return-on-investment ratios to ensure sufficient
revenue collection? Would a pilot project only for those
counties that can demonstrate revenue raising potential be
a superior investment? The Committee may wish to consider
whether AB 946 reflects its program priorities.
6. Of skinning cats . Many proposals have come forth to
help counties pay for their property tax administration
costs. In 1990, the legislation that initially allowed
counties to recover their costs from other local entities
included schools, but the provision allowing counties to
charge schools was repealed one year later. Subsequently,
the Legislature enacted the loan program, which changed to
a grant program largely because it was easier to
administer. When revenues suffered, the Legislature
allowed the program to die, the last revitalization effort
was four years ago (AB 83, Lieber, 2007). The Legislative
Analyst's Office suggests that the state should provide an
incentive for new investments in property tax
administration by contributing a state share of costs for
any increase in county expenditures on property tax
AB 946 (Butler) - 8/16/11 -- Page 8
administration. Some county officials suggest that a
dedicated funding mechanism should be created to shield
property tax administration funding from the
unpredictability of the state's annual budget process. The
Committee may wish to consider whether reinvigorating the
loan program is the best way to produce an efficient and
fair property tax system, especially given the
complications presented by Proposition 98 (see Comment #2).
7. Keep the change ? AB 946 specifies maximum loan amounts
for each county, and allows the Department of Finance to
make loans in the amount it deems fit up to that maximum.
However, what happens if the county doesn't spend all the
loan proceeds? The Committee may wish to consider amending
AB 83 to specify that the appropriated but unspent funds
should return to the State General Fund.
8. Urgency . AB 946 takes effect immediately as an urgency
statute.
9. Suggested Amendments . Committee staff suggests the
following amendments, to be taken in the Senate
Appropriations Committee should the measure be approved:
The measure is currently unclear regarding how and
when the Department of Finance determines that a
county has diverted revenues to other purposes, and
when the county should repay the state.
The bill's performance measures refer to
performance of mandatory audits and assessment
practices surveys, neither of which directly measure
whether loan proceeds result in reduced assessment
workloads. Additionally, the California Assessors'
Association should not be able to design its own
performance measures. These performance measures
should be deleted.
The measure states that loan amounts shall be
"carried over" in test one year. This language should
be clarified to ensure that the Department of Finance
can make loans, and counties can spend proceeds, in
test one year to better reflect intent.
On Page 4, line 5, change "stated" to "proposed"
On Page 4, lines 6 and 7, change "a different,
unapproved use" to "non-property tax related purposes"
On Page 8, line 28, strike "eligible"
On Page 8, line 31, specify that "board" means
AB 946 (Butler) - 8/16/11 -- Page 9
"State Board of Equalization"
Assembly Actions
Not relevant to the August 16, 2011 version of the bill.
Support and Opposition (8/18/11)
Support : California Assessors' Association, California
State Association of Counties, San Jose Silicon Valley
Chamber of Commerce, NAIOP Silicon Valley, the California
Apartment Association, Silicon Valley Leadership Group,
Lawrence Stone, Assessor, Santa Clara County,
Opposition : California Taxpayers Association