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Anatomy of a Tortured Relationship, Three Decades in the Making

By Dan Walters, political columnist at the Sacramento Bee.

For related commentaries and content, please visit the Untangling the State-Local Fiscal Relationship page.

When Orange County’s Board of Supervisors rebelled in mid-November, defying a new state law by refusing to shift $73 million in property taxes from the county’s coffers to local school districts, it marked a new chapter—and perhaps a new low—in the tortured history of relations between California’s state and local governments.

Although many, if not most, of the Capitol’s politicians, including Governor Jerry Brown, have served stints in local government themselves, they tend to act as professional athletes do when traded from one team to another. Yesterday’s teammates are often today’s bitter rivals and could even be teammates in another season.

It would take a book—a long book—to adequately depict the many mileposts in the state-local relationship, but the Twitter version would be that the conflicts are usually, but not always, about money, and they began when voters passed Proposition 13 in 1978.

The landmark property tax limit measure had the direct consequence of severely limiting—virtually eliminating—the long-held power of cities, counties, school districts, and other local governments to raise revenues as they saw fit.

Arguably, it was exercising that power that led to Proposition 13’s passage. During a period of high inflation, county assessors were routinely imposing double-digit annual increases on property values and local officials were feasting on the resulting tax bounties. Presented with Proposition 13 as an antidote to their ever-rising property tax bills, voters embraced it.

One indirect consequence of Proposition 13 was to make "locals,” as they were dubbed, highly dependent on the state—especially counties and schools— and therefore subject to the whims of Capitol politics. And the fiscal burden has been, more often than not, more than the state’s own sales and income tax systems could bear, especially since the measure also made raising state taxes more difficult.

A subtler, but very important, factor is that Proposition 13’s impacts hit the Capitol at the precise moment when its occupants were undergoing a cultural implosion, becoming more overtly partisan and career-minded and less interested in policy for its own sake.

That change of orientation made the Capitol a target-rich environment for special interest groups with money to spend on lobbyists and campaign contributions. And local governments, schools and—most importantly—the unions that represented their employees quickly became, collectively, the largest and most influential special interest bloc in town.

The collegial, pre-Proposition 13 relationship between Sacramento and the locals quickly evolved into an exercise in power politics. The Capitol became an arena in which the locals jousted with the state over money and in which local disputes, especially those involving money, were taken for political resolution. Local officials and their employees’ unions, for instance, have often clashed in the legislature.

Moreover, Sacramento politicians quickly grasped that their power of the purse would allow them to influence local government and education matters by specifying how aid money was to be spent. An early example occurred in the 1980s when the Los Angeles County Board of Supervisors acquired a 3–2 Republican majority and the county’s Democratic legislators used the state budget to force the board into doing things it didn’t want to do.

When a severe recession hit the state in the early 1990s, thanks to severe cutbacks in Pentagon spending, the state-local relationship became overtly contentious. Schools had persuaded voters to enact a sweeping, and extremely complex, education finance measure in 1988—aimed at creating an inviolable floor under state school aid—and when the recession-battered state budget couldn’t meet its education obligation, then-Governor Pete Wilson and the legislature forced local governments to shift billions of dollars in property taxes into school coffers.

Over the next two decades, governors and legislators repeatedly fiddled with the mix of property, sales and vehicle taxes going to the state, the schools and local governments. One such maneuver became known as the "triple flip.” ERAF—the Educational Revenue Augmentation Fund—became a four-letter swear word among city and county officials.

All this set in motion locals’ years-long effort to regain fiscal independence, which included two ballot measures aimed at protecting their treasuries from state raids and numerous court battles—one of which is still being fought, as the multi-billion-dollar squabble over the state’s grab of city redevelopment funds and the Orange County rebellion this month indicate.

The county was caught up in one of the state’s periodic revisions of ERAF allocations—thanks to machinations over its declaration of bankruptcy years earlier—and refused to send the property taxes to schools, saying it was being treated unfairly. Supervisors acted even though an Orange County senator had obtained a special $35 million allocation of property taxes for the county two years earlier as his price for voting for a controversial 2009–10 state budget bill.

Who’s right and who’s wrong? When it comes to the interplay of state and local finances, there is no right and wrong; there are only winners and losers. Orange County won one round in 2009 but may lose in 2011 if the state goes to court to get the $73 million.

Cities, like Orange County, are claiming victimhood because Brown and legislators agreed to end all local redevelopment programs as a way around Proposition 22, a 2010 city-sponsored ballot measure aimed at protecting municipal funds from state raids.

Abolishing redevelopment after nearly 70 years would redirect about $5 billion that redevelopment agencies skim off the top of the property tax pool each year to other local entities, thus saving the state about $2 billion because the schools would get more property taxes.

Another state law would allow the redevelopment agencies to remain in business, but only if they sent the state enough money to compensate for its school costs—an issue that’s now being fought out in the state Supreme Court.

With the state budget facing multi-billion-dollar deficits for years to come, the triangular state-local-school jousting over money shows no signs of ending, but there’s also a new wrinkle. While cities battle the state in court, the counties have become partners with the state in what Governor Brown calls "realignment” — shifting more functions, especially in criminal justice, from the state to counties, along with more than $5 billion to finance them.

It’s a way for the state to comply with federal court orders to reduce prison overcrowding, and the counties like getting the money because they think they can come out as net winners—but there’s a big caveat. With the history of ERAF and other conflicts, county officials are willing to shoulder the new responsibilities only if they have an iron-clad guarantee that the money will always be there, and that would take a constitutional amendment approved by voters that’s still to materialize.

Nor, as mentioned earlier, are the state-local conflicts always about money. One of the most cherished local powers has been land use—deciding what can be built and where. But that authority has been eroded over the years by a series of state actions, such as the adoption of specific controls over development in the coastal zone by a state commission in the 1970s and, more recently, direction from the state to adopt more transit-friendly land use policies as part of California’s effort to reduce greenhouse gases.

At the same time, however, the state has reduced its once-dominant role in transportation, especially highways, and local governments have filled the vacuum by financing and managing many highway projects with locally raised sales taxes.

What of the future?

Some visionaries—such as members of the Think Long Committee for California—believe that the bell can be unrung, that the first steps of realignment can expand into a complete reconfiguration of state and local responsibilities, along with an overhaul of the state-local tax system.

Whether that happens is uncertain, but it is certain that the relationship that has developed over the last three decades is fundamentally unhealthy, divorcing responsibility for taxing from accountability for performance. It leaves the public confused and angry and dissipates civic energy on political infighting that would be better spent delivering effective services.

Most Californians, one is certain, don’t care who does what. They’d just like for someone to do the job.