League of Cities Negotiates Budget Deal With Governor, Awaits Legislative Approval

The governor has struck a deal with the League of Cities re-garding both his budget needs and local government revenue protection in future years. Can you give us your reaction to this agreement?

I have two reactions. One is that the budget cuts that are associated with it for two years are very substantial and they are going to be very painful. But, the governor's commitment to lead the campaign to accomplish the number one goal of the League and other local government organizations was viewed with great enthusiasm by our leadership. They recognized that the sort-term pain, while serious, is worth the accomplishment of this long-term goal of local government.

Implementation of that arrangement depends on action by the Legislature. Can you give us your thoughts on how the Legislature is likely to react?

We're in the early stages of getting legislative reaction to the proposal. The initial reaction we're getting from many legislators is a preliminary indication of a willingness to support the package. They certainly are going to pore over the details, and they should. But, I think they understand the need to end the longstanding friction between state and local governments resulting from the state's use of local revenues to balance the state budget.

Chris, last month MIR ran an interview with Steve Peace, a former state finance director, state senator and assemblyman, who said, "we have got to get local governments off of sales tax dependency. It has produced horrific distortions in land use decision making, and it just makes fundamental sense for local governments to be principally interested in the growth of the property tax." The deal advanced by the governor and the League appears to do little more than secure the revenues now flowing to local governments, and doesn't change the composition of those revenues. What is the League's position on the latter?

Actually, it does change the composition of the revenues. And, as people find out more about the deal, they'll understand that it strikes a much stronger balance between property taxes and sales taxes. In fact, our fiscal consultant advises us that by the third year of implementation of this package and for the first time since before Proposition 13, cities will be receiving more of their total revenues from property taxes than from sales taxes. When you're talking about moving $4 billion onto the property tax side of the revenue portfolio, that is a major change in the revenue mix of local governments. No, it doesn't decrease the sales tax side, but this still is a very significant change.

There are a couple of other aspects to this issue that people need to keep in mind. One is that 30-percent of the sales tax is actually derived from business to business transactions. There's a great degree of focus on the big box retail and the accusation that it's led to horrible land use patterns. I keep challenging people to understand that local governments actually derive retail sales tax from manufacturers and other businesses that purchase goods and taxable services from other businesses. In these cases, it is the sales tax that provides incentives for location and land use decisions.

Two, the state of California has realized it needs to have more of a balanced revenue portfolio, and the same thing is true of local governments. The idea of creating even greater dependence on the property tax will make local government revenues less diverse and more subject to the same economic cycles as the state that sees its income and sales tax revenues decline at about the same rate during a recession. So, let me make it concrete. The sales tax typically declines in response to downturns in the economy quicker than the property tax that typically lags behind by a couple of years. By the time the property tax is beginning to decline, the sales tax typically will begin to rebound. So, local governments, by having a good balance between property and sales tax, can weather economic cycles better than the state of California can with its income and sales taxes. This agreement is a massive change in the revenue balance between the property tax and sales tax, and we believe we ought to take a few years to assess that change and make sure that further change isn't going to greater revenue instability,

In this month's Metro Investment Report, Assembly Budget Chair Darrell Steinberg is critical of the League's position. If you remove local governments from the threat of being raided by the state, he asserts, you will never get either the reform that we need to separate the sources and uses of tax revenues, or a local tax base that empowers local government to be the architects of their futures. How do you respond?

I find very frequently that legislators form hard opinions on issues like this before they've looked at the facts. When they have a chance to go back and look at the actual numbers, many times they discover that their hard opinions need to be tempered. I don't think anybody can disagree that this is a massive change in the balance of revenues. The people who suggest that we need to have a figurative gun held to our head in order to embrace reform are some of the same people who have participated in taking revenues from local governments.

There have been many blue-ribbon commissions in the last decades-from the Constitutional Revision Commission, to two Speaker's Commissions, to Senator Peace's hearings around the state. All have suggested that the 70 year history in California prior to Prop. 13 of separation of sources and uses worked very well and was unintentionally changed by Prop. 13. Now, they asserted, we need to fix the dysfunctional structure. Is that not the position of the League of Cities?

We have described it in terms of achieving separation and stability between state and local finance. We think that's exactly what this proposal does. It helps to reestablish the separation of sources.

The principle of the separation of sources doctrine is that you define which revenues will be used to finance local government and which revenues will be used to finance state government. For about 12 years, the state has been using local revenue to finance its obligations. This would end that practice by preventing the state from taking any more local revenues for that purpose.

What does the deal between the Governor and League not do that must be further worked on in coming years?

It doesn't roll back the $5 billion that have been taken by the state. To the extent that state leaders are willing to acknowledge that they have a major IOU to local government, we need to have a serious discussion about how that repayment is used to accomplish our joint objectives, such as housing. We put a proposal on the table three years ago that Sen. Peace rejected as not daring enough. After his tour of the state and his effort to reach some kind of compromise, the League and CSAC developed a proposal that would return ERAF moneys to local governments and reward them for higher density and smart growth related housing. That was rejected. We developed it three years ago, and we're still interested in going forward with it today. The money wouldn't come back exactly the way it left, but it would be used to incentivize housing production and more compact development. That's exactly the kind of thing that our next agenda ought to look at.

What other issues are difficult to achieve unity around but nonetheless are important to be addressed by the state?

I think there's a common agenda that threatens us: dealing with housing. There's a great concern about that issue. What has made it so hard to take on these major growth and development issues is that the state government has been so difficult to trust in the last ten years, making it particularly difficult for local government to take risks and tackle some of these other issues, like housing. I passionately believe that once we can stabilize this fiscal relationship, cities will be emboldened to address some of these other issues, and there's a great desire to do it.

We have three major goals this year. One is revenue stability, two is the jobs/housing imbalance and the housing crisis in the state, and three is ethical conduct in city government. We view them all as important and we're working on many fronts to tackle them. As soon as we can get the revenue stability I think we'll be devoting even more effort in the housing area.

I also just go off a phone call with my colleagues from the school boards association and the county association. I think we're all going to be focusing a lot in the next year on the obesity epidemic and it's relationship to land use and development patterns.

Government often functions in silos. For example, cities have typically not been represented in discussions on how to allot $35 billion in state school bond dollars. In the Los Angeles basin, there is $11 billion in school facility bond dollars to be allocated in the next five-to-seven years, but there's no formal mechanism for the city planning agencies and departments to be involved in what will be the most significant investment in many neighborhoods in the next generation. What needs to happen to bring the parties together to create viable, healthy neighborhoods through the investment of these silo dollars?

A lot needs to happen. A major focus for the next few years of the League, CSAC and the California School Boards Association through our City County School (CCS) Partnership will be to identify and disseminate information about best practices in that area. Some of this is going on, but the information isn't getting out there. Along with Assemblymembers Steinberg and Wiggins, we support trying to identify changes in the planning and zoning laws that will lead to greater collaboration among local government agencies, including schools, in the planning of new facilities. In some cases it may take a change in state law. In other cases, it's going to take a change in how money's allocated. Perhaps most importantly, people need to be made aware of new decision making models that are leading to results that are better for everybody at the community level.

For years now, there's been the sense among regionalists that the challenges facing our local governments are often beyond their jurisdictional and legal capacity to respond. Whether it's air quality, water reliability, or transportation and mobility, local government is limited in its ability to address the vexing challenge, yet it is faced with the ramifications of the absence of good policy solutions. What do we need to do to give real life and vitality to regional forms of decision-making?

One proposal is to emulate what we have done with the allocation of transportation dollars on a regional basis. That program has demonstrated that when you bring local elected officials together at the table to make decisions about regional investments, they can come to solutions and be fully supportive of the process. They'll even contribute local money, where appropriate, to those projects. More and more we need to be incentivizing regional decision making in the allocation of public investments.

We have to get away from the notion that all state funds should be allocated at the state level, simply because we do most of our bonding at the state level. That kind of centralized approach does not build regional decision-making capacity.

Chris, you've led the League into a much more political posture vis-à-vis the state Legislature and the Capitol. How do you believe it's been paying off?

A number of years ago, the League decided that if cities were going to address their longstanding grievances with the state-local fiscal relationship, we were going to have to find a way to utilize one of the major policymaking tools available in California-the initiative process. So, we've become educated on that process. We've made investments. We've made substantial efforts at raising private funds, with success, in order to further that agenda. The result of this effort has been to get the attention of state policy makers. We stress over and over again that this is not just a city or a local government agenda. We want a strong state government. But, we can't have a strong state government, or a massive state government, at the expense of local services; there has to be balance.