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This is the ninth blog post in our series California’s Property Tax: Where Does Your Money Go?. Though our posts to date have described how the property tax decisions of the mid-1970s influence property taxes today, this post explores an exception. Specifically, in the mid-1990s, the state temporarily allowed Santa Cruz County enterprise districts’ property tax revenue to be redirected to a supplemental fund supporting the county library system.

Some Special Districts Charge Fees. As we discussed in a previous post, special districts provide a variety of services to their residents. Generally, special districts fall into two categories: enterprise districts and non-enterprise districts. Enterprise districts operate similarly to a business, charging customers for their services, like water. Non-enterprise districts provide more general benefits to the community, like parks. Both types of special districts can receive property tax revenue.

Some Special Districts Received State Aid After the Passage of Proposition 13. Proposition 13 (1978) reduced local governments’ property tax revenue and directed the state to allocate the property tax  revenue from the new 1 percent rate among local governments. In response, the state directed county auditors to determine local governments’ shares of the property tax based on the property tax rates the local governments levied prior to Proposition 13. Because special districts generally did not levy high property tax rates—compared to other local governments in their counties—many special districts received small shares of the 1 percent rate after Proposition 13. To help special districts with the revenue loss, the state created the Special District Augmentation Fund (SDAF) to support special districts.

State Directed Enterprise Districts To Rely on Fees. Though the state created SDAF to provide revenue to special districts after Proposition 13, the state determined that enterprise districts could charge fees to cover their revenue losses. In particular, the state intended that enterprise districts “rely on user fees and charges for raising revenue due to the lack of the availability of property tax revenues after the 1978-79 fiscal year” (Senate Bill 154: Chapter 292, Statutes of 1978). Furthermore, the law creating SDAF directed enterprise districts to shift to user fees and charges—rather than property tax revenues—in the year following the passage of Proposition 13.

State Later Eliminated SDAF Due to Budget Shortfall. Due to state budget shortfalls in the mid-1990s, the state eliminated the fund in 1993-94. At the same time, the state shifted a share of county, city, and special district property taxes to schools. This shift reduced county, city, and special district property tax revenues and increased property tax revenues for schools. The state shifted these property tax revenues to schools to reduce state funding requirements.

Santa Cruz County Public Libraries Faced Revenue Shortfall Due to Elimination of State Support. Elimination of the SDAF cut Santa Cruz County public library revenue by roughly one-third. Absent alternative new revenues, county libraries stated that all of their branches, with the exception of the Central Library, would close. At the time, the libraries could not raise sufficient new revenue to compensate for the loss. Similarly, Santa Cruz County and its cities stated they did not have the resources to provide additional funding to the library due to their recent property tax reduction.

State Allowed Redirection of Property Taxes To Support Library System. In response to the Santa Cruz County libraries' revenue loss, the state directed the county auditor to allocate the enterprise districts’ property tax revenue to a supplemental fund in 1994 legislation (Chapters 1025 and 1167, Statutes of 1994). This legislation allowed the county board of supervisors to allocate the revenue in the fund to the libraries. A report by the county administrator found that “the public is best served by ending a tax subsidy to enterprise districts” and recommended shifting the majority of the revenue in the supplemental fund to the libraries (Report on the Distribution of the Santa Cruz County Special Allocation Fund, 1993).

Santa Cruz County Libraries’ Case a Rare Example. Santa Cruz County supervisors retained the ability to shift property tax from enterprise districts to the libraries until 1996-97. As a result, enterprise districts in Santa Cruz County may have raised their fees during this period, charging more to customers for services like water. Giving the county greater control over its property taxes, however, allowed the board of supervisors to address a deficiency in services in the county. While enterprise districts could raise additional revenue through higher fees, the libraries did not have a suitable alternative source of funding. Since the passage of Proposition 13, very rarely have local governments been granted this authority over the property tax.

To receive email notices of future posts in this series, email the LAO's local government analyst, Carolyn Chu.

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