HomeMy WebLinkAbout4.13 SMART ReportAnalysisAGENDA STATEMENT
CITY CLERK FILE # 660-40
CITY COUNCIL MEETING DATE: (September 21, 1999)
SUBJECT:
SMART Report Analysis
Report Prepared by: Richard C. Ambrose
ATTACHMENTS:
SMART Task Force Report
RECOMMENDATION:
)/Receive Report
FINANCIAL STATEMENT: None
DESCRIPTION:
This report is in response to a proposal from the State Municipal Advisory Reform Team (SMA~.T),
which was formed by State Controller Kathleen Connell in March 1999. The SMART task force was
composed of representatives 0fbusiness, labor, academic and elected officials who worked to devise a
proposal that would rectify the imbalance between state and local revenue support. The report was
completed on August 19, 1999 and distributed to Mayors across the state asking for their written
comments and support.
There are three key components to the proposal. The first and most controversial is a recommendation to
gradually replace the current "point of sale" sales tax distribution formula with a new formula based on
population. The SMART Report contends that this will "encourage more responsible local planning." The
plan uses a "90/10/100" formula. In year one, 90% of all sales tax would be apportioned among counties
and cities based on their proportionate contribution to statewide retail sales the preceding year. l:his was--
recommended in order to allow local govemmeuts to be able to honor their existing bonding requirements
and other agreements tied to sales tax revenues.
In subsequent years, 100% of the net local sales tax gains will be apportioned by population. What this
means is that, as statewide sales tax revenues increase over the next 20 years, greater portions of the sales
tax will be allocated by population. This change in the sales tax allocation formula would require an
amendment to the State Constitution.
H/cc-forms/agdastmLdoe
COPIES TO:
ITEM NO.
The SMART report acknowledges that there will be many communities severely impacted by the sales tax
proposal. To diminish these negative affects, the Task Force proposes that the ERAF baseline be reduced
by approximately $450 million annually, and return this difference to local. govemments. $150 million of
this money would be specifically set aside as an inducement for the creation of a state constitutional
amendment to restructure the distribution of local sales taxes. This second element of the report was
apparently included to soften the fiscal blow to many communities and to help increase support for the
proposal.
The third component is a plan to end "unfimded state mandates." Under this proposal, the State would be
required to produce an Economic Impact Projection that accurately discloses the costs to local
governments of any new state law or regulation and appropriate funds to pay those costs before local
governments are obligated to implement them.
IMPACT ON THE CITY OF DUBLIN
Due to the City of Dublin's strong retail sales base, it is estimated that City sales tax revenues would be
greatly reduced under this proposal, but it is unclear by how much. It would depend on when the proposal
was adopted, and how much the City's population-retail sales 'mix changes over the next 10 years.
Staff has been working with the City' s financial consultants, Hinderliter de Llamas and Associates (HDL)
to determine the fiscal impacts to the City of Dublin. Unfommately there has been some difficulty in
securing the sales tax figures and calculation used in the SMART report. This has made it difficult to get
completely accurate numbers. Although it is difficult to be entirely certain of the impacts to the City of
Dublin in the long run due to the variables and uncertainties involved, it is possible to get a good idea of
what the immediate impacts would be. The following are preliminary estimates of the impacts to the
City of Dublin in year 1 based on the 97-98 sales tax figures. 98-99 sales tax figures for the state are not
yet available. Future impacts to the City of Dublin are likely to improve modestly over time, as Dublin's
population increases faster than the state average. It is important to note that these numbers are
preliminary estimates and are presented onlyto approximate what is likely to occur under this proposal. A
more detailed and accurate analysis will follow, as more information becomes available.
97/98 Dublin sales tax revenue
8,025,448
90% of 97/98 Dublin sales tax revenues
Dublin' s share of 10% population distribution
SMART proposal- combined point of sale
and population distribution
7,222,903
280,460
7,503,363
Total sales tax reduction in year 1
Sales tax reduction by percent
(522,085)
(6.8%)
97/98 State population of 33, 226, 000 and Dublin population of 26, 725
97/98 Total State sales tax revenues (County and city distribution)- $3,487, 012, 000
It's clear from this preliminary analysis of the sales tax portion of the SMART proposal, that the City of
Dublin would stand to lose considerable sales tax revenues. It is estimated that about 50% of Catifomia
cities and counties would be hurt by the proposal and the other 50% would receive a sales tax windfall. To
lighten the blow dealt to cities such as Dublin, the task force is recommending that the state return $450
millio,n in ERAF money that was diver~ed from local governments eight years ago in order to cope with a
state budget crisis.
Every city in the State of Califomia would certainly support this recommendation. City's have been
fighting to~ get the ERAF money retumed ever since it was taken away. Unfortunately, the likelihood of
the State giving local govemments $450 million is extremely low. A large part of the SMART report and
its analysis is based on the assumption that the Govemor and State Legislators would be willing to give
local govemments a share of the State's property tax revenues. This has been an extremely difficult
proposition in the past, and there is no reason to believe that things will change in the near future. The
current Govemor, Gray Davis has been particularly reluctant to promise any long-term State funds,
fearing an economic downtown would force him to raise taxes or make deep budget cuts. Under the
SMART proposal, the City of Dublin would be losing sales tax revenue in exchange for property tax
money that is unlikely to ever be remmed.
Even in the unlikely event that $450 million in ERAF revenues were returned to cities and counties, the
City of Dublin would still stand to lose over $300,000 in total revenues. The following summarizes the
estimated impact of the ERAF restoration.
SMART proposal- combined point of sale
and population distribution
7,503,363
SMART- additional ERAF allocation
Combined sales tax redistribution and ERAF
restoration
Net impact to City with sales tax
redistribution and ERAF restoration
Net impact to City by percent
220,752
7,724,115
(301,333)
0.75%)
In addition to the sales tax revenue that the City will lose, on a more fundamental note, City staff
disagrees with the general statements and assumptions made by the SMART Report. The authors of the
Report claim that the Report will "Incentivize cash-starved municipalities to invest in community,
housing and quality of life programs--instead of erecting huge car malls on cheap land to attract sales tax
revenue." Unfortunately, the authors fail to mention the real reason behind land development- economics.
Auto malls and retail centers locate where there is a market and where they can make the largest profits-
typically near freeways and other major transportation routes. If the State wants to do away with the
fiscalization of land use, they may want to consider limiting or eliminating financial incentives given by
cities to developers. The real damage is done by jurisdictions competing with each other over retail and
commercial development. Cities rarely make decisions that would place an auto mall where a housing
project could have gone. City planning is not done by computing the overall tax potential of a piece of
land, but rather by responding to the needs and desires of the community.
Furthermore, it is appropriate for sales tax revenues to be distributed based on a point of sale basis
because of the expenses involved in providing and maintaining the infrastructure for a commercial
development. people travel from other jurisdictions to shop in Dublin and use the City's facilities and
infrastructure. Therefore it is reasonable for the City to expect a greater proportion of sales tax revenues to
pay for these additional expenses. The people of Dublin should not .be burdened with these additional
.costs. To distribute sales tax revenues based on population would mean that bedroom communities with
~ very little commercial or retail developments would receive more sales tax revenues than Dublin, even
though their citizens frequently use Dublin's roads and services. It does not make any sense to distribute
sales tax revenues based on population.
The final part of the SMART report asks the State Legislature to eliminate the practice of imposing
unfunded mandates on cities and counties. The City of Dublin would certainly welcome this initiative, but
this too, may be unrealistic. For years the State has ignored a legal mandate to pay local governments for '
the costs imposed on them by the State. It is unclear how this proposal would change this mandate.
Recommendation
The League of California Cities, HDL and City staff are in the process of further analyzing the impacts of
the SMART Report. The City is working to identify the long-term effects of the proposal and the impact it
would have on City services. When the analysis is complete, City staff will dmf~ a letter to Controller
Connell opposing the recommendations. It is expected that all pertinent information will be available and
the analysis completed within the next month. At that time, staff will present the letter to the council for
consideration.
It is unclear at this time how much support the SMART proposal has around the State and whether any of
the recommendations will ultimately be implemented. What is clear, is that it will be an extremely long
and difficult process. HDL estimates that it would take a minimum of two-to-three years to gain enough
support to place a constitutional amendment on the ballot. We will continue to keep the Council apprised
of any significant develo ~ments.
SMART Task Force
Report
Kathleen Connell
California State ContrOller
August 1999
ATTACHMENT 1
ConWoHer's Message
2
Summary of Recommendations
New Local Financing Formula
Funding of Local Mandates
Govemment Accountability
Implementation
4
4
14
15
16
Perspectives of Stakeholders
17
Building a Foundation for the Future
Historical Perspective
Tax Policy
Intergovernmental Accountability
Land Use Planning
/
18
18
23
28
32
Appendices
A. Percentage of Local Revenues
and Expenditures for Califomia
Cities and Counties (1993-1997)
B. Education Revenue
Augmentation Fund (ERAF)
Shift (1992/1993 - 1998/1999)
C. Notes to Alternative
Plans and the "SMART Formula"
37
38
39
KATHLEEN CONNELL * STATE CONTROLLER 1
Today we stand on the threshold of the
21st century md all Califomians share
unbridled optimism that our great State
will expand its role as the intellectual
and economic capital oflhis exciting
new age. As Califomia's Chief Finan-
cial Officer, I am concemed that we
may sabotage this future unless we
confront directly the current imbalance
between State and local finances and
forge a consensus that will retum
faimess to statewide revenue allocation.
We must allow our cities and counties to
rebuild from the neglect of the past
years and prepare for the new century.
Over the past decade, local govem-
ment has not been able to provide the
qualily and level of services that our
citizens have a right to expect be-
cause the State government --
unwilling to raise taxes or cut ser-
vices -- has resolved its own budget
problems by expropriating property
taxes, long the primary revenue
resource for local govemment
Califomia's remarkable economic
surge over the past three years
presented an oppommily for the State
to reverse the annual flow of property
tax diversions back to the local level.
Instead, it captured almost $3.6
billion in property taxes in fiscal year
1998-1999, celebrated a $4.3 billion
surplus and planned its budget
accordingly.
With the State experiencing unparal-
leled economic grovCth and budget
surpluses, the timing could not be
better for addressing what I increas-
ingly believe is the most crucial
public policy issue facing our State
and its future. If we wait until the
next inevitable downturn, it will be
too late to identify -- much less
implement- any truly innovative
strategies.
Thus, in February 1999, I formed the
State Municipal Adviso~ ReformTeam
(SMART). The SMART Task Force
was comprised of distinguished repre-
sentatives of State and local govern-
men,, business and labor, environmen-
talists, real estate developers, and
economists. I charged the Task Force
members with finding an equitable
solution that would assure a stable,
predictable revenue stream to local
govemment without jeopardizing
e:dsting obligations and without raising
taxes. I asked them to be creative,
prapmatic and visionary. Andthey
were.
Their first key decision was to focus on
three distinct areas in which State
govemment actions have skewed local
policy decisions and hampered the
ability of local governments toaddress
their citizens' needs. These are tax
policy, intergovemmental accountability
and land use planning.
]~ollowing six months of study, meetings
and debate, the Task Force settled on
three primmy recommendations that
redefine intergovemmental icing
relationships:
Recommendation 1:
Restructure State and Local Properly
and Sales Taxes
The Task Force engaged in exhaustive
economic analysis to test the fiscal
impacts of an innovative approach to
place a "cap" on the State's diversion
of property taxes revenues and
apportion future local sales t~xes on
KATHLEEN CONNELL ' STATE CONTROLLER 2
factors independent of point-of-sale
considerations. This analysis contimed
that a carefully structured formula, if
implemented, will:
· Generate approximately $4.5 billion
in additional revenue for local govern-
ment over a 10-year period;
· Make a baseline reduction in EKAF
property tax diversions to $3.2 billion
to assist the State in funding its educa-
tional obligations;
· Reduce the retail fiscalization of land
use at the local level by eliminating the
tax incentives for poor local planning
decisions. Sales tax will continue as a
source of repayment for existing redevel-
opment commitments by local govern-
menIs and special districts; and
· KEQUIRE NO NEW STATE OR
LOCAL TAXES AND NO MODIFI-
CATIONS OF PKOPOSITION 13.
The Task Force's sales tax re-alloca-
tion proposal could also be unilaterally
enacted with a State financial commit-
ment of $31 million based on Fiscal
Year 1997-1998 sales tax revenues, an
extremely moderate sum in light of the
current $4.3 billion State surplus.
However, if the State does not equalize
sales taxes and guarantee a miramum
$150 million in local assistance, a
'lmrd cap" on ERAF should be consid-
ered. For that minimal investment all
of the countywide allocation inequities
could be offset and retail fiscalization
would become a non-issue in future
local planning decisions.
The Task Force also strongly recommended
that the State establish a prudent reserve for
economic downturns and require perfor-
mance budgeting of State programs as a
way to fund those reserves.
Recommendation 2:
Eliminate "Unfunded" State Man-
dates to Municipalities
The Task Force was convinced that
the State should be required to
accurately disclose and fully fund the
cost of any new law, regulation or
executive order that requires imple~
mentation by local governments.
Recommendation 3:
Improve Efficiency and Effectiveness
of Government Programs
The Task Force insisted that all State
programs administered by local agen-
cies should h~corporate a mutual
compact listing the respective obliga-
tions and responsibilities of the State
md localities and intergrating State
funded performance based budgeting
and perfont, race auditing.
The SMART Task Force has provided
us with an innovative blueprint. The
current economic prosperity in Califor-
nia will smooth the way for a relatively
painless restmcturing of State and local
finances. Now we need only the
political will to act. By releasing this
report as the Califomia State Legislature
reconvenes in August 1999, the
SMART Task Force urges the Legisla-
ture to make this issue atop priority.
Let us usher in the millennium with
bold decisions that establish asolid
firmncial inlhstmcttnre for all levels of
Califomia's govemments and set the
stage for anew Golden Era for the
Golden State in the 21st century!
Kathleen Connell
California State Controller
KATHLEEN CONNELL · STATE CONTROLLER 3
New Local Financing Formula
Discussion of Objectives
For local governments to regain their
fiscal heal~ two major structural
changes must occur..
· Local govemments musthave a
source of secure, stable, and sufficient
revenues to meet local needs, indepen-
dent of State control or intervention;
and
· Local govemments and services
mandated by the State must be accom-
panied by funding that is sufficient to
support them
The Task Force quickly concluded that
the current scheme of State and local
taxation in Californiahas been domi-
nated by two serious problems:
· The growing diversions of property
tax revenues by the State fitrough its
Educational Revenue Augmentation
Funds OERAFs) has critically short-
changed cash starved local govem-
menIs; and
· The distribution of the local compo-
nent of the sales tax based upon point-
of-sale has distorted local planning
decisions by creating financial incen-
fives for local govemments to promote
retail outlets that generate high volume
sales at the expense of housing and
businesses that create well-paying jobs.
This is more commonly known as
"retail ~scaliTalion."
To address these problems, the Task
Force agreed that a maj or readjustment
inthe collection and reallocation of
sales taxes and property taxes is needed.
This proposal to end the distribution of
local sales taxes on the basis of point-of-
sale will begin the transition towards
distribution of revenue on the basis of
populafion_ The Task Force identified
multiple proposed solutions to redistrib-
ute sales tax and property mx revenues
that could conceptually fulfill both
objectives and then quantified the impact
of each altemafive formula on
Califomia's local govemmenS.
Review of Alternative Plans
The Task Force readily concedes that the
identification of these problems was not
novel. Virtually every one of the groups
and research organizations that have
studied, and are studying Califomia's
current tax structure, have identified the
sameproblems.
Likewise, all of these groups and
organizations have recommended the
adoption of some form of tax redistribu-
tion targeted to accomplish three
objectives:
1. Increase discretionary income for local
govemment without unduly impacting
State govemment or increasing taxes;
2. Redistribute sales tax revenues aniong
local govemments in a manner that
would be proportional to public need;
and
3. Encourage balanced planning deci-
sions in the future while not punishing
local govemment for past planning
decisions that were predicated on "point-
of-sale" reimbursement
The challenge was to create a solution
that was economically fair across the
board and capable of achieving approval
~om abroad political consensus. This is
the point at which the S MART Task
Force and the other groups and organi-
KATHLEEN CONNELL ® STATE CONTROLLER
zations diverged. This caused the Task
Force's predecessors to suggest only
general concepts and approaches
without any fixed formulas that could
be tested against real-life economic
scenarios.
However, the two most common
approaches-- a Statewide property tax/
sales tax "swap" and asales tax allo-
cated by statewide population have
serious consequences on local govem-
ment when actually implemented. These
formulas do not result in an equitable
flow of revenues to dries and counties.
Alternative One- Property Tax Swap
Some commentators have suggested a
revenue neutral exchange fithe state-
controlled ERAF property taxes for
local sales taxes under the generic
description of '~tax swap". The
common claim of the "tax swap"
supporters is that such a direct
exchange statewide would create
local incentives for better land use
planning and an end to ~scalization.
The Task Force discovered that there
can never be atruly dollar-for-dollar
".swap" of ERAF property taxes and
local sales taxes because local sales tax
revenues are substantially greater. Even
if the State attempted to exchange every
ERAF dollar for identical sales mx
dollars in each county, an excess of
$500 million in local taxes would
continue to be generated on a "point-of-
sale" basis and therefore prolong retail
~scalization.
Creative local elected leaders will
continue to engage in furious competi-
tion for business that generate retail
sales so long as the oppommity exists to
enhance local tax revenues. Even if the
incenrives are reduced by some factor,
the lack of any other politically "pain-
less" method ofincreasing revenues
means that any marginal tax benefits
from "point of sale' will sustain retail
~sc~li7~:~fion
Poor planning decisions that discrimi-
nate against housing and higher income
industries are the natural political by-
products of ~x revenue inducements
caused by the "point of sale" distribu-
tion
Although specifically not quanlffied in
the Task Force report, the "swap"
would also cause serious disruptions at
the dty level because the vast majority
of local sales taxes, particularly in the
high growlh urban counties, are
dedicated city revenue. For example in
fiscal year 1996-1997, the cities of San
Jose and Santa Clara combined
ceived over $86 million more in sales
taxes than in total property taxes. To
effect a "swap" in Santa Clara County,
its dries would be most impacted by the
loss of sales taxes while its county
government would be the favored
redpient of the returning property
taxes (see chart below). As a result,
most of the major metropolitan areas
would drown in a tide of red ink.
Proportional Share of
County-Wide Revenues
-"!.'
: $1: :::::..,
Sales Tax ERAF
Finally for the State to equalize for
those countywide areas that would
sustain a loss due to the "swap," the
State would be required to backfill
$252 million to the 15 impacted
counties. To be compatable with the
K~THLEEN CONNELL · STATE CONTROLLER 5
Alternative Plan I -- Impact of Swapping Sales Taxes with the Educational Revenue Augmen-
..... 3tion Fund {ERAF') Property Tax (Amounts in Thousands)
SMART Formula EQualization
Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Impedal
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Mafin
.~--,Mariposa
endocino
.vlerced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obispo
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Sobno
Sonoma
Stanislaus
Sutter
Tehama
Trinity
/._.Tulare
.... ,~olumne
entura
YoIo
Yuba
Total
Estimated
County and Property Tax
Cities ERAF Current County Contributions or
Property Tax and Cities Sales Sales Taxes for
Contributions Taxes County and Cities
190,905 191,173 190,905
153 289 153
2,297 2,792 2,297
8,863 16,506 8,863
2,881 1,917 1,917
1,699 1,920 1,699
102,345 96,275 96,275
1,226 1,511 1,226
1 O, 500 10,490 10,490
65,197 69,651 65,197
1,997 1,895 1,895
10,847 11,127 10,847
6,904 10,768 6,904
1,768 2,169 1,768
46,966 57,805 46,966
8,606 7,492 7,492
3,995 3,245 3,245
1,208 1,834 1,208
1 ,O81,013 881,047 881 ,O47
7,233 7,251 7,233
29,435 32,017 29,435
875 1.235 875
6,684 8,111 6,684
16,295 13,838 13,838
681 584 584
1,580 1,535 1,535
28,760 37,390 28,760
12,477 12,588 12,477
7,400 7,776 7,400
208,161 360,558 208,161
20,890 31,503 20,890
1,181 1,664 1,181
88,668 123,351 88,668
113,619 129,258 113,619
2,287 3,631 2.287
126,219 144,524 126,219
191,889 284,166 191,889
138,524 111266 111,266
61,253 48,910 48,910
20,169 22,328 20,169
76,699 110,149 76,699
31,518 39,546 31,518
185,525 277,242 185,525
19,473 23,186 19~473
12,350 16,249 12,350
280 164 154
3,432 3.381 3,381
32,903 33,412 32.903
38,255 51,730 38,255
29,101 40,962 29,101
6,294 7,538 6,294
3,838 3,867 3,838
163 556 163
26,899 27,510 25,899
3,782 3,955 3,782
58, 155 72,837 58,155
15,839 17,982 15,839
4,764 3,355 3.355
3,182,917 3,487,012 2,930,164
Total Maximum Excess ERAF
Swap of the Lesser Property Tax
of Estimated ERAF Contributions
$450 Million State
over Sales Total Swap plus Excess Sales Supplement Net After
Taxes Excess ERAF Taxes Distributed based Receipt of $450
remaining with remaining with remaining on ERAF Million State
State State County-wide Contributions Supplement
190,905 268 26,990 26,990
153 136 22 22
2,297 495 325 325
8,863 7,643 1,253 1,253
964 2,881 407 1,372
1,699 221 240 240
6,070 102,345 14,469 20,540
1,226 285 173 173
10 10,500 1,485 1.495
65,197 4,454 9,218 9,218
102 1,997 282 384
107847 280 1,534 1,534
6,904 3,864 976 976
1,768 401 250 250
46,966 10,839 6,640 6,540
1,114 8,605 1,217 2.331
749 3,995 565 1,314
1,208 626 171 171
199,966 1,081,013 152,833 352, 800
7,233 18 1 .O23 1,023
29,435 2.582 4,162 4,162
875 361 124 124
6,684 1,428 945 945
2,457 16,295 2,304 4,761
97 681 96 193
45 1,580 223 268
28,760 8,630 4,066 4,066
12,477 111 1,764 1,764
7,400 376 1,048 1,046
208,161 152,396 29,430 29,430
20,890 10,613 2,953 2,953
1,181 483 167 167
88.668 34,684 12,536 12,536
113,619 15,639 16,063 16,063
2,287 1,344 323 323
126,219 18,306 17,845 17,845
191,889 9Z,277 27,129 27,129
27,Z58 138,524 19,584 46,842
12,343 61,253 8,660 21,003
2Q,169 2.159 2,851 2,851
76,699 33.450 10,844 10.844
31,518 8,029 4,456 4.456
185,525 91.717 26,229 26,229
19,473 3,713 2,753 2,753
12,350 3,899 1,746 1,746
116 280 40 155
51 3,432 485 537
32,903 509 4.652 4,652
38,255 13.475 5,408 5,408
29,101 11.861 4,114 4.114
6,294 1,245 890 890
3,838 29 543 543
163 393 23 23
26,899 610 3,803 3,803
3,782 173 535 535
58,155 14.682 8,222 8,2Z2
15,839 2,143 2,239 2.239
1.409 4.764 674 2,083
252,753 3,182,917 556,848 450,000 702.753
Source: State Con~'otlers Office computed based on information fTom the Board of Equalization (1997-98) and Department of Finance (1999}
KATHLEEN CONNELL · STATE CONTROLLER
second alternative and the SMART ".~.s~;
formula, the cost to the State would be
over $700 million as opposed to $450
million.
A revenue neutral property tax/sales tax
swap may be appropriate and even
highly productive between county and
city govemments within each county,
but that approach translates very poorly
at the statewide level. The Task Force
believed that the "swap" plan was
unacceptable due to its inability to
conclusively resolve fiscalization among
local govemments.
Alternative Two - Allocation of Sales
on the Basis of Population
Some observers have suggested the
cessation of local sales tax revenues
based upon point-of-sale in favor of a
population based dislribution. This
altemative's supporters argue that their ~
approach would remove tax incentives
for retail fiscalization while generally
focusing and equalizing tax dollars
based upon each local jurisdiction's
resident population. While an admirable
goal in the long-term, the abrupt imple-
mentation of an exclusively population-
based sales tax appointment would have
disastrous consequences for many ciries
and Counties over the short-range.
Redistribution of retail sales taxes on the
basis of popularion, as contrasted with
allocation of sales taxes on a point-of-
sale basis, results in significant dispad-
lies between jurisdictions. Those
localities that have a high population
relative to their sales tax collection
benefit greatly while those jurisdictions
with low population relative to their
sales tax distribution are faced with a ~.~'
seriously negative position because of
their past planning decisions to focus on
retail sales tax enhancement.
K~THLEEN CONNELL · STt~ CONTROLV.~R 7
Alternative P)an 2 -- impact of Afiocating Sa)es Tax Based on Population Versus Point of Sa~e
J-~,mounts in Thousands)
SMART Formula Eoualization
Current County
and City Sales
Taxes
Alameda 191,173
Alpine 289
Amador 2,792
Butte 16,506
Calaveras 1,917
Colusa 1,920
Contra Costa 96,275
Del Norte 1,511
El Dorado 10,490
Fresno 69,651
Glenn 1,895
Humboldt 11,127
Imperial 10,768
Inyo 2,169
Kern 57,805 '
Kings 7,492
Lake 3,245
Lassen 1,834
Los Angeles 881,047
Madera 7,251
Marin 32,017
Mariposa 1,235
Mendocino 8,111
Merced 13,838
,'~ doc 584
n o 1,535
Monterey 37,390
Napa 12,588
Nevada 7,776
Orange 360,558
Placer 31,503
Plumas 1,664
Riverside 123,351
Sacramento 129,258
San Benito 3,631
San Bernardino 144,524
San Diego 284,166
San Francisco 111,266
San Joaquin 48,910
San Luis Obispo 22,328
San Mateo 110,149
Santa Barbara 39,546
Santa Clara 277,242
Santa Cruz 23,186
,Shasta 16,249
Sierra 164
Siskiyou 3,381
Solano 33,412
Sonoma 51,730
Stanislaus 40,962
Sutter 7,538
Tehama 3,867
Trinity 556
Tulare 27,510
,'~-tolumne 3,955
tura 72,837
~lo 17,982
Yuba 3 355
Total 3 487 01'2
Sales Taxes
Based on
Population
147,986
123
3,516
20 853
3 937
1 913
94 612
2 901
15 567
81 955
2, z80
13,231
14,736
1,885
66,946
13,248
5,708
3,515
1,007,400
11,956
25,604
1,662
9,004
21,365
1,026
1,118
40,388
12,863
9,250
286,570
23,320
2,111
152,120
121,610
4,944
170,785
294,602
81,614
57,248
24,944
74,627
42,241
177,097
26,095
17,079
331
4,577
40,280
45,809
44,701
7,919
5,749
1,363
37,506
5,487
76,607
16,395
6 235
3 487 017
Increase Net Increase
(Decrease) in Additional ERAF (Decrease) in
Distribution Allocation Distribution
(43,187) 26,990 (16,197)
(166) 22 (145)
724 325 1,049
4,347 1,253 5,600
2,020 407 2,427
(8) 240 233
(1,663) 14,469 12,807
1,390 173 1,564
5,076 1,485 6,561
12,304 9,218 21,521
885 282 1,167
2,103 1,534 3,637
3,968 976 4,944
(284) 250 (34)
9,141 6,640 15,781
5,754 1,217 6,971
2,463 565 3,028
1,682 171 1,852
126,353 152,833 279,187
4,705 1,023 5,727
(6,413) 4,162 (2,252)
427 124 550
893 945 1,838
7,527 2,304 9,831
442 96 538
(417) 223 (194)
2,998 4,066 7,064
275 1,764 2,039
1,474 1,046 2,520
(73,988) 29,430 (44,558)
(8,183) 2,953 (5,229)
448 167 615
28,768 12,536 41,304
(7,647) 16,063 8,416
1,313 323 1,637
26,261 17,845 44,105
10,436 27,129 37,566
(29,652) 19,584 (10,068)
8,338 8,660 16,998
2,615 2,851 5,467
(35,522) 10,844 (24,678)
2,695 4,456 7,151
(100,145) 26,229 (73,915)
2,909 2,753 5,662
830 1,746 2,576
167 40 207
1,196 485 1,681
6,869 4,652 11,520
(5,921) 5,408 (512)
3,739 4,114 7,853
381 890 1,270
1,882 543 2,424
807 23 830
9,996 3,803 13,799
1,533 535 2,067
3,770 8,222 11,992
(1,587) 2,239 652
2 880 67x~ 3 553
(0~ 450 DO0 450 O00
Source: State Controller's Office computed based on information from the Board of Equalization (1997-98) and Department of Finance (1999)
KATHLEEN CONNELL ' STATE CON"rROLLEK 8
The SMART Formula
In an effort to mitigate the negative
results that are generated by either a
property tax swap or asales tax distri-
bution based solely on population, the
SMART Task Force developed a
formula utilizing an approach that
ensures fairness in revenue distribution
for local entities and the State, and
requires neither new taxes nor modifi-
cafiom to Proposition 13.
In order to adjust sales taxes partially
based on a county 's population, rather
than where the sale occurred, the
current percentage of sales tax revenues
distributed county-wide and the per-
centage of population by county were
compute& This total represents what
jurisdictions countywide would nor-
mally receive under the current 1%
allocation of taxable sales.
These percentages were weighted and
then multiplied by the total sales tax
revenues distributed in fiscal year
1997-1998, because the 1998-1999
sales tax figures were not available at
the time the report was written. This
was done to determine the impact of
distributing some of the sales tax
revenue on population versus a point-
of-sale basis. To initiate the transition
away from local govemments'
dependency on point-of-sale distribu-
tion, the Statewide sales tax revenue
was redistributed so 90% was based
on the previous point-of-sale method
and 10% was based on population.
This resulted in 15 of the 58 county-
wide areas receiving less sales tax
than they would have under the
previous method and 43 receiving
more.
Under the SMART formula, all future
increases in statewide sales tax rev-
enues would be distributed exclusively;
upon populatior~ As the growth of
retail sales tax revenues over the next
quarter centuW eventually equals and
exceeds current statewide sales tax
revenues, population will become the
dominant factor in sales tax distribu-
tion. The '~istoric sales tax base" that
comprises 90% of the formula in the
first year will gradually become an
artif act.
Finally, in order to provide the counties
with some relief from the ERAF shift,
the Task Force proposes an ERAF
baseline reduction to approximately
$3.2 billion. The formula will also result
in a $450 million increase to local
property tax revenues which will be
redistributed statewide based on the
proportionate county-wide ERAF
contributions for the fiscal year. A
limited number of ERAF contributions
had to be estimated as data is not
available.
The overall result of the SMART
proposal, which reallocates sales taxes
based on population and historic point-
of-sale, and allocates $450 million in
funding to offset the loss of property
tax revenue from the EKAF shift, is a net
increase in tax revenues on a countywide
basis for all 58 Califomia counties.
There are a handful of cities which
will experience a reduction in sales tax
revenues under the SMART Formula
when 10% of the sales tax revenues
are initially shifted to a population
basis. Many of these municipalities
should be able to mitigate their losses
by eng~oing in an intra-county swap o
sales taxes for a greater share of
property taxes within their municipal
KATHLEEN CONNELL" STATE CONTROLLER 9
boundaries. However, there are a
handful of cities who will be signi~-
canfly impacted during the transition.
These are the cities which have over-
loaded their commercial centers with
vast auto malls and have failed to
fully develop their residential and
non-retail business and industrial
areas. Cities that have historically
abused retail ~scalization the most
will have the greatest challenges
during transition.
The Task Force was convinced that
the restmcturing of state and local
taxes would be most effective, if the
suggested changes to the sales tax and
property tax were undertaken in
tandem. The SMART tax plan has
been crafted and tested to take
advantage of the counter-balancing
economic effects of the proposed
sales tax and property tax re-alloca~
lions. In addition, the Task Force
members believed that any state and
local tax proposal that did not com-
pensate for the years of financial
imbalance that have impacted
Califomia's local govemments would
be grossly inadequate.
In the 1999-2000 budget year the
State has already earmarked $300
million for local assistance. This
money, if redistributed according 10
the SMART formula and guaranteed
each succeeding year, would account
for all but another $150 million of the
fully funded version recommended by
the Task Force.
However, if the annual expenditure of
$450 million is too ambitious for
some state officials, the Task Force
can offer a "discount" option of only
adopting that part of the SMART tax
plan which reallocates sales taxes. If
the State is willing 10 spend approxi-
mately $31 million, based on fiscal
year 1997-1998 sales tax revenue
distribution, 10 offset the projected
countywide deficits in 15 California
counties, future local planning
decisions will be immediately ben-
eftted by the elimination of the
"point-of-sale" tax distribution that
encourages the pursuit of large retail
businesses.
The Task Force believes that the
financial crisis at the state and local
level is 10o severe 10 adopt only a
revenue-neutral proposal. If the State
on an annualized budget basis fails 10
transfer to local goverment an amount
sufficient for sales tax equalization
for that fiscal year plus another $150
million increment, a 'Ixard cap"
should be applied to ERAF. In lhis
manner, the State will not receive any
appreciation in property tax revenues.
While not addressing the serious
revenue problems being experienced
by local govemments due to the
diversion of properly taxes, even this
lower cost approach could end the
~scalizafion of local land use plan-
ning. By itself; it would be a noble
achievement. The'Task Force mem-
bers also cautioned that a failure by
the State to take advantage of the
more comprehensive opportunities
offered by the entire SMART tax plan
would be tra~cally myopic.
The Task Force chose to exclude all
special districts and less than county-
wide districts from the reallocation
formula for three reasons. First, those
districts were created by the voters in
those districts based on very specific
KATHLEEN CONNELL * STATE CONTROLLER
10
representations and understandings. It
would be improper to alter those
elements after the fact. Second, the
financing arrangements for those
districts are both sensitive and
complex. The Task Force felt it
unwise to disrupt those credit ar-
rangements. Finally, since those
districts are limited in purpose and
authority to a single, narrow concern,
they do not share the general planning
authority that dries and counries have
used to promote retail ~scaliZation.
Curren~y the intm-county allocation
of tax revenues results in a pattern in
which all allies are disproportionately
dependent on sales tax revenues
while county govemments rely
disproportionately on property taxes.
This pattem causes two serious
problems even under the SMAKT
formula_
First, the excessive dependency of
any government on a dominant,
single source of tax revenue height-
ens the fiscal vulnerability of that
government during economic cycles.
Since property taxes are generally
inelastic and respond relatively
slowly to economic upswinSs, the
revenue growth of county govem-
ments consisten~y has lagged behind
the prosperity of cities within those
counries during periods of economic
growth. Conversely, the extreme
reliance on hiShly volatile sales tax
revenues by dries has clramarically
intensified the negative impact during
economic downturns.
Second, if cities increased their
stakehold interest in property taxes,
they would be ~nandally encouraSed
to favor planning dealsions that
promote high quality residential and
commerdal developments that could
maximize each city' s share of prop-
erty taxes. In this manner, the in-
creased munidpal service demands of
residential and commercial develop-
menIs can be mitigated once the dries
exchange their historical share of
sales taxes for an increased share of
their county's property taxes.
Also, by engaging in a revenue
neutral "tax swap" at the intra-county
level that balances the sources of
county and dty revenues, both
counties and cities can benefit from a
blended stabilized tax base. Such a
blending will adjust for economic
conditions and facilitate constmcrive
growth.
Spedfying a genetic intra-county tax
distribution formula was beyond the
scope of the Task Force. It is, however,
an important final component in the tax
reallocation recommendation and
should be addressed by cib' and
county elected officials in conjunc-
tion with the proposed tax changes.
In combination with the distribution
of statewide local sales taxes sug-
gested by the SMART formula, a
balanced intra-county sales tax/
property tax swap can replace retail
"fiscalizarion" with constructive land
use policies.
Economic Scenarios
The Task Force has anticipated the
critical observation that the SMART
plan appears to yield spectacular
results during periods of economic
prosperity, but may result in negative '~
consequences when an economic
downram forces austerity. Admittedly
KATHLEEN CONNELL · STATE CONTROLLER ll
the proposals recommended by the
Task Force will not immunize Cali-
fomia from future recession, nor will
they provide a panacea to spare
govemment leaders from the difficult
decisions necessary in hard times.
However, the implementation of the
Task Force' s recommendations offers
mitigating aspects during difficult times:
· First, by providing both state and
local governments with a better mix of
elastic and inelastic revenue sources, no
sin~e level of govemment will have its
revenues disproportionately depressed
in times of economic slow-down; and
· Second, by better solidifying the
funding responsibilities of state and
local govemments, one level ofgovem-
ment will not be able to resolve its
issues by shifting problems to another
level. All levels of government will be in
the same boat sharing a co-dependent
interest in remaining afloat.
It is undeniable that the State will
need to make the greatest adjustment
in anticipation of and during the next
recession. The combination of the
education funding obligations imposed
by Proposition 98, fixed debt servicing
obligations and the proposed "cap"
on property tax diversions will challenge
current and future State leaders. Those
challenges, however, require only a
minimum of financial planning and a
modicum of political courage.
Since it is inevitable that the astound-
ing growth of the late 1990's will not
continue on its current robust perfor-
mance pace, the State must begin to
plan for afumre with less economic
resources now rather than later. Aggres-
sive performance auditing throughout
State govemment will expose waste
and inefficiency. Those savings can
be added to regular set-asides to
create a prudent reserve as ahedge
against %ad times." This is the same
minimal precautionary financial
planning that the State demands from
local school districts. The State could
profit and protect itself by following
its own advice.
In a tree economic catastrophe, it
may be necessary for the State to
temporarily increase the propemd tax
diversions through the ERAFs. The
Task Force believed that such a
sim__afi_'on is highly unlikely, but also
did not want to foreclose the
possiblity should such an improbable
scenario occur. Therefore, the Task
Force would consider a "suspension"
of the ERAF limitation, if it was
accompanied by a simultaneous
"suspension" of the State's Proposi-
tion 98 educational obligations. Any
shortfall from the emergency year
would then be repaid to local govem-
ments in the same manner that
shortfalls due to suspension of
Proposition 98 are repaid to school -
districts.
The looming retirement of the baby
boomers' generation, the exploding
birth rate from the "boomers' echoes"
and the relatively small number of
Califomia workers in their prime
earning years will very' soon put
Califomia's foresight and financial
planning to a rigorous test. Without
immediate steps to compensate for
those inevitable financial tensions, no
comprehensive State and local
financial reform plan -- current or
proposed -- will save us from any
I~HLEEN CONNELL" STATE CONTROLt-F-P, 12
Alternative 3 -- The SMART Ran (Amounts in Thousands)
Sales Taxes
Based on 90%
Current County Sales Taxes Point of Sale Increase Additional
and City Sales Based on and 10% on (Decrease) in ERAF Net Increase in
Taxes Population Population Distribution Allocation Distribution
Alameda 191,173 147,986 186,855 (4,319) 26,990 22,671
Alpine 289 123 273 (17) 22 5
Amador 2,792 3,516 2,865 72 325 397
Butte 16,506 20,853 16,941 435 1,253 1,688
Calaveras 1,917 3,937 2,119 202 407 609
Co lusa 1,920 1,913 1,919 (1) 240 239
Contra Costa 96,275 94,612 96,108 (166) 14,469 14,303
Del Norte 1,51 1 2,901 1,650 139 173 312
El Dorado 10,490 15,567 10,998 508 1,485 1,992
Fresno 69,651 81,955 70,882 1,230 9,218 10,448
Glenn 1,895 2,780 1,984 88 282 371
Humboldt 11,127 13,231 11,338 210 1,534 1,744
Imperial 10,768 14,736 11,165. 397 976 1,373
Inyo 2,169 1,885 2,141 (28) 250 222
Kern 57,805 66,946 58,719 914 6,640 7,554
Kings 7,492 13,246 - 8,068 575 1,217 1,792
Lake 3,245 5,708 3,492 246 565 811
Lassen 1,834 3,515 2,002 168 171 339
Los Angeles 881,047 1,007,400 893,682 12,635 152,833 165,469
Madera 7,251 I 1,956 7,721 470 1,023 1,493
Marin 32,0! 7 25,604 31,376 (641) 4, 162 3,520
Mariposa 1,235 1,662 1,278 43 124 166
Mendocino 8,111 9,004 8,201 89 945 1,034
Merced 13,838 ' 21,365 14,591 753 2,304 3,057
Mod oc 584 1,026 628 44 96 140
Mono 1,535 1,118 1,493 (42) 223 I 82
Monterey 37,390 40,388 37.690 300 4,066 4,366
Napa 12,588 12,863 12,616 27 1,764 1,791
Nevada 7,776 9,250 7,923 147 1,046 1,194
Orange 360,558 286,570 353,159 (7,399) 29,430 22,031
Placer 31,503 23,320 30,685 (818) 2,953 2,135
Plumas 1,664 2,111 1,708 45 167 212
Riverside 123,351 ~ 152,120 126,228 2,877 12,536 15,413
Sacramento 129,258 121,610 128,493 (765) 16,063 15,299
San Benito 3,631 4,944 3,762 131 323 455
San Bernardino 144,524 170,785 147,150 2,626 17,845 20,471
San Diego 284,166 294,602 285,209 1,044 27,129 28,173
San Francisco 111,266 81,614 108,301 (2,965) 19,584 16,619
San Joaquin 48,910 57,248 49,744 834 8.660 9,494
San Luis Obispo 22.328 24,944 22,590 262 2,851 3,113
San Mateo _ 110,149 74,627 106,596 (3,552) 10,844 7,292
Santa Barbara 39,546 42,241 39,816 269 4,456 4,725
Santa Clara 277,242 177,097 267,228 (10,014) 26,229 16,215
Santa Cruz 23,186 26,095 23,477 291 2,753 3,044
Shasta 16,249 17,079 16,332 83 1,746 1,829
Sierra 164 331 181 17 40 56
Siskiyou 3,381 4,577 3,500 120 485 605
Solano 33,412 40,280 34,099 687 4,652 5,339
Sonoma 51,730 45,809 51,138 (592) 5,408 4,816
Stanislaus 40,962 44,701 41,336 374 4,114 4,488
Sutter 7,538 7,919 7,576 38 890 928
Tehama 3,867 5,749 4,055 188 543 731
Trinity 556 1,363 637 81 23 104
Tu lare 27,510 37,506 28,509 1,000 3,803 4,803
Tuolumne 3,955 5,487 4,108 153 535 688
Ventura 72,837 76,607 73,214 377 8,222 8,599:
Yolo 17,982 16,395 17,823 (159) 2,239 2,081
Yuba 3 355 6 ?35 3 6zl3 '288 674 96'2
Total 3 487.012 3.487.012 3.487.0'1:2 (0~ 450 000 450.000
Source: State Controller's Office computed based on information from the Board of Equalization (1997-98) and Department of Finance (1999)
KATHLEEN CONNELL ' STATE CONTROLLER 13
poor choices our State leaders may
make now and in the immediate
future. Political procrastination,
fueled by the blind hope that the.
inevitable collapse will occur during
a successor's term of office, is a
betrayal of the citizens of Califomia_
SMART Plan 's Value
The Task Force engaged in several
calculations testing the fiscal impacts of
this innovative approach. The analy-
sis confirmed that the SMART
formula was an approach that pro- -
moted long-term economic develop-
ment without undermining current
obligations. Over its initial ten-year
period, the SMART formula will:
· Generate over $4.5 billon dollars in
additional revenue for local govem-
ment;
· Allow the State to maintain a
portion of the ERAF to substantially
fund its education obligations over
the next 10 years; and
· Eliminate the incentive for retail
'~iscalization" of land planning
decisions.
Funding of Local Mandates
Discussion of Objectives
Curren~y the State violates the Crann
Initiative and the California Constitution
by imposing expensive mandates on
localities and then routinely proclaiming
them to be neither mandates nor
expensive. Thereafter, localities receive
no financial reimbursement mill their
claims have wound their way through
lhe cumbersome Commission on State
Mandates process. The economic
impact on localities in the interim is
negative. The objective of the SMART
Task Force with regard to the funding
of State mandates was to develop a
mechanism that would ensure all
State mandated programs are ad-
equately funded by the Legislature
before implementation.
Presentation of Plan
The Task Force recommends that
whenever the State enacts a new
program or increases the level of
service that local governments are
required to implement, the State
should be required to contemporane-
ously appropriate funding to cover
local governments' costs of compli-
ance. In the absence of such funding,
local agencies should not be required
to implement the new law, executive
order or regulatiorL
For these cases, local agencies should
be allowed to seek a court-ordered
Preliminary Stay of Operation
suspending the enforcement of any
portion of a statute, executive order,
or State agency regulation imposing
any additional mandated costs on
local govemment while a test claim is
pending before the Commission on
State Mandates. Exceptions would be
allowed if the State establishes that
the appropriated reimbursement funds
deposited in the State Mandate
Claims fund for the specific mandate
are equal to at least 75% of its
reasonably projected annual costs.
The Stay of Operation will remain in
effect until:
a) A supplemental deposit brings the
balance to 75% of the reasonably
projected annual costs; or
K~THLEEN CONNELL ' STATE CONTROLLER 14
b) The commission denies the test
dairn; or
c) The local agency abandons its test
daim
In addition, the Task Force recom-
mended that when local govemments
agree to administer a State program,
bilateral compacts should be formed
that incorporate spedtic expectations
and obligations of the State and local
partners. These compacts should
include a commitment by the State to
fund and by the locality to implement
effective performance-based budget-
ing and performance auditing that
would be appropriate to the specific
program.
Value of the State Mandate's For-
The formula devised by the SMAKT
Task Force requires the State to affix an
accurate price tag on every proposed
mandate and concurrently appropriate
the amount of money necessmy to
ensure that the local agency is fully
reimbursed. Future decisions on
whether to impose a mandate will be
weighed against the related cost.
Governmental Accountability
The Task Force found that aparticu-
larly sensitive area of tension between
the State government and the localities
involves the several State-funded
programs, such as health and welfare,
that are administered through local
govemments. State representatives
complained that their funding cannot be
tracked to concrete results once it
reaches local hands. Local representa-
fives countered that agreements with the
State seem to be in a constant state of
flux. Everyone agreed that a lack of ~
effective communication is the mot
cause for the impasse.
Bilateral Compa~
The recommendation made by the Task
Force mirrors the very successful
approach incorporated into the State's
'%Vorkfare" program The critical
component is a bilateral compact
between the funding State and the
administering local government that
clearly and unequivocally sets forth
the obligations and the expectations
of both parties. The greater the level
of specificity and precision in the
language of the compa~ the more
likely that accountability and respon-
sibility will produce the anticipated
results.
Several of the Task Force participants~w/
suggested that these bfiateml compacts
should include the most current budget-
ing and auditing tools in order to
provide an accurate appraisal of
performance. Performance-based
budgeting and performance auditing,
already established as powerful main-
stays in the budget process of many
govemments throughout Calffomia and
the nation, are useful weapons in the
war against waste. Since the savings
g~erated would be realized by the
State, the Task Force was adamant that
the costs of implementation should be a
State expense exclusively.
Finally, the Task Force was insistent
that performance auditing should
become a regular tool of government
applied across the board and not as
only a punitive device. The potential
benefits of effective performance
auditing are too impressive to limit its
application.
KATHLEEN CONNELL · STATE CONTROLLER 15
While outside the scope of this study,
the Task Force encourages State
govemment to increase its use of
these approaches to generate more
effective and efficient control of
operations. The oppommity to realize
substantial savings is too great to
ignore.
Implementation
The SMART Task Force realizes that
the proposals and recommendations
contained ii~ this report will require
statutory amendments and may
require a constitutional amendment
for full implementation. As imple-
mentation of the proposals contained
in lhis report will require a wide
range of support from throughout the
State, the Task Force intends to
circulate the report to, and seek input
from, elected State and local officials,
business, union, and community
leaders and Statewide stakeholder
organizations.
K437HLEEN CONNELL · STATE CONrrROLLER 16
The Task Force's membership repre-
sentedmost elements ofthe wide
spectrum of divergent economic and
political interests that together create the
California political mosaic. Therefore,
the Task Force was acutely aware flint
each positive concession made in one
direction otten generated anegative
consequence --sometimes unintended
-- in another direction. The generous
input from the Task Force members
was essential in idenlifying theSe trade-
offs. The challenge to balance these
perspectives without losing sight of the
ultimate goals was more daunting.
Even within a category ofstakeholders,
the Task Force found variances in
· perspectives and interest For example,
'Yetailers" do not speak with a common
voice. The concems of"Main Street"
shop owners and "Big Box" conglomer-
ates are often diametrically opposed.
Saturation advertising anddiscount
prices by 'Big Box" retailers frequently
threaten the survival tithe local
businesses.
Educational interests, protected by
Proposition 98 guarantees, see the
world from a much different perspec-
tive t~han higher education interests who
must compete for their slice of the
general revenues. The constimencies of
State government unions often have
demands tl'mt are incompatible with
their union colleagues who belong to
local public employee associations.
Even among city and county leaders,
the economic profiles of those they
represent create alliances and conflicts
independent of the level ofgovemment
they represent
Much of the time spent developing the
Task Force' s recommendations was
devoted to accommodating needs,
moderating consequences and generally
injecting notions of fairness and equity.
Obviously, ffany one of the spedtic
interest groups that partidpated in this
exercise constructed an "ideal solution"
from their own perspectives, there
would be little similarities with this Task
Force's recommendations. Our Task
Force members were consistently able
to put aside professional self interests
and adopt an attitude for the greater
good Hearing the sincere, candid
concems of their counterparts encour-
aged constructive and creative compro-
mise. The valuable recommendations
contained in this report reflect that
process.
The Task Force acknowledges that its
recommendations cannot satisfy every
goal of every group with astake in the
relationghi p of State and local govern-
ment in Califomia. However, the Task
Force does believe that its recommen-
dalions will create the financial incen-
tives to form a more productive, better
balanced future in which all stakehold-
ers will make the necessary adjustments
and ultimately prosper.
I~L4,THLEEN CONNELL ' ST~E CONTROLLER 17
In February 1999, State Controller
Kaltaleen Cormell appointed a Task
Force called the State Municipal
Advisory Reform Team (SMART) and
charged it with the goal of improving
the fiscal relationship betwere State and
local govemment in California. Com-
posed of public and private sector
leaders, labor and business representa-
rives, county and dty offidals, commu-
nity leaders, academics, and elected
officials, this Task Force represented a
wide range of perspectives and exper-
rise. In March 1999, the Task Force
began a series of meetings throughout
Califomia, inviting experts to address
specificissues.
The following objectives guided the
Task Force:
Tax Poficy - Identify stable and reliable
sources of revenue for local govem-
merit that are not susceptible to diver-
sion or preemption by State govem-
Intergovernmental Accountability -
Identify budgetmy and auditing pro-
cesses that will ensure the delivery of
vital local govemment services; provide
a reliable, predictable, and adequate
source of revenue; ~d fully mitigate the
expense of complying with State-
mandated programs; and
Land Use Planning - Recommend local
government land use politics lhat can
promote long-term employment growth
and sustainable economic prosperity
without unduly jeopardizing traditional
sources of local govemment financial
support.
Historical Perspective
To better understand the Task Force
members' comideration of these issues,
a brief review of three laws is helpful.
These laws, approved by voters and
lawmakers over the past three decades,
have had amajorimpact onlocal
governments' fiscal affairs. Much of the
Task Force's deliberations centered on
the impact of these laws and the reforms
that should be considered to restore
balance to the State-local tax structure.
Proposition 13
The largest source of revenue for
Califomia's local governments was
historically propert~ taxes. That changed
with passage of Propos~rion 13 in 1978
(California Consti~tion article YlTI A).
This measure cut local property ~
revenues by 57%. Proposition 13
amended the California Constitution to
provide that:
· General property mx cannot exceed
1% of assessed value;
· Property is taxed based on its 1975
assessment or its value when acquired~
· Any new "special" taxes from count,
city, or school dis~icts must be passed
by nvo-th~rds of the electorate;
· Property ~ces are to be collected by
counties on behalf of all local govern-
memal entities, the proceeds to be
apportioned according to law to the
· Any new State taxes must be passed
by a ~vvo-thirds vote of the Legislature;
· State and local government cmmot
impose any other taxes on property;
and
KATHLEEN CONNELL ' STATE CONTROLLER 18
sage 'wtLs' projected
~.m'~nts has bee~ t~te hms
· The base-year acquisition value cannot
increase more than 2% a year.
Among the exceptions to the acquisi-
tion-value assessment system set by
Proposition 13 are:
· Market value, if lower than inflated
acquisition value, establishes value for
tax purposes;
· Property transferred between spouses,
parents, children, grandparents, and
grandchildren is not massessect;
· Certain other events, addedto Article
X/IIA by voter approval in theyears
since 1978, do not trigger re,assess-
ment; and
· Property assessed by the State Board
of Equalization, such as property of
State-regulated utilities, is not subject
to the acquisition-value lirnitatiop_
The immediate result of Proposition 13 's
passage was projected to be at least a
$6 billion loss of local revenues to
counties, cities, school districts, and
special districts. The long-term impact on
local govemments has been the loss of
fiscal autonomy. Local entities could no
longer set their own tax rate at alevel to
meettheirneeds.
Cities adjusted in a variety of ways.
Some cut jobs and services to save
money and/or introduced or increased
charges for services such as sewage
treatment. These dedicated revenues are
now the largest source of income for
most cities, followed by sales tax rev-
enues. Such services as electricity, water
and sewage are provided from these
revenues.
Counties confronted a different set of
challenges following Proposition 13. As
they already faced more legal constraints
on their taxing powers, most counties
had to cut spending deeply. Rural
counties especially found it difficult to
meet Slate spending requirements. At
the other end of the State, Orange
County approved Calffomia's first toll
road inhalfa century when it could not
afford to build a new fleeway.
Prior to passage of proposition 13 in
1978, federal, State, and county
govemments contributed 27% of all city
revenues. By fiscal year 1995-1996,
.this supportwas just 13%. State
assistance to cities now consists of
motor vehicle license fees, gasoline
taxes, reimbursement of certain man-
dated costs, and homeowners' property
tax relief reimbursements.
Califomia's current allocation of
property taxes varies among different
areas depending upon lhe historic
property tax levels and which agencies
provide given serdces in an area
However, on average, a city resident's
properly tax revenues are distributed as
follows: City, 14%; County, 16%; State/
Schools, 52%; and Special Districts,
18%.
Proposition 98
Proposition 98, approved by the voters
in 1988, amended Califomia Constitu-
tion, Article XVI, section 8 to require
the State to commit a prescribed
amount of State funding to school
districts and community college dis-
uicts. The State's contribution to
schools would never be less than the
percentage of State General Fund
revenues allocated to schools in fiscal
year 1986-1987, which was 40%.
Though not anticipated at the time it
was adopted, Proposition 98 eventtmlly
would impact local funding. This began
KATHLEEN CONNELL · STATE CONTROLLER
occurring in fiscal year 1992-1993
when the State, facing a severe budget
shortfail, opted to require local govern-
ments to shift property taxes to schools.
The Legislature directed each county
auditor to establish a special fund, the
Educational Revenue Augmentation
Fund, or ERAE Using a formula
established by the Legislature, county
auditors were directed to reduce the
allocation of property taxes that each
local government entity would other-
wise receive and place the diverted
funds into the ERAF.
The ERAF funds were allocated to local
school districts, but only if the alloca-
tion would result in dollar-for-dollar
savings to the State. The Legislature
then reduced the State allocation to
schools (the "backfill" amounts) by the
amount funded through local ERAFs,
approximately $1.2 billion in fiscal year
1992-1993.
The practice was continued the follow-
ing year, based on new legislation that
required the following:
1. The amount of property tax deemed
allocated to each county, or city and
county in the prior fiscal year was
reduced by an amount equal to 80 cents
per resident. Similar reductions were
required for cities.
2. Property tax allocalions for each
county were reduced in accordance
with calculations in the "Eslimated
County Property Tax Transfer Under
Governor's May Revision Proposal,"
published by the Legishtive Analyst's
Office (1993).
As in the prioryear, this shift was
intended to reduce the State obligation
under Proposition 98 by an equal
amount. Once again, the Legislature
calculated the percentage of General
Fund revenues due the schools as if the
fiscal year 1993-1994 tax shift had also
happened in fiscal year 1986-I 987, thus
reducing the State's potential educa-
tional funding obligations as a part of
the State budget from 40% to 34%.
Since each ERAF is defined as a
"school entity" and has been granted
the status of a governmental entity,
each ERAF is due an allocated "share"
of the property tax. The amount of
property tax revenues shifted from
what local governments would have
received without ERAFs continues to
grow as gross annual property tax
receipts increase. The ERAF shift
reached $3.6 billion as of fiscal year
1998-1999.
Proposigon 4:
The Reimbursement Process for
State-Mandated Actiriges
The concept of State reimbursement to
local agencies and school districts for
mandated activities originated in the
Property Tax Relief Act of 1972,
Senate Bill 90, Chapter 1406, Statutes
of 1972, commonly known as SB 90.
The primary purpose of SB 90 was'to
limit the ability of local agencies and
school districts to levy taxes. As an
offset for these State-imposed limita-
tions, the Legislature declared its intent
to reimburse local agencies and school
districts for the costs of new programs
or increased levels of service mandated
by State government.
In 1979, the votes approved Proposition
4, the Gann Initiative, which added
article XIII B to the California Consti-
tution. Section 6 of article XIII B states
that, whenever the Legislature or any
State agency mandates a new program
KATHLEEN CONNELL' STATE CONTROLLER 20
or a higher level of service on local
govemment, the State must reimburse
the associated costs, with certain
exceptions: 1) mandates requested by
the local agency; 2) legislation
deeming a new crime or changing an
existing definition of a crime; 3) a
mandate that existed prior to January
1, 1975; or, 4) when the federal
government bypasses the State and
direc~y imposes costs on local
agencies for fedemily mandates
pro.grams.
Given that this constitutional amend-
ment was primarily concemed with
imposing appropriation limits on the tax
proceeds of both State and local
government, Section 6 of article XIII B
was superimposed on SB 90. Originally,
the Board of Control was identified as
the body with the authority to hear and
decide claims requesting reimbursement
of costs mandated by the State.
Subsequenfiy, on January 1, 1985, the
Commission on State Mandates was
created as a quasi-judicial, deliberative
body with the primary responsibility to
hear and decide claims brought by local
agencie~ and school districts that believe
they are entitled to reimbursement for
costs mandated by the State.
The Commission currently consists of
seven voting members in three catego-
ries: constitutional members (the State
Controller and the State Treasurer);
executive branch (the Director of the
Depamnent of Finance and the Director
of the Office of Planning and Re-
search); and three public members.
California Government Code Section
17525 (b) requires that, of the three
public members, one must have ~/
experience in public finance, and two
must be elected local officials from
either a city counc~, a county board of
supervisors, or a governing board of a
school district. All public members are
appointed by the Governor, subject to
Senate confirmation, and serve a term
of four years, subject to renewal.
The traditional parties before the
Commission are local governments,
school districts, special districts, and
affected State agencies such as, the
Department of Finance or the State
Controller's Office. Even though both
of these State offices have votes on the
Commission, there has never been a
disqualification imposed on a voting
member. Instead, a majority of the
members have consistently left the
decision to recuse on an item to the ~/
member with the perceived conflict.
This has sometimes increased the
dismist by local governments and
school districts appearing before the
Commission.
The projected elapsed time from the
Efiing ofatest claim until the Commis-
sion finally approves a Statewide Cost
Estimate for inclusion in the "Local
Government Claims Bill" is approxi-
mately 18 months, assuming there are
no unforeseen complications causing
further delay.
Whenever a local government claimant
or an affected State agency is the
recipient of an unfavorable determina-
tion by the Commission, the dissatisfied
party may challenge the decision by
filing an action in Superior Court, an
increasingly technical process that can
take several years before final judg-
ment.
KATI-ILEEN CONNELL · STATE CONTROLLER 21
Even a resolution of all of the admin-
istrative and judicial procedures does
not translate into immediate reim-
bursement for the expense of a State-
mandated program. The local claim-
ants must then present detailed
documentation supporting their
reimbursement claims to the State
Controller 's Office for review. A
disagreement at that point brings the
parties back to the Commission with
an Incorrect Reduction Claim.
As a result of this process, some test
claims filed in 1992 are still pending.
Meanwhile, the affected local govern-
ments are obligated to fully perform as
the State has mandated, trying to
finance compliance costs from a smaller
revenue base.
KATHLEEN CONNELL · STATE CONTROLLER
Tax Po$icy
In considering ideas for constructive
change in the structure of the financial
relationship among the State, local
govemments, and the Califomia
taxpaying public, both individual and
business, the SMART Task Force
subcommittee on tax policy recoLmi Tixt
the status quo could prove a powerful
opponent.
Local govemments- county and city,
rural and urban - all struggle to secure
the financial resources required to
provide the level of service their public
needs, expects, and desires. Success
comes to different areas in different
degrees and by different means. Yet
each locality strives to locate depend-
able revenue sources. For some, it is
growing tourism in order to secure the
sales and hotel occupancy tax revenues
toudsm brings. Other localities have
encouraged development with an eye
toward higher property values and the
resulting increase in property tax
revenues. Still others have tumed to
retail or auto malls to draw consumers
and their sales tax dollars from sur-
rounding areas.
Over the years, local govemments,
communities, and businesses have made
decisions and planned forthe future
based on the incentives built into the
current tax structure. Changes in tax
systems and relationships are not easily
made. It is axiomatic that any prescrip-
tion for change will create winners and
losers. Yet a systemthat does not
deliver adequate resources fairly or
efficiently requires change for a better
and more secure future. As members of
the tax policy subcommittee noted one
size does not fit all; even when
change is initiated, consideration must
be given to the range of local situa-
tions.
Need for Local Control
The lax policy subcommittee believes
policy makers, in undea'taking change in
local govemment icing, should
make certain to retain a focus on local
control. Local govemments are best
able to determine local needs and
should be given the ability to set up
revenue streams to meet those needs.
Currently, local governments often must
chase grant monies established by State
or federal authorities. Often, the macro
choices the State or federal govemment
makes may not be the choices local
govemment representatives would
select fortheir own community. Indeed,'~'/
although money may be available, a
local govemment' s failure to adequately
address locally voiced needs could be
related to factors beyond the local
govemment's control. When the State
or federal government releases ftmds
to localities to address what may be
perceived as peculiarly local problems,
that money often comes with strings
attached. In many such cases, the local
govemrnent is not truly flee to deter-
mine how best to expend those funds in
the context of its community.
Filters for Any Proposal
The tax policy subcommittee recom-
mended a series of"filters" for analyz-
ing the feasibility of any suggested
solution to the revenue challenges
facing local govemments. These filters
are: Stability, Predictability, Reliability,
Faimess, Connection to Services,
Accountability, Economic Efficiency,
Kn}XLE~.N CONNELL · STATi CONTaOLL~ 23
and Viability. While some may appear
synonymous, each has a distinct
meaning. The filter definitions are:
Stability - Whether the solution will
provide astable revenue stream to local
govemment so it is not unduly sub-
j ected to the vagaries of the business
cycle and can provide a generally stable
level of service to the public. Impor-
tanfly, the subject of the tax should not
be so easily moved lhat people could
make tax considerations thek decision
point;
Predictabil~'ty - Whether the solution
will provide a predictable revenue
stream so taxpayers can budget appro-
priately for their tax obligations and
local governments can have a realistic
basis on which to plan expenditures and
savings for an improved level of service
to the public; importantly, the fiscal
pressures of State govemment should
not change the amount of money
flowing to local govemment;
Reliability - Whether the solution will
assure that the revenue source to local
govemment will not be withdrawn.
Fairness - Whether the solulion will be
fair in terms of its impact among
classifications of taxpayers or among
taxpayers generally;
Connection to Services - Whether the
solulion will provide a revenue stream
that is connected or reasonably related
to services provided by the local
govemment to the taxpayers who fund
the revenue stream;
Accountability - Whether the solution
will provide an auditable tax melhod to
ensure proper and full collection and to
allow local govemmentto be held
accountable for any changes;
Economic Efficiency - Whether the
solution will provide a tax that will be a
natural reflection of the marketplace
and will minimize tax avoidance
planning by not unduly influencing
taxpayerbehavior, and
Viability - Whetherthe solution will
create atax method to make the
solution polilically viable (and even
acceptable) wheretaxpayers orlocal
governments might otherwise be drawn
to oppose the solution were it to be
broadly stated.
Property Tttres are Local Revenues
The tax policy subcommittee considered
whether property taxes should be
permanently returned to local govem-
menIs and schools and not be used to
absorb the State govemment's General
Fund obligalions. The justifications for
this consideration were simple: the
property tax is a traditional revenue
source for local govemment in Califor-
nia; the services provided by local
govemment have a close and substanlial
connection to the property wiffin the
local government's jurisdiction; and the
perception of the general rexpaying
public is that the property taxes it pays
stay wi~fin lhe local community.
However, while the elimination of all
property tax funding for state govem-
ment services works in principle, the
Task Force' s projections demonstrate
that it collapses in practice.
The subcommittee believes the State
should undertake full funding for items
that are truly within the Legislature' s
purview and responsibility, such as the
trial courts.
Proposition 13 is Here to Stay
According to conventional wisdom,. the
I~rHLEEN CONNw.~,~, · Sr~r~ CoNr~o~um
historicMjy h~.bee~
im~r~ax~ disc. reti~rm .rj.,
reve~e,sou~e ~br
go~-eae~. 7~e
concluded that
gr~wth ~ k~csLsales
rise tax' reveR~es
be diocated ~a~ig
vsdous
o~ a per capita bas~
ra~er ~ ~e c~'reng
financial problems of lo cal govemment
and the proliferation of fees and other
charges are due to Proposition 13 and
its progeny. While Proposition 13 was a
reaction to the financial stresses
property owners faced during a time of
rapid value increases and tax rate
hikes, it is an acknowledged part of the
political landscape. Since 1978, the
voters have proved willing to add
exclusions from changes in ownership,
which they presumably would not
readily give up, further restricting the
growth of property tax revenues. Even
split-roll proposals, which would assess
business property differently, have
been unsuccessful with the voters.
Several of the Task Force members
expressed considerable concern that
Proposition 13 may unfairly impact
new homeowners by disproportionately
increasing their property tax obligations
vis-a-vis existing homeowners, thus,
adversely impacting housing
affordability. They also expressed
concern that Proposition 13 has had the
unintended effect of stifling competition
in the commercial sector by forcing
new or relocated businesses to absorb
a higher property tax obligation com-
pared with established competitors.
These Task Force members believe
that detailed studies of Proposition 13
winners and losers may reveal inequi-
ties that could be resolved by periodi-
cally reappraising commercial proper-
ties and moderating the impact of
higher taxes on home purchasers
without increasing taxes on existing
homeowners.
The majority of the Task Force mem-
bers felt that these types of detailed
studies may be appropriate for a future
focused study group, but such studies
were beyond the resources of this Task
Force. On a more pragmatic level,
the voters have resisted prior attempts~
to treat commercial properties
differently through any sort of split-
roll proposals. The tax policy sub-
committee concluded that any recom-
mendations concerning split-roll were
premature and not viable in the
current political environment.
Sales and Use Taxes should be
Reallocated
The sales and use tax historically has
been an important discretionary revenue
source for local govemments. The tax
policy subcommittee concluded that
future growth in local sales and use tax
revenues should be allocated among the
various local jurisdictions on a per
capita basis rather than the current
point-of-sale basis. The "point-of-sale"
allocation of sales and use tax revenues
is responsible for today's "cash-box"
approach to land use planning, contrib-
uting to unbalanced development
(discussed in greater detail by the Task
Force subcommittee on land use
planning).
The tax policy subcommittee focused
on the local general purpose portion of
the sales and use tax. Generally under-
stood as a single tax, the total sales and
use tax rate is actually comprised of
several separate but conforming taxes.
The State tax is imposed at 6%. The
local sales tax is 1-1/4%, with 1% for
local general purposes and the remain-
ing 1/4% for transportation develop-
ment. Separate transit and other special
district taxes are up to 1-1/4%.
While calling for a change in the current
point-of-sale method of allocating local x~
sales and use tax revenues, the tax
policy subcommittee felt an immediate
reallocation based on population would
KATHLEEN CONNELL * STATE CONTROLLER 25
not be viable. The current system has
been in place for many years. Local
governments and taxpayer-merchants
have made land use planning and busi-
ness location decisions that rely on this
revenue stream. Many localities will
believe they have too much already
invested in this long-standing system to
readily release revenues authorized by
local ordinances, in compliance with the
law, and on which their long-term finan-
cial planning and budgeting have been
based.
However, it is hoped that, as localities
recognize and appreciate their collective
need for a well-rounded approach to
community planning, they will endorse a
broader and less divisive and distortlye
method of allocating future growth in
local sales and use tax revenue. Thus, the
tax policy subcommittee recommends
that future growth in local sales and use
tax revenues be allocated on a per capita
basis. However, the subcommittee
acknowledges that an allocation that
appears fair today could result in inequi-
ties over time.
Broaderdng the Sales and Use Tax
Base
The sales and use tax base is increasingly
narrow. The tax policy subcommittee
briefly discussed broadening the base in
conjunction with lowering the rate in
order to increase local discretionary
funds. Sales tax exemptions traditionally
have been used as a means to encourage
various industries or to avoid adding a
regressire burden to basic necessities,
such as food.
Since California's economy is increas-
ingly service oriented, adding services to
the base is the most logical choice for
broadening the scope of the sales and use
tax. However, the members of the tax
policy subcommittee also noted that
revenues from the addition of services
would be subject to the business cycle,
and strongly opposed by the business
community. Therefore, the subcommittee
did not make any recommendations in
this area.
Exchange orSales Tax for Property
Tax
Reversing the property tax shift of the
early 1990s is a major political and
financial goal for local governments. The
tax policy subcommittee discussed
whether a return of property tax rev-
enues to local govemments should be
coupled with dedication of all sales and
use taxes as State General Fund rev-
enues.
,The subcommittee considered mainly the
general purpose local taxes. Dedicating
sales and use taxes as State General
Fund revenues should eliminate the
distortion the current point-of-sale
allocation method has caused in land use
planning decisions. Trading a return of
property taxes for sales and use taxes
thus could be an attractive solution.
However, at least two significant con-
ceres arise. First, since the passage of
Proposition 13 and even more so since
the State created the ERAFs, local
governments have focused more and
more on sales and use taxes as a replace-
ment for property taxes. At this point in
time, the State's share of the property
taxes are dwarfed by the local sales
taxes. A dollar-for-dollar "swap' in the
common notion is financially impossible.
Second, and perhaps more important,
sales and use tax, have become the
primary domain of the cities. Trading a
return of property taxes for the local
KATHLEEN CONNELL * STATE CONTROLLER 26
sales and use tax revenues would result
in a disastrous shorffall for city govern-
ments. Such a trade would mean only
that, instead of a property tax shift,
there would be a sales and use tax shift
that would cripple the high growth urban
center. City governments fighfiy would
perceive the trade as continued usurpa-
tion of their local government revenues
for the benefit of State and county
government. All levels ofiocal govern-
ment are seeking not only to recover the
money they lost in the property tax shift,
but also to generate additional revenues
so they can adequately support local
government services.
Income and Franchise Taxes
The subcommittee discussed whether
the personal income and/or the corpo-
rate income and franchise tax should be
replaced with an alternative tax scheme
such as a consumption or value-added
tax. However, it was concluded that no
such change should be undertaken as
long as the federal income tax system
remains in place. The efficiencies
gained from the dual income tax system
for government and taxpayers alike
support continuity.
Tipplers' Tax
The subcommittee considered having
the State authorize counties to impose a
tipplers' tax, a tax on alcoholic drinks
served, since counties have not been as
successful as cities in locating additional
discretionary revenue sources post-
Proposition 13. However, a tipplers'
tax would not appear to pass the
analytical filters the tax policy subcom-
mittee recommends.
Conclusions of the Subcommittee
California must renew its dialogue at the
local community level to assure reven'
raising authority is associated with ~
spending authority. Representative local
government now must rely on the direct
democracy of the ballot box to obtain
needed financial resources. In a "don't
tax you, don't tax me, tax that guy
behind the tree" world, local government
must fred ways to persuade voters that
the health of the community matters to
each individual and each property in
the community. Listening to constituents
and being accountable for financial
decisions should assist in convincing
voters that local governments must have
authority over resources to do the job the
community expects.
KATHLEEN CONNELL · STATE CONTROLLER
billion
intergovemment~l
Accountability
The greatest concern among local
elected leaders is that State government
officials no longer regard ~eir local
cotmterparts as "parreefs" in the
multidimensional challenge of providing
appropriate govemmental services in
the most efficient and effective manner.
Instead, local offidals are convinced
that California State government has
been balancing its budget on the backs
of municipal govemment by either
confiscating traditional revenue sources
or forcing localities to substantially
underwrite State programs. These were
the views that emerged from the
discussions of the SMART Task Force
subcommittee on intergovernmental
State Control of Local Revenues
Local governments believe they are
viewed by State govemment as existing
only to provide revenue to Sacramento
on demand regardless of the resultant
financial impact on critical local ser-
vices. Overthe past seven years, the
State has shifted approximately $21.5
billion in property tax monies away
from local governments.
Even with the historic State surplus in
1999, the State's 'qargesse" toward local
governments was almost token. The
State budget for fiscal year 1999-2000
provided local govemments with $150
million, half going to cities and counties
based on population and the other half
based on the amount of property tax the
State transfers from these entities each
ymr.
Essentially, the State govemment has
sacrificed county-run programs,
most notably health, community
services, and local irmastructure, to
subsidize its own budget needs. The
subcommittee concluded that the only
way to correct this irabalance is to
restore the property tax as the primary
revenue source for local govemments
and to minimize the impacts of the
ERAF.
Unfunded State Mandates
The subcommittee members discussed
the State' s practice of regularly disre-
garding its legal and ethical obligation to
fully fund expenses incurred by local
governments that result from State-
mandated programs or increased levels
of service. Many local officials believe it
is irresponsible for State elected leaders
to take public credit for legislation
without accurately disclosing the price
tag that accompanies the new program
Local governments deeply resent being
compelled to comply with State-
mandated programs regardless of cost,
particularly when there is no adequate
or timely reimbursement from the State.
For example, Task Force members
from relatively rural Mariposa County
estimate that the new State-mandated
program imposing a stringent regiman
on animal control agencies forthe care
of recovered animals will increase ltmt
county 's annual animal control budget
from $30,000 to roughly $300,000.
Counties were to comply by July l,
1999. However, the State has provided
no funding to absorb the cost of this
program's implementation.
In instances where the locality does seek
reimbursement forthe costs imposed by
a State mandate, the process to secure
that compensatory funding is tedious,
complicated, and dominated by State
government interests. The complexity
IGxa~.~N Co~.~.x~ · SrAr~ Co~mo~.~z~ 28
of the mandate process is demonstrated
by the overview flow chart shown on
the following page that was created by
the Commission on State Mandates to
'Tacilitate" understanding. Meanwhile,
through all the delay, local govemments
face the challenge of identifying
resources to self-fund the State's
mandate.
Given the enormous strain this places
on local budgets, the subcommittee
members recommended that the State
be required to affix an accurate price
tag to every proposed mandate and
concurrently appropriate the amount of
money necessary for full reimburse-
ment. This would be accomplished by
requiting any legislation, executive
order, or State agency regulation that
imposes any costs on local entities to be
accompanied by an Economic Impact
Projection (EIP) prepared either by the
Legislative Analyst's Office or the
Department of Finance. The EIP would
identify the mount of annual reim-
bursement to which affected local
entities will be enti~ed.
Every bill, executive order, or State
agericy regulation subject to the EIP,
including those containing an urgency
clause, would be required to include a
contemporaneous appropriati on to
provide immediate reimbursement. The
amount should equal or exceed the
projected reimbursement cost identified
inthe EIP. These fun& would then be
deposited in the Slate Mandate Claims
Fund, where they would be separately
held and applied only to reimburse costs
ofthe specific mandate for which they
were deposited. If the funds are not
deposited, local agencies would not be
required to implement the new law,
executive order, or regulation_
In conjunction with this recommenda- ~.~
lion, the subcommittee believes any
affected local agency should be allowed
to file for an injunction seeldng a
Preliminmy Stay of Operation of any
portion of any statute, executive order,
or State agency regulation while atest
claim is pending before the Commission
on State Mandates. The Slay should be-
issued unless the State establishes by a
preponderance of the evidence that the
reimbursement funds deposited in the
State Mandate Claims Fund for the
specific mandate are equal to at least
75% ofth,.e reasonably projected costs
of the mandate.
Such a stay would remain in effect until
one of the following occurs: 1) A
supplemental deposit is made bringing
the deposit to a level equal to 75% of
the reasonably projected costs, as ~w~J
detemined by the court; 2) The
Commission on State Mandates issues a
Statement of Decision denying the
claim and issuing the Statewide Esti-
mate of Costs forthe mandate; or 3)
The local agency abandons its claim
This State respomibility for maldng full
Icial disclosure should commence
the day the mandate takes effect.
State and Loeal Partnerships
Currently, there are more than 100
programs funded by the Slate and
administered through local govemmenis
that display the potential for tree
intergovernmental cooperation, where
each partner is accountable to the other.
The subcommittee believes such
partnerships should be encouraged. In
addition, the subcommittee feels local ~,
entities that administer State-funded
programs have an obligation to strictly
account for the manner in which those
KATULE~.N CONNELL · STEE CONr~OX. LE~. 29
STAR1
Fina~ .:xr,~ 510 CSM He~ri.,~ edi:,i~s _.~~
to parties 18'3 Ercma~
525 ~
~ ~4~ mt"dm°ns'ae;igibleenC';iswi!hin~Ods)su(
Staffdeve~apss'aL~ide + receivin~mead°rc"dP&G:s
c~ e~,imate (SC~; II a~l;~m.~ an
L~i age~les file rei.q~.'smem claims wm m SCO,
p~epares ar,2.i)'sis a~ ~ and f~a are SCO aud ..u and pa~s reim~lrs~mnm rla ires '
recnmrne~lati{x', mails available. the ~a.'.e ·
~ cJate Mande~Ciaim. s
Yes Fun~ {SMCF)
CMSH~qrn~
ParameL~ & Guidelines
adopt~
t30 , 150
Final p~c. pesa; i '-'
I
I
C~S Hearing
SOD
K~THLEEN CONNELL ' STATE CONTROLLER 30
a ~m~g web
go~r~men~td s~q~o~
the ,~eeds ~/~ts
funds are spent.
To promote this objective, the subcom-
mittee recommended that where such
parmerships are created, the State and
local entities should enter into bilateral
compacts that incorporate the specific
expectations and obligations of each
party. Included within these compacts
would be a commitment by the State to
fully fund and the locality to effectively
implement some forms of performance.
based budgeting and performance
auditing that would be appropriate to
the specific program
The subcommittee members also felt
local governmentS should engage in
revenue sharing when it is coupled with
shared responsibility for services to the
public. For example, some Task Force
members said Sutter andYuba counties
are partnering in the delivery of mental
health services to their residentS. Such
consolidated approaches have the
potential for offering more comprehen-
sive services in a cost-efficient manner
than either of the partnering entities
might be able to offer on its own. Local
govemments should be given tools that
will encourage, where appropriate,
consolidated approaches to difficult
financing and service delivery chal-
lenges. This als6 will minimize inter-
governmental rivalties for scarce
resources.
Concl~ions ~f the ,Subcommittee
The State should be able to rely on local
govemments to competenfly administer
State-funded programs, but ~he fiscal
health and viability of those local
govemments will determine their
effectiveness as administrators. Super-
/mposing additional budgeting and
auditing controls on local govemment~
such as perfommnc~based budgeting ~;
or performance auditing, without a
stipend to absorb the costS is fll advise&
Local leaders would welcome any new
approach that will make govemment
spending more efficient and effective as
long as the costs of additional auditing
services can be passed through to the
State, and the Slate will live up to its
obligations.
Local governmentS carmot be treated as
"colonies of Sacramento," ffCalifomia
is to rebuild the strong web of govern-
mental supportthat so effectively served
the needs of its citizens in the past To
act othgnvise would ultimately destroy
the entire system of govemment in
Calffomia by eroding the foundation of
local govemment
KATHLEEN CONNELL ' STATE CONTROLLER 31
premier s~rc~: qf
L~nd Use
The land use planning subcommittee
found Lhat inappropriate land use
decisions are being made in large part
due to the State-local m structure.
While recommendations to revise this
structure were left to the Task Force's
tax policy subcommittee to develop, the
land use subcommittee focused onhow
future land use derision-making would
be improved, fithe fiscal relationship
between California State government
and local govemments was altered.
Proposition 13 and the Fiscalization
of Land Use
Since passage of proposition 13 in
1978, the State has controlled the
distribution of tax revenues among local
govemments. Local govemments'
property tax revenues have plummeted
over the last two decades, in part, due
to Proposition 13. To compensate for
deep cuts in property taxes, local
govemments have increased developer
fees and homeowner charges to fund
the s ervi ces that new residential and
commercial developments require, such
as roads, parks, sewers, schools, and
police and fire protection.
While the fees typically are for long-
term funding of such services, the
hio~her up-front costs hinder develop-
ment Local govemments may deny
approval for new developments, or
make approval hard to obtain, if it is
deemed the development will not pay its
way in terms of funding services. One
-ldnd ofpermitting bias that has grown
in the post-Proposition 13 em works
against moderate- income homeo wners.
Local govemments have come to favor
upscale homes with large lots over
small er-lot homes because the former
represent lower housing density and
hence lower infrastructure costs.
Proposition 13 has skewed land use and
economic development in anumber of
ways that do notnecessarily serve the
community's best interests. Retail
growth is now preferred over manufac-
lining and other industrial growth
because it generates sales tax revenues.
Financially slruggling ciries and counties
compete to attract shopping mails,
discount clubs, and auto malls. In many
cases, neighboring cities have launched
bidding wars to attract big retailers
while looking skeptically at prospective
manufacttmg or R&D developments.
Given strong public support of Proposi-
tion 13, efforts to revise it to address
these stifling effects on growth and
rebuild depleted infrasmlcture have met
stiff opposition.
The collective effect of these trends is
that the sales tax is now the premier
source of revenue for local govern-
ments. Fartoo often, local officials are
setting aside sound planning principles
as th~ compete for revenue-producing
projects, a phenomenon that has
become known as the '~i~calization of
land-use." The land use planning
subcommittee concluded that reform of
the tax structure, which was dealt with
by the Task Force subcommittee on tax
policy, is critical to restoring the
appropriate balance in land use decision
make.
The ERAF Shifi
Although the property tax shifts played
a critical role in helping Califomia
resolve its severe budget difficulties in
the early 1990s, these shifts also
negatively affected local govemments'
incentive to approve new land develop-
I(&THLEEN CONNELL ' STATE CONTROLLER
ments and, to alesser degree, to
prope~y administer the property tax
collection system Local govemmmts
do not have as much control over
property taxes as they did in the past,
and property taxes are no longer as high
apriority forthem. Forthis reason, the
land use planning subcommittee
believes State lawmakers should phase
out the ERAF shift as soon as possible.
Housing
Aside from land use issues related to the
tax structure, the subcommittee found
homing to be the most critical land use
challenge facing Calffomia. Currently,
business andj ob growth do not balance
with housing growth. Many jobs have
been created due to the economic boom
in Califomia, which also has driven up
the demand forhousing. However, new
residential construction has been
somewhat slower in parts of Califomia~
For example, in 1998 in Orange
County, there were 61,000 new jobs
created, but only 10,000 building
pen-nits were issue&
The location of housing is another key
concem. California nee& to develop
incentives fcir people to live relatively
close to their workplace. Business
leaders are demanding affordable
housing to attract talent to Califomia
(especially in high growth areas such as
the Silicon Valley). Employees also
want affordable housing near their
workplace. To address these needs, the
subcommittee believes stronger incen-
fives should be put in place to increase
construction of affordable housing,
including multi-family dwellings, in
urban centers. In addition, many older
neighbonhoods need to be improved
and maintained. This 'should include
construction of new schools and job,
training centers. Improving the livability~
of urban centers will increase private
sector investment in those communities
and help stem tlight to the suburbs.
Construction Defect Lit~,ation
Litnits
Multi-Family Housing Construction
Since the 1980s, new multi-family
residential coustmction has been falling
as a percentage of total residential
construction. The major mason forthis
tremendous drop is that construction
defect litigation has opened the door to
unnecessary lawsuits against the owners .
ofnew multi-family dwellings. Devel-
opers of multi.family housing face the
added burden of strict liability for
construction defects and a 1 O-year
period when a suit may be filed. This, in
tum, has resulted in both contractors
and subcontractors being unable to
obtain insurance. Although California
needs more multi-family housing,
current litigation practices have all but
stopped its construction.
The subcommittee concluded that State
law needs to be changed to increase the
incentives for multi-family and entry-
level housing.
Regional Needs w the 'iNimby'
Syndrome
Many communities that are experienc-
ing a sharp increase innewjobs, such
as San Francisco, also have agrowing
need forhigh-density housing. How-
ever, the communities themselves
generally oppose more high-density
housing due to its local impact on open
space, congestion, and aesthetics. '~Not
in my back yard" arguments often
prevail over regional planning goals.
The land use planning subcommittee
K~x~xs.~.r~ CONNELX~ · ST~E Com~o~.usR 33
considered whether financial incen-
tives should be developed to reward
communities with "growth" polides,
which would not be available to
communilies with "no growth"
policies. However, no recommenda-
lions were made in this area_
California Housing Finance Author-
ity and R elated A geneies
California has 11 of the 25 least
affordable communities in the entire
nation. To combat ils shortage Of
affordable housing, California created
the Califomia Housing Finance Author-
ity (CHFA). Acting as the State' s
mortgage bank, the CHFA offers
below-market rate mortgage financing
to meet the homing needs of low- to
moderate-income families. Assembly
Bill 1404 (Dutra), introduced this year,
would increase the CHFA' s debt limit ~
from $6.75 billion to $8.95 billior~ The
subcommittee strongly encourages all
such measures to increase funding for,
and consequently the availability of,
affordable housing. At the same time,
Califomia should review how these
funds are allocated to ensure that
innovative plans that address the
greatest housing needs are being
funded.
Military Bases for Housing
The closure of military bases represents
a potential partial solution to the
shortage of affordable housing in
Califomia~ Especially in Northem
California, military bases generally are
located near urban centers. The land
could be used for what it already
provides, for example, housing. How-
ever, as seen in other parts of the State,
these bases may become sites for large
retail or commercial ventures instead of
housing. While the land use planning
subcommittee was favorably im-
pressed with the concept of using
dosed military bases for expanding
the availability of affordable housing
in urban areas, it did not make a
specific recommendation.
Inpastructure
Lack of infrastructure funding in
recent years has become a major
crisis for Califomia_ As with other
issues addressed by the SMART Task
Fome, the availability of resources for
this purpose has been largely dictated
by the fiscal relationship between the
State and local governments.
The subcommittee noted that local
entities would be better able to address
the infrastructure challenges that
surround them, including outdated
sewer systems and roadways, if they
were allocated more than the small
portion of property lax they currently
receive. Currently, as they lack the
resources, city governments are taking
two actions to address infrastructure
needs: raising developer and home-
owner charges and opting for develop-
ment ofupscale homes with large lots
over smaller homes.
The subcommittee recommends that an
increase in funding for infrastructure
should be used in support of affordable
housing and modemizing infrastructure
in urban areas. Decaying downtowns
should be rebuilt and modemized. The
effect of suburban and edge-city sprawl
will be greatly improved through
funding for transportation, mixed use
in-fill, and habitat protection.
Performance-Based Funding f or
Inpastructure
KATHLEEN CONNELL * STATE CONTROLLER 34
A common problem with funding
infrastructure projects is the lack of
data on project effectiveness. Where
data is collected, there is little nexus
between the project's success and
future funding. For example, the State
has apportioned hundreds of millions
of dollars to improve public transpor-
tation, but statistics have shown that
the increased funding did not translate
into increased ridership. Often,
government support for these types of
projects is not contingent on Showing
the effectiveness of the spending.
The subcommittee concluded that, ff
the State increases the use of perfor-
mance measures when allocating
resources, those resources will be used
more efficien~y, and only where they
provide significant benefit.
Increasing Local Government
Commtmication
The subcommittee discussed the need
for local governments to improve
communications with respect to infra-
structure spending, thus enhancing
efficiency. California should consider
adopting several city planning proce-
dures within the optional elements of
the general plan guidelines published by
the Governor's Office of Planning and
Research. The State should provide
fiscal incentives to encourage cities to
follow one of the adopted measures.
However, the subcommittee concluded
that specific guidelines should be
developed by a joint Task Force of
State and local officials, rather than the
SMART Task Force.
Land Use Objectives for the 21st
Centtny
The land use planning subcommittee
determined that certain objectives ~.~
should guide local governments in
planning their communities. After
much deliberation, the subcommittee
developed the criteria it believes
should guide this decision-making,
with particular attention to the
differences between new develop-
ment and existing development.
These criteria are described below.
New Communities - Ideally, new
communities in California should be
integrated so they include housing,
shops, work places, schools, parks, and
civic facilities that are essential to the
daily life of the residents. Community
size should be designed so that housing,
jobs, daily needs, and other activities
are within easy walking distance of each
other. These communities should
include diverse housing types, enabling ~:
citizens from a wide range of economic
levels and age groups to live within its
boundaries.
Urban Communities - The subcommit-
tee agreed that urban communities often
lack a central focus that combines
commercial, dvic, cultural, and recre-
ational i/ses within easy walking
distance of transit stops. Each commu-
nity or duster of communities should
have a well-defined edge, such as
agricultural greenbelts or wileRife
corridors, permanently protected from
development. Regional land use
planning structure should be integrated
within a larger transportation network
built around transit rather than free-
ways. Regional institutions and services
(e.g., government offices, stadiums, and
museums) would be located in the
urban core.
Existing Communities - The subcom-
KATHLEEN CONNELL · STATE CONTROLLER 35
mittee concluded that the ~nandal
and time costs necessary to achieve
these ideals in existing metropolitan
communities are too high in relation
to the results achieved. In developed
areas, California must use existing
social and physical infrastructure
while permitting in-fill and intercon-
nected communities. However, by
improving land use decision-making,
communities can achieve cleaner air
and water, less traffic congestion and
more affordable housing while
reversing and/or controlling sprawl,
at the lowest possible social and
financial costs.
Conclusions of the Subcommittee
The fiscal realities of the post-
Proposition 13 worId create great
disincentives for wise land use policy
in California. Until those fiscal
factors are addressed, California's
local governments will continue to
forego "smart" growth in favor of
new revenue sources.
Each community in Califomia is
unique. The State government should
be wary of mandating local land use
processes. Rather, the State should
focus on providing adequate fmandal
resources for those communities to
make their own land use planning
dealsions. Given adequate resources,
local govemments are far more likely to
make balanced and appropriate plan-
ning dealsions, which will protect open
spaces, promote adequate housing, and
improve California's economy.
KATHLEEN CONNELL * STATE CONTROLLER
Appendix ~A
Percentage of Locai Revenues & Expenditures for California
Cities and Counties for the Period ofJu~y ~, 1993 through June
30, I997
Cities Revenues 1993-94 1994-95 1995-96 1996-97
Sendee Charges (Sewage, Water, Electricity) 41% 41% 4t% 39%
Sales and Use Taxes 10 10 10 9
State and Federal Taxes 12 13 13 13
Property Taxes 7 7 7 6
Revenues from Use of Monies and Property 4 4_ 5 4
Utility Taxes 4 4 4 4
Business License Tax 2 2 2 2
Licenses and Permits 1 1 1 1
Transportation Tax 1 2 2 1
Other. 18 16 15 21
Total 100% 100% 100% 100%
Counties Revenues 1993-94 1994-95 1995-96 1996-97
StateAid 42% 39% 42% 43%
FederalAid 22 21 21 21
Property Taxes 15 11 12 12
Service Charges, Miscelaneous Revenues and
Other Financing Sources 12 21 17 15 "~I~/
Sales Tax and Other Taxes 3 3 3 3
Other 6 5 5 6
Total 100% 100% 100% 100%
Cities Expenditures 1993-94 1994-95 1995-% 1996-97
Public Safety (Police, Fire, Paramedics) 26% 26% 26% 26%
Public Utilities (Gas, Electricity, Water) 21 21 20 20
Cornmunit~ Development and Health 21 21 22 22
Transportation (Streets) 15 15 15 15
Parks, Recreation, Libraries 8 9 9 8
General Govcmm,nent 9 8 8 9
Total 100% 100% 100% 100%
Counties Expenditures 1993-94 1994-95 1995-96 1996-97
Public Assistance (Welfare) 41% 38% 40% 38%
Public Protection (Gas, Electricity, Water) 27 25 28 29
Health and Sanitation 17 14 14 16
Administration and Elections 9 15 9 9
Roads 3 3 3 3
Education, Recreation, Culture, Debt Service 3 5 6 5
Total 100% 100% 100% 100%
Source: Stale Controller' s Office Annual Financial Transaction Reports
KATI{LEEN CONNELL ' STATE CONTROLLER 37
Appendix B
Education Revenue Augmentation Fund (ERAF) Shif~ (Amounts in Thousands)
~1992-93 '1993-94 1994-95 '1995-96 '1996-97
Alameda 71.413 176.746 190.541 191.974 195.207
Alpine 22 131 22 150 152
Amador 558 1,997 2,019 2.110 2.120
Butte 3,773 12,689 13,243 11,302 10,081
Calaveras 1,041- 2.614 2,887 3.013 3,107
Colusa 411 1,420 1,475 1,525 1,651
Contra Costa 40.962 98,986 110,826 101.701 105,381
Del Norte 339 1,127 1.282 1,508 1.344
El Dorado 4,910 11,010 11.166 11,592 12,025
Fresno 17,108 63,538 65, 148 66,998 68.560
Glenn 592 1,845 1.963 2,001 2,049
Humboldt 3,021 9.740 10.172 10,655 11.085
Imperial 2.220 9.491 10.164 10,473 9, 949
Inyo 516 1,970 1,956 1.887 1,783
Kern 13,087 51,583 46.163 51,499 51.901
Kings 2.581 8.325 8.951 9,110 8.873
Lake 2,154 4,556 4,555 4,610 4.635
Lessen 366 1.369 1.275 1,494 1.391
Los Angeles 460.656 1,280,693 1,162,638 1.139, 190 1,123,618
Madera 1.785 4.376 7.777 8,112 8,334
Madn 11,640 29.847 31.158 32,212 33,259
Mariposa 159 751 860 852 863
Mendocino 1,734 4,123 6,718 6.986 7,319
M erced · 4.821 15,752 16.457 16,353 17,864
M odo c 195 726 733 789 702
Mono 730 1,620 1,857 1,782 1,805
Monterey 8,952 27,232 28,147 29,637 30.294
Nape 3,026 10,997 11,397 11,671 12,058
Neveda 1,598 6.772 7.106 7,489 7,705
Orange 100,790 266,326 263.291 256,668 258,394
, ~"'~lacer 6,099 19.190 19,804 21,018 22.152
lumas 419 1.179 1.452 1.393 1.446
Riverside 42,395 101,442 100,987 101,248 100,470
Sacramento 33,520 92,601 119,029 120, 312 121,027
San Benlto 1.125 2,555 2.445 2,550 2.536
San Bernardino 52,952 61,795 122,948 124,230 127,236
San Diego 53.115 118.687 193,143 195.402 195.788
San Francisco 53,906 136,249 139,667 130.444 133,975
San Joequirt 15,533 57.246 58,568 60,510 61,723
San Luis Obispo 6,448 19,909 21,443 21.632 21,954
San Mateo 19,405 74,505 76.101 77,125 79,427
Santa Barbara 10,724 30,256 31,379 32,042 32,951
Santa Clara 58.524 134. 577 166,292 166, 834 171,152
Santa Cruz 5.913 19,444 19,971 20,577 20.727
Shasta 2.704. 11,896 12.471 12.917 12.485
Sierra 143 ' 284 303 310 318
Siskiyou 900 2.906 3.097 3,408 3,523
$olano _ 15,758 32.384 34,670 37.499 36,571
Sonoma 11,709 35,935 37.634 37,654 38,205
Stanislaus 5.243 28.201 28.517 29.002 29.206
Sutter 1,657 5.968 6.161 6,312 6.620
Tehama 924 3,272 3,567 3,760 3,899
Trinity 113 393 487 508 539
Tulare 8,036 27,267 28,703 29,891 30.658
Tuolumne 1.267 3,492 3,919 3.862 4,098
Venture 26.523 63,070 68,900 70,154 71,003
Yolo 4.364 14,228 15.925 16.735 16,929
Yuba 1 371 4 511 4 gR4 4 gRr} 4
Total 1 201 900 3 21t 995 3 3s4 512 3 327 654 3 345 080
1997-98 1998-99
207.221 217.426
169 174
2.433 2,438
10,461 10.869
3,197 3.355
1,739 1,812
105.925 110.731
1.437 1,474
12.448 13,072
70.153 71.928
2,076 2.164
11,493 11.906
7.461 9,479
1.816 1.760
56.068 . 53,285
9,394 9,668
4,753 4.831
1.455 "' 1,551
1,140.069 1,142,036
8,771 9,164
35,037 36,947
968 994
7,674 8,341
17,419 18,224
718 732
1,643 1.887
32,031 33.725
12,591 13.318
7,966 8,320
267,539 283, 108
23,073 24,877
1,612 1,691
101,026 104,645
122,089 127,312
2,552 2.757
130,511 133,188
202,003 215, 277
138,524 152,317
64,201 66,251
22,695 23,451
83,780 90.783
34,418 37224
184,753 209,795
21,513 22,654
13,211 13,520
319 345
3,667 3,720
37,118 38,165
39,541 41,504
29,805 30,609
6,771 6,964
4,010 4,136
546 519
31,806 32,808
4,200 4,306
70,518 73269
16,894 18,332
5 049 5 775
3 438 527 3 570 913
Source: SCO's Annual Report of Property Taxes for the 1992-93 Through 1998-99 Fiscal Year
Fiscal Year 1997-1998 ERAF Contributions
Contributions
Counties $ 2,656.218,449
Cities 5?6 698 06?
Subject to swap · 3,182,916,511
Special Districts 255 610 808
$ 3.438.527.319
I~ATHLEEN CONNELL · STATE CONTROLLER
Append ix C
Notes to Alemate Ptans and ths "SMART Formula"
After discussion of the merits and
drawbacks of several methods that
might be used to reallocate sales taxes,
and to offset local govemmenls forthe
lost property tax revenues associated
with the creation of the Educational
Revenue Augmentation Fund (ERAF),
the following methodology was used for
computing the information in Altema-
fives 1 through 3.
In order to reallocate sales taxes based
more on a county' s population, rather
than where the sale occurred, the
current percentage of sales tax revenues
distributed by county, and the percent-
age of population by county were
computed. First, information from the
State Board of Equalization' s 1997-
1998 Annual Keport, the latest report
available, was obtained. Sales tax
infonmtion from Table 21A- Revenues
Distributed to Cities and Counties from
the Local Sales and Use Taxes, was
summarized to provide the total sales
tax revenues for counties and cities.
This total therefore represents what a
county would normally receive on 1%
of taxable sales.
Informalion on population by county
was obtained from the Department of
Finance' s Population Certification letter
dated July 22, 1999. The proportionate
statewide percentage oflimt county's
population to total population was
computed by dividing the county' s
population by the statewide total
population.
After the percentages were obtained for
countywide sales tax revenues disaib-
uted and population by county, these
percentages were weighted and then
multiplied by the total statewide sales
tax revenues distributed in fiscal year
1997-1998.
This was done to determine the impact
of weighting some of the sales tax
revenue distribution on population
versus point-of-sale. The p~rcentages
were weighted in the following manner,
sales taxes by point-of-sale, i.e. sims,
were multiplied by 90%, while sales tax
distributed by population was multiplied
by 10%.
Finally, in order to provide the counties
with some relieffrom the ERAIF shift;
which first occurred in fiscal year 1992-
1993, we allocated $450 million to
these counties based on the percentage
of the ERAF shift forthe fiscal year
1997-1998. Informati on from the State
Controller's Office' s 1997-1998 Annual
Report of Property Taxes was used in
most cases. Forthe counties not
providing the breakdown of the ERAF
shift by county and city for 1997-1998,
1998-1999 data was used to eslimate
the 1997-1998 information.
KATHLEEN CONNELL · STATE CONTROLLER 39
State Controller Kathleen Connell wishes to extend her heartfelt
thanks to all the individuals whose hard work and dedication made this report
possible.
TAT r
'~'IUNICIPAL
Taskforce
Membership
Hon. Richard Alarc6n
State Senator
Hon. Doug Balmain
Mariposa Board of Supervisors
Chair of Accountability Subcommittee
Hon. Ed Edelman
Rand Corporation
Len Frank
Pardee Construction
David French
Regional Counci] on Rural Coun-
ties
Mark Gaughan
San Diego Gas & Electric Com-
pany
Travis Gibbs, Esq.
O'Me]veny & Meyers
AnneHe Gra, jeda
SEIU- Local 660
I-Ion. Lucy Killea
S. D. international Community
Foundation
Pius Lee
California Realty & Land Inc.
Hon. Gloria Molina
L.A. County Board of Supervisors
Chair of Taxes Subcommittee
Dowell Myers, PhD
USC - School of Policy, Planning
and Development
Hon. Beverly 0 'Neill
Mayor of Long Beach
Hon. Julie Partax;sky
Mayor of Davis
Chair of Land Use Subcommittee
Hon. Judy Pennycook
Monterey Board of Supervisors
Mark Pisano
Southern California Association
of Governments
George Popyack
AFSCME
Hon. George Runner
State Assembly Member
Steven Szalay
California State Association of
Counties
Jeff Vesely, Esq.
Pilsbury, Madison. & Sutro
Tom W'mfield, Esq.
Brown, Winfield & Canzoneri, Inc.
KATHLEEN CONNELL · STATE CONTROLLER 40