State/Local Fiscal Reform Will Require Legislative Action: Antonio Villaraigosa & David Abel Opine

By Speaker Emeritus Antonio Villaraigosa and Commission Chairman David Abel

A City Manager predicts the fiscal ruination of his city in another 10 to 15 years because it is largely a residential community. A small town mayor complains that she's had to fence off city parks because her budget has no room to pay for maintenance and management of them. Prosperous Silicon Valley workers commute 100 miles each way every weekday because there is no housing for them to buy or rent near their jobs. Southern California community activists fight a new big-box discount store because it will flood their neighborhood with traffic. Counties sue the state trying to retrieve precious dollars lost when the governor and legislature needed them to balance a recession-ravaged budget.

These are tales from the front lines of fiscal warfare in California. They are sure signs that there is an unsettling sense of instability beneath the veneer of prosperity we see all around us in the Golden State. They are also indications that something needs to change.

At various times during the 20th Century, the government and people of California have sought to reform the fiscal management of the state. These efforts, some of which led to actual amendments to State statutes or the Constitution, often reflected the political and economic climates of their respective times. They were earnest attempts to address such issues as tax policy, home rule and governmental accountability that always concern activists and so-called policy wonks but too rarely hit the radar of the general public.

The fundamental issues do not seem to change. There has been a growing consensus that key aspects of the way California collects and apportions tax revenues are greatly flawed, if not downright dysfunctional. There is agreement that the current system has de-valued the role and power of local government, that it promotes a bias in land use decision-making that, to some, is hurting our economy, raising the cost of living and making it difficult for communities to evolve in a balanced manner. Instead of fostering regional cooperation to solve shared problems, it promotes "store wars," the compretition between neighboring jurisdictions to land retailers and auto malls to generate sales taxes. There also is agreement that it promotes a lack of public trust in governmental institutions that has been corrosive to our democracy.

As with any aspect of government, there are institutions and groups who benefit from the status quo or feel secure in its familiarity. There are branches of government that enjoy the enhanced powers that flow with the current fiscal scheme. There are jurisdictions that have learned to take fiscal advantage of the rules, just as there are those who suffer both loss of authority and wealth. In short there are winners and losers now, and there will be winners and losers if changes are made in the future.

Looking at what had happened to California's finances in the ‘90s, it was obvious that there had been few winners and many losers. Every level of government was under-financed during the economic recession of early and mid-decade. Local jurisdictions had, for many years, been ceding authority to the State while facing the wrath of constituents who didn't understand why their city councils and boards of supervisors could not provide better services and infrastructure. They wondered why their communities suffered from too much traffic, too little housing and too few high-paying jobs. Even when the economy bounced back, many of the problems persisted, defying any efforts to solve them.

The big losers in California's game of fiscal roulette have been its communities and its people. In a place with such a rich past, whose future holds so much promise, this is unacceptable. California "incentivizes" the arguably skewed decision making of its governmental institutions in an unintended, de facto, manner because of its fiscal policies. Perhaps some thought should be given to just which behavior deserves such incentives.

The Speaker's Commission on State and Local Government Finance was created at the end of 1998 to address these problems. The Commission's report, released at the end of March, attacks them from several perspectives.

First, it addresses where the money comes from and where it goes. It suggests taking a big step back toward the days when local jurisdictions received property tax revenues that reflected the results of their decision making. By suggesting a swap of half of current sales tax receipts for an equivalent amount of property tax receipts, the Commission proposes to provide a fiscal incentive for a city to choose land uses that enhance property values, not just sales taxes. Instead of approving another big box retail, local planners could encourage a high-tech job generator or some much-needed housing without feeling guilty about bankrupting the treasury.

Second, the Commission proposes a set of governmental accountability reforms to make it easier for the public to understand, and thus impact, what jurisdictions do with tax dollars. Chief among them is a proposal to require governmental entities to develop performance measures so that communities can evaluate their performance based on outcomes. In other words, there should be an easier way to tell if government is doing what it promises than to wait for the next barrage of confusing and sometimes misleading campaign advertising and hope that the public comes away with a coherent understanding of what's going on.

Third, the Commission urges the state government to get serious about the growth issues that whipsaw cities and counties every time the economy heats up. It suggests a framework of environmental, economic and quality of life policies that should become a permanent part of the planning process in California. It also discusses some basic structural issues concerning how we govern ourselves and how we work together (or don't) to solve problems that transcend neighborhoods or communities. Some problems, such as transportation, solid waste management and air quality, transcend individual communities and require regional cooperation. The Commission's report recognizes the possibility that the state's fiscal structure will someday have to acknowledge the interdependencies.

Some have suggested that these recommendations are too timid to address the major changes needed in state fiscal policy and governmental structure. Others are concerned that the revenue redirection policies are too radical and will harm the 20% of the state's cities that have profitably adapted to the current tax system. As the old saying goes, if you've got everybody mad at you, maybe you're doing something right. Actually, however, not everybody is upset at the work of this commission. But it did do something right: The vast majority of people in the state will, over time, be better off if its proposals become law.

What happens next is up to all of us. For far too long in matters of fiscal reform, the broader public interest has been subservient to the interests of those who have learned to work the system under the current rules. They have successfully taken advantage of the complexities of the issue and the public's seeming disinterest to discourage lawmakers from getting serious about reform. But as the direct relationship between our fiscal situation and every aspect of our economic vitality, environmental health and quality of life becomes more apparent to more people, they will demand that the governor and legislature roll up their sleeves and do something.

The full report of the Speaker's Commission on State and Local Government Finance is available on the Web at http://speaker.metroforum.org.

Antonio R. Villaraigosa (D-Los Angeles) is Speaker Emeritus of the State Assembly, representing the 45th District in Los Angeles.

David A. Abel is a Los Angeles-based publisher and businessman who served as chair of the Speaker's Commission on State and Local Government Finance.