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