Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Local Government Financing (9210)

This budget item contains funding for six purposes:

• General Purpose Relief. The Governor proposes to provide local governments with $250 million in the budget year on a one-time basis for general purpose fiscal relief. The proposal is discussed in detail below.
• Citizens' Option for Public Safety (COPS). The COPS program was created in 1996 to provide local governments with funds for law enforcement. The program was expanded in 2000-01 to include funding for local juvenile justice programs. The budget proposes to continue the program's funding at $242 million, which we discuss below.
• Local Law Enforcement Technology Grants. The 2000-01 Budget Act provided $75 million to local law enforcement agencies for the purchase of high technology equipment. The funds were allocated with a minimum $100,000 to each agency, with the remaining funds allocated on a per capita basis. The Governor proposes to fund this program again in 2001-02 at $75 million.
• Property Tax Administration Loan Program. This program was created in 1995 to provide forgivable loans to counties for additional spending on property tax administration. The program is due to sunset at the end of 2001-02. We discuss long-term financing for property tax administration below.
• Special Supplemental Subventions. Three programs provide specified local governments with special funding: (1) qualifying redevelopment agencies for revenues lost as a result of the repeal of the business inventory exemption in 1984 ($1.2 million),
• (2) counties with no incorporated cities on the basis that they are not eligible to receive the city portions of the gas tax and vehicle license fee distributions ($147,000), and (3) local agencies which paid jail booking fees in 1997-98 ($38 million, continuously appropriated).
• State-Mandated Local Programs. This item includes funding to reimburse local governments for costs incurred in complying with certain state-mandated local programs ($6 million).

Provide Long-Term Improvements to Property Tax System

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:

• The property tax shifts—which redirected over $3 billion in property taxes from local governments to schools—forced counties to make budget cuts to many discretionary spending programs, including assessor offices.
• The statewide economic recession dramatically increased many assessors' workloads by requiring the processing of downward assessments and assessment appeals.

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 twice—most recently by Chapter 602, Statutes of 2000 (AB 1038, Wesson), which extends the program's sunset date by one year—through 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.

• Does Not Address Underlying Disincentives. While providing an infusion of needed funding into many counties' property tax administration systems, the loan program does nothing to alter the underlying disincentive for counties to invest in their own systems. A county continues to receive a very small proportion of the benefits for each dollar it chooses to spend on property tax administration.
• Awkward Governance Structure. For the majority of their budgets, assessors seek approval from their county boards of supervisors. However, for the portion of their budget funded from the loan program, the assessor instead seeks approval from DOF. The state must try to evaluate the funding needs of local departments, each with their own set of circumstances. Thus, the program creates an awkward system in which an assessor's budget is reviewed twice but never from a comprehensive perspective. The current system also creates a sizable workload for DOF. Each year, the department must review and renew contracts with up to 58 counties and then evaluate each county's performance to determine whether its loan ought to be forgiven. In fact, a recent State Auditor report found that because of "weak oversight," DOF does not have adequate information to make "good business decisions" regarding the program.
• Nonuniform Benefits. While the loan program has benefitted many counties, 11 counties have elected not to participate for administrative or other reasons. Therefore, the benefits of the program have not been uniform across the state. Moreover, the program does not adjust to the changing demands of individual assessor offices. The maximum loan amounts for which each county is eligible is set in statute and has not been amended since the program's inception.

Options for a Permanent Solution. In its audit, the State Auditor recommended continuing the loan program—but 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.

• State Share of Growth in Costs. One option would be for the state to pay for the schools' pro rata share (about 52 percent) of all growth in property tax administration expenditures. Counties would be required to continue to maintain their baseline spending on property tax administration with the costs shared along their current ratios. However, increases in administration costs would be paid for by all of the entities benefitting from property taxes—according to their share of the benefits. Counties would, therefore, make future decisions about whether to spend additional dollars on property tax administration knowing that the benefits of such investments would be commensurate with their costs. If statewide property tax administration costs increased by 5 percent, this option would cost the state about $12 million annually. This option is discussed in more detail in The 1997-98 Budget: Perspectives and Issues.
• State Share of All Costs. Another option would be for the state to simply pay for the schools' entire share of property tax administration costs (base and growth), at a cost of about $235 million. Since state funds would replace county funds already invested in the property tax administration system, we would expect counties to spend most of these savings on priorities outside of the property tax system. This option, therefore, is primarily one that promotes general fiscal relief to counties. It would, however, establish the same type of positive incentives for future spending as the incremental cost option discussed above (though at a much higher state cost).

Funds Should Be Used Strategically for Reform

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 COPS Program Expanded to Include Juvenile Justice Funding

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:

• $75 million to cities and counties for front line law enforcement.
• $12.5 million to district attorneys for criminal prosecution.
• $12.5 million to sheriffs for county jail construction and operations. Chapter 289 was due to sunset at the end of the 1999-00 fiscal year, and the Legislature took that opportunity to expand the program to include new components.

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:

• $121.3 million, including $100 million for the public safety items previously in the COPS program plus an additional $21 million to guarantee a minimum allocation of $100,000 for every local law enforcement agency. (The rest of the funds are allocated on a per capita basis.)
• $121.3 million to implement a comprehensive multiagency juvenile justice plan for each county.
• $750,000 to the Board of Corrections to oversee the implementation of the juvenile justice component of the funding.

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:

• An assessment of existing services for juvenile offenders and at-risk youth.
• An identification and prioritization of neighborhoods, schools, and other areas that bear a significant juvenile crime burden.
• A local action strategy that includes a continuum of responses to juvenile crime.
• A specific menu of programs that fit the strategy to be funded with the Schiff-Cardenas funds.

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.