May 6, 2004 - From the February, 2002 issue

Will AB 680 Advance State/Local Fiscal Reform? Steinberg/Silva Offer Perspectives On the Bill

The financial relationship between state and local governments was irrevocably changed after the approval of Prop. 13 and the ERAF shift. Those actions mark what has become an ongoing and downward spiral of distrust between those two bodies. AB 680 hopes to end that by reallocating the sales tax so that we begin to prioritize long-term and comprehensive solutions across jurisdictional boundaries. MIR is pleased to offer the following interviews with Assemblyman Darrell Steinberg, the bill's author, and PPIC's Fred Silva, an expert on the state/local fiscal relationship, in an attempt to understand the issue & ascertain whether AB 680 will help policy makers better address our dysfunctional fiscal system.

Fred Silva

Assemblyman Darrell Steinberg

Darrell, could you address AB 680 and your leadership role in advancing this legislation? Perhaps you could help our readers understand the state/local fiscal challenge and the need for AB 680's targeted reforms.

Everyone likes to talk about regionalism. It's a much-heralded notion. But what I've found is that there is a long distance between talking about it and translating that talk into real action. Action involves real choices. And AB 680 represents a discussion that must be had.

The problems and challenges of regions throughout the state know no city or county boundaries-traffic jams, housing and air quality do not go from bad to good merely by crossing a city or county border. These are regional problems that demand regional solutions.

But the current system is not set-up to deal with these issues regionally. What the current system does is inhibit and discourage municipalities from dealing with those issues. It encourages an "every jurisdiction for itself" mentality that results in skewed land use decision-making, a system of haphazard regional development and endless competition instead of consistent cooperation. AB 680 is an attempt to address that problem and change that system.

What AB 680 does is take the growth in the sales tax in the Sacramento region and divides it essentially two-thirds/one-third-a third pure back to cities, a third across the population and a third back to cities if affordable housing, social service, open space and infill goals are met. The base is not touched, this only redistributes the growth.

You served in local government and now serve as the new Speaker's Chair of the Assembly's Appropriations Committee. In light of such experience & responsibilities, what are the built-in tensions between the needs of local governments post-Prop 13 and the state's role in funding local government? What are the turf wars that arise from this fiscal relationship.?

At its core, the source of this tension is Prop. 13 and the subsequent actions by the state that have made it more difficult for local government. The result is a system, which again, pits every jurisdiction against one another. And local government has a right to be unhappy about that system. And their belief that the state-local fiscal relationship should be looked at comprehensively is a valid point. I agree with that. But that does not mean that we have to wait for a comprehensive reform of the entire system before we fix what we know is broken. If we continue to cling to that type of thinking we're never going to get started. That is a recipe for inaction.

A columnist in the Sacramento Bee has been hounding you for the last month, allegingthat weaknesses might exist in your proposals. Could you address Dan Walter's assertions and whether your bill will encourage more or less collaboration among jurisdictions in your region.

His assertions are just plain wrong. When you can't argue the policy, you resort to the lowest common denominator. The assertion that this bill is a contrived cash grab and that I'm merely trying to take money from the rest of the region and give it to the city and county of Sacramento is simply wrong. That's not what I'm doing. And it's certainly not what motivated me to get into this issue.

Why is it good policy that if I'm from city A and I spend my hard-earned money in city B, that every dime of the local sales tax ought to go to city B? We're a region here. That's not logical policy. The system sets up a perverse incentive, it's not healthy and ought to be changed.

Fred Silva, of the Public Policy Institute and a respected guru in the Capitol on state-local finance, commends you for getting this issue even voted upon-something that the California Constitutional Revision and Antonio Villaraigosa's Commission on State-Local Fiscal Relationships were not able to do. But he asserts that simply focusing on the redistribution of a locally-levied tax rather than a state-levied tax forces local jurisdictions to complain louder. Does his critiism have merit?

Fred's assertion gets back to the argument of, "in the absence of fixing the entire system, you ought not to start to fix what you know is broken." I disagree with that. You fix what you know is broken.

And again this gets to the fundamental question of the state shifting back some of its resources to local government. I'm all in favor of that. However, the fact of the matter is we have a $12.5 billion deficit. That kind of shift is simply not going to happen this year. Our goal needs to be to protect local government from any further hits.

Why is the current systen such a problem? Take into account the investments and subsidies that cities and counties have made to attract retail. Imagine if that same money was paid to attract research and development, light manufacturing, more housing. I understand the fact that local governments look at their history with the state and are wary of this sort of proposal, but we must get past that initial hesitance and begin to really understand what the proposal is trying to do-keep money in the region, add value by giving any region that does the right thing higher priority for state transportation and housing dollars and change the system prospectively.

I made it very clear as I pushed forward with this proposal that I have an open door. There is an opportunity here for people who've thought and worked on these issues for years to come forward with their alternatives. I'm open to that. There's no such thing as a perfect bill or perfect idea. I wish that rather than merely turning their back and doing nothing but oppose this bill, that those who agree that the current system is broken come to the table and help devise solutions. This bill offers them an opportunity to do that.

Darrell, let's close with this question. Some people would say that the only thing that works in Sacramento with respect to fundamental change is what's termed "creeping incrementalism" Perhaps your bill, AB 680, is moving forward because you've only focused on your region, Sacramento, and you're taking measured half-steps to address this challenge. Is there no way to pass more fundamental reforms thatwould better allign state/local governments and acknowledge that local boundaries are increasingly less important than regions? Are those seeking system reform left only with incrementalism?

You move forward as fast as you can. Despite the rough and tumble nature of this bill, I'm very happy with what has occurred here in terms of the level of discourse and discussion on this issue. The question now is, can that energy be turned into the beginnings of comprehensive change? That's what I seek.

This bill made it through the Assembly against big odds. We've got time now before Senate deadlines begin to kick in. This is the first step and it will lead to second, third and fourth steps. Politics is the art of moving an issue forward. You don't accomplish everything at one time. But we can't go back. Our quality of life is dependent on thinking as a region and acting as a region.


Fred Silva

Fred, in an attempt to redefine the state-local fiscal relationship and offer a model for regions around the state, Asm. Darrell Steinberg this session proffered AB 680, the Sacramento Regional Smart Growth Act. It recently passed the Assembly with a 41-27 vote. Give our Southern California readers a quick overview of what that bill includes & how it intends to improve the current state-local fiscal relationship.

The dilemma that communities face is that they rely too heavily on their locally levied sales tax to finance local community services. This problem exists because they get a relatively small share of the property tax. And that distribution of the property tax is controlled by the state. Some years ago, the state decided to give most of the property tax to our schools and allocated a smaller share for community services. That problem has existed since the early 1990s and is one of the consequences of Proposition 13 era because communities have had to deal with major state restrictions and a lack of control over their local resources.

The sales tax is one of the last remaining locally levied taxes. In Los Angeles County, most of the cities, including L.A., place a fairly high reliance on the sales tax because they exert land use control allowing them to approve more commercial development and they have no control over how much of the property tax they will get to keep for local services. That has set up a situation where a given local government will seek more retail land uses in order to maintain these local revenues.

AB 680 seeks to take a piece of that locally levied sales tax and redistribute it within the Sacramento region-it is basically California's first experiment with sharing a locally levied tax within a region. The pitfall in this approach is that it seeks to reallocate a tax that is levied by individual cities for their constituent services and reallocate it for other communities for their use. As long as we are proposing the redistribution of a locally levied tax there is going to be continued opposition on the part of the cities who are the losers. Without putting the state controlled property tax in the mix you are destined to have the losers fighting the winners.

It sounds like you're articulating the challenge and solutions that were incorporated in the Constitutional Revision Commission, Speaker Villaraigosa's State-Local Fiscal Reform Commission, and Speaker Hertzberg's Commission on Regionalism, none of which have been picked up by the Legislature. Is it fair to assert that Asm. Steinberg is trying to take half a loaf when a whole loaf was impossible to secure?

Over the last 8 years various commissions and task forces have been formed to try to resolve several interrelated issues. The solution everyone is looking for attempts to solve three problems: provide sufficient resources to meet the service demands of city and county residents, treat all communities in an equitable manner and is neutral to land use decisions.

The Constitution Revision Commission in the mid-1990s, Speaker Villaraigosa's Commission on State/Local Finance Reform and Speaker Hertzberg's Commission on Regionalism and task forces of the League of California Cities and The California Association of Counties have all focused on a core problem of how communities finance their services and what incentives there are for balancing land use choices. That's the core of the problem. In each case these groups have looked at both the property tax and the sales tax, one controlled by the state and the other controlled by local government. I do not believe it is possible to fix this system by the state simply moving around a locally levied tax. That's the difficulty in the Steinberg bill. It simply takes one existing local tax and moves it around. That is not a solution for the state-local finance problem. It is also not a solution to the fiscalization of land use problem. A growing community that has a low share of the property tax-even with the tax sharing formula-is still going to go after retail. Having said that Assemblymember Steinberg should be thanked for opening a debate on an issue that both the Constitutional Revision Commission and the State-Local Finance Commission had trouble doing. We should be patient and recognize that this problem has been with us for a while and it will take some time to fix it.

You mention that this bill is more an incremental reformthan the broad-based efforts that have been proposed in the past. Give our reader's more insight into what this bill really intends to cure. Does it truly address the state/local fiscal problem, or does it just create another level of bureaucracy and infighting between cities within a region?

In Asm. Steinberg's allocation system, he plans on allocating one-third of the sales tax back to the city that levied it, another third is distributed based on population and another third based on local efforts at meeting housing goals. Any remaining amounts do to the lack of compliance with housing goals is given to the 6 county council of governments, made up of locally elected officials who would use it for projects of regional interest. I tend to be a little bit of a skeptic about our approaches toward regional decision-making because we've used an informal system for of dealing with regional issues for 45 years. What the state needs to say is that it's time to give an institutional role to regional decision-making. It may be time to enact an authorizing statue (not a mandate) for regional decision making so that there would be a context in which these decisions would be made. We need to have a statute that outlines powers and duties of regional entities. Before we can begin to give money to an entity for "regional interests", we're going to need that mechanism in place.

The other part of this that is troubling, but natural in a legislative process, is that certain entities that are not happy with this bill have already figured out how to craft exemptions. And that has caused this bill, which started as a positive step towards fixing the state/local finance mechanism, to begin to take on a different, less revolutionary shape.

As mentioned earlier, the local finance proposals made in the past have suggested that the property tax be used for municipal services. The sales tax ought to be levied on a countywide basis that would match up with general economic activity rather than municipal boundaries.

What should our readers expect the spin-off of the current debate on this bill's provisions, albeit a regional bill, be for other regions and for state fical policy going forward? If you were making a prognostication, does passage or defeat have any ramifications beyond the Sacramento region?

Yes it does, and it may be time for local governments to foster innovation in local finance. It's probably time for individual regions to look at their own local finance structures. I am convinced that every time a fairly comprehensive proposal comes along it's not acted upon simply because the state is too complicated.

We're all benefiting from Steinberg's approach of looking at one region and getting a dialogue going. It may be time for the Southern California region to begin working to solve this problem. A locally crafted solution is far better than one mandated from Sacramento.

The Speaker's Commission on Regionalism has suggested that the state authorize a series of approaches and that regions get to work on this issue. That is one of the benefits of the good Mr. Steinberg. He's doing it. You need to look at regional issues and set up a mechanism to deal with it straightaway. After doing that, then you can focus on an issue like the fiscalization of land use. This bill mixes the two of them up. That's a tough problem. We have to take them one at a time.

While that may be the rational approach, given the failure of rationality to lead the reforms of the process, should we grudgingly give accolades to Mr. Steinberg for finding a way to politically move ahead on his reforms?

As I said earlier, the benefit of what Mr. Steinberg has done is he has put this issue on the policymakers' agenda. It's by his tenacity that he's done that. We should thank him for doing it. My own criticism is more in the elements of it than the fact that he's attempting to deal with it. He should be congratulated for getting it as far as he has.


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