|Budget Issue:||Insufficient ERAF|
|Program:||Local Government Financing|
|Finding or Recommendation:||Consider limiting local government reimbursement for vehicle license fee (VLF) swap and triple flip funding shortfalls to actual sales tax and VLF revenue losses. Additionally, consider creating a locally administered mechanism to compensate local governments for VLF swap and triple flip funding shortfalls.|
For a detailed treatment of this topic, see our report Insufficient ERAF: Examining A Recent Issue in Local Government Finance. Below is a brief summary of the issue, the Governor’s associated 2013-14 budget proposal, and our comments.
Over the last two years, a small number of city and county governments in two counties—Amador and San Mateo—did not receive enough local property tax revenue to offset two complex state-local financial transactions: the triple flip and VLF swap. This funding insufficiency, commonly called “insufficient ERAF” (Educational Revenue Augmentation Fund), requires state action if the affected local governments are to receive complete payment. To date, insufficient ERAF has affected only a small number of local governments and resulted in total VLF swap funding shortfalls of less than $2 million annually. Insufficient ERAF may grow somewhat over the next few years—potentially reaching the tens of millions of dollars. In the longer term, however, insufficient ERAF likely will be limited to a small number of cities and counties—or not occur at all in some years.
The Governor’s 2013-14 budget appropriates $1.8 million from the General Fund to Amador and San Mateo counties to fully reimburse local governments for ERAF insufficiencies that occurred in 2011-12.
In addressing claims of insufficient ERAF, the Legislature is faced with two primary decisions: how much compensation cities and counties should receive and how the compensation should be provided.
Two Possible Levels of Compensation for Insufficient ERAF Appear Reasonable. As insufficient ERAF is not the product of any particular local government actions, a strong analytical argument can be made that the state should reimburse cities and counties for all triple flip and VLF swap funding shortfalls, as proposed by the Governor. On the other hand, in recognition of the significant fiscal benefits cities and counties receive under the VLF swap, the Legislature may wish to reimburse cities and counties only where necessary to replace actual sales tax and VLF revenue losses. Under this approach, no state funding would be provided to Amador and San Mateo counties for 2011-12 funding shortfalls.
Compensation Mechanisms Are Limited. We see two primary options for compensating local governments experiencing insufficient ERAF: provide the compensation in the budget (as the Governor has proposed) or through a redirection of certain local education agency property tax revenues. Providing compensation in the annual budget process allows the Legislature to weigh the expense of providing insufficient ERAF compensation against other state spending priorities on an annual basis, but decreases revenue security for cities and counties. As an alternative, the Legislature could allow certain local education agency property taxes to be redirected to fund insufficient ERAF. This approach establishes a locally administered mechanism of compensating insufficient ERAF that provides greater revenue security for cities and counties. However, this funding mechanism would cover most, but not all, of the current costs of insufficient ERAF in Amador and San Mateo Counties. If the Legislature wishes to provide full reimbursement, as the Governor has proposed, supplemental General Fund appropriations will be required.