BILL ANALYSIS Ó AB 440 Page 1 Date of Hearing: April 15, 2015 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT Brian Maienschein, Chair AB 440 (Alejo) - As Introduced February 23, 2015 SUBJECT: Local government finance: property tax revenue allocations: County of San Benito. SUMMARY: Addresses past property tax apportionment factors in San Benito County. Specifically, this bill: 1)Deems as correct the property tax apportionment factors applied in allocating property tax revenues in the County of San Benito for each fiscal year (FY) through FY 2001-02, inclusive. 2)Specifies that for FY 2002-03 and each FY thereafter, property tax apportionment factors applied in allocating property tax revenues in the County of San Benito shall be determined on the basis of property tax apportionment factors for prior FYs that have been fully corrected or adjusted, pursuant to the review and recommendation of the State Controller. 3)Finds and declares that a special law is necessary because of the uniquely severe fiscal difficulties being suffered by the County of San Benito. EXISTING LAW: AB 440 Page 2 1)Requires each county's auditor to allocate property tax revenue to local governments in accordance with specified formulas and procedures. 2)Requires, generally, that each jurisdiction be allocated an amount equal to the total received in the previous year plus its percentage of the property tax increment, as defined by law. 3)Provides for the computation of apportionment factors based on property tax allocations that are applied to actual property tax revenues in each county in order to determine actual amounts of revenue received by each jurisdiction. FISCAL EFFECT: This bill is keyed fiscal. COMMENTS: 1)Background. County auditors allocate property tax revenue to the county, cities, special districts, and schools pursuant to complex formulas in current law. In 1992-93 and 1993-94, in response to serious budgetary shortfalls, the Legislature and Governor permanently redirected over $3 billion of property taxes from cities, counties, and special districts to schools and community college districts. Under Proposition 98, these redirected funds reduced the state's funding obligation for K-14 school districts by a commensurate amount. The property tax shift is accomplished through contributions that cities, counties, and special districts deposit into the Education Revenue Augmentation Fund (ERAF), the proceeds of which are then transferred to school districts within the county. These contributions grow over time in line with the property tax growth rate in each local jurisdiction. AB 440 Page 3 The Controller's Office regularly audits the apportionment and allocation by counties of property tax revenues in accordance with a statutory schedule contained in the Government Code - some counties undergo annual audits, some are on three-year schedules, and those with small populations, like San Benito County, are on a five-year cycle. San Benito County was audited by the Controller's Office in 1998, 2005, and 2009. Following an audit by the Controller, it was determined that San Benito County underfunded ERAF for the fiscal years between July 1, 1993, and June 30, 2001. The Controller's Office and the County of San Benito have had different interpretations of several sections in the Revenue & Taxation Code and their applicability to ERAF between those years. In the December 11, 1998, audit, the Controller's Office determined that ERAF was underfunded by $514,016. The county did not reimburse ERAF for this amount. In a subsequent audit issued on July 28, 2005, the same amount had grown to $3,929,689. In 2004, the Governor signed SB 1096 (Senate Budget and Fiscal Review Committee), Chapter 211, Statutes of 2004, which forgave county property tax allocation errors and deemed correct any misapplication of apportionment factors for any Controller's audit conducted between July 1, 1993 and June 30, 2001. SB 1096 forgave the initial amount of San Benito County's debt to ERAF of $514,016, but the difference of $3,415,673 must be returned to ERAF. 2)Bill Summary. This bill will deem the property tax apportionment factors applied in allocating property tax revenues in San Benito County for each FY through the FY 2001-02 to be correct. This bill requires that for FY 2002-03 and each FY thereafter, property tax apportionment factors AB 440 Page 4 applied in allocating property tax revenues in San Benito County must be determined on the basis of property tax apportionment factors for prior FYs that have been fully corrected and adjusted, pursuant to the review and recommendation of the Controller. This bill is sponsored by the County of San Benito. 3)Prior Legislation. There is a precedent for deeming correct those property tax apportionment factors used in a county's calculations, and the net effect is that it holds the local government harmless for the erroneous calculation. Prior to 2001, the Legislature forgave past mistakes for several counties including Santa Clara, Santa Barbara, Plumas and Riverside. In 2001, the Legislature created a standard approach to fixing these errors, declaring the Controller's audits to be correct. If adjustments are needed, the law requires repayments but caps them at 1% of the current year's secured tax revenues, paid in equal increments over the next three fiscal years. This approach applies only to errors uncovered on or after July 1, 2001 [AB 169 (Wiggins), Chapter 381, Statutes of 2001]. Following the passage of AB 169 (Wiggins), bills for several counties including Colusa, Imperial, Madera, Tuolumne, and San Benito have all stalled in the Legislature. Most recently, AB 1676 (Alejo) of 2012, which is nearly identical to this bill, failed passage in the Senate Governance and Finance Committee. The Department of Finance opposed AB 1676 in the Senate Governance and Finance Committee. SB 446 (Cannella) of 2013, which failed passage in the Senate Appropriations Committee, would have declared some erroneous property tax allocations in San Benito County to be correct and would have allowed the County to repay remaining misallocated property tax revenues. AB 440 Page 5 4)Author's Statement. According to the author, "This bill brings closure to a longstanding property tax allocation error inadvertently administered by San Benito County. The result of the error was miscalculation of the contribution to the county's ERAF. The error occurred in 1997 during an attempt to address audit findings by the Controller and was not discovered until the subsequent Controller's audit in 2005. "The 1997 Controller's audit indicated that San Benito County underfunded ERAF due to a misinterpretation of the Code related to fire districts and which districts were required to contribute to the ERAF fund. The County disagreed with the finding, but attempted to move forward using the recommended Controller's methodology. During the process of addressing the audit findings, a subsequent accounting error was made resulting from the use of an incorrect base year. This 'new' error, which unknowingly occurred in 1997, was not detected until the subsequent Controller's audit, which did not occur until 2005. Unfortunately for the County, the "small" error that began in 1997 had grown to a significant issue by the time it was discovered in 2005. "This bill would deem correct the property tax revenue apportionment factors used by San Benito County to apportion property tax revenues for the fiscal years between 1993 and 2002 as specified by the Revenue and Taxation Code (RTC) 96.81. This bill would, as a matter of fairness, allow San Benito County to join other counties including the Counties of Riverside, Plumas, Santa Clara and Santa Barbara, who have successfully attained legislative relief in similar disputes of interpretation of RTC that affect the apportionment and allocation of property tax revenue with the Controller." AB 440 Page 6 5)Policy Consideration. Because the Legislature has forgiven more than $500,000 of the amount that San Benito County owes to ERAF, the Committee may wish to consider under what circumstances additional relief is warranted. 6)Arguments in Support. According to San Benito County, "This bill would finally take the necessary steps to relieve San Benito County of this last remaining "unforgiven" property tax allocation issue. The County appropriately adjusted the property tax allocation amounts at the time of the discovery of the error and has been issued clean audits in the cycles following the error. Allowing the county to move forward will not affect the status quo for the State, and let the county use their already scarce resources to fund critical public services for their constituents." 7)Arguments in Opposition. None on file. REGISTERED SUPPORT / OPPOSITION: Support Opposition San Benito County [SPONSOR] None on file Rural County Representatives of California Service Employees International Union Local 521 AB 440 Page 7 Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958