|Budget Issue:||Amador and Mono Counties Triple Flip/ VLF Swap Backfill|
|Program:||Local Government Financing|
|Finding or Recommendation:||Consider Governor's January budget proposal for $4.4 million for Amador and Mono Counties in the context of overall state-local finance and develop a plan that is financially viable for the state and counties over the long term.|
The budget includes $4.4 million (General Fund) under Item 9210 to reimburse the counties of Amador and Mono, and the cities in these counties, for their 2010-11 budget shortfalls related to two 2004 state-local financing changes—the “triple flip” and the “swap.”
How the Flip and Swap Work. In 2004, the state established an ongoing financing plan to offset city and county losses associated with the redirection of some local sales tax revenues (triple flip) and the reduction in the VLF rate (swap). Under this financing plan, cities and counties receive increased property tax revenues from two sources: (1) countywide property tax accounts known as the Educational Revenue Augmentation Fund (ERAF) and, if ERAF resources are not sufficient, (2) base K-14 district property tax revenues. (The state, in turn, offsets K-14 district revenue reductions by providing increased state aid.) State law specifies, however, that “basic aid” K-14 district property tax revenues are not available for allocation to cities and counties for this purpose. (Basic aid districts are those that receive sufficient funding from the local property tax and do not receive resources from the state for general educational purposes.)
Why a Shortfall Developed. In Amador and Mono Counties in 2010-11, the cost of offsetting the triple flip and swap exceeded the funds in their ERAFs. Because every school district in the counties was basic aid, no K-14 district property tax revenues were available to shift to the cities and counties.
Potential Additional Shortfalls. The determination of which K-14 districts are basic aid is made annually and reflects local property tax revenues, district enrollment, and state general education funding levels. At this time, we do not know whether Amador and Mono Counties—or other counties—will have similar shortfalls in the current year or the future. Based on the number of basic aid K-14 districts within their borders, the counties most likely to experience funding shortfalls in the future appear to be: Inyo, Marin, Plumas, San Mateo, and Sonoma. We note, however, that two factors could affect this assessment. Specifically, the dissolution of redevelopment likely will increase the number of basic aid districts because K-14 districts will receive additional property tax revenues from the former agencies. Conversely, the planned expiration of the triple flip within a few years will end the associated local sales tax revenue losses and thus reduce the amount of offsetting funds needed.
Pending Legislation to Establish a Reimbursement Process. AB 1191 (Huber) outlines a process whereby county auditors, in any year that they determine that one or more local governments did not receive full funding under the triple flip and swap, would present this information to the State Controller. The State Controller would transfer funds appropriated in the annual budget to the county auditor for distribution to the affected local governments.
As in the case with many issues regarding state-local finance, there is no single right answer to this funding shortfall. Below, we discuss two approaches: approving the budget proposal and rejecting it.
Approve the Budget Request. During development of the triple flip/ swap legislation, the Legislature stated its intent that (1) all local agencies receive funding that fully offset their revenue losses and (2) this funding be provided promptly and outside of the state budget process. The administration’s proposal satisfies a major part of the legislative intent—it reimburses the local governments in Amador and Mono counties for their budget shortfalls. We note, however, that the proposal provides this funding two years late, through the annual state budget process, and that the administration indicates it is not making a policy commitment with regards to funding future budget shortfalls.
Reject the Budget Request. The triple flip/swap financing plan (1) was developed by the state with active city and county participation and (2) does not contain provisions making the state financial responsible if some local governments do not receive sufficient offsetting funds. The overall fiscal effect of the financing plan is to provide more funds to most local governments than they received before the triple flip/swap. This is because the swap replaced a slow growing local revenue source (the VLF) with a somewhat more volatile, but faster growing source (the property tax). The state has not changed the financing plan or caused the budget shortfall and thus, arguably, should not be held financially responsible for an unexpected outcome of the financial plan.
Over time, additional budget shortfalls (similar to the ones experienced by local governments in Amador and Mono Counties in 2010-11) likely will materialize and could involve considerably larger sums. The local governments experiencing these shortfalls invariably will expect to receive the same support that the state extends to Amador and Mono County local agencies in 2012-13. Accordingly, we recommend the Legislature consider this proposal for local fiscal relief in the context of overall state-local finance and develop a plan that is financially viable for the state and counties over the long term.