Calif. League of Cities' John Russo: The Public Case for Local Revenue Protection from State

The League of Cities negotiated a deal with the Governor related to protections of local revenue from state takings as the budget negotiations opened last month. Can you provide our readers with some background on the negotiations between the governor and the League?

The League gathered over 1.1 million signatures to place a measure on the November ballot that would forbid the Legislature from encroaching any further upon local government revenue streams during this or any other future budget year. As we were about to file our signatures, the Governor's Office contacted us and asked us not to file the signatures because the Governor wanted to make a deal. The League worried – and our worries have been borne out – that a deal with the Governor might fail to get through the Legislature. Consequently, we filed the signatures and the measure (Prop. 65) will be on the ballot as local governments' insurance policy.

We now have a deal with the Governor whereby local governments have agreed to a $2.6 billion contribution to the state over the next two years. At the end of that period, we will not only receive constitutional protection for our revenue streams as they stand today, but we will also receive repayment of the Vehicle License Fee gap, and much better un-funded mandate protection than we had under our own measure. So, when you net it out to cities, counties, special districts and redevelopment agencies, the actual loss number comes out to $1-1.5 billion over two years.

The fiscal issues that local governments face are the same as the state, but it is in our interest for the state to solve its problems. The state's budget process is dysfunctional. It needs to be fixed. The first step to fixing the state budget is to force state government to look nowhere but to itself to balance its budget. Cities and counties should not be a piggy bank that can be cracked open in order to allow politicians in Sacramento to avoid responsibility for both raising revenues and cutting services.

Commission after commission over the last decade, from the constitutional revision commission up to former Finance Director Peace, has suggested that the allocation of property taxes by the state that was a established in Prop. 13 is at the crux of the dysfunctional state/local fiscal relationship. In fact Joel Fox, who rode around with Howard Jarvis to campaign for Prop. 13 said the one unintended consequence of that proposition rested on that provision, and he never intended to leave the locals a financial problem in local government. Why do we back away from fixing that problem?

It's a political and ideological challenge because Prop. 13 is holy writ in this state. This was the Trojan Horse of Prop. 13-I'm convinced that nobody who voted for Prop 13 went into the ballot box thinking, "You know what I want to do here? I want to take power away from City Hall and give it to the politicians in Sacramento. I want to centralize governmental authority." People were trying to keep money literally in the equity of their home. It is an irony that a measure that was designed to protect the homestead actually destroyed the power of the home town to determine its own destiny.

There is still a gap between the deal struck by the cities and the governor and the legislative leaders, who have the authority to pass the budget. A quote by Darrell Steinberg, the Budget Chair, "I favor constitutional protection for local government only if it's coupled with real reforms." I believe he means the reforms we were just talking about. What's missing from this question that prevents you all from getting together on this?

I don't know. The League put together a proposal that's been on the table for nearly four years now that would satisfy the concerns of those folks who are seeking a sales tax-property tax swap. It is one necessary measure, but I don't think that, by itself, it would change the dynamics. Assemblymember Steinberg and others are trying to create a different set of incentives for decisions that local government will make in the future; specifically, between whether to pursue so-called "big box" retail as opposed to building housing.

Assuming, for the sake of argument, the sales tax to property tax swap would effectively change the equation, the problem is that every proposal that has come forward actually punishes local governments for the decisions they have already made. So far, the proposals local government has seen from the state would hinder "big box" development; but it is pure sophistry to claim that the swap will encourage housing. And everybody knows it. The swap is merely another way for the politicians in Sacramento to accrue more power over local government.

The League and Assemblywoman Lynn Daucher (R-Brea) have proposed a system by which cities would no longer have an incentive to develop new sales tax generators. But those parcels that have already been developed as sales tax generators would continue to be sales tax generators, whether they generated more or less sales tax. Cities developed these parcels after the state legislature stole local government's property tax revenues in the early 1990s and changed the incentives. New sales tax generators would create money that the state could then use to make housing work for our communities. But it won't be done as long as politicians in Sacramento insist that they and they alone are the fountainhead of all solutions. There is a way to make this happen-it can be done.

Let's delve down a little deeper. Again I want you to give you an opportunity to respond to the assertions made by the Budget Chair in last month's issue of MIR. He said, "the understanding the governor made with local governments does two things that I find objectionable. First, it fails to take advantage of the small window of opportunity, which comes around once in a decade or so, to change what we know is broken about our system of state-local government finance. Second, and even worse, is that [the League of Cities proposal] not only fails to take advantage of the window, but by virtue of imbedding this dysfunctional system in the constitution, it specifically prohibits the Legislature from enacting reforms next year and beyond."

First, and with all respect to Darrell, that's not correct. The fiscal system can always be fixed – all that's lacking is courage. The best window to correct the state-local finance system was five years ago. The window was open wide when the state was flush with a surplus. That's when things could have been changed without damaging the finances of any level of government. Instead, the Assembly, the Senate and the former governor all decided to cut taxes and gave big raises to government employees instead of solving the problem. That was the opportunity to create a different set of incentives when there was enough cash in the system to protect the extreme cases.

Second, the LOCAL/Governor proposal creates a floor; it does not say that the state would be unable to enter into voluntary compacts with cities, counties, or unincorporated areas. Nor does it preclude giving more money to cities for property taxes in order to incentivize investment and zoning decisions other than retail.

Last but not least, Assemblymember Steinberg's statement demonstrates a flawed, capital-centric view of political reality. As long as there is utter – and well founded - distrust of state government in the hearts and minds of local elected officials, there is no way that local government can be a real partner for reform. However, once local government has revenue streams upon which it can rely, then it will be possible to create a more rational state and local system. The leadership and the dynamics within the League are such that it can happen in the next two years, but it's not going to happen in the last minute and jammed "down the throats" of local government.

Assemblymember Steinberg goes on to say why this reform hasn't happened, which is in part a different take on what you've been addressing. He says, "The League of Cities plays to the lowest common denominator. Their own studies show that 80-percent or more of cities benefit from the half-cent sales-property tax swap. Yet, they fight this tooth and nail, unwilling to even talk about a phased-in approach or something that would meet some of the legitimate concerns that have been raised throughout the debate."

That's incorrect. I would suggest that Assemblymember Steinberg take a look at Assemblymember Daucher's bill. It addresses all of his concerns, but it doesn't allow the state to use the guise of the sales-tax property-tax swap to steal more local revenue. You know the saying " fool me once, shame on you-fool me twice, shame on me." Darrell's proposal is an attempt to fool local government for the fourth time in the last ten years.

Again, we have come forward with a proposal that has been rejected out of hand, a proposal which deals precisely with the concerns that are being articulated by Assemblyman Steinberg. That is, to disincentivize creating zoning for sales tax generators and incentivize switching to what we all agree are better land-uses.

In a May interview with Former Finance Director Steve Peace, he said, "trying to tackle this issue is very difficult, principally because there are so many different local governments going in so many different ways and affected unevenly by whatever proposed changes are made." And so he suggested that there needed to be two proposals for reform ultimately; one that says this is what we want the future to look like, and a second proposal that says how we are going to transition from where we are today to where we want to be. Have we missed the boat in coming forward with two proposals, one being where we want to be and one being how we are going to transition in it?

Steve is correct on this point. There has to be some type of transitional consideration for those outlying cases in which the reform process may create catastrophic consequence to some local government's budget. But California has not missed the boat on this essential issue. Real reform happens slowly and deliberately. It doesn't require consensus, but it does require a critical mass politically. Unfortunately the top-down approach which some reformers in the Legislature, have taken neglects the cities and counties who are the targets of reform and who are essential to that critical mass. Right now, we're taking the first step; we're trying to create an environment that treats the local governments like they are partners, and recognizes that people should not be punished for land use decisions they made under a system imposed upon them by the state government. That's why there is so much anger. We're trying to remove that anger by taking the equity issue off the table. If we can do that, there is nothing that we can't do. Once you get passed this piece of reform, you could get 80-to-85-percent support for a true prospective sales tax-property tax swap.

Give us some explanation of the changing dynamic within the League. How does the League reach consensus without playing to "the lowest common denominator"?

The League used to be a mutual defense pact, in that a threat to one city was an offense against all. Since every city has a different fiscal posture, every proposal would impact some city in a bad way, so you had to protect each. But we're not in that situation any more, and in the past two years we've been able to achieve consensus upon positive reform measures. Some cities will be impacted pretty substantially by the budget deal we made with the governor. Yet, we easily had between 90-to-95-percent approval by our membership because we all recognized that we would have to take some hits in the short term in order to set ourselves for the process of real and lasting reform.

As a City Attorney and a former city council member from Oakland, what do your citizens want?

This is part of why I personally tend to be supportive of taking away incentives for getting sales tax dollars. In Oakland, Wal-Mart recently proposed building a Supercenter. We realized that we would be creating jobs that didn't provide healthcare benefits, and that lack of benefits falls back on the county and the state. They are able to compete with other grocery stores, in effect, by not providing healthcare. So it's a race to the bottom.

It's understandable why somebody who is smart and who cares and is a very good legislator like Darrell Steinberg has grabbed onto this issue and has held onto it. I love him for his persistence. I just think the mistaken assumptions he's making about our political dynamics are hurting his capacity to lead, are hurting his proposal and are damaging the cause of reform.

So, how is this going to turn out in the coming days and weeks?

The Legislature is going to come back and focus on issues that appeal to those of us who aren't policy wonks. People are much more upset in terms about community college tuition hikes and issues like that than they are about the League's deal with the governor. The Democratic members of the Legislature are much more likely to oppose the governor on social equity issues than they are on a debate such as this one, which we know is critical to social equity issues but is not viewed in that way. They'll take their stand on those issues and, basically, give the governor what he wants on our bill. We may become a pawn in the clash over those issues, and in the partisan business as usual at the state capitol.