January 24, 2001
Sacramento

Summary and Results

The Speaker's Commission on Regionalism (SCOR) held its first formal meeting on January 24 at the State Capitol. SCOR Chairperson Nick Bollman opened the meeting and announced that the Commission's web page, www.regionalism.org was up and running.

The agenda began with the scheduled adoption of the SCOR's Vision and Values Statement and Mission Statement. However, several commissioners wanted an opportunity to make suggestions and provide additional input on the two statements prior to adoption. Therefore, it was decided that changes would be submitted to committee staff in writing in the coming week with the amended statements planned for adoption at the February 23rd meeting.

The commissioners then welcomed a panel composed of representatives from local government organizations discussing the problems with the state/local fiscal relationship.

Panel Discussions

Problems Associated With the State/Local Fiscal Relationship

Steve Szalay, Executive Director of the California State Association of Counties, began the discussion by explaining the problem with the fiscal relationship from the counties' perspective. He explained that there were 8 specific components of the problem:

• The loss of the local property tax which originally had been the best source of local government revenue. The property tax monies that they do receive now, however, are insufficient to completely fund local services.
• Lack of predictability in the current revenue mix which causes instability at the local level.
• The current revenue mix is highly dependent on sales tax dollars, encouraging development of large retail projects. This, in turn, causes a shortage of housing, as well as a shortage of manufacturing and industrial space, which creates an economy of minimum wage and no benefits jobs.
• The working relationship between the state and local governments, particularly counties, is dysfunctional and not a true partnership. The state mandates that counties provide services, however, revenue to fund county services comes from many different sources - several not within the control of the counties.
• Local government, especially counties, are limited in the manner in which they may raise funds, often to collecting revenue only in unincorporated areas.
• There are an extraordinary number of local government entities, leading to fragmentation and the duplication of services.
• There are gaps in the "mandated services" protections. If a state mandates a program on the local government, the state should to fund it. However, there are huge funding gaps, particularly in the criminal justice system.
• The initiative system is a problem in that revenue increases have to be passed by a two-thirds majority vote. However, initiatives that support a loss of revenue need only to pass by a simple majority vote.

Chris McKenzie, Executive Director of the League of California Cities, continued with the cities' view of the state/local government fiscal problem. He explained three main problems that the cities face:

• Cities face problems with regard to predictability of revenues, especially with regard to discretionary funding. Their main issue is the ability of cities to decide how the local needs are to be met.
• Good governance, long-term decision-making has been sacrificed for short-term problem management.
• There is a growing disconnect between service costs and revenues. In 1975, 15% of revenues were derived from the stable property tax, now it is only 7%. This has caused an increasing reliance on the sales tax, which is very unstable. The state has been an inconstant partner with regards to the distribution of revenues it provides for the services it mandates that local governments supply.

Also, revenues continue to decline, at a time when service costs are up. However, the state is not allowing the cities the flexibility to spend monies in ways best fitted for the individual cities. And, the monies that are going to the cities are unstable, making long-term planning very difficult.

Catherine Smith, Executive Director of the California Special Districts Association, began by explaining the difference between the different kinds of special districts. She discussed how they suffer from the same kind of fiscal problems as the cities and counties, in that their revenue sources have become unstable. They have a strong need for a predictable, stable source of revenue.

Rick Pratt, Assistant Executive Director of Governmental Relations for the California School Boards Association, concluded the morning panel by concurring that the biggest issue is the lack of stable, discretionary funds from the state.

The Commissioners then engaged in a discussion with the panelists. It was mentioned that educating the public about the vagaries of the state/local fiscal relationship is an important step that needs to be taken. Many people do not realize where their property taxes go and who provides the services they receive.

The Public's Attitudes

Mina Yaroslavsky, Research Associate at the Public Policy Institute of California, began the afternoon discussion with information on the public's opinions of the state's competency for handling public policy problems. She began with data that shows that the public thinks government wastes their money, however they remain confident that problems will be solved.

Ms. Yaroslavsky also shared with the commission, and to the surprise of the locally elected members, that the public thinks as poorly about local government as they do the state government, at least in regards to fiscal responsibility. In addition, Californians think local services are insufficient, however, they do not want to raise their local taxes. Data indicates that citizens do not realize the inconsistencies in these statements. They care a lot about their community but do not always understand the ways in which revenue streams affect their futures.

Panel Discussion

Potential Solutions to the Problems Associated with the State/Local Fiscal Relationship

Fred Silva, Advisor on Governmental Relations for the Public Policy Institute of California, began the afternoon panel by explaining the history of the state/local fiscal relationship. The state of California has had three distinct periods in its history as it relates to its fiscal relationship with local governments.

During the first 50 years of California's statehood, the state controlled most or all local finance. However, by 1910, California's local governments had become frustrated with the power the state had over local finances and voters approved a constitutional amendment separating the sources of taxes - statewide taxes would be used for state purposes and property taxes would be used for local purposes. Basically, up until 1978 and Proposition 13, property taxes were a locally levied tax for local services. Proposition 13, however, changed the separation of sources and local government no longer set the tax rate. Distribution of the resources was given to the state which has not had a great interest in surrendering that power. Since then, a constant source of controversy has been how the state allocates that money back to the local governments.

Throughout all this, and since 1950, counties have been political subdivisions of the state, being treated as agents of the state. However, they have residual local duties, mainly duties in unincorporated areas of the county. They have to provide state agent services, like human services, but do not have any countywide local power. Therefore, Mr. Silva concluded, the dilemma is in crafting a system that maintains some level of local power and which can handle the regional equity problem. That piece of local finance puzzle is missing and has been missing from the beginning.

State Senator Tom Torlakson, spoke to the Commissioners on how he felt regionalism would benefit local government. He believes that citizens will be more satisfied with all levels of government if they see it working together. The idea of regionalism and collaboration is important - the public likes joint use.

Senator Torlakson went on the say that incentives should be used to encourage communities to work together. The state should start an ERAF return process and begin rewarding cities for the right kind of regional planning. The state can't just put up money, but also needs to become partners in addressing the states' growth needs - in other words, smart growth. The Senator believes that both the state and local governments will save money if escalated growth is contained. He concluded with the thought that there needs to be new, creative thinking for smart growth in order to unlock the ERAF money to get it back to local governments.

Assemblymember Patricia Wiggins, continued with the discussion and agreed with Senator Torlakson that there needs to be collaboration among local governments and to achieve that, revenues need to be stabilized. She also agreed that ERAF money needs to be returned with property tax revenue incentives. The Assemblymember went on to say that the state should look at smart growth models from other states, like in Maryland, where they have had success in infrastructure investment zones. She concluded with suggesting that smart investment at the outset will help lead to more comprehensive planning.

Richard Lyon, Senior Legislative Advocate, for the Building Industry Association, concluded the panel by talking about the creative efforts the BIA has undertaken to "incentivize" the production of housing in desired areas, and also addressing the state-local government fiscal relationship. Mr. Lyon told of how efforts of the Job Center Housing Coalition have been united around the theme that there is a housing crisis throughout the state, both in terms of supply and affordability. He continued with the previously stated theme, that creative property tax proposals need to be developed. Mr. Lyon stated that the intricacies of the state-local government fiscal relationship have left cities and counties with a dwindling base of discretionary revenues. Consequently, it has been much more difficult for public/private partnerships to be established to jointly fund the infrastructure, amenities, and services needed to support smart growth.

The Commissioners then had a general discussion with all the panelists before opening up the meeting to public comments.

Public Comments

Debra Greenfield, General Counsel and Director of Legislative Affairs for the San Diego Association of Governments, gave her support for the work the Commission have embarked upon. She then shared with the Commission a regional growth strategy that her association has developed.

At the conclusion of the meeting, members of the State/Local Fiscal Committee began work on formulating recommendations on improvements to the state/local fiscal relationship.