BILL ANALYSIS Ó
AB 440
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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:
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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.
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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
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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.
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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."
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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
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Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958