Legislative Analyst's Office
Analysis of the 2001-02 Budget Bill
This budget item contains funding for six purposes:
We recommend that the Property Tax Administration Loan Program not be extended beyond its sunset of 2001-02. In its place, we recommend that the Legislature consider implementing a long-term structural improvement to the property tax system.
Background. Counties are the level of government with the primary responsibility for assessing property and collecting property tax revenues,which are expected to total more than $25 billion in 2001-02. County assessor offices assess the value of property, and then county tax collectors and auditors collect the revenues and allocate them among local governments. It is estimated that $450 million is spent annually on the property tax administration system.
In the early 1990s, county assessor offices suffered two financial strains:
Since the property tax shifts reduced the share of each property tax dollar collected that goes to a county, counties experienced a decline in the financial incentive to invest in the property tax administration system. Although cities and special districts are required to pay for their share of property tax administration costs, school districts are not. As a result, counties pay more than 70 percent of property tax administration costs, yet they now receive less than 20 percent of the revenues.
Loan Program to Sunset. Although the property tax is a local tax, it nevertheless benefits the state as a result of California's education financing system. Under this system, increases in property taxes generally translate into reductions in the required state contribution for education. Recognizing the fiscal strains facing counties and the state interest in a well-administered property tax system, the Legislature created the Property Tax Administration Loan Program by enacting Chapter 914, Statutes of 1995 (AB 818, Vasconcellos). This program has been extended twicemost recently by Chapter 602, Statutes of 2000 (AB 1038, Wesson), which extends the program's sunset date by one yearthrough 2001-02. The legislation appropriates $60 million each year for loans to counties for additional spending on property tax administration. These loans may be forgiven if counties can demonstrate that they have generated or preserved sufficient revenues for schools to offset the costs of the loans. In recent years, 47 counties have participated in the program, with all the loans being forgiven (totaling $50.9 million in 1999-00). The Department of Finance (DOF) is responsible for administering the program and determining whether to forgive the loans.
Short-Term Benefits But Long-Term Concerns. The program was designed as a short-term solution to the growth of assessor workload backlogs. In this regard, the program has been relatively successful. By both increasing property tax revenues to governments and helping to ensure that taxpayers receive a fair assessment, the program has strengthened the property tax administration system. Work backlogs in most counties have been significantly reduced or eliminated. In our view, however, extension of the program is not the most effective method for achieving a stable and efficient property tax administration system in the long term. Below, we discuss a number of the problems with the program.
Options for a Permanent Solution. In its audit, the State Auditor recommended continuing the loan programbut this was only in comparison to having no state role in property tax administration. While we agree that the loan program is preferable to having no state role, we recommend allowing the program to sunset as scheduled and replacing it with a better long-term solution to the disincentives that counties face to invest in the property tax administration system. The program has generally been considered in two contexts: (1) improving the property tax administration infrastructure and (2) providing general fiscal relief to counties. Based on which of these goals is a higher priority, the Legislature could implement one of the following ongoing options in place of extending the sunset of the loan program.
We recommend that the Legislature strategically use the $250 million in proposed local government fiscal relief to achieve a specific reform goal. The proposed formula would do nothing to address the underlying problems of the local government fiscal system.
Legislature Has Recognized Need for Local Government Fiscal Reform. The Legislature has previously stated its desire to reform the existing system of local government finance. Problems with the existing system include outdated revenue allocation formulas, a lack of local control over finances, and development incentives which favor retail development over other land uses. The property tax shifts in the early 1990s magnified these existing problems by limiting local governments' discretionary dollars (through required contributions to the Educational Revenue Augmentation Fund [ERAF]).
Governor Proposes Relief. In both 1999-00 and 2000-01, the state provided cities, counties, and special districts with general purpose fiscal relief by allocating payments to jurisdictions half based on their contribution to ERAF and half based on their share of population. The Governor proposes $250 million in 2001-02 for general purpose relief for local governments, again based on this formula. Under this proposal, cities would receive approximately $121 million, counties $118 million, and special districts $11 million.
A Missed Opportunity. While the proposed relief would mitigate local governments' lack of discretionary revenue on a one-time basis, the payments would fail to reform the underlying problems of local government finance. As such, the proposal misses an opportunity to allocate the funds in a way which specifically addresses an existing problem with the local government fiscal structure.
Use Funds Strategically. Given the thousands of local governments involved, more than $250 million on a one-time basis would be needed to implement a broad-based local government reform effort. At the same time, we believe that the $250 million could be used more strategically to make improvements in the local government finance system. As discussed above, for instance, a long-term state role in property tax administration would benefit both local governments and the state. The $250 million in one-time funds could provide a number of years of funding for paying a state share of growth in administration costs. Additionally, as discussed in our report Realignment Revisited: An Evaluation of the 1991 Experiment in State-County Relations (please see the 2001-02 Perspectives and Issues, Part V), a reserve for realignment would help mitigate the need for health, mental health, and social services program reductions during periods of economic difficulty. Alternatively, the Legislature could reserve the $250 million for use as part of a broader funding package to help implement a future reform effort.
The Schiff-Cardenas Crime Prevention Act of 2000 expanded the Citizens' Option for Public Safety program to include funding for local juvenile justice related programming and ensure that every local law enforcement agency receives a minimum grant of $100,000. The Governor's budget continues funds for this purpose.
Background. In 1996, the Legislature enacted Chapter 134, Statutes of 1996 (AB 3229, Brulte), which created the COPS program to provide $100 million for local public safety expenditures. Under Chapter 134 and its successor, Chapter 289, Statutes of 1997 (AB 1584, Prenter), the $100 million was divided as follows:
Schiff-Cardenas Crime Prevention Act of 2000. In September of 2000, the Governor signed Chapter 353, Statutes of 2000 (AB 1913), known as the Schiff-Cardenas Crime Prevention Act of 2000. This measure included funding for the programs previously included in the COPS program, as well as additional items. The bill appropriates $243.4 million to be allocated as follows:
In order to receive their juvenile justice funds under the bill, counties must convene a local juvenile justice coordinating council with members representing a broad array of public safety and social service agencies as well as community-based organizations that work with delinquent youth. This council must then assemble a comprehensive multiagency juvenile justice plan that includes the following:
Programs to be funded under the bill can address a wide array of juvenile justice issues, from prevention to incapacitation, but they must be based on programs or approaches which have been demonstrated effective. In addition, they must adopt a collaborative, integrated services approach where appropriate, and adopt objectives and outcome measures that can be used to evaluate their effectiveness.
Budget Proposal. The Governor's budget proposes to continue to fund the expanded program at the $242.6 million level (not including the funds for Board of Corrections) established by Chapter 353. It is intended that this money would continue to be subject to Chapter 353 and would be allocated in the manner described above.
Program Due to Sunset in 2002. Chapter 353 will become inoperative as of July 1, 2002. Thus, if the Legislature wishes to continue this program beyond the budget year, new legislation extending the sunset date needs to be enacted.