California cities and counties have been tightening their belts over the last decade, partly due to raids on their treasuries by the state government. Now, with an historic local-state tax revenue agreement in place and the state’s fiscal year 2004-05 bu dget passed and signed by Gov. Arnold Schwarzenegger, local governments find they must also hold their collective breaths until November. That’s when California voters will decide on a state constitutional amendment—Proposition 1A—that would put restraint s on the ability of the state to shift tax money away from cities and counties.
“For Alameda County and most of local government, at least it gives us some predictability,” said Alameda County Supervisor Keith Carson (D-Berkeley-Oakland), who was part o f the recent budget negotiations between local leaders and representatives of the Legislature and the governor’s office. “It helps us to do better planning.”
Carson said the roots of the local-state fiscal problem go as far back as 1992 to the administra tion of Gov. Pete Wilson. “Historically what’s happened is that every single year since then, we’ve put our budget to bed in June, and [the state has] come back much later—sometimes October or November—and taken out money, and we’ve had to reopen up our p rocess and further cut our programs. Not knowing from year to year how much the state was going to take, you don’t know how to budget.”
The problems deepened in 2002, following the energy crisis, when the projected state budget deficit ballooned to as hi gh as $22 billion. For local governments, the hits from state takebacks became enormous. In the upcoming fiscal year, the City of Richmond will lose $1.6 million in expected state revenue, Berkeley will lose $1.9 million, and Oakland will lose $6.2 millio n. Those losses have already been built into the respective cities’ budgets.
But in May, Gov. Schwarzenegger announced an agreement worked out with representatives of local governments, including the League of California Cities, in which the local govern ments pledged not to fight $1.3 billion in budget cuts for fiscal year 2004-05, and again in 2005-06. Local government leaders also dropped their support for Proposition 65, which would have blocked the state from taking the $1.3 billion this year and nex t. In return, the governor pledged his support for Proposition 1A in November.
Under that proposed constitutional amendment, the Legislature could only borrow a limited amount of money from local governments—not seize an unlimited amount outright—could o nly do so twice in a 10-year period, and would have to pay the money back to local governments before borrowing any more.
Carson thought that was a good trade.
“Proposition 65 was just going to be headed up by cities, counties, and special districts,” h e said. “We now have the governor and the Democratic members of the Legislature all speaking with the same voice with local government of the importance of the passage of Proposition 1A.” Carson’s chief of staff, Rodney Brooks, said that according to repo rts from Alameda County’s state lobbyist, the “overwhelming majority of the Legislature will be supporting the initiative.”
That overwhelming majority won’t include at least one local legislator—Loni Hancock (D-Berkeley)—who said she would remain neutral on Prop 1A, calling it “one big diversion” from the need to raise revenues and saying it locks in inequities between local sales and property taxes.
“If we don’t raise revenues, this state is going to cut, and nip, and tuck until we can’t provide a qual ity of life for anybody,” Hancock said. “1A is a little better than 65 was. It has more flexibility. But it still would put in the state constitution totally inappropriate things like the mix of property and sales tax. It locks in the fiscalization of lan d use by keeping in perpetuity and unchangeably the current incentive for cities to get retail as the major source of their financial security, as opposed to building housing.
“We should have just defined what revenues should be permanently set aside for cities, and just done that by statute.
“I think it’s a good thing that the cities have some revenues that the state doesn’t take. That part of [the deal] is fine. I think there should have been more flexibility.”
But Berkeley’s budget director was pleased with the deal.
“It stabilizes our fiscal situation, if the proposition passes in November,” Tracy Vesley said. “We lose $1.9 million to the state in ‘05 and ‘06, and 2006 will be another significant deficit year for the City of Berkeley. But by 2007, we will no longer have to transfer that $1.9 million to the state. And through this agreement, the state will reimburse us $1.7 million in lost vehicle license fees from 2004. With that combination, 2007 will definitely be a better year if this whole pac kage comes to fruition.”
Vesley cautioned that beyond 2007, Berkeley is still facing a structural budget deficit based upon possible rising costs of the California Public Employees’ Retirement System (CalPERS). “So we’ll still see some budget concerns in 2008, albeit not as significant as ‘05 and ‘06.”
Meanwhile, according to Supervisor Carson, the local fiscal bleeding for this year hasn’t stopped, even with the local-state budget deal in place. Carson said that the state legislature is currently debat ing implementation bills to the state budget that could cost county government an additional $15 million from the loss of jail booking fees and reimbursement for mental health services. Carson, who serves as the chair of the County Supervisors Budget Comm ittee, says he has “already called for an emergency meeting of department heads as soon as we know what those new numbers are.”›?