SR-100-002 (24)
F:\CMANAGER\Staff Reports\CouncilProp1-A.doc
Council Mtg Date: September 14, 2004 Santa Monica, CA
TO: Mayor and City Council
FROM: City Staff
Subject: Support on State Proposition 1-A
Introduction
This report requests Council support of State Proposition 1-A: Protect Local Taxpayers
and Vital Local Services on the November 2004 ballot.
Background
Proposition 1-A is the result of a bipartisan agreement between Governor
Schwarzenegger, local governments, legislators, public safety officials, healthcare
advocates, taxpayers and community leaders. If passed in November, it would help to
stabilize local revenues by circumscribing the manner in which the State can “borrow”
local revenues for its own purposes. It is an underpinning of the State’s fiscal year
2004-2005 budget passed by the legislature and signed by the Governor which relies
upon $1.3 billion in local revenues to help balance the State’s budget. Local
government agreed to this redirection of local revenue both for the current fiscal year
and for the subsequent year in exchange for constitutional limits on the State’s ability to
raid local revenues, specifically property taxes, sales taxes and vehicle license fees
(VLF), in future years.
The State has regularly diverted local government revenues to the detriment of
essential local services. Problems deepened in 2002, following the energy crisis, when
the projected State deficit ballooned to $22 billion. The League of California Cities
estimates that the State currently seizes more than $5.2 billion annually in local property
tax funds from cities, counties and special districts. This has cost local government $40
billion in lost revenue over the past 12 years which has seriously reduced resources
around the State for local fire, law enforcement, public health and emergency medical
care, roads, parks, libraries, transportation and other basic local services.
City officials have repeatedly made hard decisions to balance their budgets during State
takebacks, recessions or other economic downturns, by cutting expenditures and/or
raising revenue. In Santa Monica, in FY 2003/04, $7.0 million was cut from the general
fund operating and capital improvement budgets and 31 positions eliminated. For FY
2004/05, $4.0 million was cut and 11 positions eliminated, and 4 sworn police officer
positions were “frozen”. In regard to revenue, Santa Monica implemented a variety of
fee and fine increases, and is seeking an increase to the TOT tax rate by 2 % in
November 2004. In summary, like local governments across California, Santa Monica
has sacrificed to assist the State. Local services will most certainly be adversely
impacted further if the State continues to find it easy to balance its own budget on the
backs of local government.
Discussion
Proposition 1-A amends the state constitution to prevent the legislature from reducing
the combined property tax shares of cities, special districts, and Counties, except to
borrow funds on a temporary basis to address a “severe state fiscal hardship”.
Beginning in the 2008-2009 fiscal year, if the state has already paid cities and counties
the amount owed from the 2003-04 VLF loan (estimated at $1.22 billion), the governor
may issue a proclamation that declares that there is a “severe state fiscal hardship” that
requires the state to temporarily suspend Proposition 1-A basic local protections. Next,
the legislature must adopt a statute with 2/3rds vote that contains the suspension for
that one year only with a promise to repay the total amount of property tax loss with
interest within three years. In summary the steps are:
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The 2003 VLF GAP loan must be repaid before another loan can occur,
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The loan could only occur twice within a ten year period,
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The loan must be repaid with interest within three years, and the loan must be
repaid before borrowing could occur a second time within ten years,
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The amount of the loan is limited to no more than 8% of the total amount of
property tax allocated to cities, counties and special districts in the previous fiscal
year; and
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The reduction could only occur with a 2/3 vote of the legislature.
Proposition 1-A also replaces the more volatile VLF backfill with property tax, after the
2003 VLF loan is repaid. Cities would no longer have to comply with “unfunded
mandates”, with the State either paying for its obligations or suspending the mandate.
Proposition 1-A does not raise taxes. It does not reduce funding for schools or other
State programs or services. It does not increase funding to local governments. It does
provide stability and predictability for the long-term financial protection for local
governments.
Financial/Budget Impact
The recommended action does not have any immediate fiscal impact on Santa Monica’s
budget; however over the long term, the protections in the Proposition will offer greater
stability for Santa Monica revenues and reduce the likelihood of raids by the State to
balance its budget.
Recommendation
Staff recommends that City Council support passage of Proposition 1-A, the statewide
measure that will circumscribe the ability of the state to further borrow local government
revenues.
Prepared by: Steve Stark, Director of Finance
Kathryn Vernez, Assistant to the City Manager, Government Relations