Property Tax Allocation Hearing - September 21, 1999 - Summary Report

Property Tax Allocation


The Summary Report from the Interim Hearing of the Senate Local Government Committee


Tuesday, September 21, 1999
State Capitol, Room 112
Sacramento, California


Summary Report
Table of Contents

Property Tax Allocation
Staff Findings
The Witnesses
Introductory Remarks
Recurring Themes
Public Comments
Future Prospects
Briefing Paper



On Tuesday morning, September 21, 1999, the Senate Local Government Committee held an interim hearing at the State Capitol in Sacramento to review property tax allocation issues. Three State Senators received testimony from local officials, business leaders, policy analysts, and legislative advocates. The Committee’s hearing began at 9:35 a.m. and continued until 12:20 p.m. About 75 people attended the hearing. The three Committee members who participated in the hearing were:

  • Senator Richard K. Rainey, Committee Chair
  • Senator K. Maurice Johannessen
  • Senator Richard G. Polanco

This summary report contains the Committee staff’s explanation of what happened at the hearing and the briefing paper that the staff wrote for the Committee. The witnesses submitted over 100 pages of statements, charts, and other written materials that appear in a printed version of the committee's final report. To order a copy, contact Senate Publications at 916-327-2155 and ask for stock number 997-S.



Any attempt to distill three hours of presentations and discussions into a few findings must necessarily gloss over important details and subtle nuances. But after carefully considering the witnesses’ testimony and after reading the written materials, the Committee’s staff identified nine findings:

  • Property taxation is a state-dominated system. Local officials control none of the components of the property tax system: base, rate, or revenues. The California Constitution controls both the property tax base and tax rate. State statutes allocate the resulting property tax revenues. With 53% of the property tax revenues going to the schools --- a state responsibility --- it’s a state-dominated system.
  • The allocation formulas are outdated. Based on taxing and spending patterns from the mid-1970s, the formulas for allocating property tax revenues have only a faint relationship to current service levels and costs. No witness defended the current method of allocating property tax revenues.
  • Reallocating property tax revenues within the current system is a zero-sum game. To increase one agency’s share of property tax revenues requires taking money from other agencies, a situation that economists call a "zero-sum game." There was a broad understanding among the witnesses of this pernicious practice.
  • The ERAF shifts still restrict local officials’ ability to deliver local services. Although the state government has mitigated some of the burdens created by the ERAF shifts with both programmatic and fiscal relief, other programs still lack adequate funding. Nonenterprise, non-public safety special districts remain the hardest hit.
  • Redevelopment’s share of property tax revenues is greater than realized. A fresh look at redevelopment agencies’ property tax increment revenues disclosed surprising diversions from other local governments. Witnesses pointed out how these highly localized conditions can produce fiscal stress.
  • Allocating property tax revenues has land use consequences. The "fiscalization" of land use means that local officials use their planning and development decisions to pursue revenue generating land uses and not necessarily the goals of balanced economic development, environmental quality, and social equity. When debating property tax reallocation, policy makers must keep land use results in mind.
  • Support is growing for reallocating property tax revenues based on services. There is increasing interest in restoring the link between what property owners pay in taxes and what they receive in services. Witnesses repeatedly referred to local service levels when describing distortions in the current system.
  • Reallocation may require increasing local revenues. Because reallocating property tax revenues is a zero-sum game, state officials may need to boost local revenues to ease the competition for current revenues. But it’s clear that there’s no consensus on this issue.
  • Suggestions for reform are starting to emerge, but there’s no consensus yet. It’s widely accepted that the property tax allocation system needs reform. Several groups, task forces, and commissions have documented these problems and some have proposed alternative solutions. But serious thinking and political leadership must emerge before these proposals can replace the current system.




The following fourteen people addressed the Committee:

Marianne O’Malley, Principal Analyst
Legislative Analyst’s Office

Michael Coleman
Municipal finance consultant

Michael Kodama, President
Michael R. Kodama Planning Consultants

Honorable Christian P. Christiansen, Mayor
City of Covina

Honorable Gary G. Larson, Mayor
City of Chino Hills

Pat Leary, Legislative Advocate
California State Association of Counties

Baxter Culver, Legislative Advocate
County of Sacramento

Jeff Dubshansky, General Manager
Fulton-El Camino Recreation and Park District

Fred Silva, Government Relations Advisor
Public Policy Institute of California

John P. Chamberlain, President
Orange County Taxpayers Association

Professor Rob Wassmer, Graduate Program in Public Policy and Administration
California State University, Sacramento

Reed L. Royalty, Past Chairman
Orange County Business Council

Betty T. Yee, Chief Deputy Director
State Department of Finance

Steve Sabbe, Resource Specialist
Calleguas Municipal Water District

In addition to the 14 witnesses’ remarks, the Committee received written advice from:

Joseph M. Goeden, City Manager
City of West Sacramento



Senator Rainey opened the Committee’s hearing by noting that the allocation of property taxes is always controversial. He observed the background paper’s assertion that "there is no equity, there are only different forms of inequity" in allocating property tax revenues. Rainey explained that he had called this hearing after talking with municipal officials who had noted the disparity between the services they deliver and the property taxes they receive. Learning more about these inequities and about attempts to achieve fairness will help legislators prepare themselves for working on bills when the Legislature reconvenes next January, Rainey said.



Eight themes appeared repeatedly during the witnesses’ comments. Although not all of the witnesses agreed, most of them recognized the same problems. The written materials convey the witnesses’ exact words, but this section summarizes their views.

State control over tax allocation. Representing the Legislative Analyst’s Office, Marianne O’Malley told the legislators that the property tax system is essentially controlled at the state level. By controlling the property tax base, property tax rate, and the allocation of the resulting property tax revenues, Proposition 13 shifted the locus of decision making from city halls to the State Capitol. Later, she demonstrated local variations by comparing property tax allocations in four tax rate areas in Contra Costa County. "It doesn’t make a lot of sense and it’s not under local control," O’Malley proclaimed. Later, reacting to proposals for removing the state’s control over the distribution of property tax revenues, Senator Johannessen expressed his skepticism by saying, "It’ll be hard because they’ve had their snout in the trough so long."

Outdated allocations. Witnesses from both the public and private sectors understood that the statutory formulas for allocating property taxes enacted in the late 1970s are increasingly irrelevant at the turn of the century. Perhaps the most vivid comment came from the LAO’s Marianne O’Malley who said, "We’ve flash-frozen the property tax preferences of the 1970s, and like anything that’s been left in the freezer too long, it’s not particularly palatable."

Chris Christianson, Covina’s mayor, agreed that "It’s time to reexamine the property tax system." Chino Hills mayor Gary Larson called for a "clean sheet" approach that does not rely on past formulas. In his letter to the Committee, West Sacramento city manager Joe Goeden agreed that "a comprehensive review of tax allocation is in order for the three major tax sources in California - property, sales, and income."

Representing Orange County taxpayers, John Chamberlain urged legislators to avoid allocation formulas that "contribute to the continuing bedlam affecting underfunded local governments." Reed Royalty, an Orange County businessman, said that it was "particularly galling" for taxpayers to find that property tax shares are locked into place especially when those outdated formulas keep public officials from delivering the "humble services" that businesses want from their local governments.

Reversing ERAF. The Educational Revenue Augmentation Fund (ERAF) continues to annoy local officials. Reversing ERAF was the primary recommendation from Jeff Dubchansky, the park district manager. Likewise, water district representative Steve Sabbe supported returning ERAF dollars "to where they rightfully belong."

But Finance’s Betty Yee told the Committee members that, "A more comprehensive approach is more appropriate than just reversing ERAF." Part of that exercise involves recognizing the fiscal and programmatic relief that the state government has already provided. According to Yee, "The Administration is going to be fairly aggressive" in its accounting for ERAF mitigation.

Land use implications. Just as land use decisions have fiscal consequences, the allocation of revenues affect land use choices. Municipal finance consultant Michael Coleman linked the fragmented structure of local governance to confusion over local responsibilities for delivering public services. Further, Coleman argued, this fragmentation contributes to the fiscalization of land use. Speaking for the Davis Administration, Betty Yee noted that "skewed fiscal incentives" result in the fiscalization of land use. The state’s revenue and taxation rules entice local officials to pursue land uses that generate revenues and avoid other uses that result in high service costs. CSAC’s Pat Leary explained that counties "focus on property tax because it’s a ‘good’ source" of revenue --- it’s predictable, stable over time, and does not distort local land use decisions. West Sacramento city manager Joe Goeden wrote to the Committee members suggesting that the state’s reapportionment of property, sales, and income taxes "can ‘guide’ development throughout the state, yet leave room for local decision-making."

Redevelopment’s effects. Noting the permutations caused by redevelopment agencies’ use of property tax increment financing, the LAO’s Marianne O’Malley explained that sometimes a redevelopment agency gets a bigger share of property tax revenues than the city government itself. O’Malley cited San José as one of those communities. According to the Department of Finance’s Betty Yee, the Davis Administration will focus on redevelopment funding (especially for affordable housing) when it reviews how tax allocations influence the fiscalization of land use.

Reallocation is a zero-sum game. More than in previous years, witnesses and legislators acknowledged the difficulty of changing the current property tax allocation system without creating losers in the attempt to produce more winners. They recognized that attempts to reallocate a fixed amount of revenue is invariably a zero-sum game. When describing the Legislature’s shift of property tax revenues from counties in the 1980s to help the no- and low-property-tax cities, the LAO’s Marianne O’Malley quipped, "There is no free lunch." Finance’s Betty Yee acknowledged that the existence of a zero-sum game was the first of three major challenges facing reformers.

Later, Chino Hills Mayor Gary Larson told the legislators that "Maybe it’s time to take a clean sheet of paper and figure out what makes sense." Senator Rainey responded that working from a clean sheet is probably a good idea, but the results would be "a zero-sum game" that produces winners and losers.

CSAC’s Pat Leary contended that "Reallocation is just picking someone else’s pocket." Representing Sacramento County, Baxter Culver noted that "Counties are at a point where there isn’t much left to move around."

New local revenues? One of the lessons that the Legislative Analyst’s Office is learning from the study commissioned by AB 676 (Brewer, 1999), is that legislators can’t hold to revenue neutrality when fashioning fiscal reforms, explained Marianne O’Malley.

Voter approval of Proposition 218 made it harder for local officials to raise local revenues from non-tax sources such as benefit assessments, according to Gary Larson, Chino Hills mayor.

Jeff Dubchansky suggested that nonenterprise special districts share in sales tax revenues. West Sacramento city manager Joe Goeden and CSUS economist Rob Wassmer both recommended that local agencies receive some revenues from the income tax. Wassmer also listed the alternative of giving local officials the option of raising local revenues. That remark prompted Senator Johannessen to retort that the economics professor had never met a tax he didn’t like. Curing local fiscal problems with more taxes, Johannessen said, was "not acceptable."

When Wassmer acknowledged that putting more state funds into local programs might mean cutting state programs to find the money, Senator Polanco said that the idea might not be so far fetched. For example, Polanco explained, "Everyone sits kind of quiet" when Governor Davis proposed spending $350 million on another state prison when the money could have gone to satisfy local requests instead. What could local officials have bought with that $350 million, Polanco asked rhetorically. Legislators need to "start talking about what is really an opportunity."

In her later remarks on behalf of the Davis Administration, Betty Yee agreed with the need to "bring more balance into the kinds of revenue available to local officials." She agreed with Senator Polanco that setting the state’s spending priorities requires tough political and policy choices.

Service levels and revenue shares. Municipal finance consultant Michael Coleman told the Committee members not to be surprised when others discover that different cities receive differing shares of property tax revenues. "All cities are not created equally," Coleman said. He distinguished between what he termed "partial-service cities" where special districts and county departments deliver municipal-type services and "full-service cities" that pay for a complete range of facilities and services. In most full-service cities, the cost of fire protection is greater than the cities’ property tax revenues. Representing Covina’s interests, Mike Kodoma contended that the current property tax allocation system discriminates against certain cities.

CSAC lobbyist Pat Leary told the legislators that focussing on property tax allocation was using the "wrong end of the telescope." Instead, she argued, policy makers should be looking at local governments’ service levels when debating reallocation issues. Instead of guaranteeing revenue shares, legislators should look at communities’ differing levels of service, and then determine an appropriate mix of revenue sources. With agencies delivering different services, Leary asserted "there’s no pat answer."

Baxter Culver, Sacramento County’s lobbyist, pushed this same theme with the Committee members. Instead of looking at property tax allocations in a vacuum, Culver said, legislators need to compare cities’ per capita revenues by adding together their property taxes, sales taxes, and redevelopment revenues. Then legislators should consider if the city is full-service or limited-service.

Business interests support restoring the link between the taxes paid and the purposes for which local officials spend the resulting revenue, explained Reed Royalty, the Orange County business representative. Maybe it’s "the politics of envy," Royalty said that drives the comparisons among different communities.



Following the Committee’s traditional practice, Senator Rainey asked if anyone in the audience wanted to offer additional advice.

Steve Sabbe is a resource specialist for the Calleguas Municipal Water District which provides wholesale water to communities in Ventura County. The water district supports legislative efforts to reverse the ERAF shift and return property tax revenues to local governments "where they rightfully belong." When local voters approved the District’s creation in 1953, Sabbe said, they intended for their property tax dollars to support the development of water service.

The Committee also received a thoughtful letter from Joe Goeden, city manager for the City of West Sacramento. Goeden’s letter asks the Legislature to use the state laws on property, sales, and income taxes to influence local officials’ development decisions. By changing the rules for revenue and taxation, legislators can change the incentives for the choices about land uses.



What can the Committee members expect in 2000? Responding to a question from Senator Rainey about the LAO’s study and recommendations for reforms, Marianne O’Malley explained that the Analyst intends to meet the Legislature’s December 31, 1999 deadline for delivering recommendations for allocating property tax revenues.

While discussing the difficulty of enacting reforms, Senator Rainey suggested that sweeping changes may need to go to a statewide ballot measure to succeed. Taking that theme further, CSAC’s Pat Leary noted that the bill implementing the State Budget’s fiscal relief (AB 1661, Torlakson, 1999) offers two "prizes" to local governments: capping ERAF and returning the growth to local governments, and having the state government pay property tax administration costs.

Taxpayers’ advocate John Chamberlain told the legislators that they needed to pursue three steps: acknowledge the problem, "resolve to solve" the problem, and then solve the problem. The current strong economy gives the Legislature a better opportunity to achieve change.

Looking beyond local agencies’ routine operating costs, park district manager Jeff Dubchansky recommended relaxing the existing requirement for 2/3 voter approval for passing long-term local bonds needed to pay for capital costs.

Economics professor Rob Wassmer offered his "more normative opinions," listing five recommendations, ranging from the least to most the preferred: reverse the ERAF shift, create a new allocation formula, fund state mandated local programs, encourage greater use of discretionary local revenues, or allow local officials to raise local revenues.

After conceding how hard it is to "change the order of things," long-time policy observer, Fred Silva focussed the Committee members’ attention on three different approaches to reform:

  • Charter reform. The Constitutional Revision Commission understood that to reallocate tax revenues requires reallocating service responsibilities and the best way to achieve that goal would be to require voters to act on new local charters.
  • Incremental change. Proposals to swap shares of sales taxes for property taxes has initial appeal but while it "works fine for cities" it does not work for county governments.
  • Starting over. A more "global approach" would invite policy makers to rebuild the local property tax system by reversing ERAF, reallocating revenues based on service needs, and reallocating the schools’ shares of property tax revenue based on the number of students they service, not situs.

The Committee members and their witnesses were particularly interested in how the Davis Administration might approach these issues in 2000. Representing the Department of Finance, Betty Yee urged a broader approach to local government finance reform than merely reversing the ERAF shifts of the 1990s. Property tax reallocation reform should occur within the broader, more comprehensive context of long-term reform of the state-local fiscal and programmatic relationships.

More specifically, Yee listed four elements:

  • ERAF relief, consistent with an accounting for mitigation measures.
  • Local sales tax allocations, mindful of the impact on land use decisions.
  • Redevelopment projects, minimizing the effects on the State General Fund.
  • Affordable housing, encouraging local efforts.

Recognizing that several other groups have already studied these issues and tested alternative recommendations, Yee explained that the Davis Administration would not attempt "to reinvent the wheel." OPR Director Loretta Lynch has already had informal discussions with local official about the recommendations that are coming from those other efforts.

Yee then posed four challenges that policy makers will face in 2000 when they try to achieve local fiscal reforms:

  • Zero-sum game, recognizing there may be winners and losers.
  • Variations among local governments, a "cookie-cutter approach will not work."
  • Fiscal relief versus programmatic relief, noting that property tax administration is "something we have to grapple with this [coming] year."
  • Sustainability is key to the land use consequences of fiscal decisions.


The Briefing Paper


Table of Contents


Property Tax Allocation
About This Paper
Everything’s Connected
In Search of Equity
How Did We Get Here?
Redevelopment Complicates Everything
Audits: To Err Is Human, To Forgive Is Legislative
Another Burden: The Cost of Property Tax Administration
No & Low Cities: Reach Out And Grab Someone
Educational Revenue Augmentation Fund: Shift Happens
What Happened in 1999: Relief But Not Reform
Prospects For Change
Policy Topics
Sources & Credits

Property Tax Allocation


California’s property owners pay more than $20 billion in property taxes every year.

  • Where does their money go?
  • Where should their money go?
  • What is the equitable way to allocate property tax revenues?

The hard lesson to be learned about property tax allocation is that there is no equity, there are only different forms of inequity. The California Constitution charges the Legislature with the duty to allocate property tax revenues. Nevertheless, intergovernmental politics --- more than constitutional principles --- influence the state laws that distribute revenues to counties, cities, special districts, redevelopment agencies, schools, and community college districts. The struggle over who gets what continues to generate friction and dissent.

About This Paper


This briefing paper prepares the members of the Senate Local Government Committee for its interim hearing on "Property Tax Allocation," on Tuesday, September 21, 1999, at the State Capitol in Sacramento.

An interim hearing is a special meeting that a legislative committee conducts during the California State Legislature’s fall interim recess. One of the central purposes of any legislative body is to study public policy issues before they become crises. Senate Committees, for example, periodically review public finance topics and then legislators author bills.

It’s been a dozen years since the Senate Local Government Committee last held an oversight hearing on property tax allocation. In December 1987, the Committee heard 30 witnesses describe the problems they faced because of the way that state law allocates property tax revenues. Since then, there have been several major adjustments to those statutes, making it appropriate for legislators to return to the topic.

Everything’s Connected


When legislators start to examine the state’s rules for allocating property taxes, they quickly discover that the issue does not exist in isolation. Tug at one strand in this ball of yarn and you will find it leads to other, similarly complicated topics.

Any discussion of counties’ shares of property tax revenue immediately triggers a debate over the state’s responsibility to fund county-run programs in public health, social welfare, and justice.

Raise the issue of cities’ property tax shares and the discussion quickly turns to incorporations, annexations, dependent districts, and redevelopment agencies. The competition among and between cities and counties for property tax revenues is well known.

Ask about special districts’ property tax receipts and the topic of government structure, subsidized public services, and community preferences comes into the open.

Any suggestion that schools should get less property tax revenue because they’re the state government’s constitutional responsibility instantly provokes protectionist moves by state officials worried about managing the State General Fund.

As a tax on wealth (that is, the accumulated value of land and improvements), the property tax may not be well suited to paying for public programs that are not related to property. But broach the possibility of restricting property tax revenues to agencies that provide property-related services and there’s a debate over the fiscalization of land use. When new investment in real property produces limited tax returns, communities go in search of other revenues, including sales taxes.

Local and state officials who are searching for simple alternatives to the current rules for allocating property tax revenues are going to be disappointed. As the Legislative Analyst’s Office pointed out in 1996, four factors explain why local governments’ property taxes vary:

  • High property values yield high property tax revenues.
  • All local governments are not the same.
  • Redevelopment influences property tax receipts.
  • State rules on property tax allocation.

In Search of Equity


If politics is defined as the allocation of scarce resources, then it’s no surprise that the legislative efforts to allocate property tax revenues after Proposition 13 have been intensely political. The political process invites elected officials to make choices among and between competing interests. These decisions award property tax revenues to competing groups, reflecting the decision-makers preferences for some values over other competing values. The winners can justify their success by praising the decision-makers’ fairness and sense of equity. Losers sometimes characterize the results as inequitable and unfair. Sorting out the competing claims about fairness and equity is difficult because the interest groups advocate different values.

Compounding a legislative search for equity is the astounding diversity of California’s local agencies: 58 counties, 473 cities, 403 redevelopment agencies, 3,400 special districts, and 1,100 school districts. Given their differing fiscal and physical settings, each of these governments has a different response to the allocation of property tax revenues. Each agency faces a unique set of service demands and fiscal resources, producing a wide variety of local experiences. Although counties must deliver the same types of state programs, even adjacent counties find themselves unlike one another. Three recent studies demonstrate these widely varying conditions:

  • The California Research Bureau surveyed eight counties to find out how budget cuts affected their services and their constituents. Researchers visited county officials to find out how they coped with fiscal stresses. The counties reported remarkable variations in their responses to the ERAF shifts. The CRB reported that some had to make major adjustments while in other counties, revenues bounced back rather quickly.
  • Researchers at the Graduate Program in Public Policy and Administration at California State University, Sacramento used econometric techniques to inquire into the causes and consequences of fiscal stress among counties. Using published data, they found that counties responded to fiscal stress by changing the ways they budget, spend, and generate replacement revenues.
  • A study commissioned by the League of California Cities documented how cities changed their spending and revenue behaviors in response to voter-approved initiatives and the state’s property tax shifts. City officials altered their spending priorities during a period of high population growth while coping with revenue limits.

Economists call the allocation of a fixed resource a zero-sum game because for every winner there must be a loser. When legislators change the rules that allocate scarce property tax dollars, they inevitably create losers in order to create winners. Every dollar that legislators send to one type of local agency comes at the expense of some other agency. For example, the recently unsuccessful attempt to increase the City of Hesperia’s share of property taxes would have cost the County of San Bernardino an equal amount (AB 1057, Olberg, 1999).

The Senate Local Government Committee must confront a central question at its September 21 interim hearing: what is equity? A wholly cynical answer could be: Equity is achieved when you get 21 votes in the Senate and 41 votes in the Assembly. In a blunt political sense that’s true because a majority of the people’s elected representatives support the result. If there is broad political support for a program it must be acceptable. But there are at least three other possible responses to that question:

  • Historical shares. As later sections of this background paper explain, the current property tax allocation scheme relies on local agencies’ historical shares of property tax revenues. With only three weeks to adopt implementing laws after the passage of Proposition 13, legislators decided to allocate the remaining property tax revenues in proportion to what local agencies and schools received in the recent past. The use of historical shares from 1975-78 to allocate property tax revenues was politically expedient, allowing legislators to avoid a wide-open debate over alternative views of equity. Agencies with relatively higher levels of services and costs levied higher property tax rates before Proposition 13 and garnered relatively higher revenues as a result. Low cost and low service agencies pulled in relatively lower amounts of property tax revenues before Proposition 13. The use of historical shares to allocate property tax revenues essentially froze those differences into statute. Even though communities’ needs have changed since 1978, the basic premise is still in effect, 25 years after the base year period.
  • Per capita. Another possible way to achieve equity in the allocation of property tax revenues could be distributing money based on population. A per capita allocation formula would give more property tax money to the counties, cities, and special districts that have lots of residents. Among cities, Los Angeles would get the most because of its 3,781,500 residents while Vernon would get the least based on its 85 inhabitants. Equity is achieved because local governments would get an equal amount for each resident. But there is an immediately apparent shortcoming to the per capita approach: it bears no relationship to the types and levels of services that local governments provide. For example, a full-service city like Covina runs its own fire department and library programs while a low-service city such as Cudahy receives its fire protection from a special district and its library services from a county-run program. Allocating property tax revenues based on a per capita formula might appear to be equitable from one perspective but fails to achieve equity when compared to services.
  • Services. For all of its other faults, the property tax system that existed before Proposition 13 had the benefit of roughly linking taxpayers’ payments to the services they received. For example, the owner of a $100,000 property in downtown Redding might have paid $3,375 in property taxes before 1978 because the City, Shasta County, and the local schools each levied their own property tax rates, totaling $13.50 for each $100 of assessed value. Another $100,000 property in the remote rural reaches of Shasta County might have paid $2,125 in property taxes because its property tax rate was significantly lower at $8.50 for each $100. The downtown property paid more because it was inside local governments with higher costs, presumably reflecting higher service levels. By substituting a uniform 1% property tax rate, Proposition 13 ruptured the link between tax rates and service costs (or levels). Some local officials say that the Legislature should use the state’s allocation rules to restore the connection between what a property taxpayer pays and the services they receive. A full-service city should receive more property tax revenue than a low-service city.

How Did We Get Here?


When resources contract, conflicts expand. The Legislature has seen competition grow among local agencies for property tax revenues. The California Constitution restricts the property tax rate to 1% of full cash value, directing county officials to allocate the resulting revenues "according to law" (Article XIIIA, §1 [a]).

The initial bailout. When the voters approved Proposition 13 in early June 1978, they gave the Legislature until July 1, 1978 to implement the constitutional amendment. Legislators immediately responded by forming a conference committee and passing SB 154 (1978). SB 154 was the "bail-out bill" that initially allocated property tax revenues to local agencies and made up some of their revenue losses from the State General Fund.

SB 154 allocated revenues from the 1% property tax rate to all counties, cities, special districts, and school districts on a pro rata basis. The formula relied on the average percentage of all property tax revenues that each county’s local agencies had collected in the three prior fiscal years. For example, if the hypothetical City of Happy Valley had generated 3% of the property tax revenues in the hypothetical Klamath County, then Happy Valley received 3% of the shrunken revenues.

The bail-out bill also adjusted the financing of several health and welfare programs that the state shared with the counties. Additionally, SB 154 provided $878 million from the State General Fund to local governments as block grants. These state payments protected local agencies from falling below 90% of what their budgets would have been if Proposition 13 had not passed. Later, the Legislature supplied an additional $37 million to help special districts with their unmet needs (SB 2212, Gregorio, 1978).

AB 8 - The first long-term solution. The Legislature’s first long-term solution to restructuring local finance after Proposition 13 was AB 8 (L. Greene, 1979). Legislators wanted to create a new program of allocating property tax revenues that would restore fiscal stability and eliminate the need for annual bailouts of local governments. AB 8 crated a local property tax allocation scheme that allowed local agencies to benefit from the growth in property tax revenues produced by growth in assessed values.

Instead of an annual bail-out from the State General Fund, AB 8 shifted some of school districts’ property tax revenues to counties, cities, and special districts and then replaced the schools’ losses with increased state subsidies. Before Proposition 13, school received about 53% of all property tax revenues. By 1985-86, their share was just 37%. This "AB 8 shift" increased each local agency’s share of the property tax by the amount of its SB 154 block grant, as reduced to hold down the state’s cost. As it turned out:

  • Cities received 83% of their 1978-79 block grants.
  • Special districts received 95% of their block grants.
  • Counties received the sum of:

    The 1978-79 block grant, plus
    An amount specified in AB 8 representing the reduction in the state’s buy-out of AFDC costs, minus
    A new state grant for county health services.

AB 8 also allocated the growth in property tax revenues based on their location. This situs method of property tax allocation means that property tax revenues which result from increases in assessed value accrue only to the jurisdictions in which the increases took place. For example, the construction of a new warehouse on a vacant lot inside the City of Woodland boosts the assessed value of that parcel. The resulting increase in property tax revenues will go to the City, the local school district, the community college district, and the County of Yolo. The new property tax revenues will not go to other local governments or school districts in Yolo County that do not serve that piece of property. When the Legislature passed AB 8, one legislative staffer summarized the allocation rule as You get what you got in the prior year, plus growth.

And since then… Although SB 154 and AB 8 form the foundation of the rules for allocating property tax revenues, other forces have also shaped the current situation. It is impossible to think of the allocation of property tax revenues without appreciating the subsequent decisions by the Legislature and voters. As sketched by Michael Cohen of the Legislative Analyst’s Office, other actions influence the state-local fiscal relationship:

Proposition 4 (1979). The voters amended the California Constitution to require local agencies and the state government to set and follow spending limits. The state must reimburse local agencies for state-mandated costs.

State Budgets (1981-83). The Legislature repealed three subvention programs that had shared state revenues with local agencies to replace earlier local tax programs.

City taxing powers (1982). The Legislature gave general law cities the same taxing powers as charter cities.

Medically Indigent Adult Program Shift (1982). The Legislature shifted the MIA program to counties.

Mello-Roos Act (1982). The Legislature allowed local governments and schools to pass parcel taxes to fund public works and limited services, subject to 2/3 voter approval.

State Budget (1984). The Legislature raised vehicle license fees (VLF) and gave local governments the new VLF revenues.

Proposition 47 (1986). The voters amended the California Constitution to guarantee that vehicle license fee (VLF) revenues go to counties and cities.

Proposition 62 (1986). The voters passed an initiative statute to require majority voter approval for local general taxes.

County sales tax powers (1987, 1990). The Legislature gave counties the power to raise sales taxes with majority voter approval.

Proposition 99 (1988). The voters imposed a surcharge on cigarettes and tobacco with the revenue going to health education and health service programs.

Trial Court Funding (1987). The Legislature increased state funds for trial courts.

No- and low-property tax cities (1987). The Legislature shifted property tax revenue from counties to cities that previously received no property tax revenues or only low levels of property tax revenues.

Program realignment (1991). The Legislature shifted mental health, health, and social services programs to the counties; increased Trail Court funding; raised sales taxes, vehicle license fees (VLF), and court fines to pay for some of the new costs to counties.

ERAF (1992-94). The Legislature shifted over $3 billion a year in property tax revenue from counties, cities, and special districts to schools and community colleges.

Proposition 172 (1993). The voters approved a ½¢ state sales tax increase to pay for local public safety services.

Proposition 218 (1996). The voters amended the California Constitution to require majority voter approval for local general taxes and to require property owners’ approval of benefit assessments and property-related fees.

Welfare reform (1997). The Legislature gave counties more flexibility in delivering welfare-to-work and recipients’ eligibility.

Trial court funding (1997). The Legislature capped county spending on trial courts and allowed cities to keep revenues from fines.

One result of these actions is that counties and cities vary widely in the amount of revenue --- particularly property tax revenues --- that they receive.

Redevelopment Complicates Everything


The California Constitution and the Community Redevelopment Law allow local officials to divert property tax increment revenues to pay for the debt needed to implement redevelopment plans. And they have.

In 1982-83, redevelopment agencies attracted 3.6% of the total property tax revenues but by 1997-98, their share had grown to 7.9%. The following table, assembled by the California Research Bureau from data supplied by the State Board of Equalization shows that redevelopment agencies’ property tax increment funding has complicated the allocation of property tax revenues:

Allocation of Property Tax Revenues
  1982-83 1997-98
Cities 13.6% 10.7%
Counties 35.2% 18.3%
Schools 36.1% 53.1%
Less than countywide 1.9% 1.2%
Special districts 9.6% 8.8%
Redevelopment 3.6% 7.9%

["Less than countywide" includes county fire departments and county free libraries that received property taxes as if they were special districts.]

The following tables present the data for all counties in both 1982-83 and 1997-98.

1982-83 Table
(percentage of total; includes levies and subventions)





Schools Less than Countywide Special Districts



Alameda 24.6 33.9 21.8 1.9 15.2 2.7 100.0
Alpine 0.0 75.5 17.0 0.0 7.5 0.0 100.0
Amador 4.0 46.1 47.5 0.0 2.4 0.0 100.0
Butte 7.9 21.5 57.8 0.0 10.9 1.9 100.0
Calaveras 0.7 26.7 55.2 3.8 13.6 0.0 100.0
Colusa 4.2 34.6 48.3 3.8 9.1 0.0 100.0
Contra Costa 10.5 26.0 35.0 2.1 21.4 5.0 100.0
Del Norte 2.4 34.5 55.0 0.0 8.2 0.0 100.0
El Dorado 7.4 33.6 38.5 0.0 20.4 0.0 100.0
Fresno 13.9 33.1 39.1 0.0 12.5 1.3 100.0
Glenn 6.2 34.9 52.5 0.0 6.2 0.2 100.0
Humboldt 6.4 31.7 45.6 5.0 8.2 2.9 100.0
Imperial 14.5 29.3 46.4 5.2 3.0 1.7 100.0
Inyo 2.1 37.8 52.4 0.0 7.6 0.0 100.0
Kern 4.6 36.4 44.2 8.9 5.5 0.3 100.0
Kings 8.2 36.2 34.3 11.8 8.8 0.8 100.0
Lake 3.2 36.8 43.8 0.0 16.2 0.0 100.0
Lassen 4.9 30.2 57.4 0.0 7.4 0.0 100.0
Los Angeles 19.2 46.3 20.0 0.8 7.0 6.7 100.0
Madera 4.2 28.1 58.3 0.0 9.4 0.0 100.0
Marin 12.8 27.6 42.1 2.3 14.3 0.8 100.0
Mariposa 0.0 33.2 60.8 0.0 6.0 0.0 100.0
Mendocino 3.7 42.3 47.5 0.0 6.5 0.0 100.0
Merced 8.5 33.8 40.8 7.2 6.3 3.4 100.0
Modoc 3.5 38.4 51.3 0.0 6.9 0.0 100.0
Mono 0.0 42.8 31.2 0.0 26.0 0.0 100.0
Monterey 9.8 26.9 50.5 1.2 10.0 1.6 100.0
Napa 11.7 27.6 51.5 2.6 4.7 1.9 100.0
Nevada 3.2 29.0 48.3 0.8 18.6 0.0 100.0
Orange 13.2 15.9 51.2 4.4 11.5 3.7 100.0
Placer 5.2 30.0 48.0 2.0 14.8 0.0 100.0
Plumas 0.9 28.0 58.5 0.0 12.6 0.0 100.0
Riverside 9.5 26.9 43.3 4.7 11.5 4.0 100.0
Sacramento 12.2 37.3 28.1 2.1 17.8 2.5 100.0
San Benito 6.8 21.1 64.4 1.9 5.9 0.0 100.0
San Bernardino 11.1 31.1 34.6 1.4 17.1 4.6 100.0
San Diego 14.6 25.7 51.8 0.8 5.6 1.4 100.0
San Francisco 0.0 90.0 9.1 0.0 0.9 0.0 100.0
San Joaquin 13.1 39.6 31.1 1.5 14.4 0.4 100.0
San Luis Obispo 8.5 33.3 51.5 2.5 4.2 0.0 100.0
San Mateo 13.5 23.9 51.0 1.3 9.5 0.8 100.0
Santa Barbara 6.0 30.6 47.6 0.0 12.8 2.9 100.0
Santa Clara 12.8 25.1 50.4 1.1 5.6 5.1 100.0
Santa Cruz 7.3 25.2 52.3 3.1 11.6 0.5 100.0
Shasta 8.1 27.4 56.1 0.2 8.1 0.1 100.0
Sierra 1.0 63.2 25.0 0.0 10.9 0.0 100.0
Siskiyou 7.8 35.4 51.6 0.0 5.2 0.0 100.0
Solano 19.5 36.1 30.3 3.3 7.9 3.0 100.0
Sonoma 9.1 35.2 46.8 0.8 6.4 1.7 100.0
Stanislaus 8.9 28.2 58.1 0.0 4.8 0.0 100.0
Sutter 8.0 34.7 46.7 1.0 9.7 0.0 100.0
Tehama 6.2 33.2 50.9 5.5 4.2 0.0 100.0
Trinity 0.0 38.7 55.7 0.0 5.5 0.0 100.0
Tulare 7.4 38.2 41.4 5.7 6.7 0.7 100.0
Tuolumne 1.5 37.3 51.1 2.0 8.1 0.0 100.0
Ventura 7.2 29.9 38.6 1.8 20.0 2.5 100.0
Yolo 14.5 30.5 40.8 3.6 10.5 0.0 100.0
Yuba 6.0 41.6 42.1 0.0 8.8 1.5 100.0
TOTAL 13.6 35.2 36.1 1.9 9.6 3.6 100.0

1997-98 Table
(percentage of total; includes levies and subventions)

County Cities Countywide Schools Less than Countywide Special Districts Redevelopment Total
Alameda 18.2 16.3 45.2 1.0 13.4 5.9 100.0
Alpine 0.0 64.3 26.4 0.0 9.3 0.0 100.0
Amador 4.2 33.2 60.8 0.0 1.8 0.0 100.0
Butte 5.6 8.0 64.5 5.7 6.2 10.0 100.0
Calaveras 0.5 17.2 66.5 2.5 13.4 0.0 100.0
Colusa 4.9 25.7 58.7 2.9 7.9 0.0 100.0
Contra Costa 8.2 12.6 49.6 1.3 19.8 8.4 100.0
Del Norte 1.0 19.0 64.3 0.0 10.1 5.6 100.0
El Dorado 3.2 22.8 48.8 1.5 22.8 0.9 100.0
Fresno 12.3 14.2 60.3 0.0 8.5 4.7 100.0
Glenn 6.5 21.5 67.4 0.0 4.6 0.0 100.0
Humboldt 3.1 16.3 62.9 4.1 7.3 6.4 100.0
Imperial 8.3 14.3 57.0 8.2 3.1 9.1 100.0
Inyo 1.2 30.0 62.2 0.0 6.6 0.0 100.0
Kern 5.5 20.2 58.4 8.3 5.1 2.4 100.0
Kings 6.5 16.9 54.1 9.0 6.7 6.8 100.0
Lake 3.0 24.7 57.2 0.0 13.7 1.5 100.0
Lassen 3.9 19.1 71.7 0.3 5.0 0.0 100.0
Los Angeles 15.3 24.0 43.3 0.6 7.5 9.2 100.0
Madera 2.8 15.7 72.8 0.1 4.9 3.7 100.0
Marin 10.6 17.1 56.8 1.8 11.3 2.3 100.0
Mariposa 0.0 26.0 68.8 0.0 5.3 0.0 100.0
Mendocino 1.9 27.9 59.3 0.0 6.0 4.9 100.0
Merced 6.5 15.8 61.5 7.3 3.9 5.0 100.0
Modoc 3.4 27.0 63.8 0.0 5.8 0.0 100.0
Mono 3.1 32.1 41.0 0.0 23.8 0.0 100.0
Monterey 7.1 15.5 61.3 1.2 8.7 6.1 100.0
Napa 9.3 17.5 64.8 4.9 1.7 1.7 100.0
Nevada 6.3 15.5 59.2 0.0 18.3 0.7 100.0
Orange 10.5 6.0 63.4 0.8 11.5 7.8 100.0
Placer 6.4 19.3 61.4 1.1 10.4 1.3 100.0
Plumas 0.7 22.3 65.5 0.0 11.5 0.0 100.0
Riverside 6.6 11.0 49.9 3.3 9.3 19.9 100.0
Sacramento 9.2 18.2 50.4 1.7 16.2 4.3 100.0
San Benito 2.6 13.3 63.1 0.0 6.6 14.4 100.0
San Bernardino 7.1 12.8 47.2 0.8 14.3 17.8 100.0
San Diego 13.0 14.7 62.7 0.5 3.7 5.4 100.0
San Francisco 0.0 61.6 32.0 0.0 0.8 5.6 100.0
San Joaquin 11.2 20.6 56.2 2.2 6.7 3.1 100.0
San Luis Obispo 6.9 23.6 62.7 2.2 3.9 0.7 100.0
San Mateo 10.7 13.6 61.5 1.7 7.4 5.0 100.0
Santa Barbara 5.0 20.2 59.6 0.0 11.5 3.7 100.0
Santa Clara 9.3 12.1 61.7 0.6 5.2 11.1 100.0
Santa Cruz 4.9 13.9 59.2 1.9 11.4 8.7 100.0
Shasta 7.0 14.7 67.0 0.0 5.9 5.4 100.0
Sierra 0.7 55.8 33.5 0.0 10.0 0.0 100.0
Siskiyou 6.1 22.7 66.8 0.4 4.1 0.0 100.0
Solano 13.9 16.8 44.8 1.7 5.4 17.4 100.0
Sonoma 6.3 23.1 59.1 0.0 6.3 5.2 100.0
Stanislaus 6.8 11.9 74.8 0.3 3.7 2.5 100.0
Sutter 7.3 17.8 63.3 0.6 8.4 2.6 100.0
Tehama 4.5 20.0 66.3 5.7 3.5 0.0 100.0
Trinity 0.0 30.2 65.1 0.0 4.7 0.0 100.0
Tulare 5.8 17.4 61.2 4.2 6.2 5.2 100.0
Tuolumne 0.8 26.3 63.1 3.4 5.6 0.9 100.0
Ventura 7.5 16.7 52.4 0.9 16.7 5.8 100.0
Yolo 18.1 8.7 57.8 1.5 2.8 11.1 100.0
Yuba 3.8 22.0 64.8 0.0 7.7 1.6 100.0
TOTAL 10.7 18.3 53.1 1.2 8.8 7.9 100.0

While it’s clear that the ERAF shifts boost schools’ shares of property tax revenues at the expense of cities, counties, and special districts, until the California Research Bureau probed these data, redevelopment’s effect was not well understood. The growth of redevelopment agencies’ shares of property tax revenues has been nothing short of dramatic, as the following table reports for the top dozen counties:

Redevelopment’s Share of Property Tax Revenue
  1982-83 1997-98
Riverside 4.0% 19.9%
San Bernardino 4.6% 17.8%
Solano 3.0% 17.4%
San Benito 0 14.4%
Yolo 0 11.1%
Santa Clara 5.1% 11.1%
Butte 1.9% 10.0%
Los Angeles 6.7% 9.2%
Imperial 1.7% 9.1%
Santa Cruz 0.5% 8.7%
Contra Costa 5.9% 8.4%
Orange 3.7% 7.8%
Statewide 3.6% 7.9%

There is no doubt that redevelopment has literally changed the look of California, often for the better. But when nearly a fifth of all property tax revenue goes to redevelopment agencies --- as in Riverside, San Bernardino, and Solano counties --- the other local governments must inevitably scramble to replace that revenue or cut their budgets. In rural counties like San Benito, Yolo, Butte, and Imperial, redevelopment agencies have drastically changed the fiscal landscape. Many of these counties have teetered on the brink of fiscal disaster but the causes are not just ERAF and state-mandated local programs. Redevelopment agencies have siphoned off significant shares of property tax dollars from other governments, including their own host cities.

  • Because city councils control most redevelopment agencies and their funds, should state legislators consider property tax increment revenues when cities ask for reallocations of property tax revenues?
  • Should the Legislature declare a moratorium on new redevelopment project areas, expanded project areas, and new redevelopment debt until the state sorts out the rules for allocating property tax revenues?

Audits: To Err Is Human, To Forgive Is Legislative


Everyone who works with the property tax allocation rules agrees that state laws create a complicated way to allocate revenues to counties, cities, special districts, redevelopment agencies, schools, community colleges, county offices of education, and the Educational Revenue Augmentation Fund (ERAF). Compounding the original complexities of SB 154 and AB 8 are the Legislature’s repeated attempts to adjust inequities. Each change, however, requires county auditors to recalculate their tax rate area factors. As counties have computerized their systems, these changes are easier to implement than they were in the late 1970s.

Concerned that local officials were not allocating sufficient property tax revenues to schools (and thereby requiring the State General Fund to pick up the difference), the State Department of Finance audited 20 counties’ property tax allocations in the early 1980s. When state auditors found errors, the Legislature responded by forgiving their fiscal mistakes. But concerned that Los Angeles County’s chronic underpayments to schools, the Legislature required the State Controller to routinely audit all counties’ property tax allocation programs (SB 418, Boatwright, 1985 and SB 734, Garamendi, 1987). The State Controller audits Los Angeles County annually, medium-sized counties every three years, and the smallest counties every five years (Government Code §12468). The State Controller has institutionalized the audit program and her staff now routinely releases slim blue reports detailing any exceptions to statute’s complex rules.

Legislative forgiveness. When the State Controller’s audits find that county auditors have underpaid schools or ERAF, local officials frequently seek legislative relief from the obligation to repay their errors. For example, SB 982 (Leslie, 1999) validates the property tax apportionments to the Placer County Free Library and the San Joaquin County Free Library. AB 236 (Honda, 1999) validates property tax allocations to fire districts in both Santa Barbara and Santa Clara counties. AB 838 (Longville, 1999) validates Santa Barbara County’s property tax allocations to ERAF. All three bills are on Governor Gray Davis’s desk.

Go forth and sin no more? These bills are not the first to forgive property tax allocation errors. Prior measures have contained statements of legislative intent, warning county officials that the Legislature will not look the other way in the future. For example, SB 982 declared:

It is the intent of the Legislature not to validate in the future any other mistake in the County of San Joaquin [Placer] in the allocation of property tax revenue, unless the mistake is the result of written advice from the Department of Finance or the Controller with respect to the particular allocation.

This practice began at the insistence of the State Department of Finance. Administration officials were wary of forgiving inadvertent errors without any assurance that legislators would insist on repayments when local mistakes were not so innocent. The practice continued throughout the Wilson Administration. This year, SB 982 warns Placer and San Joaquin counties not to expect future legislative relief if they repeat their mistakes. But neither AB 236 nor AB 838 carries a similar warning to Santa Barbara and Santa Clara counties.

  • Have the State Department of Finance and the Davis Administration stopped insisting on legislative intent language warning counties against making the same mistakes?
  • Do AB 236 and AB 838 represent a new legislative policy, not to warn counties against making the same mistakes?
  • Will the Legislature forgive Santa Barbara and Santa Clara counties’ future allocation errors if they repeat the same mistakes?

Another Burden: The Cost of Property Tax Administration


Because they receive less than a fifth of the property tax revenues, counties have few incentives to invest in administering the property tax system. The California Constitution and state laws completely control the property tax system --- defining the tax base, fixing the tax rate, and allocating the resulting revenues. Counties can recover their administrative costs from cities, special districts, and redevelopment agencies, but not from schools.

To provide counties with a fiscal incentive to improve the property tax system, the Legislature set up the State-County Property Tax Administration Program and authorized loans of up to $60 million a year (AB 818, Vasconcellos, 1995; AB 719, Torlakson, 1997). Counties sign contracts with the State Department of Finance specifying the loan amount, repayment provisions, reporting requirements, and how they’ll use the funds. A participating county must meet maintenance-of-effort standards so that the state loans supplement but do not supplant county funding. Instead of repaying the loans directly, counties generate more property tax revenue. When schools get more property tax revenue, that reduces the State General Funds apportionments to schools.

Counties spend about $400 million a year to administer the property tax system. The schools’ shares of those costs are about $212 million, much higher than the state’s $60 million loan program. When the counties wanted to boost the loan program to $160 million, the bill stalled in the Senate Appropriations Committee (AB 1036, Wesson, 1999).

The state government’s current loan program is a cumbersome way to get counties to spend more money on a revenue system that largely benefits the State General Fund. It’s an intensively bureaucratic approach instead of using market-like mechanisms.

  • Should the Legislature allow counties to charge schools for their share of administering the property tax system?
  • Isn’t buying-out the property tax administration system similar to buying-out counties’ trial court costs? Won’t paying for a program release county funds for other discretionary purposes.

No/Low Cities: Reach Out And Grab Someone


Because state law allocates property tax revenues based on each agency’s historical share, cities which never levied a property tax rate and cities which levied relatively low rates did not share in the early allocation of property taxes after Proposition 13. There were 31 no-property-tax cities and about 60 low-property-tax cities that received less than 10% of the property tax revenues generated within their communities. For some of these no- and low-property-tax cities, sales tax revenues were sufficient to pay for local services. Some of the no/low cities delivered few municipal services, so their costs were equally low. For other no/low cities, the avoidance of significant property tax bills was a matter of civic pride and intense political commitment. Proposition 13 left the no-property-tax cities untouched: no property tax rates, no property tax revenues, no property-tax losses.

As other cities shared in the property tax allocations after Proposition 13, the no/low cities began clamoring to receive property tax revenues. The Legislature set a precedent 15 years ago by statutorily granting Yorba Linda a special share of the property taxes generated from within its city limits. Because property tax allocation is a zero-sum game, the money had to come from some other local government’s share. The special legislation shifted funds from the County of Orange to the City of Yorba Linda (SB 794, Marks, 1984).

In 1987, when the Legislature provided money to counties for the Trial Court Funding program, it also directed counties to shift property tax revenues to their no- and low-property-tax cities. Following the Yorba Linda precedent, the Legislature told counties to transferring some of their own property tax revenues to the no/low cities. Each of the no/low cities would receive a fixed 10% of the property tax revenues generated within its boundaries (SB 709, Lockyer, 1987). The no/low cities succeeded in capturing a share of property tax revenues by linking their success to the Trial Court Funding program that shifted state funds to all counties.

In 1988, the Legislature modified the property tax shift from counties to the no/low cities by phasing-in a 7% shift over seven years and by allowing the no/low cities to benefit from the growth in their property tax base (AB 1197, W. Brown, 1988). Special provisions exist for the no/low cities in Los Angeles, Orange, San Mateo, Santa Clara, and Ventura counties (now codified as Revenue and Taxation Code §98-§98.4).

The property tax shift from counties to the no/low cities was not based on the types and levels of services that these cities delivered to their residents. In many no/low cities some of the basic municipal services --- fire protection, libraries, parks --- come from special districts that also receive property tax revenues. When a no/low city’s share of the property tax revenues is added to the property tax revenues going to special districts that deliver municipal services, the community actually receives a substantial share of property tax revenues. Some municipal finance observers note that communities with no/low cities receive as much or more in property tax revenues as communities with full service cities.

  • Should the Legislature provide a direct subsidy to the counties that had to shift property tax revenues to their no- and low-property-tax cities?
  • Should the Legislature commission a study comparing property tax allocations to the no- and low-property-tax cities with full service cities to document how much property tax revenue goes to municipal type services?
  • Should the Legislature reduce the property tax shift to no/low cities to recognize that special districts in those communities already receive property tax allocations?

Education Revenue Augmentation Fund: Shift Happens


Faced with significant budget problems in 1992-93 and then again in 1993-94, the Legislature and Governor Pete Wilson faced tough political choices. While some legislators were willing to raise taxes again, as they did in 1991-92, Wilson resisted. While Wilson was willing to cut state spending and entitlement programs, many legislators resisted. Instead, they settled on an expedient third alternative, shifting property tax revenues from counties, cities, redevelopment agencies, and special districts to schools and community colleges. Boosting schools’ local revenues eased the pressure on the State General Fund. Every new dollar in property tax revenue for schools was a dollar that the State General Fund avoided spending on schools.

The Educational Revenue Augmentation Fund (ERAF) is the mechanism for shifting property tax revenues from local governments to schools. Blamed for nearly everything except El Niño, ERAF has become the icon for all that is wrong with state-local relations. Even to the most thoughtful observers, ERAF continues to be the major irritant in the state’s relationship with its local governments. Local officials rate reversing the property tax shifts as their highest priority, as resentment over ERAF infects nearly all other debates over programs and fiscal policy.

However, from the state government’s point of view, ERAF is the logical consequence of Proposition 13 and its aftermath. After the voters cut property tax revenues in 1978, the Legislature used its budget surplus to bail-out schools and local governments. The AB 8 shift in 1979 solidified the state’s post-Proposition 13 subsidies by boosting state funding for schools and shifting schools’ property tax revenues to counties, cities, and special districts. By spending more on schools and then sending schools’ property tax revenues to local agencies, the State General Fund indirectly subsidized local governments form 1979 to 1992. The state government was able to sustain this indirect bail-out so long that local officials came to accept it as the normal state of fiscal affairs. When the state government’s budget crisis got worse in 1992-93, ERAF reversed the 13-year old property tax shift. ERAF played havoc with local governments’ budgets, but the result may not have been much different than what would have happened in the late 1970s without the AB 8 property tax shift.

The Legislative Analyst says that the ERAF shifts in 1998-99 totaled $3.6 billion:

Value in
Counties $585 $2,023 $2,798
Cities 240 313 537
Special districts 375 244 285
Redevelopment 200 65 0
Totals $1,400 $2,645 $3,620

(Dollars in millions)

Since the 1992-93 and 1993-94 crises, the Legislature has limited some local governments’ shifts. Although different observers count the types and amounts of fiscal relief differently, the Legislative Analyst recognizes five measures that are associated with the ERAF property tax shifts:

Proposition 172, the ½¢ state sales tax for local public safety programs, produces about $1.9 billion in 1998-99, mostly for counties.

Trial Court Funding provided counties with about $357 million in 1998-99.

COPS program delivers $100 million a year for local law enforcement.

General Assistance grants by counties declined by about $200 million, saving money for county governments.

Fines and forfeiture revenue for counties and cities grew by $62 million because of changes in state formulas.

While these countermeasures ameliorated some of the fiscal problems caused by the ERAF shifts, the relief has not been uniform. Counties were the direct beneficiaries of the boosts in funding for public safety and trial courts. Cities received some relief from the COPS program and, although politically unpopular, raised local revenues. Special districts --- particularly nonenterprise, non-public safety programs --- suffered the most.

Governor Wilson blinks. Faced with mounting pressures to ease the fiscal burdens created by the ERAF shifts, a coalition of local officials, builders, developers, and realtors asked the Legislature to cap the ERAF shift at the 1996-97 level. If ERAF amounts were frozen at their 1996-97 levels, the growth in the property tax revenues would flow to the cities, counties, and special districts. To maintain its constitutional commitment to schools, the State General Fund would backfill for the loss of ERAF growth. Budget experts estimated that cost at $150 million in 1997-98, and more in future years. After a conference committee hammered out the details, both the Senate and Assembly passed AB 2797 (Aguiar, 1996) without any dissenting votes. Governor Pete Wilson vetoed the Aguiar bill in September 1996, calling the Legislature’s action "a piecemeal approach to local government financing reform." Wilson’s veto message suggested that a "comprehensive approach should be considered [in 1997] as part of the budget process." Neither the Legislature nor the Wilson Administration produced a long-term, comprehensive solution.

Swiss cheese policy making. During the legislative debates on ERAF, some local governments persuaded legislators to grant exceptions and exemptions. Each special pleader had a plausible argument to justify why its particular situation warranted attention. As documented in 1995 by the Assembly Budget Committee, legislators granted relief for revenues lost because of natural disasters, Oakland’s museum, newly-incorporated cities, special districts’ debt service, countywide water agencies, small rural fire districts, multicounty special districts, hospital districts, city-dependent districts, water quality spending, resource conservation districts’ donations, Teeter Plan counties, police protection districts, transit districts, veterans’ memorial districts, and more.

The resulting statutory formulas are riddled with a bewildering array of exceptions and exemptions that looks more like Swiss cheese than a consistent, rational, or persuasive body of public policy. Unable to deal with ERAF as a whole, the Legislature continues to poke holes in the property tax shifts in response to local requests. SB 215 (Dunn, 1999), a two-year bill, would exempt the four single-county transit districts from the 1992-93 ERAF shift. Governor Gray Davis has already signed AB 223 (Wiggins, 1999) which exempts additional fire districts’ revenues from ERAF shifts. AB 417 (Floyd, 1999) extends those exemptions to fire districts in additional counties; the Floyd bill is still on the Governor’s Desk.

Hardest hit. Lacking the political cachet of police and fire protection and without the ability to charge user fees to offset their costs, the special districts that provide nonenterprise services are still reeling from ERAF’s aftershocks. Recreation and park districts, mosquito abatement districts, and library programs are among the most obvious victims. Some suburban park districts have decided to fill in neighborhood swimming pools because they can’t afford to operate them anymore. ERAF’s property tax shifts and related budget problems hammered library districts and county free libraries (run as if they were districts). According to the State Library’s California Research Bureau, Alameda County’s library program suffered a 45.5% loss and Contra Costa’s library a 20.8% loss. These losses were not confined just to metropolitan counties, as Colusa County’s library faced a 38.8% hit.

What Happened In 1999: Relief But Not Reform


The convening of a new legislative session and the election of a new governor boosted local officials’ hopes for reversing the ERAF shifts in 1999. However, by September when the Legislature left Sacramento for the fall recess, there was modest fiscal relief but no ERAF reform.

What the Governor said. Governor Gray Davis’s Budget Summary for 1999-2000 traced the difficult history of state-local fiscal relationships, concluding:

The Administration supports mitigation of the ERAF shift, consistent with this accounting. Given other demands on the Budget, it will likely take a period of years to further complete this transaction. However the Administration believes that local governments are entitled to share with state government the resources stemming from California’s economic growth.

The Governor’s budget message continued by linking state-local fiscal reform to land use considerations and governance issues, declaring:

In initiating a dialogue concerning land use, the administration endorses the principle that any solution to this problem should be revenue neutral and suggests that a gradual sharing of growth in revenues may provide the best mechanism by which to correct this problem.

When budget negotiations concluded, the Administration and the Governor did not have a program to reform the allocation of property tax revenues.

Comprehensive solutions stalled. Although legislators succeeded in passing further exemptions from the ERAF shifts for particular local governments, frontal assaults stalled in 1999. With 61 Assembly coauthors, AB 1195 (Longville, 1999) was the most promising bill, passing the Assembly by a vote of 80-0. Longville’s measure would have reduced local agency’s ERAF shifts by 10% in 1999-2000 if the State Budget made up the loss to schools. Sidetracked by budget negotiations, AB 1195 remains in the Senate Local Government Committee. SB 165 (Rainey, 1999) was the Senate’s entry in the ERAF reform derby. Rainey’s bill would have capped the 1999-2000 ERAF shift at its 1998-99 level. Beginning in 2000-01, the bill would have reduced the ERAF shift by 10% each year until ERAF disappeared in 2009-10, providing for more state funding to schools to offset the ERAF cuts. Also sidetracked by the budget debates, SB 165 is stalled in the Senate Appropriations Committee.

The Peace train. Tackling the budget negotiations for the first time as Chair of the Senate Budget and Fiscal Review Committee, Senator Steve Peace jumped into the debate over state-local relationships and property tax allocations. In an unusual move, Senator Peace and other legislators traveled around the state in January and February, holding six public sessions: Los Angeles, Placerville, Oakland, San Diego, San Bernardino, and Merced. Listening to local elected officials and key administrators, the legislators engaged in sometimes provocative exchanges over the state’s role in funding public programs. Time and again the irritant of ERAF came up. Senator Peace has talked about authoring a constitutional amendment and implementing bills to restructure the state-local fiscal relationship.

Thinking about it. After 20 years of voter initiatives, legislative reactions, and local adjustments, property taxpayers find the state-local fiscal relationship nearly incomprehensible. Private groups in Orange County --- led by the Orange County Taxpayers Association --- launched their own studies to figure out why their county gets just 6% of the countywide property tax revenues while the statewide county average is 19%. At the Association’s request, Assembly Member Marilyn Brewer authored a bill to require the Legislative Analyst to report to the Legislature by December 31, 1999 (AB 676, Brewer, 1999).

Brewer’s measure directed the Legislative Analyst to come up with at least two alternative ways to restructure property tax allocations, consistent with three goals:

  • Increase taxpayers’ knowledge of property tax allocations.
  • Provide greater control over property tax allocations.
  • Give cities and counties greater fiscal incentives to approve land developments other than retail developments.

The Analyst must also consider the option of establishing a minimum percentage for each county.

AB 676 acknowledged that the restructuring of property tax allocations would result in gains and losses to local governments. To minimize these fiscal impacts, the bill declared the Legislature’s intention to consider allocating an unspecified amount in additional revenues to cities, counties, and special districts. Governor Davis allowed the Brewer bill to become law without his signature.

Budget brings relief. Although reforming property tax allocations did not emerge from the 1999 legislative session, the Legislature and Governor Davis delivered $200 million in fiscal relief that was associated with the ERAF discussions:

  • $150 million as a one-time state subvention from the State General Fund to local governments for ERAF relief:

    $75 million to counties and cities, allocated per capita.

    $75 million to counties, cities, and districts based on 1998-99 ERAF shifts.
  • $50 million to cities, allocated on the booking fees they paid in 1997-98.

The specific language to allocate these funds appeared in two of the "budget trailer bills" (AB 1661, Torlakson, 1999 and AB 1662, Leonard, 1999). The 1999-2000 State Budget also contained additional funding for local libraries, capital for the State Infrastructure Bank to finance local projects, the COPS program, local parks, tree planting, and flood control subventions. This year’s Budget and its related "trailer bills" were the best effort for local agencies this decade.

A promise to act? Besides delivering a modest amount of fiscal relief, AB 1661 also promised to cap the ERAF shift at its 1999-2000 level, starting in 2000-01. The Torlakson bill also promised that the State General Fund would pay the schools’ share of counties’ property tax administration costs, starting in 2000-01. But both of these long-sought reform measures are contingent on the Legislature and the voters approving a constitutional amendment in 2000. According to the bill, the new constitutional amendment must affect one or more of the following:

  • Local governments’ taxing powers.
  • State subventions to local governments.
  • The allocation of property taxes, local sales taxes, or other local tax revenues.
  • Which state legislator will author the necessary constitutional amendment?
  • What exactly will the constitutional amendment say?
  • Will there be an attempt to swap local sales tax revenues for property taxes?

Prospects For Change


Given the widespread recognition of the problems association with property tax allocation, it’s not surprising that many groups have studied the issues and recommended changes. Even groups looking at other issues find that their topics are at least indirectly related to the state’s rules for allocating property tax revenues.

Among the most thorough of these studies was the work performed by the California Constitutional Revision Commission. Among the recommendations in its 1996 final report, the Commission called for the creation of a "citizens’ charter commission on local government efficiency and restructuring" in each county. These 15-member commissions would prepare government services plans, reallocate local costs and revenues, and let the voters decide on new "Community Charters." To foster local control, the Commission said that:

The "non-school share of the property tax would be allocated by the charter. The state would be prohibited form redistributing this portion of the tax. The distribution of the local government share of the property tax would no longer be determined by state law, it would be determined by the local Community Charter.

Nearly three-dozen statewide organizations representing business, government, labor, education, public safety, health, environmental, human services, and taxpayer interests formed the California Governance Consensus Project. Much discussion and self-education preceded the Consensus Project’s March 1999 conceptual plan. Any attempt to restructure governance while maintaining revenue neutrality among and between government sectors is a delicate task.

Assembly Speaker Antonio R. Villaraigosa named 35 people to the Speaker’s Commission on State and Local Government Finance and charged them to explore feasible alternatives to the current intergovernmental conflicts. This broadly-based panel has been discussing the possibility of swapping revenue bases between the state government and local agencies. The participants understand the connections between public finance, land use decisions, and the institutional structure for governance.

The Commission on Governance for the 21st Century has the statutory mandate to review the state’s boundary laws for cities and special districts. The commissioners immediately understood that struggles over city incorporations, annexations, and district consolidations were inevitably linked to questions about how to allocate property tax revenue.

On August 18, 1999, State Controller Kathleen Connell released the recommendations of her State Municipal Advisory Reform Team (SMART). The Controller’s SMART report recommends restructuring state and local property and sales taxes that would generate more revenue for local governments, reduce the ERAF shift, reduce the fiscalization of land use, and require no new state or local taxes and no modifications of Proposition 13. This ambitious set of recommendations would involve a property tax swap and reallocating sales tax revenues based on population.

  • What proposals should the Legislature expect to see from the Davis Administration?
  • What principles should legislators keep in mind when developing their own proposals?

Policy Topics


Besides the grand themes of home rule, local control, and constitutional reform, legislators will continue to confront difficult policy choices over very specific problems involving the allocation of property tax revenues. At least four issues are already looming for 2000:

Court challenge pending. Counties have sued the state government over the ERAF shifts, arguing that the State improperly diverted revenue needed to run state-mandated county programs. That diversion requires the state government to backfill counties’ property tax losses, the counties argue. A Superior Court decision in the case, Sonoma County v. Commission on State Mandates, is likely in 2000. A question of this importance will almost certainly be appealed by either side, and so a definitive appellate ruling may not be available until much later. Nevertheless, state officials must keep the possibility of a courtroom loss in mind when negotiating the reallocation of property taxes during 2000.

Newer cities. Unlike the no- and low-property-tax cities that existed before Proposition 13 but did not receive much property tax revenue, the 56 cities that incorporated after 1978 face a completely different situation. When a community incorporates, the local agency formation commission (LAFCO) determines the amount of property tax revenue that the new city inherits from special districts and the county government based on the cost of the services that the city takes over. In other words, the dollars follow the duties. When a new city takes over few services, leaving special districts in place to pay for fire protection, parks, water, and sewers, it’s no surprise that the city receives only a small share of the property tax revenues generated within its community. If they are unhappy with their small shares of property tax revenues, new cities have at least four ways to respond:

  • Some new cities have sued the county governments to secure more revenues.
  • The City of Hesperia sponsored legislation to force San Bernardino County to give it more property tax revenue. The Senate defeated AB 1057 (Olberg, 1999).
  • The City of Chino Hills concluded intense negotiations with San Bernardino County and then sponsored mutually agreed upon legislation to permit property tax revenue sharing. Governor Davis signed SB 166 (Baca, 1999).
  • Cities and counties have been negotiating over prospective changes to the statutes used by LAFCOs to determine new cities’ shares of property tax revenues. Both AB 1495 (Cox, 1999) and AB 1526 (Thompson, 1996) are two-year bills.

Enterprise special districts. Because they levied their own property tax rates before Proposition 13, some enterprise special districts continue to receive shares of the remaining property tax revenues. Enterprise districts are special districts that run corporate-like activities that generate revenue: airports, marinas, water sales, and sewer services. Enterprise districts usually rely on user fees, water rates, and sewer charges to pay for their facilities and services. They are public enterprises. But the property tax revenues that some enterprise districts still receive act like subsidies, distorting the true price of providing facilities and delivering services. An enterprise district that gets property tax revenues can charge less for water than a neighboring district that relies entirely on water rates to pay for its enterprise activities.

  • Should the Legislature stop enterprise districts from subsidizing their operations with property tax revenues?
  • Should the Legislature reallocate property tax revenues from enterprise districts to other local governments, including nonenterprise districts?
  • If so, should the Legislature phase-out these subsidies to avoid sharp price increases?

Local agreements. Although difficult, state law allows local officials to renegotiate their shares of property tax revenues without specific legislative intervention (Revenue and Taxation Code §99.02). There are also special provisions for local agencies in Riverside and Ventura counties (Revenue and Taxation Code §99.03 and §99.04). This year, at the request of the San Diego County Board of Supervisors, the Legislature made it possible for the County to transfer some of its property tax revenue allocation to the County Free Library program (AB 494, Davis, 1999). That bill is on the Governor’s desk. The Legislature also allowed local officials to negotiate mutually acceptable adjustments for property tax payments in redevelopment agencies’ pass-through agreements that don’t affect schools. The legislation for Marin County was signed (AB 264, Mazzoni, 1999) and the bill for Riverside County is on the Governor’s desk (AB 971, Olberg, 1999).

  • Should the Legislature make it easier for local officials to adjust their shares of property tax allocations?

Sources & Credits


Committee staff consultant Peter Detwiler prepared this briefing paper with production assistance from Jane Leonard Brown, the Committee Assistant.

The Committee’s staff appreciates the help they received from:
  • Anthony Gonsalves, Joe A. Gonsalves & Son
  • Robert M. Levy, Enviro Communications, Inc., Corona del Mar
  • Lorraine Okabe, League of California Cities
  • Jennifer Swenson, California Research Bureau, California State Library

These sources were useful in preparing the briefing paper:

California Constitution Revision Commission (1996). Final Report And Recommendations To The Governor And The Legislature.

California Governor Gray Davis (1999). California State Budget Highlights. Sacramento: State of California, Office of the Governor.

California Governor Gray Davis (1999, January 8). Governor's Budget Summary, 1999-2000. Sacramento: State of California, Office of the Governor.

California State Association of Counties (1998). County Share Of State Surplus - $700 Million.

California State Controller Kathleen Connell (1999, August 18). State Municipal Advisory Reform Team. Sacramento: State of California, Office of the Controller.

Cohen, M. (1997, December). Major Milestones: 25 Years of the State-Local Fiscal Relationship. Sacramento: Legislative Analyst's Office, California Update.

Coleman, M. (1998, June 22). Financing Cities: City Financing in the Decades after Proposition 13. Sacramento, League of California Cities.

Lyon, D. (1998, September 18). Representation Without Taxation: Proposition 13 and Local Government in California. (Speech to the Municipal Law Symposium, Hastings College Of The Law, 1998). Public Policy Institute of California.

Newman, M., & O'Malley, M. (1996, August 21). Property Taxes: Why Some Local Governments Get More Than Others. Sacramento: Legislative Analyst's Office, Policy Brief.

O'Malley, M. & MacBain, A. S. (1999, February 2). Shifting Gears: Rethinking Property Tax Shift Relief. Sacramento: An LAO Report.

O'Malley, M. (1996, April 2). Reversing the Property Tax Shifts. Sacramento: Legislative Analyst's Office, Policy Brief.

O'Malley, M. (1997, June 18). ERAF and the 1997-98 State Budget. Sacramento: Legislative Analyst's Office, Policy Brief.

O'Malley, M. (1998, May 7). Why County Revenues Vary: State Laws and Local Conditions Affecting County Finance. Sacramento: An LAO Report.

O'Sullivan, A., Sexton, T. A., & Sheffrin, S. M. (1993). The Future of Proposition 13 In California. (CPS Report, A Publication of the California Policy Seminar, 1993). Berkeley: University of California.

Senate Local Government Committee (1987, December 9). Property Tax Allocation. Sacramento: California Legislature, Senate Committee on Local Government.

State Board of Equalization (1999, March). 1997-98 Annual Report. Sacramento: State Board of Equalization.

Swenson, J. (1999, February). County Services: A Tale of Eight Counties. Sacramento: California Research Bureau, California State Library.

Wassmer, R. W., & Anders, C. (1999, August). County Fiscal Stress: Cause and Consequence in California After Proposition 13. (Manuscript, Graduate Program in Public Policy and Administration, 1999). Sacramento: California State University.

Yee, B. T. (1995, August). Background Report For SB 756 Conference Committee. Sacramento: California Legislature, Assembly Committee on Budget.

Yee, B. T. (1995, November). Understanding ERAF. Sacramento: California Legislature, Assembly Committee on Budget.

Copies and analyses of many of the bills mentioned in this report are available on-line:

Committee Address