Cole Attacks League Of Cities' Stance On AB 680 –– McKenzie Fires Back With League Perspective & Data

Rick Cole

For 20 years, California cities have demanded reform. Last month, the state Assembly took the first baby step by passing AB 680, a pilot effort to share sales taxes revenue growth among Sacramento-area cities. But guess who led the opposition? The League of California Cities.

The League's opposition is a classic case of the special interest politics that has hamstrung fiscal reform since the passage of Prop. 13 in 1978. After Prop. 13 slashed property taxes, cities and counties faced draconian cuts in services, including police, fire, libraries and parks. But Gov. Jerry Brown and the Legislature stepped in to bail out local government using the state's budget surplus. California voters loved the solution: lower property taxes with minimal impact on services. So they kept voting for tax cuts until the surplus was exhausted and the bailout was reversed under Gov. Pete Wilson. Then local governments had to scramble to maintain services and stay solvent.

Cities have been particularly ingenious at avoiding service cuts without going bankrupt through a range of questionable schemes, from back-door tax increases to postponing capital reinvestment until streets fall apart. But the most damaging trend has been to aggressively pursue sales tax revenue.

Auto malls and superstores now line our freeways, decimating local businesses and cannibalizing customers from older retail areas, leaving behind empty stores and dying shopping centers. Developers and out-of-state retailers have pocketed gargantuan subsidies as cities have been forced into cutthroat competition for retail development, while "cash box" zoning has paved over environmental concerns and blocked needed housing.

Why do cities chase sales taxes? Because for every dollar in sales, a penny comes back to the local city. So if you drive to Cerritos to buy a $30,000 Ford Explorer, Cerritos gets $300. That's more than cities collect as their share of a whole year's property tax for a median-priced home in all but the most affluent towns.

So with the biggest auto mall in Southern California, it's no wonder that Cerritos can afford a new 82,500-square-foot library clad in titanium. But without any auto dealers, Azusa voters had to approve higher property taxes and compete for scarce state matching funds to replace the city's obsolete library.

Short of betting in Las Vegas, it would be hard to devise a worse way to fund city services. The current sales tax allocation system has been denounced by the Little Hoover Commission, a bipartisan watchdog agency, by the Public Policy Institute of California and by the Speaker's Commission on Local Finance.

But powerful developers and retailers like the advantage it gives them to extract subsidies or bend environmental protections. With lower costs of providing services than inner cities, wealthy cities and sprawling suburban communities love getting a higher share of the loot.

And the League of California Cities is so myopic that it sees any attack on titanium-clad libraries as a threat to "local control." But instead of local control, the league's position really promotes out-of-control sprawl.

Against this powerful coalition invested in the status quo, disadvantaged communities can muster neither campaign cash nor lobbying clout.

The only countervailing hope for reform is the greater good of the state, which ordinarily carries little weight with the Legislature or governor. But Asm. Darrell Steinberg (D-Sacramento) has pushed AB 680 through the thicket of committees by being flexible and savvy enough to compromise on his tax-sharing formula.

Now Steinberg's bill is in the state Senate. And although it applies only to the Sacramento area, it could be a model for the state. If the league succeeds in killing it, comprehensive reform may be dead for years to come.

Chris McKenzie

Rick, thanks for a copy of your column. Many folks shared

it with me Tuesday. We continue to have discussions with Assemblymember Steinberg about our concerns about his bill and how it could be improved, but I thought I would provide just a little more background on the basis for the League's position. First, the League's position was recommended overwhelmingly by the Revenue and Taxation Committee (on which you previously served briefly last year) and adopted unanimously by the 44-member Board of Directors-both of which are widely representative of the cities of the state).

Second, the position is predicated on a long history of legislative resistance to fundamental reform of state-local finance and the continued erosion of city fiscal capacity. Quite frankly, many legislators still view all local government revenue as belonging to the state for its own use or to redistribute as it sees fit. The attached powerpoint slides illustrate the state's deplorable track record as a partner in addressing these concerns.

The first (also available on the League web page, www.cacities.org) depicts the deep erosion of city revenue capacity while state revenues have skyrocketed. You should note the decline in per capita sales tax revenue and the losses of property tax revenues. The second slide shows how statewide local sales taxes have actually declined in importance in the city revenue mix since Prop. 13-from 11% or total revenues to 10% (while rising in ranking to 3, the total % has declined due to the increase in service charges). Look at the decline in the role of the property tax in both slides. Finally, the third slide illustrates the trail of state reductions of revenues to cities. Note the big hit in the early 1990s with the property tax "shift" (a.k.a. theft). Michael Coleman, the League's fiscal consultant, prepared these slides.

The 44-member League board has decided to oppose bills such as AB 680 until there is some kind of constitutionally guaranteed protection of existing city revenues. We may be the only state in the nation in which the legislature has proven its ability (now for 10 years running) to take local property tax revenues and use it to balance the state budget.

The very legislature in which you indicate such faith has Confiscated city property taxes long after they were no longer needed (remember the $14 billion surplus two years ago from which no property taxes were returned?), imperiled vehicle license fees, eliminated funding for transit-oriented housing, provided limited categorical aid, and micromanaged many aspects of city government (e.g. binding arbitration is one of city leaders' favorites). This track record does not inspire much confidence.

It is interesting to note as well that one of the amendments added to AB 680 in the Assembly actually repeals the reform bill of a few years ago that requires local governments to share the sales tax revenues from "stolen" big boxes. The League actually supported that bill. One has to wonder why it is necessary to repeal that reform in this "reform" measure.

With all the above being said, Assemblymember Steinberg is an outstanding thinker and there are merits to some of the components of AB 680 (e.g., regional impact fees). If cities can be assured their revenues can be protected from future state raids, it might even be possible at some date in the future to discuss regional revenue sharing-but not before in all likelihood. Finally, as the legislature considers this "reform" measure it should consider lending some of its own portion of the sales tax (or the property tax it took from local governments) to help structure real reform.

Thanks as always for your provocative ideas. Keep the debate alive. It is healthy.