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Local Governance and Finance Reform: Deja Vu All Over Again

By Fred Silva, senior advisor, Public Policy Institute of California
This opinion article appeared in the Western City Magazine in the November 2000 issue

The Early Struggle for Community Power
The struggle to find the right balance between state power and local governance has long been part of California history. The state Constitution, adopted in 1849, gave the Legislature considerable power over local government. The Legislature, not local communities, had the power to incorporate cities, set up their finances and provide local services. This arrangement was largely the result of the framers' concern that local governments would ignore the needs of - or even oppress - their citizens.

As time passed, the 1849 Constitution's provisions for local government attracted considerable criticism. In 1877, the voters approved a measure providing for a constitutional convention, held in 1879. Much of the debate concerned the need for community-based government. Many of the delegates were frustrated by the problem of "special legislation" - laws affecting singular matters in a specific community.

In the session leading up to the convention, the Legislature passed 572 laws, of which 503 were special legislation. Many believed the Legislature had a limited sense of what was necessary for government to work at the local level and should leave those matters to the people who lived there. As one delegate argued, "special bills were passed often ... without any members of the Legislature knowing anything about them except the member who introduced them." Not only was special legislation "detrimental to the interests of counties and townships," it was also "one of the greatest sources of corruption ... in our legislative halls."

As a result, the new Constitution prohibited special legislation in 33 specific instances and in any other case in which a general law would apply. It also allowed cities with populations greater than 100,000 (at that time, only San Francisco) to frame charters for their own government. The provisions of the charter would supersede all special laws that were inconsistent with it. Later, this authority was extended to all cities.

The Struggle to Finance Local Government
One hundred years ago, the fiscal relationship between the state and local governments was as messy as the political one. At first, the state relied on two taxes: the poll tax and the property tax. Until 1880, most of the poll tax went to counties for local services. By the beginning of the 20th century, 70 percent of the state budget was financed by the property tax. State and local governments were using the property tax to finance their respective services. Local assessors were under pressure to increase assessments in order to help finance state spending. Local governments would reduce their tax rates only to find that the state property tax rate was increasing to fund the state budget. As the Progressive movement took hold at the beginning of the new century, reformers began to explore ways for communities to organize, finance, and administer local governments.

The solution was a constitutional amendment known as the separation of sources, which voters approved in 1910. The purpose of the provision was to reserve the property tax for local services, including schools. It seemed simple enough. The state would tax the income of corporations - at the time, utilities and new communications technologies were growing rapidly - and local government would tax property to finance local services. This separation of sources would formally mark off state and local revenue streams, thereby giving local governments more control over their financial arrangements. Although the separation of sources was replaced in the 1930s by a different state tax system, the principle of using property taxes to fund local services, including schools, through a system of local control remained until the enactment of Proposition 13 in 1978.

By 1915, Progressive forces had established another important principle of governance - home rule, or the right of cities to draw up their own charters and govern municipal affairs, which remains part of the Constitution to this day. Together with the separation of sources, home rule helped maintain the balance between state government and California's cities for two generations.

Losing Our Principles
The enactment of Prop. 13 in 1978 challenged both the separation of sources and home rule. In addition to substantially shrinking local budgets, Prop. 13 gave the state more control over the distribution of property tax revenues, thereby weakening the separation of sources doctrine. In a recent monograph published by the nonpartisan Public Policy Institute of California, Michael A. Shires points out that before the enactment of Prop. 13, cities controlled 66 percent of their revenue, compared with 43 percent in 1995. In other words, cities have limited control over how they use 57 percent of their revenues.

For counties, the situation is worse. Prior to Prop. 13, one-half of county revenue was self-controlled. By 1995, self-controlled revenue had been reduced to about 20 percent. According to Shires, "One major and paradoxical consequence of Prop. 13 is that although the property tax still continues to be assessed, levied, collected, and distributed at the local level, Prop. 13 made the state the final arbiter in deciding who receives the property tax and how much they receive." By reducing local government's power to set property tax rates in the first place, it also undermined home rule.

As the home rule tradition has declined, special legislation has increased. Notes Peter Detwiler, longtime consultant to the Senate Local Government Committee, "There has been a resurgence of interest in special legislation as term-limited legislators pay closer attention to their districts and find it necessary to solve community problems that were once the province of local city councils." General state statutes used to lay out the procedures that were to be followed by all local agencies. For example, state law established a uniform process for planning and zoning, while implementation through zoning decisions is determined locally.

Now, state legislators are more likely to intervene in local zoning issues. This summer, a new state law was passed to settle a longstanding land-use and annexation dispute that should have been solved by local action.

Back to the Future?
Those Progressive era reformers can teach us several lessons today. Although it took time, they managed to combine local governance and local fiscal authority. Somewhere along the road, Californians have divided these elements and are now paying the price. Although several recent state-level commissions have continued to view fiscal and governance issues separately, others have seen the importance of reconnecting them. The California Constitution Revision Commission, for example, focused on both when it proposed a new home rule charter power, along with new fiscal powers for local government, in 1996. Another recent commission, the Joint Committee to Develop a Master Plan for Education, is also looking at the links between governance and fiscal authority as it seeks to improve the performance of California's public schools.

Another useful lesson from the past is the need for a clear line dividing state and local concerns. Some will argue that the judiciary should draw this line, but the courts have found little in the Constitution to guide their decisions. As one judge put it, many of the disputes between levels of government drift in a sea of "ad hoc intuition informed by pragmatic common sense." With so many practical problems to solve, we should not rely on the courts alone to arbitrate the disputes between state and local governments.

The Crucial Element of Trust
One of the difficulties in drawing a line between state and local responsibility is the lack of trust that has developed between state and local governments. As legislators in the 19th century were concerned that local governments would be agents of oppression, so are current legislators and governors, who exercise state power often to the detriment of community preferences. This lack of trust does not allow for a reasonable discussion over appropriate roles and responsibilities.

Two final points should be acknowledged. First, the powers of local government come from the state Constitution, which will naturally give the state a strong role. The need for statewide uniformity will always overwhelm local community differences. General laws pertaining to the issues of social justice, environment, transportation, social services, and the judicial system are generally seen as matters of statewide concern and will not be the purview of a local action - except where the state has authorized such action.

Second, state revenues should be used for statewide needs, while local resources should be raised locally, either through the property tax or other local taxes, and should benefit the community that raised them. This system would reduce the role of state government in local finance, which both levels of government may find difficult to accept. Special legislation will always be attractive to both legislators and the beneficiary.

Delineating state and local responsibilities will not be simple. If it were, it would have been done long ago. But the process should start with two time-tested goals: a constitutionally defined role in our governance system for local government and a secure source of revenue for local services.


Federal Formula Grants and California

Fiscal Rules and State Borrowing Costs: Evidence from California and Other States

The State-Local Fiscal Relationship in California: A Changing Balance of Power

Changing the Order of Things: Six Proposals for Local Finance Reform

Local Finance Reform from a Regional Perspective