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2014

Other Budget Issues

Further Detail

In January, the administration proposed $7.5 million for the State-County Assessors' Partnership Agreement Program, a three-year pilot program to study ways to improve county property tax administration. The May Revision makes minor changes to this pilot program. While we acknowledge the need for information about ways to improve county property tax administration, we recommend the Legislature reject this proposal because the pilot project, in its current form, is not likely to provide meaningful results to the Legislature. (Our earlier analysis can be viewed here.)

Background

Current Funding System for Property Tax Administration Raises Concerns. The property tax is a major source of revenue for local governments, raising more than $50 billion annually for counties, cities, special districts, and schools and community colleges. Counties administer the property tax. While most local governments that receive property taxes reimburse the county for their proportionate share of administrative costs, schools and community colleges do not. Instead, counties pay the schools’ share of costs as well as their own. Statewide, counties pay about two–thirds of the cost to administer the tax while receiving less than one–third of the revenues they collect. As a result, there have been long–standing concerns that counties might not fund property tax administration appropriately. This could have a fiscal effect on the state because local property taxes that go to schools generally offset required state spending on education.

Budget Proposed Pilot Program to Study Ways to Improve System. The 2014–15 Governor’s Budget proposed a small grant program to study ways to improve property tax administration. The administration proposed $7.5 million (General Fund) to begin a three–year pilot program, called the State–County Assessors’ Partnership Agreement Program. Under the proposal, nine counties—two urban, four suburban, and three rural counties, all to be selected later—would receive grants to hire additional county assessor staff. Participating counties would match the state grant on a dollar–for–dollar basis. Newly-hired staff would accelerate, increase, and preserve county property tax revenue. Participating counties would report results to the Department of Finance, which would use these findings to make final recommendations in 2017-18.

Proposed Pilot Program Likely to Bias Which Types of Counties Participate. The Governor's January proposal required participating counties to match state grant funds on a dollar-for-dollar basis. As we detailed in our analysis, the average county receives about one-third of countywide property taxes. Across the state, however, some counties receive much more (more than two-thirds of countywide property taxes) and others receive much less (less than one third). As a result, certain types of counties are more likely to apply to the pilot program than other types of counties. In particular, counties that receive a large share of countywide property tax revenue are more likely to join the pilot program than counties that receive a smaller share of property taxes. For counties that receive smaller shares of the countywide property tax, the amount of increased revenue from participating in the pilot might be outweighed by the required dollar–for–dollar matching amount. Due to this influence, counties in the pilot may not be representative of counties that do not participate.

 LAO Recommendations to Reduce Bias in Pilot Program. In reviewing the January proposal, our office recommended several modifications to improve the design of the pilot program. Most importantly, we recommended modifying each county’s matching amount to reflect the share that it would receive of the revenue generated as a result of the pilot grant funds. In other words, under our suggested approach, each county would pay its share of the total increase in funding from the pilot. For example, if the total grant under the pilot was $100,000 and County A’s share of countywide property taxes was 20 percent, the county would be required to contribute 20 percent of the grant cost, or $20,000. This would help ensure that a representative group of counties participated. This would occur because each county would face the same potential benefits and costs of participating in the pilot. Counties with higher (lower) shares of their countywide property taxes would be required to pay a higher (lower) matching amount, but in turn receive a larger (smaller) share of additional property taxes generated by the pilot. Therefore, each county would face the same ratio of benefits to costs when choosing whether to participate in the pilot.

May Revision

May Revision Modified Proposal. Several modifications were made in the May Revision to the proposed pilot program, including (1) allowing grant funds to be used to assess business personal property, (2) increasing grant fund flexibility between counties, and (3) allowing grant funds to be used for information technology system projects. While these modifications are beneficial, they do not address the fundamental flaw in the design of the pilot program.

Recommendation

For many years, the Legislature has expressed concern that the funding system for property tax administration may result in some counties not funding tax administration at appropriate levels. Accordingly, we ordinarily would support a proposal to establish a pilot program to study potential improvements to this system. In our view, however, the current proposal is not likely to provide the Legislature reliable information about how the program might work on a larger scale. We therefore recommend the Legislature reject the proposal and encourage the administration to propose a pilot program in the 2015-16 budget that ensures each county has an equal incentive to participate in the pilot. This way, the pilot would be more likely to provide reliable results for the Legislature to review as it considers alternative approaches for addressing this long-standing concern.