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.