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