BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: SB 85 HEARING: 2/10/10
AUTHOR: Cogdill FISCAL: Yes
VERSION: 10/26/09 CONSULTANT:
Weinberger
PROPERTY TAX SHIFTS TO COUNTIES
Background
Prior to voters' approval of Proposition 13 (1978), local
governments set their own property tax rates. Proposition
13 capped the rate of ad valorem taxes on real property at
1%, cutting statewide property tax revenues by 57%, and
required the Legislature to allocate the remaining property
tax revenues.
Proposed Law
I. Negative bailout counties . The Legislature responded
to the cut in property tax revenues by bailing out local
governments with $858 million in block grants; $436 million
went to the counties (SB 154, Rodda, 1978). The
Legislature also cut counties' payments for health and
welfare programs by $1 billion.
In 1979, the Legislature permanently restructured the
allocation of property taxes (AB 8, L. Greene, 1979). AB 8
shifted some of the schools' property tax revenues to local
agencies and replaced the schools' losses with increased
subventions from the State General Fund. The AB 8 formula
shifted additional property taxes to counties in an amount
equal to their 1978-79 block grants, plus a portion of Aid
to Families with Dependent Children (AFDC) costs not
covered by the state buyout, minus the new state grants for
county health services. This three-part package was
intended to provide proportionate bailout to all counties.
For six counties (Alpine, Lassen, Mariposa, Plumas,
Stanislaus, and Trinity), the state grants for health
services exceeded their 1978-79 block grants plus the
adjustment for AFDC costs. Consequently, rather than
shifting additional property tax revenue from schools to
these counties, these counties shifted property tax revenue
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to schools. In these so-called "negative bailout
counties," property tax revenues were reduced rather than
augmented to balance the relatively larger health and
welfare payments.
In 1982, the State Department of Finance discovered that
the six counties had not been shifting their "negative
bailout" amounts to schools. The Legislature forgave the
past $5.5 million miscalculations, clarified that some
counties would receive a "negative bailout" amount, and
required counties to shift their "negative bailout" amounts
in future years (AB 2162, Condit, 1983).
Since 1983, Stanislaus County has transferred more than $52
million in "negative bailout" to the schools. Its
"negative bailout" amount increases annually as property
tax revenues grow. Stanislaus County officials argue that
the "negative bailout" payments are an unintended
consequence of AB 8 because the Legislature wanted to
relieve the fiscal pressures on counties, not increase
them. County officials want the Legislature to freeze the
growth in counties' "negative bailout" payments.
For the 2011-12 fiscal year, Senate Bill 85 requires the
county auditor of a negative sum county, when determining
the reduction of property tax revenues to the county, to
apply a reduction amount equal to the lesser of either:
The reduction amount that was determined for the
2010-11 fiscal year, or
The reduction amount that is determined for the
2011-12 fiscal year.
For the 2012-13 fiscal year, Senate Bill 85 requires the
reduction amount to be the lesser of either:
The reduction amount that was determined for the
2011-12 fiscal year, or
The reduction amount that is determined for the
2012-13 fiscal year.
For the 2013-14 fiscal year and each fiscal year
thereafter, Senate Bill 85 requires the reduction amount to
be the amount applied for the immediately preceding fiscal
year.
II. County equity . The Legislature responded to the
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passage of Proposition 13 by allocating property tax
revenues to counties, cities, special districts, and school
districts based on each agency's pro rata share of the
property taxes collected within a county in the three
fiscal years prior to 1978-79 (SB 154, Rodda, 1978). For
example, a county government that had a low property tax
rate before Proposition 13 received a small share of the
remaining property tax revenues. The Legislature
permanently restructured the allocation of property taxes
in 1979 (AB 8, L. Greene, 1979).
Two changes to property tax allocations since AB 8 have
significantly affected local governments. In the
mid-1980s, legislators ordered counties to shift some of
their property tax revenues to the cities that either never
levied a property tax before Proposition 13 or levied only
low property tax rates (the so-called no- and low-property
tax cities). 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, and special districts to schools (the
so-called ERAF shifts).
Local governments' shares of property tax revenues vary
significantly. In 2006-07, counties received an average
17% share of local property taxes, but Alpine County
received 62% and Orange County received only 7%.
Last year, the Legislature increased Orange County's share
of property tax revenues by giving the County $35 million
of property tax revenues from the County's non-basic-aid
schools in the 2009-10 fiscal year and $50 million in each
fiscal year thereafter (SB 8xxx, Ducheny, 2009). The State
General Fund backfills the amount shifted from the schools.
Other counties that receive low property tax allocations
want the Legislature to draw upon the State General Fund to
increase their property tax shares.
Senate Bill 85 requires a county auditor to increase a
qualified county's property tax allocation by the "county
equity amount" by proportionally decreasing the amount of
property taxes allocated to the county's Education Revenue
Augmentation Fund (ERAF). If the ERAF property tax
revenues are insufficient to cover the full "county equity
amount," the remainder comes from the property tax revenues
of school districts within the county that are neither
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excess tax school entities nor community college districts.
Senate Bill 85 defines "county equity amount" as $100,000
in the 2011-12 fiscal year, and $200,000 in the 2012-13
fiscal year and each fiscal year thereafter. The bill
defines "qualified county" as the county that, of all the
counties in the state, was allocated the second lowest
percentage of total countywide and less than countywide ad
valorem property tax revenue for the 2006-07 fiscal year.
(Yolo County meets this definition.)
Senate Bill 85 declares that no reimbursement of state
mandated local costs is required because offsetting savings
to local agencies or school districts will result in no net
costs to the local agencies or school districts.
Comments
1. Cap the losses and end the inequity . When the
Legislature bailed out local agencies after Proposition 13,
six counties lost property tax revenues under the new state
formulas. In the 1990s, when the Legislature shifted $3.4
billion in property taxes to schools, many lawmakers
justified the ERAF shifts as a way to reclaim those state
bailout payments. Every county took a fiscal hit, even the
six counties that never received additional property tax
revenues. Not only are these six counties making "negative
bailout" payments, they lose money because of the ERAF
shifts. The negative bailout counties want to limit their
future losses. SB 85 caps the six counties' "negative
bailout" payments near their current levels. Legislative
reallocations of local property tax revenues also created
wide disparities in the shares that counties receive.
These relative shares reflect a county's property tax
revenues in three years before Proposition 13. In other
words, 35-year old political decisions and fiscal choices
still drive today's property tax allocations. SB 85
responds to this inequity by providing Yolo County with
more state funding.
2. Fair's fair . To temper Proposition 13's revenue
losses, the Legislature gave counties a three-part package:
an AFDC buyout, a state grant for health services, and an
increased share of property tax revenues. That bailout
package provided equal relief to all counties. In six
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counties, the state's new health grants were so large that
they offset the other aid. The AFDC buyout and health
grants still exist, although they've changed form. The
Committee may wish to consider why legislators should
change one piece of the package to benefit six counties
when the original package was fair to all counties.
3. Disparate shares, disparate needs . The extreme
variation in counties' property tax shares seems to demand
adjustments in counties with low shares to create more
uniformity. But the reality is that different counties pay
for different services and different levels of the same
service because each county is different. Counties provide
mixes of services that vary widely depending upon the
services provided by cities and special districts,
redevelopment activities, and each county's unique
economic, geographic, and demographic characteristics.
Simply because Yolo County receives the second-lowest share
of property taxes, SB 85 increases Yolo's share of property
tax revenues without accounting for its relative need for
that funding. How can legislators make changes to one side
of the ledger without examining other factors?
4. Zero-sum game . Reallocating property tax revenues
produces winners and losers; for every winner there must be
an equal loser. By capping the negative bailout amounts,
SB 85 makes winners out of the six "negative bailout
counties," which will benefit from the growth in property
tax revenues in future years. SB 85 also means that the
schools in those counties will not benefit from that
property tax revenue growth. One fiscal loser will be the
State General Fund, which must backfill the property tax
revenues that the schools won't get. School districts in
which local property taxes equal or exceed the districts'
revenue limits (the so-called "basic aid" districts) will
also be fiscal losers because the State General Fund will
not fully backfill their lost property taxes. Among the
six negative bailout counties, Alpine County and Plumas
County have basic aid school districts. The annual cost to
the State General Fund and these basic aid school districts
will grow in the future as property tax revenues grow.
5. Test one, test two . SB 85 draws on the State General
Fund by reallocating property taxes from ERAF (in Yolo
county) and from school districts that are not excess tax
school entities (in the six negative bailout counties plus
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Yolo County). Under the "Test 2" requirements of
Proposition 98, the state must backfill these property tax
revenues. Proposition 98's requirements affect schools
differently during a year in which "Test 1" applies. In a
"Test 1" year, the backfill of property tax shifts, such as
those proposed in SB 85, will not draw upon the State
General Fund, but instead will reduce the amount of
statewide categorical education program funding that would
otherwise be available. The Committee may wish to consider
whether SB 85 should include language similar to the
provision in last year's Ducheny bill that prevents the
reallocation of property tax revenues from reducing the
state's obligation to fund schools.
6. Next in line ? Last year's Ducheny bill created a new
permanent $50 million State General Fund subsidy for Orange
County. SB 85 provides hundreds of thousands of dollars
annually to Yolo County, which received a 9% share of
property taxes. Next in line are San Bernardino County
(10%), and Butte, Riverside, and Stanislaus Counties (11%).
The Committee may wish to consider whether SB 85 lays the
groundwork for future State General Fund subsidies to
counties.
7. Pay later . SB 85 delays its effects on the State
General Fund until next year. In 2011, Governor
Schwarzenegger and many legislators will no longer hold
their current offices. The Committee may wish to consider
whether today's elected officials should push the fiscal
effects of SB 85 onto their successors' shoulders.
8. Try, try again . SB 85 is not the six counties' first
attempt to cap their "negative bailout payments." Since
1996, the Legislature has considered at least seven similar
bills. The most recent was SB 684 (Cogdill, 2009), which
died in the Assembly Appropriations Committee. Since 1996,
the Legislature has also considered at least ten bills to
increase counties' share of property tax allocations. The
most recent bills include last year's Ducheny bill and SB
547 (Correa, 2007), which died in the Senate Appropriations
Committee.
9. Legislative history . SB 85 originally expressed the
Legislature's intent to enact statutory changes relating to
the Budget Act of 2009. The September 4, 2009 amendments
deleted the bill's contents and substituted language
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relating to the "negative bailout" counties. After
subsequent amendments added language relating to Yolo
County's subsidy, the Assembly passed SB 85 on September
11, 2009. However, the bill was later returned to the
Assembly for further action and was amended again on
October 26, 2009. The Assembly passed SB 85 for a second
time on January 27, 2010. Because portions of SB 85 were
never heard in the Senate, the Senate Rules Committee
referred the amended bill under Senate Rule 29.10 to the
Senate Local Government Committee for a hearing on the
Assembly's amendments. At its February 10 hearing, the
Committee has four choices:
Send the bill back to the Senate Floor,
recommending concurrence.
Send the bill back to the Senate Floor,
recommending nonconcurrence.
Send the bill back to the Senate Floor, without
recommendation.
Hold the bill.
Assembly Actions
Assembly Appropriations Committee:15-0
Assembly Floor: 77-1
Assembly Floor: 71-0
Support and Opposition (2/4/10)
Support : Stanislaus County, Yolo County, California State
Association of Counties, and Regional Council of Rural
Counties.
Opposition : Unknown.