BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 1350 HEARING: 6/22/11 AUTHOR: Lara FISCAL: Yes VERSION: 6/15/11 TAX LEVY: No CONSULTANT: Weinberger EXTRAORDINARY PROPERTY TAX RATES Requires county auditors to verify local governments' extraordinary property tax rates. Background and Existing Law Proposition 13 (1978) limited property tax rates to 1%, cutting statewide property tax revenues by 57%. The power to allocate the remaining property tax revenues became the Legislature's duty. The Legislature responded 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). In 1979, the Legislature permanently restructured the allocation of property taxes, using SB 154's property tax allocations as a base (AB 8, L. Greene, 1979). The 1% limit on property tax rates did not apply to ad valorem property taxes or special assessments needed to pay the interest and redemption charges on any indebtedness approved by voters before July 1, 1978. In its 1982 decision in Car-man v. Alvord, the California Supreme Court ruled that extraordinary property tax rates (outside the usual 1% ad valorem rate) imposed to fund employee pension systems approved by the voters before July 1, 1978 are valid under Proposition 13. In response to confusion over how local officials used their extraordinary property tax rates when calculating property tax allocations under AB 8, the Legislature imposed a temporary moratorium on property tax rates for indebtedness other than bonds (AB 377, Roos, 1983) and directed the Legislative Analyst's Office to study local AB 1350 -- 6/15/11 -- Page 2 agencies' extraordinary property tax rates. In 1985, the Legislature made the moratorium on extraordinary property tax rates permanent (AB 13, Roos, 1985). The Roos bill froze extraordinary tax rates for pensions approved by voters before Proposition 13 at their 1982-83 levels. To enforce this limit, the Legislature required a county auditor to reduce a local agency's basic property tax allocation by one dollar for every dollar of property tax revenue that the agency received from a property tax rate that exceeded statutory limits. The property tax revenues subtracted from an agency's allocation are then reallocated to school districts within the agency's jurisdiction in proportion to average daily attendance. Last year, an audit conducted by the State Controller determined that officials in the City of Bell (Los Angeles County), during the three fiscal years between 2007 and 2010, levied an extraordinary property tax rate to pay the City's pension obligations that exceeded the rate allowed under state law. As a result, property owners in Bell paid approximately $2.9 million in excessive property taxes during those three years. Rather than allowing the county auditor to reallocate the excess revenues to schools, the Legislature required the City of Bell to pay for refunds to taxpayers who overpaid (AB 900, de León, 2010). To prevent local governments from imposing excessive rates for their pensions and retirement systems, some legislators want to require county auditors to verify that local governments' extraordinary ad valorem property rates don't exceed statutory limits. Proposed Law If a local government extends or increases, after January 1, 2012, an ad valorem property tax to support specified pension programs or retirement systems, Assembly Bill 1350 requires a county auditor to verify, before the increase or extension, that the property tax rate does not exceed the maximum rate authorized by law. AB 1350 requires a local government to provide the county auditor, in the form, manner, and time prescribed by the county auditor, any documentation that is necessary to AB 1350 -- 6/15/11 -- Page 3 verify the imposed property tax rate. AB 1350 requires the county auditor to reject the increase or extension of any property tax rate that exceeds the maximum rate specified in state law. The bill requires a local government to reimburse the county auditor's actual and reasonable costs for administering the bill's verification requirement. State Revenue Impact No estimate. Comments 1. Purpose of the bill . AB 1350 protects taxpayers from having to pay illegal property tax rates, like those imposed on taxpayers in the City of Bell, to support local governments' pension and retirement programs. Although a county auditor must currently verify the results of elections approving extraordinary property tax rates, the auditor is not required to verify that the rates fall within statutory limits and can't reject a rate that exceeds the limits. AB 1350 simply provides this necessary "check" on local governments' property taxes. 2. Not all rates . AB 1350 requires a county auditor to verify only the extraordinary ad valorem property tax rates for local governments' pensions and retirement programs, but not the rates that pay for other kinds of voter approved debt. Because property tax rates to repay bonded indebtedness can vary significantly depending on how a bond is structured and on changes in assessed valuation, county auditors worry that verifying rate extensions or increases for general obligation bonds would be a complex and labor-intensive process. By contrast, the statutory limits for pension and retirement systems' extraordinary property tax rates are frozen at the rate imposed in a specified base year, making it relatively easy to verify whether an increase or extension exceeds the limit. While county auditors may be reluctant to verify all extraordinary property tax rate extensions or increases, the Committee wish to consider amending AB 1350 to give county auditors AB 1350 -- 6/15/11 -- Page 4 the option of verifying any extraordinary property tax rate and rejecting a rate that is excessive. 3. Let's be clear . The bill's language requiring the county auditor to reject the increase or extension of "any property rate" that exceeds statutory limits, could be misread as granting a county auditor the power to reject any local government property tax rate. The Committee may wish to consider amending AB 1350 to clarify that a county auditor's authority to reject a rate extension or increase that exceeds statutory limits applies only to rates to support specified pension programs or retirement systems. Assembly Actions Assembly Local Government Committee: 7-0 Assembly Appropriations Committee:16-0 Assembly Floor: 78-0 Support and Opposition (6/16/11) Support: Unknown. Opposition : Unknown.