March 25, 2004 - From the February, 2004 issue

Home Rule Initiative Proposed, State Legislature Considers Bi-Partisan Bill

Addressing the concerns of local governments regarding the current arrangement for government revenues, there are two initiatives making their way through the state Legislature. MIR is pleased to excerpt the briefing paper "Reform By Initiative: Comparing Proposals To Reform Local Government Finance," prepared for the state Senate Committee on Local Government.


Bob Hertzberg

Particularly since the property tax shifts in the early 1990s, local officials have been expressing their collective irritation with the state for restricting, raiding, and refusing to repay local revenue sources. Local officials argue (and many legislators agree) that the state's budgetary behavior toward local governments has led to increasing instability and unpredictability for local budgets. The convoluted state/local funding relationship that has evolved from the Educational Revenue Augmentation Fund (ERAF) shifts, General Fund "loans," offsets, and most recently, "flips" has removed revenue streams further and further from the services they pay for and rendered local government financing virtually impossible for the public (or anyone) to understand.

Many have discussed the deteriorating state/local fiscal relationship for years. There is little disagreement about the need for reform. Affected constituencies argue about the details, but not about the need for change. The Senate Local Government Committee's 2001 report "Tension & Ambiguity: A Legislative Guide to Recent Efforts to Reform California's State/Local Fiscal Relationship," summarizes the reform efforts.

The Legislature has picked away at change, but it has never fully attempted a statewide comprehensive reform package. The more comprehensive attempts were SB 1982 (Alpert, 2000) and its companion piece (SCA 18 (Alpert, 2000), and AB 1221 (Steinberg, 2003). The Alpert package would have changed the allocation method of the local sales tax and streamlined the mandates claim process while the Steinberg bill would have swapped local sales tax for property tax. Both efforts met with strong resistance from both local officials and legislators and neither made it to the governor's desk.

Local governments are increasingly concerned by the lack of a legislative solution, the continuing attempts to shift additional property taxes, the dysfunctional mandate reimbursement process, and the uncertain future of the vehicle license fee (VLF), including the promised backfill. As a result, the California State Association of Counties (CSAC), the League of California Cities, and the California Special Districts Association (CSDA) want to regain control of local revenue streams. Although they continue to work closely with legislators, CSAC, the League, and CSDA have filed a proposed November 2004 ballot initiative, the Local Taxpayers and Public Safety Protection Act.

Former Assembly Speaker Robert Hertzberg has been engaged in improving local governments' financial well being for many years. As Speaker, he expressed increasing concerns with a lack of stable and secure local government revenue sources and the ensuing deterioration of California's local quality of life. He has described sales tax chasing, the lack of accountability of both the state and local officials to the voters, and the resulting "blame game" as disturbing. Continuing his efforts to realign the state/local fiscal arrangement, Mr. Hertzberg, along with Curt Pringle, Mayor of Anaheim and former Assembly Member John Campbell, has filed the California Home Rule Amendment for the November 2004 ballot.

The Local Taxpayers and Public Safety Protection Act seeks to protect local revenue sources and improve the mandate reimbursement process. It makes two substantial changes to the California Constitution.

Local Revenue Protection. The initiative adds Article XIIIE, protecting local revenues. For this article it defines a "local government" as a city, county, a city and county, special district, redevelopment agency, but explicitly states that it does not include a school district, community college district, or county office of education.

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Specifically, the initiative says that any measure enacted by the Legislature that reduces, suspends, or delays revenues to local governments from the property tax, local sales tax, VLF, including the backfill amount, VLF backfill "gap" loan, or fails to reinstate the suspended half-cent local sales tax in the triple flip on time, must be approved by the Legislature by the same vote required to approve a budget bill (currently 2/3) and does not take effect until it is also approved by a majority of voters at the next statewide election.

These provisions cover the allocation of property tax revenues, including redevelopment property tax increment, any remittance of property tax to the state or a state-created fund (e.g. ERAF), the property tax associated with the triple flip, and changing the allocation method of the local sales tax. They also apply to reallocating property taxes among local governments unless they consent. These provisions do not apply to a VLF (including the backfill amount) reduction if the Legislature appropriates funds to fully offset the reduction.

Because the initiative does not apply to school districts, it does not preclude the Legislature from shifting property tax shares from schools to other local governments or from returning ERAF.

These revenue protection provisions are retroactive to November 1, 2003. Any measure enacted into law after November 1, 2003 that would have required voter approval under this initiative must be submitted to the voters at the next statewide election. Any such measure would be suspended as of the initiative's effective date, pending the outcome of the election. If the measure subsequently fails at the statewide election, the law never takes effect. If it passes, the law takes effect as of the successful election and is not retroactive to its original effective date unless the Legislature reimburses the affected local governments for their losses during the suspension period.

State Mandated Local Programs. The second piece of the Local Taxpayers and Public Safety Protection Act affects reimbursements to local governments for state mandated services. The initiative does not narrow the definition of a "local government" for its mandate provisions and this applies to all local governments, including schools.

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