HomeMy WebLinkAboutItem 4.09 ERAF ReturnCITY CLERK # 0390-10
AGENDA STATEMENT
CITY COUNCIL MEETING DATE: April 18, 2000
SUBJECT:
Request for ERAF Return
Report Prepared by: Jason Behrmann, Management Assistant
ATTACHMENTS:
1)
2)
Letter to State Legislators requesting an ERAF return.
Letter to Tri-Valley Cities requesting their support in
pursuing an ERAF return.
RECOMMENDATION-/Direct Staff to send the attached letter with the Mayor's signature to
the Cities ofPleasanton, Livermore, San Ramon and the Town of
Danville requesting their support in pursuing a remm of ERAF, and
authorize the Mayor to deliver a separate letter to the City's State
Legislators during the League of California Cities' City Action Day
in Sacramento, May 22-23.
FINANCIAL STATEMENT:
Sufficient funds remain in the City Council's 99/00 budget to cover
the cost of the trip.
DESCRIPTION: At the April 4, 2000 Council Meeting, Mayor Houston asked Staff
to prepare a letter (Attachment 1) to the City's State Legislators requesting a return of ERAF. The Mayor
also requested that Staff prepare a separate letter (Attachment 2) to other Tri-Valley Cities requesting their
support in this effort, and inviting them to join the City in a lobbying trip to Sacramento. The Mayor
would like to hand deliver the letters to the Senator Rainey and Assemblywoman Leach, along with the
other Mayors, during the League of California Cities' City Action Day in Sacramento, May 22-23.The
Mayor commented that the large State budget surplus presented cities with an excellent opportunity to
demand a remm of property tax revenues that were shifted from local governments to the State general
fund during the recession of the early 1990's.
BACKGROUND:
The Legislative Analysts' Office recently released their report, "2000-01 Budget Analysis and
Perspectives & Issues." The report states that revenues will exceed the budget forecast by a total of $4.2
billion in the current year. On top of this is the projected surplus for next fiscal year, which brings the
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COPIES TO:
ITEM NO.
~otal surplus to about $9 billion prior to the May revision of revenue estimates. Speculation is that this
surplus could grow to somewhere between $12 and $15 billion before the close of the next fiscal year.
The current dissatisfaction with the state and local fiscal relationship is rooted in a series of decisions
made by both the Legislature and the public, beginning in the 1970s. These decisions have substantially
narrowed the municipal revenue base and emphasized state control over municipal revenues.
Among the most damaging, is the on-going shift of property taxes from cities, counties and special
districts to the benefit of the state general fund beginning in the early 1990's. Last year, the property tax
shift redirected nearly one-in-five property taxes, or $3.6 billion, from local governments to schools. This
is done through an "accounting" mechanism termed the Educational Revenue Augmentation Fund
(ERAF). While the shift is to schools, through the ERAF accounting method, the ultimate beneficiary of
the shift is the State's general fund that is relieved of having to contribute this amount of money to the
schools.
The early 1990's was a difficult time for elected officials faced with the prospect of slashing budgets.
Unfortunately, the State Legislature chose to ease its burden by shifting property taxes away from local
governments to the state general fund. History has proven that the State is quick to take money from cities
in tough times, but slow to return it in prosperous times.
While cities have few reasons to believe that things will change in the near future, developments during
last year's State budget hearings produced reason for cautious optimism. For the first time, the Governor
stated publicly that local government is owed a return of revenue from the state. While this
acknowledgement had mostly symbolic significance, the State budget did include $150 million for a one-
time ERAF return and $50 million per year to reimburse cities for booking fees paid to counties. To date,
the City has received $63,731.15 in ERAF return and $60,747.80 in booking fee reimbursements. This
year's small ERAF return was a good sign, but a one-time return of such a small amount does not address
the fundamental problem. In order to truly reverse the ERAF loss, a cap must be placed on ERAF in.
addition to a sizeable return of lost revenues.
The Fiscal Year 2000-2001 State budget debate is well underway and there are several significant local
government finance proposals being discussed. The two key Democrats in the Legislature, Senator Steve
Peace and Assemblywoman John Longville, have proposed that a "place holder" be included in the
budget that would direct $1.5 billion of state general fund money for "local government relief." The
money is proposed to be divided one-half on population and one-half on a "reverse ERAF" basis (i.e. in
proportion to the original ERAF shift). This is the same formula used to distribute the $150 million in
local government relief in the Fiscal Year 1999-2000 budget. This latest proposal was surfaced in a
Subcommittee of the Senate Budget Committee. The Subcommittee is taking the proposal under
consideration, pending the State's May revision of estimates due in mid-May of this year.
Senator John Burton also recently introduced SB 1637, a bill that would cap the growth in ERAF and
return it to local governments in proportion to the original loss of property tax dollars when the ERAF
shift was first made. Current estimates place this year's growth at approximately $250 million. A
permanent cap would grow considerably over the next few years, with the growth reaching $1 billion in
about 4 to 5 years. This ERAF cap proposal matches a similar proposal that has been introduced by
Assemblyman Robert Pacheco, AB 1806. These efforts are promising, but have a long way to go in the
Legislature.
In addition to these legislative efforts to return ERAF, several counties have turned to the courts for help.
The County of Sonoma and several other counties filed a test claim before the Commission on State
Mandates in 1997, arguing that the ERAF shift constituted a reimbursable state mandate within the
meaning of the California Constitution. The Commission denied the test claim, whereupon the counties
appealed.
The court found that the shift does constitute a reimbursable mandate. The two cases on which the court
relied were Lucia Mar Unified School District v. Honig, 44 Cal. 3d 830 (1988) and County of San Diego
v. State of California, 15 Cal. 4th 68 (1997). Broadly speaking, in each of these cases, the courts found
that shifts of financial responsibility for programs previously funded by the state, constitute reimbursable
mandates.
In the Sonoma county case, the court ruled that:
[T]he ERAF legislation created a new program or higher level of service which requires
reimbursement under Article XIII B, Section 6 of the California Constitution since the shift of
local property taxes compels the counties to accept financial responsibility in whole or in part for a
program which was required to be funded by the State by the enactment of Proposition 98.
The State is now appealing the ruling. The bottom line is that the trial court's decision is encouraging
news. Moreover, the pendency of this litigation may be helpful in producing a greater receptivity to cities'
and counties' ongoing efforts to seek a reversal of the ERAF shift. All of these recent developments
should help to make the City's lobbying effort more effective, and the possibility of a return of ERAF
more likely.
RECOMMENDATION:
Staff recommends that the Council direct Staff to send the attached letter with the Mayor's signature to
the Cities of Pleasanton, Livermore and San Ramon requesting their support in pursuing a return of ERAF
and authorize the Mayor to deliver a separate letter to the City's State Legislators during the League of
California Cities' City Action Day in Sacramento, May 22-23, 2000.
April 18, 2000
<<Title>) <<FirstName)> <<LastName>>
<<Company>)
<<Address 1 >>
<<City>), <<State)> <<PostalCode>)
Dear <<Title>> <<LastName>):
On behalf of the Dublin City Council, I would like to ask for your assistance in working with the State
Legislature to return the property taxes that were shifted from local governments to the State general fund
through the Educational Revenue Augmentation Fund (ERAF) in the early 1990's. Last year, the property
tax shift redirected nearly one-in-five property taxes, or $3.6 billion, from local governments to schools.
The State is now looking at a very large budget surplus and the City feels that the State should return
these revenues to local governments. According to estimates from the Legislative Analysts' Office (LAO),
it is estimated that revenues will exceed the budget forecast by a total of $4.2 billion in the current year.
On top of this is the projected surplus for next fiscal year, which brings the total surplus to about $9
billion prior to the May revision of revenue estimates. Speculation is that this surplus could grow to
somewhere between $12 and $15 billion before the close of the next fiscal year. The economy is beyond
robust and provides the Legislature with the best opportunity in twenty years to address local government
finance.
Several members of the State Legislature have introduced Legislation that would cap ERAF growth and
return it to local governments. Others have proposed bills that would return $1.5 billion to local
governments for ERAF compensation. The City is asking that you support these efforts and work to
return the local government revenues that have been taken over the years.
Last year, the Legislature passed a budget that included $150 million in ERAF return. The City is
appreciative of the Legislature's efforts and acknowledgment of ERAF losses suffered by cities.
However, a one-time return cannot adequately compensate cities for the billions of dollars in lost
revenues, and it does nothing to stop future ERAF shifts.
We urge you to work to help local governments and the residents they serve regain the revenues that have
been lost over the past decade by capping the ERAF shift, and returning the money to local governments.
Thank you for assistance in this matter.
Sincerely,
Guy S. Houston
Mayor
cc: Dublin City Council
ATTACHMENT 1
April 18, 2000
<<Title>> <<FirstName>> <<LastName>>
<<Company>>
<<Address 1 >>
<<City>>, <<State)> <<PostalCode>>
Dear <<Title>> <<LastName>>:
As you know, the State is enjoying a budget surplus that may total $12 billion by the end of next fiscal
year. The economy is beyond robust and provides the Legislature with the best opportunity in twenty
years to address local government finance.
In addition, Sonoma County recently won a court case, which found that the Educational Revenue
Augmentation Fund (ERAF) shift constituted a reimbursable mandate within the meaning of the
California Constitution. Although the State is appealing the ruling, the pendency of this litigation may be
helpful in producing a greater receptivity to cities' and counties' ongoing efforts to seek a reversal of the
ERAF shift. It would be unfortunate if we did not take advantage of this tremendous opportunity.
At a recent Council Meeting I requested that Staff draft a letter to our State Legislators requesting a return
of property tax revenues (ERAF) that were shifted from local governments to the State general fund
during the recession of the early 1990's. I have attached the Staff Report and my letter.
There are several proposals currently being discussed in the Legislature that would cap ERAF and return
it to local governments. However it is unlikely that these or other bills will pass if cities do not take an
active role in demanding this action. I plan to deliver my letters to Assemblywoman Leach and Senator
Rainey during the League of California Cities' City Action Day in Sacramento, May 22-23, 2000. I
encourage you to join me in this effort by accompanying me to Sacramento to meet our Legislators and
discuss this issue in person.
History has proven that the State is quick to take money from cities in tough times, but slow to return it in
prosperous times. This is not acceptable. If we do not see a return of our revenues now, we may never see
it, and the next recession may bring an even greater State takeaway.
Please call my office (833-6650) as soon as possible to arrange a time to pursue this lobbying effort. If
you cannot meet on May 22 or 23, I would encourage you to send a similar letter expressing your interest
in seeing ERAF returned.
Sincerely,
Guy S. Houston
Mayor
cc: Dublin City Council
ATTACHMENT 2