BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 636 HEARING: 4/3/13 AUTHOR: Hill FISCAL: Yes VERSION: 2/22/13 TAX LEVY: No CONSULTANT: Weinberger ALLOCATION OF FORMER REDEVELOPMENT PROPERTY TAX INCREMENT REVENUE Allows a county auditor to include former redevelopment property tax revenues when calculating the amount of excess property tax revenues shifted to ERAF. Background and Existing Law 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, special districts, and redevelopment agencies to an Educational Revenue Augmentation Fund (ERAF) in each county. Every property tax dollar shifted to schools through ERAF saves a dollar from the State General Fund. State law contains formulas that county auditors use to send ERAF money to school districts, community college districts, county offices of education, and special education programs. In recent years, the amount of property tax revenue that taxing entities shifted to ERAF in Marin, Napa, and San Mateo counties has exceeded the amount needed under the state's education funding formulas. In these so-called "excess ERAF" counties, county auditors return the excess property tax revenues to the county government, the cities, and the special districts in proportion to their ERAF contributions (SB 1396, Burton, 2000). Two complex fiscal arrangements - the so-called "VLF-property tax swap" and the "triple-flip" - use money from ERAF to provide State General Fund reimbursements for local government revenue losses: The "Swap ." In lieu of a property tax on motor vehicles, the state collects an annual Vehicle License Fee (VLF) and SB 636 -- 2/22/13 -- Page 2 allocates the revenues, minus administrative costs, to cities and counties. In 1998, the Legislature began cutting the VLF rate from 2% to 0.65% of a vehicle's value. The State General Fund backfilled the lost VLF revenues to cities and counties. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the backfill from the State General Fund with property tax revenues that otherwise would have gone to schools through the Educational Revenue Augmentation Fund (ERAF). The State General Fund backfills schools for their lost ERAF money. The "Triple Flip ." Proposition 57 (2004), the California Economic Recovery Bond Act, allowed the state to sell bonds to reduce the state budget deficit. To secure the bonds, accompanying legislation enacted the so-called "triple-flip" (AB X5 9, Oropeza, 2003; SB 1096, Budget Committee, 2004). The triple-flip reduced the local government portion of the statewide sales tax rate by 0.25% and dedicated that portion to paying off the deficit financing bonds. To compensate local governments, the triple-flip transferred property tax revenues from a county's ERAF into a Sales and Use Tax Compensation Fund (SUTCF). Because transferring funds out of ERAF results in lower property tax revenues to schools, State General Fund revenues backfill the funds transferred out of ERAF. A basic aid school district is one in which local revenues are sufficient to provide the district with its full state-guaranteed funding level - its "revenue limit" - without additional state funding. The State General Fund backfills property taxes shifted away from non-basic aid school districts. When the amount of money in ERAF is insufficient to compensate local governments for revenues lost under the "swap" and the "flip," a county auditor must allocate non-basic aid school districts' property taxes to local governments to make up the shortfall. Citing a significant State General Fund deficit, Governor Brown's 2011-12 budget proposed eliminating redevelopment agencies (RDAs) and returning billions of dollars of property tax revenues to schools, cities, and counties to fund core services. Among the statutory changes that the Legislature adopted to implement the 2011-12 budget, AB X1 26 (Blumenfield, 2011) dissolved all RDAs. The California Supreme Court's 2011 ruling in California Redevelopment Association v. Matosantos upheld AB X1 26, but invalidated SB 636 -- 2/22/13 -- Page 3 AB X1 27 (Blumenfield, 2011), which would have allowed most RDAs to avoid dissolution. Last year, in a budget trailer bill modifying the redevelopment dissolution process, the Legislature required that additional property tax revenues allocated to schools and ERAF as the result of an RDA's dissolution must not increase the amount of excess property tax revenues a county auditor distributes from ERAF to counties, cities, and special districts (AB 1484, Assembly Budget Committee, 2012). Marin, Napa, and San Mateo County officials worry that excluding former redevelopment property tax revenues from the calculation of excess ERAF could, in some circumstances, deprive their counties of revenues that they would otherwise receive. They want the Legislature to repeal last year's statutory language governing excess ERAF calculations. Proposed Law Senate Bill 636 repeals the statutory prohibition against a county auditor's using additional property tax revenues allocated to schools and ERAF as the result of an RDA's dissolution to calculate the amount of excess property tax revenues the auditor must distribute from ERAF to counties, cities, and special districts. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Last year, Legislative Counsel wrote a letter raising constitutional questions about the statute governing "excess ERAF" allocations that was enacted as a part of AB 1484. Specifically, the Legislative Counsel expressed concern that the statute may violate the State Constitution's prohibition against the Legislature reallocating property tax revenues to reduce, for any fiscal year, the percentage of the total amount of countywide property tax revenues that are allocated to SB 636 -- 2/22/13 -- Page 4 counties, cities, and special districts. Last year's "excess ERAF" statute also raises questions of equity. Under some circumstances, the statute may require that a portion of State General Fund repayments to local governments for the VLF swap and triple flip must be offset with funds that would otherwise have gone to those local governments. When the state committed to repaying local governments through ERAF, local officials understood that the repayments would come from State General Fund revenues, not from local revenues. SB 636 resolves these questions about constitutionality and equity by repealing the problematic statute. 2. Zero-sum game . Allocating former RDAs' property tax increment revenues is a zero-sum game; every reallocation creates winners and losers. By allowing additional property tax revenues generated by an RDA's dissolution to be counted towards "excess ERAF," SB 636 makes winners out of Marin, Napa, and San Mateo Counties. The fiscal loser will be the State General Fund, which must backfill additional property tax revenues shifted away from non-basic aid schools pursuant to the "swap" and the "flip." 3. Legislative history . SB 636 is nearly identical to SB 1030 (Senate Budget Committee, 2012), which Governor Brown vetoed last year. The Governor's veto message suggested that taxing entities in the excess ERAF counties will receive a generous increase in property tax revenues due to redevelopment dissolution and expressed reservations, in light of General Fund uncertainties, about the bill's potential cost. Support and Opposition (3/28/13) Support : Counties of Marin, Napa, and San Mateo; California State Association of Counties. Opposition : Unknown.