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object(Timber\Post)#3711 (44) { ["ImageClass"]=> string(12) "Timber\Image" ["PostClass"]=> string(11) "Timber\Post" ["TermClass"]=> string(11) "Timber\Term" ["object_type"]=> string(4) "post" ["custom"]=> array(5) { ["_wp_attached_file"]=> string(13) "R_1299FSR.pdf" ["wpmf_size"]=> string(6) "552030" ["wpmf_filetype"]=> string(3) "pdf" ["wpmf_order"]=> string(1) "0" ["searchwp_content"]=> string(168480) "The State-Local Fiscal Relationship in California: A Changing Balance of Pow e r• • • J. Fred Silva Elisa Barbour 1999PUBLIC POLICY INSTITUTE OF CALIFORNIA Library of Congress Cataloging-in-Publication Data Silva, J. Fred (John Fred), 1943– The state-local fiscal relationship in California : a changing balance of power / J. Fred Silva, Elisa Barbour. p. cm. Includes bibliographical references. ISBN: 1-58213-020-5 1. Intergovernmental fiscal relations—California. 2. Fiscal policy—California. I. Barbour, Elisa, 1961– II. Title. HJ325.S55 1999 336.3'09794—dc2199-057670 CIP Research publications reflect the views of the authors and do not necessarily reflect the views of the staff, officers, or Board of Directors of the Public Policy Institute of California.Copyright © 1999 by Public Policy Institute of California All rights reserved San Francisco, CAShort sections of text, not to exceed three paragraphs, may be quoted without written permission provided that full attribution is given to the source and the above copyright notice is included. iii Foreword Thirty years ago, students of U.S. government took the concept of home rule for granted. It was a self-evident truth that local governments had the authority to tax residents and to fund services with the revenue. Students in the latter part of the century, however, know that the fiscal foundation of home rule in California has shifted enormously. In The State-Local Fiscal Relationship in California: A Changing Balance of Power, Fred Silva and Elisa Barbour trace nearly a century of budgetary shifts between state and local government. They also note the importance of Proposition 13Ñthe fiscal earthquake of 1978Ñwhich, among other things, shifted control over property tax revenue to the state. As the authors note, home rule was itself the result of a ground shift that occurred in the 1910s, when Progressive Era advocates pressed successfully for local autonomy and a division of state and local revenue streams. Before home rule and the separation of sources, local governments were regarded as mere creatures of the state. Although the authors do not argue that California has come full circle with Proposition iv 13, they do call attention to the diminishing fiscal authority of local governments, especially counties. The lack of a clean separation of tax revenuesÑproperty tax for local government, income and sales tax for the stateÑhas aggravated the chronic tension in the state-local fiscal relationship. This tension, in turn, endangers the smooth and efficient delivery of local services and undermines local officialsÕ sense of accountability. In an earlier PPIC study, Why Government Fails, Mark Baldassare concluded that it was this very confusion over revenue expectations that led in part to the bankruptcy of Orange County. The authors conclude that the current fiscal relationship between state and local government reflects neither the potential benefits of a state-run system nor those of a more decentralized one. The redistributive function of a broad-based tax has lost out to a rapid growth in licenses, fees, and assessments. Property taxes, a traditional source of discretionary income for local governments, shrank to a mere 10 percent of total county revenues in the 1990s. In sum, the authors describe a system that manages to meet the expectations of local residents but that also stands in need of a substantial overhaul. They conclude with several options for creating a less risky way to finance the business of state and local government. David W. Lyon President and CEO Public Policy Institute of California v Summary The evolution of public finance in California is the story of a shifting balance of power between the state and local governments. Local governmentsÕ resistance to state control has been a constant source of policy conflict throughout the century. As California has grown and developed, however, its different forms of government have evolved along different lines, and this has modified the outcome of the struggle between them. This study identifies two major turning points in the evolution of fiscal authority in California. The first is 1910, when the Progressive movement pushed for greater local control after two generations of untempered state power. The second is the passage of Proposition 13 in 1978, when voters awarded (or rather, reawarded) powers to the state that Progressives had successfully assigned to local governments. Proposition 13 heightened the chronic tension between the state and local governments, so much so that advocates for these local governments are now calling for another round of reforms. The need for such reforms vi becomes especially clear when the matter is viewed against a historical backdrop, for as we hope to show, that landmark initiative magnified a growing distinction between city and county governments, throwing their different strengths and weaknesses into relief. It is only when these historical patterns are acknowledged that the full effects of Proposition 13 can be gauged, because only then do we understand its varying effects. At the center of this study is the matter of fiscal power and how it is shared. In addition to providing historical analysis, this report develops several measures for assessing the changing nature of the state-local fiscal relationship in California. In particular, we use revenue and expenditure data between 1916 and 1995 to gauge federal and state control over local governmentsÕ ability to tax and spend freely. We also test the vulnerability of various local government revenue streams to economic and political shocks at the state and national levels. After exploring recent shifts in city and county governments and their respective fiscal structures, we conclude the report with a discussion of current proposals for reform and their policy implications. Home Rule Is Established: Finance in California Before Proposition 13 The relationship between the state and local governments in California has been contentious since the stateÕs inception in 1849. During the Progressive Era, reformers gradually won independent political and fiscal authority for local governments. By the start of World War One, two legal principles had been established: home rule power, or the right of cities to draw up and establish their own charters and govern municipal affairs; and the separation of sources, which formally marked off state and local revenue streams. vii Home rule power, and the local fiscal authority that underpins it, became a watchword during the Progressive Era. Local power was limited, however, by two constraints: the stateÕs interest in the uniform application of its policies, and federal constitutional law, which grants state government the right to strike the balance of power between itself and local governments. The balance began to shift when the Separation of Sources Act of 1910 granted local governments exclusive control over property taxes. Because most public revenue at that time came from this tax, the exclusivity was especially important. The separation of sources doctrine ensured that the fiscal powers of local governments were aligned with their responsibilities. In particular, the doctrine endorsed the notion that the governmental body that levied taxes or fees would determine how that revenue would be spent. This balance shifted even further toward local government in 1914, when California voters approved a constitutional amendment allowing communities to adopt charters, which permitted cities to enact local ordinances without state authorization. Taken together, these two developmentsÑcharter cities and the separation of sources doctrineÑgranted local governments a degree of fiscal autonomy within the stateÕs overarching control. Although this legal framework for the state-local fiscal relationship remained stable until 1978, city and county governments changed considerably over the century and along different lines. Beginning with the New Deal and continuing through the postwar period, counties assumed a more prominent role in administering state and federal programs in areas such as health care and welfare. As county governments increasingly became Òagents of the state,Ó their revenue profiles also changed. In 1932, 82 percent of county funds came from own-source revenue; by the end of World War Two, subventions, or viii funds sent by the state or federal government, formed about 50 percent of that total. An even higher proportion of county revenueÑmore than two-thirdsÑwas spent according to state or federal guidelines. In addition to their role as agents of the state, counties also acted as local general-purpose governments, providing services in areas such as transportation, corrections, tax collection, and public safety. Most of the discretionary revenue for these services came from property taxes, which were cut dramatically by Proposition 13. Much more than counties, cities achieved and maintained fiscal independence from the state. Subvention funding has rarely constituted more than one-fifth of city revenue, and an even smaller shareÑseldom more than a tenthÑhas ever been restricted by state or federal spending guidelines. As cities adopted the role of provider of local utility and public safety services, they gained increasing amounts of revenue from locally levied sources intended to fund those services. Cities came to rely less and less on property taxes, which made up 36 percent of city revenue in 1945 but only 16 percent in 1978. The Era of Limits: Proposition 13 and Its Aftermath From the perspective of local government, the fiscal shock of Proposition 13 was unlike any event during the century, including the Great Depression. In one year, property tax revenue to local governments was cut in half. Counties were affected most, because they still relied almost solely on the property tax for discretionary revenue. Their budgets contracted 24 percent from 1978 to 1980, whereas city revenue, which was tied more closely to public services, dropped less than 10 percent. ix In addition to reducing the size of county government, Proposition 13 changed the terms of the state-local fiscal relationship. Although the initiative reflected growing public dissatisfaction with government in general, it had the effect of enhancing state power at the expense of local governments by giving the state control over distribution of the property tax. Because the property tax rate is now set by statute, and revenue distribution is controlled by the state, the property tax now resembles a state-controlled revenue source rather than a local one. This development has undermined the traditional separation of sources doctrine. The passage of Proposition 13, however, was not solely responsible for the transformation of the property tax. If the state had continued to allocate property tax revenue based on local preferences, the separation of sources would not have been so significantly eroded. But the state began to allocate property tax revenue in response to political and economic pressure. First it attempted to cushion the effects of Proposition 13 by enacting a fiscal relief program in 1979, replacing about two-thirds of the property tax revenue lost to local governments with various forms of state aid. Faced with constitutionally mandated spending guarantees for education enacted in 1988, however, the state revised its fiscal relief plan when the economy slid into recession during the early 1990s. During 1993 and 1994, the state changed the allocation formula to direct more property tax revenue toward school districts and away from cities, counties, and special districts. The state replaced a portion of the lost property tax revenue with funds dedicated for law enforcement, thereby trading local discretionary revenue with funds earmarked for a specific purpose. The Òproperty tax shiftÓ angered local governments, giving rise to calls for reform. The shift was particularly hard on county x governments, whose per capita discretionary revenue declined by nearly 25 percent from 1992 to 1995. Cities and counties have responded differently to increasing fiscal constraints in recent decades. Cities were better prepared to cope with the constraints because they had broader local revenue bases. In particular, they increased revenue from sources closely tied to the cost of services, such as user charges and fees. Communitywide taxing power has declined as a result. Counties, on the other hand, have come to rely more than ever on state aid, and their general-purpose functions have been undermined. Many counties have sold assets, taken on debt, or substantially cut services to balance their general-purpose budgets. The Future of the State-Local Relationship: The Need for Reform Many government observers are concerned that the recent trend toward more state control over local finance has gone too far and should be reversed. Current reform proposals focus on two primary areas of concern: the need to define more clearly the responsibilities of local governments, and the need to restore local fiscal authority. Redefining Local Government Sorting out state and local responsibilities is especially important for counties, whose traditional responsibilities outstrip their financial capacity. County government is increasingly subsumed by state priorities, but expectations regarding its general-purpose role have remained largely unchanged since the 1930s. The appropriate role for county government is being determined in a de facto fashion as counties cut local services to remain solvent. xi County fiscal authority could be realigned with county responsibilities in a number of ways. One solution is to return to the status quo ante by restoring the level of fiscal control counties experienced before the passage of Proposition 13. This reform would enable counties to maintain their dual role as agents of the state and local general-purpose governments. A different solution would call on the state to take on even greater responsibility for county functions, further reducing the county general-purpose role. The best solution may be a combination, in which the state takes on greater responsibility for certain current county functions, for example, in the area of courts and justice, and counties gain greater authority over other functions, such as transportation planning. At a time when many observers point to a growing need for regional policymaking, the underlying functions of counties and even their geographical boundaries would benefit from a thorough reexamination. Redefining Fiscal Authority A strong state role in local finance makes sense if the primary objective of CaliforniaÕs citizens is to maximize equity in the allocation of public resources. However, the state government has not exercised its redistributive power to devise an effective system for property tax allocation. The system that the state government established in 1979, based on the relative tax shares in place before Proposition 13, increasingly fails to reflect local needs and preferences. The problem was compounded when the state used the tax to maintain its own fiscal health in the early 1990s by redirecting property tax revenue toward schools. Viewed as a policy choice, the state opted to avoid state xii expenditure reductions or tax increases at the expense of countywide services. Reflecting concern that the state government is using the property tax as a fiscal shock absorber, many current reform proposals would separate local property tax revenue from the state budget to restore the traditional separation of sources. Proponents argue that such reforms would enhance efficiency, accountability, and innovation in local government. Opponents counter that local control over the raising of revenue is not a prerequisite for accountability in relation to expenditure. Regardless, the current state of local finance in California is in need of repair. It reflects neither the potential benefits of a state-run system based on commonly defined principles nor those of a more decentralized system based on a separation of sources. Instead, the current system reflects efforts to cope with fiscal stress through cost-shifting and competition between levels of government. Once again, control over the property tax dominates current debate about the state-local fiscal relationship. This same issue lay at the heart of the two major popular reform movements of this century: the movement to establish home rule powers and the tax revolt of the 1970s. Even as local governments diversified their revenue base over the century, the property tax remained the local revenue source that provided the greatest level of flexibility, discretion, and accountability. Progressive Era reforms wrested control of the property tax from the state. Proposition 13 did the opposite, thereby returning the state-local relationship to the situation that existed before the Progressive Era. Local governments have resisted the recent shift, and current reform proposals reflect the need to reestablish a sustainable relationship between the state and local governments. xiii Citizens have yet to achieve consensus about what that relationship should look like. Although Proposition 13 reflected their desire to limit local government taxing and spending, their views are less distinct when it comes to the virtue of home rule as opposed to state control over local affairs. To find the proper resting point for the state-local balance, governance and finance issues must be reviewed together. xv Contents Foreword................ iii Summary.......... v Figures........... xvi Tables............ xix Acknowledgments.......... xxi 1. INTRODUCTION......... 1 The Legal Framework of the State-Local Relationship.. 3 From Local Control to State Power: Proposition 13 Shifts the Balance........... 6 Assessing the Effects of Proposition 13 on Local Governments........... 9 Measuring the State-Local Relationship..... 10 Measuring Local Control over the Raising of Revenue.... 11 A Second Measure of Control over the Raising of Revenue: Revenue Predictability........... 12 Measuring Local Control over the Expenditure of Revenue.. 13 Agency Funding: The Measure of CountiesÕ Role as Agents of the State............ 13 Organization of the Report........... 14 xvi 2. THE HISTORY OF LOCAL FINANCE IN CALIFORNIA BEFORE PROPOSITION 13........... 17 The Era of Expanding Power and Separation of Sources: 1911 to 1932........... 17 The New Deal Transforms County Governments: 1932 to 1945.............. 19 The Roles of City and County Governments in the Postwar Period............ 24 The Era of Growth: 1946 to 1978....... 24 3. THE ERA OF LIMITS: 1978 TO 1995..... 31 The Immediate Fiscal Effect of Proposition 13.... 32 The Deepening Distinction Between Cities and Counties... 32 The Effect of Proposition 13 on Counties: Greater Dependence Leads to a Growing Crisis..... 40 The Property Tax Shift: A Tightening Vise for County Governments............ 43 City Government in the Post-Proposition 13 Environment: Tighter Budgets Lead to More Entrepreneurial Strategies.............. 46 4. CONCLUSION.............. 49 Current Issues in the State-Local Relationship....... 49 Current Issues for Cities: Implications of the New Entrepreneurship................ 51 Current Issues for Counties: Destabilization of CountiesÕ General-Purpose Government Function........ 52 Review of Contemporary Thinking: Proposals for Reform Meet Resistance.............. 53 Policy Choices............... 56 Rethinking the Role of County Government.... 56 Rethinking Fiscal Authority............ 58 Appendix A. Notes on Data and Methodology........... 63 B. Supplementary Data.............. 71 C. Data Organization .................. 87 Bibliography................... 107 About the Authors.................. 111 xvii Figures 2.1. Per Capita Revenue by Type for California Cities, 1916 Ð 1945............... 19 2.2. Per Capita Revenue by Type for California Counties, 1916Ð1945.......... 20 2.3. Own-Source Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð1945... 21 2.4. Restricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1945.. 22 2.5. Revenue by Type as a Percentage of Total Revenue for California Counties, 1916Ð1975...... 27 2.6. Revenue by Type as a Percentage of Total Revenue for California Cities, 1916Ð1975........ 28 3.1. Per Capita Revenue for California Cities and Counties, 1916Ð1995............. 33 3.2. Per Capita Revenue by Type for California Cities, 1916 Ð 1995............... 34 3.3. Revenue by Type for California Cities as a Percentage of Total Revenue, 1916Ð1995.......... 35 3.4. Per Capita Revenue by Type for California Counties, 1916Ð1995............. 36 xviii 3.5. Revenue by Type for California Counties as a Percentage of Total Revenue, 1916Ð1995........... 37 3.6. Externally Controlled Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð 1995.............. 38 3.7. Per Capita State and Federal Subventions for California Cities and Counties, 1960Ð1995 ..... 39 3.8. Restricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1995... 41 3.9. Per Capita Discretionary Revenue for California Counties, 1960Ð1995 ......... 44 xix Tables 2.1. CountiesÕ Dual Role as Agents of the State and as Local Governments.............. 25 2.2. City Government Functions....... 25 B.1. Components of Own-Source Revenue for California Cities and Counties......... 72 B.2. Revenue by Source for California Cities, 1916Ð1995... 74 B.3. Per Capital Revenue by Source for California Cities, 1916Ð1995........... 75 B.4. Revenue by Source as a Percentage of Total Revenue for California Cities, 1916Ð1995....... 76 B.5. Revenue by Source for California Counties, 1916Ð 1995................ 77 B.6. Per Capita Revenue by Source for California Counties, 1916Ð1995............ 78 B.7. Revenue by Source as a Percentage of Total Revenue for California Counties, 1916Ð1995....... 79 B.8. Components of Restricted Revenue for California Counties, 1916Ð1995............ 80 B.9. Variability of Revenue Sources over Time for California Cities and Counties............ 82 xx B.10. Components of City per Capita Own-Source Revenue for California, 1980 and 1995........... 83 C.1. Revenue Line Items Listed in the Annual Financial Transactions Series for Cities in California, Organized into Revenue Categories Used in This Report.... 88 C.2. Revenue Line Items Listed in the Annual Financial Transactions Series for Counties in California, Organized into Revenue Categories Used in This Report.... 93 C.3. Components of County Agency Expenditures for Health and Welfare................ 106 xxi Acknowledgments The authors wish to thank a number of people who were invaluable in helping complete this work. In particular, the project would not have been possible without Elizabeth BerkoÕs monumental efforts to record and disentangle decades of revenue and expenditure data published by the California State ControllerÕs Office. Four people reviewed the report and provided many helpful comments: Juliet Musso, at the University of Southern California; Steven Erie, at the University of California, San Diego; and Michael Teitz and Paul Lewis, at PPIC. Peter Richardson helped edit the report and Michael Shires provided technical assistance and inspiration. Although these individuals helped improve our report, the authors are solely responsible for its content. 1 1. Introduction Although the state-local fiscal relationship has become a matter of much concern and debate in recent years, tension between the state and local governments is nothing new. In fact, current controversies are an extension of debates that long pre-date 1978. TodayÕs policy debates can be viewed as only the most recent expression of a much older struggle to define the proper balance between local governmentsÕ desire for fiscal and political autonomy and the state governmentÕs desire to exert its policy authority. This report places current issues in their historical context by assessing the changing nature of the state-local fiscal relationship throughout CaliforniaÕs history. From the first days of statehood in 1849 to the present, legislators, governors, and local officials have argued over their respective roles and the amount of autonomy that local communities should possess. In spite of significant shifts over the last century and a half in the structure of government finance, this fundamental struggle has persisted. The ability of local governments to act on their own behalf, or Òhome rule power,Ó 2 ends where the state expresses an interest in the uniform application of a statewide policy interest. And therein lies the dilemmaÑwhere should the line be drawn? The focus of this study is the relationship between the state government and general-purpose local governments, by which we mean local governments that provide a range of services in response to local voter preferences. There are two forms of general-purpose government at the local level: cities and counties. Other governmental entities such as school districts and utility service districts also form part of the fabric of local government. The essential purpose of such districts, however, is to provide specific services in a given geographic area. In fact, special- purpose districts are often dependent agencies of cities or counties, governed by the respective city council or county board. Because we are primarily interested in evaluating the general-purpose and state agency functions of local government, districts are not addressed in our study. The state government has always played the primary role in determining the amount of power local governments may exercise. Throughout the stateÕs history, however, local governments have sought to carve out and maintain a sphere of influence within the stateÕs overarching control. The degree of control exerted by the state over local government has changed over time, depending on the backdrop of state politics. Furthermore, local governments have evolved in different ways over time, affecting their ability to respond to constraints imposed by the state. We hope to show that current debates about the proper balance between state and local power can be properly understood only when recent developments are viewed in relation to the history of the conflict. We start with an overview of the legal framework of the state-local relationship over the century. This legal framework sets the structure 3 within which the struggle between local governments and the state plays out. However, the framework itself has changed over time as a result of the struggle and also as a result of broader political shifts. An overview of this history highlights some of the most fundamental issues involved in the state-local relationship. The Legal Framework of the State-Local Relationship The state government ultimately determines the amount of power local governments may exercise, whether through the legislature, the courts, or voter initiatives that change the constitution or state statutes. Local governments have no status under federal constitutional law, which leaves the state to determine the balance of power. The doctrine that establishes the allocation of local powers is called ÒDillonÕs rule,Ó which refers to the name of the judge in a pair of 1868 rulings that narrowly constructed the powers of municipal corporations. As interpreted by the Supreme Court in 1903, the doctrine establishes that local governments are Òthe creatures, mere political subdivisions of the state for the purpose of exercising a part of its powers. They may exert only such powers as are expressly granted to them, or such as may be necessarily implied from those stated.Ó 1 The first decades after statehood was established in 1849 reflected this unilateral construction of the state-local power balance. Those years were marked by mistrust and attempts by the California legislature to intervene in the affairs of local communities. Gradually, local _________ 1Merriam v. MoodyÕs Executors, 25 Iowa 163, 170 (1868). 4 governments won independent political and fiscal authority, but it would take 60 years to firmly establish new terms for the state-local relationship. The first state constitution of 1849 kept local governments on a tight leash. The current constitution, established in 1879, first introduced the principle of home rule, or the right of cities to draw up and establish their own charters, but the power to raise local resources was still tightly held by the state. The new constitution granted San Francisco the ability to adopt a home rule charter to govern its affairs. Other cities wanted the same advantage, but this new power was granted slowly. In 1887, the ability to frame a charter was granted to cities larger than 10,000. Three years later the right was extended to cities of 3,500 or more. 2 An 1896 constitutional amendment provided that cities would be subject to general laws except in municipal affairsÑa more liberal grant of power than had been originally provided. A 1914 amendment to the state constitution finally cemented home rule power by providing that chartered cities could Òmake and enforce laws and regulations in respect to municipal affairs, subject only to the restrictions and limitations provided in their several charters.Ó These Òcharter citiesÓ could enact local ordinances without seeking state authority to do so. This affirmed the power of cities to take independent action regarding municipal affairs. The amendment reflected a desire to establish a basis for local control that extended beyond the narrow confines of ÒDillonÕs rule.Ó It granted protection from legislative interference in municipal affairs by establishing a standard for reviewing this delegation of power. _________ 2Detwiler (1996). 5 Local fiscal authorityÑthe ability to levy taxes at the local level for services determined locallyÑhas long been viewed as a critical underpinning of home rule power. The right to levy property taxes was first established in 1850. This tax formed the primary revenue base for both the state and local governments for the next 50 years. By the turn of the century, about 20 percent of the local property tax bill went to the state. 3 A 1910 ballot measure, known as the ÒSeparation of Sources Act,Ó changed that. It provided that the property tax was to be used exclusively for local purposes. Given that the property tax formed the bulk of local government revenue, the ballot initiative established the principle that state and local revenue sources should be separated. From then on, the state would derive the bulk of its revenue from other state - levied taxes. Taken together, the establishment of charter cities and the separation of sources provided a measure of autonomy for local governments. However, although we tend to lump cities and counties into the same category of general-purpose local government, each has been given a distinct role in CaliforniaÕs government structure and a different constitutional status. The constitution grants counties the authority to provide municipal services in unincorporated areas, and counties are also expected to provide certain services at the county level, but counties have not been granted the same home rule powers as cities. Cities enjoy a greater degree of protection in governing municipal affairs under the provisions of the 1914 state constitutional amendment; countiesÕ legal status is still governed principally by the narrower provisions of ÒDillonÕs rule.Ó _________ 3Tax Digest (1946). 6 From Local Control to State Power: Proposition 13 Shifts the Balance The framework for the state-local relationship established during the Progressive Era remained largely unchanged for 70 years until the passage of Proposition 13 in 1978. It is widely understood that Proposition 13 reduced property tax rates, but fewer Californians recognize that the state-local relationship changed in some fundamental ways as a result of its passage. The initiative transferred control over the distribution of property tax revenue from local governments to the state. By giving the state the authority to determine how property taxes are allocated among different governments, Proposition 13 substantially undid the provisions of the 1910 separation of sources doctrine. The passage of Proposition 13 alone did not guarantee that property tax revenue would become a state-controlled revenue stream. Another important source of local government revenueÑthe 1 percent local sales taxÑis a state-authorized locally levied tax, for which the state sets a maximum rate. Revenue from the local sales tax is considered to be under local control in spite of the stateÕs role, however. That is because a stable nexus between the receipt of the revenue and the local activity that generated it has been preserved through the situs rule, which ensures that the tax is levied locally and the revenue is returned to the jurisdiction in which the sale took place. Cities and counties retain a certain amount of discretion in relation to levying the taxÑwhether to levy it at all, and in the case of counties since the 1980s, whether to adopt add-on rates for a variety of countywide services that exceed the statewide rate. These 7 special countywide sales taxes now represent about one-third of locally levied sales tax revenue. 4 In implementing Proposition 13, the state legislature might have protected the property tax as a locally controlled revenue source in a fashion similar to the sales tax. Instead, the state legislature repeatedly shifted property tax revenue allocations in response to political and economic pressures. First, the state attempted to cushion the effects of the initiative by providing fiscal relief. Assembly Bill 8 (AB 8) was enacted in 1979 as an effort to provide relief and establish a long-term local finance system in the wake of Proposition 13. It is still the basic operating legislation, although it continues to be tinkered with. Local fiscal relief was financed by shifting property tax revenue from schools to cities, counties, and special districts. The state cost of KÐ12 education increased by the amount of the shift. In its final report to the governor and the legislature, the California Constitution Revision Commission noted that the action taken by the state to replace lost property tax revenue was the beginning of the end of a locally controlled finance system independent of the state. 5 In effect, local own-source revenue used for local services was replaced with state funds. AB 8 also established the formula by which property taxes are allocated to the local governments in each county based on the proportional shares that were in place before 1978. So, for example, a city with a relatively high tax rate based on decisions made by local voters before 1978 receives a larger share of the countyÕs now fixed property tax revenue pool than a city that had a lower rate. After AB 8 was adopted, _________ 4California State Board of Equalization (1997). 5California Constitution Revision Commission (1996a). 8 the only way that local governments could affect property tax receipts was through annexation, incorporation, or economic development under the special provisions of redevelopment law. Two problems have emerged over time that served to disconnect property tax allocation from local fiscal needs and preferences. First, the AB 8 property tax shares were locked into place permanently. As communities have continued to grow and develop, the allocation system increasingly fails to reflect current realities. The effect of the current system is to provide large older cities with a larger share of the property tax than growing suburbs, because the older cities tended to have higher tax rates when the system was instituted. Second, the state altered the distribution of property tax revenue in response to economic and political pressure, thereby reversing the 70- year trend of separating the basic sources of state and local revenue. It was only when California fell into severe recession in the early 1990s, however, that the consequences of the shift in the balance of power toward the state level became fully apparent. When the recession hit, the state government was in a position to balance its own budget by reversing the fiscal relief program instituted in 1979. Had the state maintained a stable allocation mechanism for property tax revenue based on local preferences, rather than shifting property taxes in response to fiscal pressure, the separation of sources would not have been eroded so significantly. By the time of the recession, the cost of local fiscal relief represented nearly one-quarter of the state budget. 6 The state government faced new statutory mandates for education spending as a result of Proposition 98, _________ 6California Constitution Revision Commission (1996a). 9 passed by voters in 1988. When the economy soured, the legislature and the governor partially reversed the fiscal relief program enacted in 1979 to solve the stateÕs fiscal crisis. In fiscal years 1992Ð93 and 1993Ð94, the state reduced the property tax allocation to cities and counties and transferred the revenue to the schools, thereby reducing the state general fund commitment to KÐ12 education. Although the state returned a portion of the lost funds to local governments in the form of revenue earmarked for public safety, the Òproperty tax shiftÓ ended the stateÕs commitment to provide discretionary fiscal assistance in response to Proposition 13. For all practical purposes, the property tax is now treated as a state tax used for the purpose of financing that portion of the state budget allocated to KÐ12 education. Thus, although property tax revenue is still levied locally, the stateÕs manipulation of this revenue stream has tended to transform its character. The property tax more closely resembles a state-controlled revenue stream than a stable local revenue source that the state merely administers. 7 Assessing the Effects of Proposition 13 on Local Governments Proposition 13 undermined the traditional doctrine of the separation of sources by providing the state government with control over the property tax. This development has prompted calls to restore the old arrangement. Many reformers argue that a separation of state and local revenue sources is necessary to ensure that fiscal responsibility is aligned with fiscal authority. _________ 7See Shires (1999) for further discussion of this issue. 10 By the time that Proposition 13 passed in 1978, however, local government finance was much more complex than it had been when the original doctrine of the separation of sources was established in law in 1910. That doctrine reflected the common fiscal structure of cities and counties at the time: Local government general-purpose functions were funded primarily by property taxes. By 1978, however, cities and counties had developed very distinct fiscal structures, both from their own beginnings and from each other. As a result, the effects of Proposition 13 have been different for cities and counties, and proposals for reform need to accommodate those differences. Proposition 13 not only affected cities and counties differently, it intensified the differences between them. By tracing the different historical trajectories of cities and counties over the century, we can better understand why this occurred. In certain fundamental ways, the struggle between local governments and the state has changed little. Control over the property tax continues to dominate governance debates, even as it did at the turn of the last century. In other ways, however, the struggle has indeed changed, because the actors themselves have changed. The roots of todayÕs policy obstacles and controversies are to be found in the past. The purpose of this report is to find them. Measuring the State-Local Relationship To trace the evolution of local finance, we analyze shifts in the major sources of local government revenue between 1916 and 1995, using data compiled by the State ControllerÕs Office. We develop measures for assessing local fiscal control on two principal dimensions: 1. How much control do local governments have over how their revenue is raised and how much to raise? 11 2. How much control do they have over the way their revenue is spent? Both dimensions of control are important in evaluating local fiscal autonomy. The second measure, however, is perhaps more important in evaluating home rule power. Local power depends especially on being able to control how revenue is spent, regardless of its origin. Measuring Local Control over the Raising of Revenue City and county governments receive revenue from many sources. Ultimately, they all fall under state control. However, the state exerts varying levels of functional control over the different local revenue sources that it has authorized. In some cases, the amount of state control over a particular revenue source has also changed over time. Attempts to define local control over the raising of revenue usually seek to distinguish which level of governmentÑfederal, state, or local Ñ controls whether and how much revenue is levied. To fund local activities, the state has authorized local governments to levy revenue in various ways, including taxes, fees, assessments, services charges, and fines. In each case, it takes an action of the voters or the governing body of the city or county to raise this local revenue. Revenue from such sources, often called own-source revenue, is usually considered to be under local control. Own-source revenue is usually contrasted with subvention revenue. Subventions are local shares of revenue levied by the state or federal government and then allocated to local governments on a formula basis. Examples include federal funding for health and welfare programs, revenue from gas taxes, and motor vehicle license fees that the state government allocates to local governments. Some subventions come 12 with restrictions imposed by the sending government on how the money may be spent; others have no restrictions. From the point of view of local fiscal autonomy over the raising of revenue, however, subventions represent revenue over which local governments have no control. Since the passage of Proposition 13 in 1978, the traditional distinction between own-source revenue and subvention funding has become less useful as a measure of local control over the raising of revenue. As we have discussed, Proposition 13 transferred control over the allocation of property taxes to the state. Our measure of locally controlled revenue is based, in general, on the traditional distinction between own-source revenue and subvention funding, except in the case of property tax revenue. We designate 1978 as the year when property tax revenue shifted in character from being locally controlled to externally controlled. 8 A Second Measure of Control over the Raising of Revenue: Revenue Predictability As an additional measure of local fiscal control over the raising of revenue, we evaluate the stability of the main components of local revenue over time. Stable revenue sources lend another measure of fiscal control to local governments, since they enable local governments to plan more effectively. Some local revenue streams have been stabler than others, because they have been less susceptible to external shocks of either economic or political origin. For example, city revenue derived from public service enterprises such as utilities or hospitals has been relatively _________ 8Table B.1 in Appendix B provides a breakdown of the main components of own- source revenue for cities and counties in the state. The more detailed tables in Appendix C provide a breakdown of all revenue line items recorded by the State ControllerÕs Office from 1916 to 1995. 13 stable because it is not as heavily affected by swings in the business cycle as other sources. On the opposite end of the stability scale, subvention revenue can be volatile, since it is particularly subject to political shifts at the state and national level. However, some subvention funding has been quite stable, in particular, funding sent to counties for health and welfare programs. Measuring Local Control over the Expenditure of Revenue A thorough evaluation of local fiscal control must consider whether restrictions have been placed on how revenue may be spent by local governments, not just how it is raised and allocated. In measuring discretion, we seek to define the share of revenue that best measures local governmentsÕ ability to choose between competing priorities. We define discretionary revenue as the share of local revenue whose expenditure is not earmarked for purposes strictly mandated by another level of government or for ongoing maintenance of quasi-independent enterprises such as hospitals and utilities. 9 Agency Funding: The Measure of CountiesÕ Role as Agents of the State Since the time of the Depression in the 1930s, counties have been given a major role as agents of the state, administering state and federally mandated services. These services are funded in large part by agency subventions sent by the state and federal governments to counties. Although both cities and counties receive subventions that are targeted _________ 9Appendix A discusses the components of discretionary and restricted revenue used in our analysis. 14 for certain program areas such as transportation improvements, only counties receive agency subventions. Agency subventions entail the greatest degree of external control, requiring that the recipient government carry out programs in a specific manner subject to detailed regulatory oversight by the sending government. Most agency funding is provided for health and welfare programs, including programs such as Temporary Assistance for Needy Families (TANF) and food stamps. Although the state government requires that counties provide these strictly defined services (and the federal government through the state), it does not provide all of the funding that counties need to carry them out. Counties are obligated by law to commit a certain portion of their general-purpose revenue toward agency functions or, as they are often called, state-mandated local programs. This county contribution to agency programs is considered restricted revenue in our analysis. We define the degree to which counties act as agents of the state or federal government by their level of agency funding, which consists of agency subventions on the one hand and the required local contribution of general-purpose revenue on the other. 10 Organization of the Report In the following chapters of this report, we review the history of local finance in California during two time periods over this century: ¥ 1911 to 1978: the era of separation of sources and home rule power, and ¥ 1978 to 1995: the era of fiscal constraint and state control. _________ 10For a description of the different types of subventions that local governments receive, as well as the manner in which we calculated the local county contribution of general-purpose revenue required for agency programs, see Appendix A. 15 Finally, we discuss the policy implications that arise from our findings in relation to current efforts to restructure the state-local fiscal relationship. 17 2. The History of Local Finance in California Before Proposition 13 The Era of Expanding Power and Separation of Sources: 1911 to 1932 By 1916,1 the basic legal framework for the state-local relationship had been established. Progressive Era reformers had instituted home rule for charter cities and local fiscal autonomy through the separation of sources. The property tax was the principal source of revenue for both cities and counties, and after the passage of the Separation of Sources Act in 1910, it was reserved for that purpose alone. From this similar starting point, the fiscal structure of cities and counties then began to diverge. _________ 1Our data analysis starts in 1916, when the State Controller began collecting revenue data from local governments in a systematic way. 18 As cities became the main provider of utility services, revenue from Òpublic service enterprises,Ó namely, quasi-independent public entities such as utilities and hospitals, began to rise. From 1919 to 1932, per capita city revenue from this source more than tripled, as Figure 2.1 reveals. Counties could not diversify their own-source revenue base in this fashion. Counties manage dependent special districts, but they do not operate public service enterprises within their general operating budgets, as cities do. Instead, counties began to receive more and more subvention funding for administration of state and federal programs, as Figure 2.2. indicates. Revenue from public service enterprises and subvention funding grew more quickly than other revenue streams during the first few decades of the century, and this largely accounts for the diverging fiscal structure of cities and counties. Figures 2.1 and 2.2 depict the main revenue components to cities and counties in California from 1916 to 1945. 2 Own-source revenue is broken down into three categories: property taxes, public service enterprises, and a category labeled Òlicenses, fees, assessments, and other income.Ó This last category includes revenue from licenses, permits, fees, service charges, other taxes, assessments, and use of money and property. The figures convey the growing importance of public service enterprise revenue for cities and subvention funding for counties during the early decades of the century. 3 _________ 2In our graphs, revenue levels from fiscal year 1915Ð16 are labeled as Ò1916,Ó and so forth. Revenue is depicted in per capita dollars, adjusted for inflation to 1995 levels, for all cities and counties in the state. 3Figures for revenue by category to cities and counties at critical junctures between the time periods discussed in this report are presented in Tables B.2 through B.7 in Appendix B. 19 0 150 300 1915 1925 1935 1945 Revenue ($) Public service enterprises Property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.1ÑPer Capita Revenue by Type for California Cities, 1916Ð1945 (1995 dollars) The New Deal Transforms County Governments: 1932 to 1945 The onset of the Great Depression marked a key turning point in local finance. Own-source revenue for cities and counties declined by about one-tenth from 1932 to 1934. State and federal subventions to local governments increased rapidly from 1932 to 1937 as New Deal programs were established to alleviate the shock to local economies. Although subventions to cities would be reduced after the worst effects of the Depression had subsided, subventions to counties would continue to 20 0 100 200 1915 1925 1935 1945 Revenue ($) Property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.2ÑPer Capita Revenue by Type for California Counties, 1916Ð1945 (1995 dollars) rise, transforming counties into agents of the state and federal governments. The state legislature took steps in response to the Depression that set the stage for a larger state role in local finance. In 1933, the legislature placed a plan before the voters to change the structure of the state-local finance system. Known as the Riley-Stewart Act, it introduced a new era of larger state involvement in school finance, laying the foundation for major growth in state and local spending over the next 45 years. The state took on greater responsibility for funding schools, and soon levied new taxes, including a 2¢ sales tax for education and a new state income tax. 4 _________ 4Hartley, Sheffrin, and Vasche (1996). 21 The period from the Depression to the end of World War Two was critical for county government. In 1932, four-fifths of county funds came from own-source revenue; by 1945, that share had dropped to only one-half. Figure 2.3 portrays the widening gap between the structure of city and county finance over the period. It shows own-source revenue as shares of total city and county revenue. Even when public service enterprise revenue is subtracted from city revenueÑto ensure greater comparability with the county fiscal structureÑthe greater independence of the city revenue structure is evident. 50 75 100 1915 1925 1935 1945 Revenue (%) City own-source revenue City own-source revenue without public service enterprises County own-source revenue SOURCE: Author’s calculations based on data from the California State Controller’s Office. Figure 2.3ÑOwn-Source Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð1945 22 If another level of government controls the raising of local revenue, local governments might be said to be dependent. However, if another level of government also mandates how the revenue can be spent, then local governments are truly constrained. At the extreme, local governments may become agents of the controlling government. Although half of county revenue was derived from external sources by the start of World War Two, an even higher shareÑmore than 70 percentÑwas restricted in terms of how counties could spend the funds, as Figure 2.4 reveals. Restricted revenue forms a higher share because we include the portion of county general-purpose revenue devoted to health and welfare programs. It is misleading to characterize the county role in providing such relief as an agency role before the Depression, since counties provided the assistance with little state or federal oversight. 0 50 100 1915 1925 1935 1945 Revenue (%) County restricted revenue County agency revenue SOURCE: Author’s calculations based on data from the California State Controller’s Office. Figure 2.4ÑRestricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1945 23 Starting with the Depression years, the amount of such oversight has increased over the course of the century. Therefore, the county relief role represents a case where a revenue and expenditure stream has remained relatively constant while the level of external control has shifted over time .5 During the Depression, counties adopted a major role as agents of the state and federal governments, as agency subventions for health and welfare programs began to increase sharply. Figure 2.4 reveals that most of the rise in restricted revenue to counties over the period was due to a rise in agency funding. By the start of World War Two, more than half of all county revenue reflected this new agency role. A key long-term pattern in subvention funding emerged during the years after the Great Depression. Over the century, city subvention funding has been more volatile, subject to external political shifts, whereas county subvention funding has been relatively stable. New Deal programs were not geared just toward county governments. In fact, subventions to cities increased more rapidly than those for counties from 1932 to 1937. That pattern reversed completely by the onset of World War Two, however, when city subventions began to decline. In contrast, subventions to counties continued to rise as a share of county revenue even during the war years. 6 The new county revenue structure emerged rapidly because subventions to counties increased whereas local government own-source _________ 5See Appendix A for a description of our measure of the required county contribution for agency programs. Figures on the components of restricted revenue to counties at critical junctures over the century are presented in Table B.8 in Appendix B. 6Table B.9 in Appendix B presents a statistical measure of variability in revenue streams over time. It confirms that city subventions have been more unstable than county subventions over the century. 24 revenue suffered a long decline over the period between the Depression and the end of World War Two. Just as subventions helped stabilize county revenue over the period, public service enterprise revenue provided a stable source for cities. By 1945, nearly half of city revenue (43 percent) came from public service enterprises. This revenue is generally earmarked for the ongoing maintenance and operation of the enterprises themselves. Thus, we see that during the long decline of the Depression and war years, the most restrictive forms of local government revenue also remained the most stable. By end of World War Two, a fiscal pattern was established that would prevail until the passage of Proposition 13. Subventions formed half of county revenue but only one-tenth of city revenue. Counties had shifted in a matter of three decades from almost complete revenue independence to a situation in which nearly three-quarters of county expenditure was externally restricted. Although cities had maintained revenue independence by developing a more diverse own-source revenue base, counties increasingly relied on subventions. The Roles of City and County Governments in the Postwar Period By 1945, the responsibilities of city and county governments had stabilized into a pattern that persists to this day. Tables 2.1 and 2.2 outline the responsibilities assigned to city and county governments by the end of World War Two, which still hold half a century later. The Era of Growth: 1946 to 1978 In comparison with other periods, the time between 1945 and the passage of Proposition 13 in 1978 was characterized by stable 25 Table 2.1 CountiesÕ Dual Role as Agents of the State and as Local Governments a. County Functions as Agents of the State Temporary income maintenance Mental health and employment training Public health General relief Social services Health care for indigents and Alcohol and drug program services related activities Courts and court-related activities Elections b. County Functions as Countywide Government General administration Treasury/tax collector Assessor District attorney Sealer of weights and measures Local Agency Formation Commission Youth and adult corrections Probation Transportation c. County Functions as Local Government in Unincorporated Areas or Undertaken on Behalf of Cities Land use planning Development regulation Recreation and parks Library services Fire protection Police protection County roads Waste disposal Flood control Table 2.2 City Government Functions Public Safety Culture and Leisure Utility Services Police Park and recreation Water/sewer Fire Libraries Street lighting Community centers Waste disposal Gas and electric Community Development Planning and development regulation Development and maintenance Economic development of community infrastructure Redevelopment uninterrupted growth. The stateÕs population grew from 9.5 million in 1946 to 22.6 million in 1978. During this period, 135 new cities were formed. Local government authority to levy local taxes expanded with 26 the stateÕs growth. Inflation-adjusted per capita local government revenue more than tripledÑfrom $516 in 1945 to $1,742 in 1978. 7 This period is often referred to as the ÒTax and SpendÓ period in CaliforniaÕs fiscal history. The basic structure of local finance was stabler over the period than earlier in the century. Counties continued to receive about half their revenue from external sources; for cities, the share was less than one - quarter. Although this basic structure remained stable, cities continued to diversify their own-source revenue base. Counties did not do so, relying primarily on property taxes for discretionary revenue. Cities began levying a sales tax under their home rule authority. In 1946, six cities levied a sales tax; by 1951, 141 cities were doing so. Each city set its own tax rate and collected the tax until 1955, when the legislature enacted the Bradley-Burns Uniform Local Sales Tax Act in response to complaints from retailers. 8 The Bradley-Burns Act established a uniform locally levied sales tax rate of 1 percent. The local agency that levied the tax received the proceeds of the tax paid within its jurisdiction. Sales tax revenue to cities climbed until it leveled off at about 13 percent of city revenue after 1957. As more and more cities levied the sales tax, the county share dwindled to the small portion levied in unincorporated areas. Counties received only one-tenth the amount that cities did. In 1948, the motor vehicle in-lieu tax, first instituted in 1935, was increased. A vehicle registration fee and a 2¢ per gallon tax on fuels had been enacted in the 1930s, and the state subvened a portion of the _________ 7These figures are calculated as the sum of combined total revenue to cities and counties divided by the total population of the state. 8Doerr (1997). 27 revenue to cities and counties for streets and roads. With the flood of new automobiles, these became important revenue sources. Economic conditions often provide the backdrop for changes in the state local finance system, as in this example. Figures 2.5 and 2.6 portray the development of local finance during the postwar growth years. Figure 2.5 confirms that the story of county revenue is largely the story of only two revenue streams: property taxes and subventions. Property taxes declined steadily as a share of county revenue as subvention funding increased. Figure 2.6 indicates that although property tax revenue also declined steadily as a share of city 0 50 100 1915 1925 1935 1945 1955 1965 1975 Revenue (%) Sales taxes General property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.5ÑRevenue by Type as a Percentage of Total Revenue for California Counties, 1916Ð1975 28 0 50 25 75 1915 1925 1935 1945 1955 1965 1975Revenue (%) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Public service enterprises SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.6ÑRevenue by Type as a Percentage of Total Revenue for California Cities, 1916Ð1975 revenue, cities replaced that funding with new own-source revenue instead of subventions. During the immediate postwar growth years, local governments became more self-reliant. Subvention funding leveled off from 1950 to 1963, and own-source revenue grew more consistently. With the advent of Great Society programs in 1963, however, subventions began to rise again. Subventions to cities rose especially quickly, repeating the pattern of the New Deal period. From 1963 to 1979, subventions to cities nearly quadrupled in per capita terms, outpacing other revenue sources. Federal grants to cities increased 20 times, accounting for most of the rise. Subventions to counties also increased rapidly, but only about half 29 as much as for cities. By 1978, subventions formed a quarter of city revenue. In spite of the sharp rise in subventions to cities, own-source revenue still dominated city finance by the end of the period, because cities generated so much revenue from new locally levied sources. As a result, their reliance on property taxes declined from 36 percent of city revenue in 1945 to only 16 percent by 1978. Counties, unable to diversify their own-source revenue base, remained dependent on property taxes, which still formed two-thirds of county own-source revenue by the 1970s. 31 3. The Era of Limits: 1978 to 1995 The passage of Proposition 13 in 1978 introduced a new era of fiscal constraint and increasing state control over local governments. In this chapter, we consider the effect on the structure of local finance. Proposition 13 had three primary elements that affected local finance: ¥ It limited the general property tax rate to 1 percent of the full value of property and limited the reassessment of property to no more than 2 percent annually, except for cases of a change in ownership or new construction. ¥ It assigned the state the responsibility of allocating the proceeds of the property tax. ¥ It increased the ability of the electorate to vote on certain local tax increases. Any special taxes (which were not defined) needed to be approved by two-thirds of the voters. No new ad valorem property taxes could be imposed. 32 The Immediate Fiscal Effect of Proposition 13 The most immediate effect of Proposition 13 was a drastic reduction in local government resources, as property tax revenue was cut in half because of the new tax rate limits. The shock experienced by local governments was unlike any event during the century, including the Great Depression. Because counties were more reliant on property tax revenue than cities, they were hit the hardest. County own-source revenue declined by 39 percent in one year, whereas city own-source revenue declined only by 6 percent. Following on the heels of the property tax cuts, the federal government began to reduce subvention funding, as federal ÒdevolutionÓ to the states began to accelerate. The double blow was most severe for counties. County government contracted in size by one-quarter from 1978 to 1980 but city per capita revenue dropped only by a tenth. Figure 3.1 shows the steep drop in revenue to cities and counties from 1978 to 1980. Figures 3.2 through 3.5 break down the underlying revenue components, revealing the decline in property tax revenue and subvention funding that explain the overall pattern. The Deepening Distinction Between Cities and Counties Proposition 13 and declines in federal subvention funding over the 1980s affected cities and counties differently. By 1978, cities and counties had different revenue bases, affecting their abilities to cope with increasing fiscal pressure. New constraints brought the contrasting strengths and weaknesses of city and county fiscal structures to the surface. 33 0 600 1,200 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue ($) City revenueCounty revenue SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.1ÑPer Capita Revenue for California Cities and Counties, 1916Ð1995 (1995 dollars) Proposition 13 revealed the relative fragility of county finance. Counties have been more vulnerable to external forces than cities, not only because of their greater reliance on subvention funding, but because of their heavy dependence on property tax revenue to fund their general- purpose functions. By 1978, property taxes had declined to one-fifth of city own-source revenue, and cities no longer relied on the property tax for discretionary revenue. By contrast, county general-purpose finance had not changed much at all over the century. As a result, counties were more fundamentally destabilized by Proposition 13. In 1978, property tax revenue still represented two-thirds of county own-source revenue. 34 0 200 400 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue ($) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Public service enterprises SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.2ÑPer Capita Revenue by Type for California Cities, 1916Ð1995 (1995 dollars) Other than the property tax, counties have always had limited countywide taxing power. Although they are expected to provide such services as property tax assessment, jails, and transportation at the countywide level, their power to raise revenue is generally restricted to unincorporated areas. As the state continues to develop, less area remains unincorporated, which serves only to compound the problem. Figure 3.6 shows our measure of local control over the raising of revenue for cities and counties. It is a variation on the traditional breakdown between own-source revenue and subvention funding. The only change is the way we categorize property tax revenue, which is considered locally controlled before 1978, and externally controlled after 35 0 50 25 75 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Public service enterprises SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.3ÑRevenue by Type for California Cities as a Percentage of Total Revenue, 1916Ð1995 then. We recategorize property taxes at that point because Proposition 13 gave control over their allocation to the state. The figure reveals that Proposition 13 dramatically altered the basic structure of county revenue, while leaving the city revenue structure less changed. Because of Proposition 13, county governments effectively lost control over the way the majority of their revenue is raised. Externally controlled revenue jumped from one-half to four-fifths of total revenue overnight, because of the drop in property tax revenue as well as the transfer of control over the property tax to the state. Cities, on the other hand, remained largely revenue-independent, with externally controlled 36 0 400 200 600 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue ($) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.4ÑPer Capita Revenue by Type for California Counties, 1916Ð1995 (1995 dollars) revenue generally forming about one-quarter of total city revenue in the most recent period. Cities were vulnerable in a different way, however, in the aftermath of Proposition 13. Although they had a more robust own-source revenue base, cities paid a price for their independence. They faced a problem during the 1980s that counties were not forced to contend with: a steady decline in subvention funding. Figure 3.7 tracks per capita subventions to cities and counties over time by their government of origin: either state or federal. (Cities also receive subventions from counties, which are included with state subventions to cities.) 1 Immediately after the passage _________ 1The State ControllerÕs Office began to track city subventions by type only in 1959. 37 0 50 100 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) SOURCE: State Controller’s Office, Annual Financial Transactions series. Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Figure 3.5ÑRevenue by Type for California Counties as a Percentage of Total Revenue, 1916Ð1995 of Proposition 13, federal subventions to both cities and counties began to decline precipitously, as the graph indicates. Federal subventions to California cities dropped by over three-quarters in per capita terms from 1978 to 1992 and by about one-quarter to counties. The stateÕs increasing commitment to counties more than made up for the loss of federal subvention funding during the 1980s. As a result, per capita county subventions kept rising. In contrast, state subventions to cities have remained flat since 1978. 2 Therefore, the loss of federal _________ 2In part, the reduction in state subventions to cities was due to Proposition 13 itself. When faced with tight budgets during the recessions of the early 1980s and 1990s, the state reduced a variety of general-purpose subventions to local governments and eliminated others entirely. Subventions from homeownersÕ tax relief were reduced (one of the effects of Proposition 13) as was the cigarette tax subvention and the motor vehicle 38 0 50 100 25 75 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) County revenueCity revenue(Externally-controlled revenue without property taxes) SOURCE: Author’s calculations based on data from the California State Controller’s Office. Figure 3.6ÑExternally Controlled Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð1995 funding over the decade produced a sharp drop in the share of city revenue derived from subventions. Earlier in the century, subventions to cities and counties had always risen and fallen during the same periods. The new pattern after 1980 helped to deepen the structural distinction between cities and counties, as cities became increasingly self-reliant, and counties relied more than ever on external funding. ____________________ in-lieu tax subvention. Liquor license funds were eliminated in 1982 and business inventory tax relief in 1985. Subventions from trailer in-lieu taxes and cigarette taxes were eliminated in 1994. 39 0 200 400 1960 1965 1970 1975 1980 1985 1990 1995 Revenue ($) SOURCE: State Controller’s Office, Annual Financial Transactions series. State subventions to counties Federal subventions to counties State subventions to cities Federal subventions to cities Figure 3.7ÑPer Capita State and Federal Subventions for California Cities and Counties, 1960Ð1995 (1995 dollars) Our statistical measure of the predictability of different local revenue streams over time helps to confirm these conclusions about the relative strengths and weaknesses of city and county fiscal structures. 3 It indicates that county revenue has been more volatile in general than city revenue since the 1930s. This volatility has been due to the greater variability of county own-source revenue. The pattern for subventions is the mirror opposite; county subventions, especially agency subventions, have been stabler than city subventions. Since the mid-1950s, city revenue has been composed of higher shares of more predictable sources, in particular, revenue from public _________ 3Table B.9 in Appendix B lists the results. 40 service enterprises and licenses, fees, and assessments. The property tax has been a relatively unstable revenue source, even when the effect of Proposition 13 on its variability is not considered. Since the passage of Proposition 13, variability in property tax revenue based on fluctuations in the economy has been reduced, as property taxes are now levied according to a set formula. However, the passage of Proposition 13 itself and manipulations of the property tax by the state demonstrate that property taxes continue to be particularly susceptible to external shocks, although now the shocks may be considered as primarily political rather than economic. The Effect of Proposition 13 on Counties: Greater Dependence Leads to a Growing Crisis Like the implementation of the New Deal, the passage of Proposition 13 fundamentally altered the fiscal structure of county governments in the state. County government contracted by a quarter from 1978 to 1980 as the new property tax limits shrank county own - source revenue. Counties have spent the last 20 years trying to make up the lost ground. Although city per capita revenue nearly regained its pre - 1978 level by 1986, counties were still slightly below pre-1978 revenue levels by 1995, the endpoint of our analysis. Because of Proposition 13, county governments effectively lost control over the way the majority of their revenue is raised. However, we must also consider whether counties lost control over the expenditure of their revenue. In fact, countiesÕ role as agents of the state remained fairly stable immediately after the passage of Proposition 13, as Figure 3.8 (an extension of Figure 2.4) reveals. It began to rise substantially only during 41 0 50 100 25 75 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) SOURCE: Author’s calculations based on data from the California State Controller’s Office. County restricted revenue County agency revenue Figure 3.8ÑRestricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1995 the 1990s. Thus, our two principal measures of local fiscal power indicate that although counties lost control over the raising of their revenue following the passage of Proposition 13, they retained roughly the same degree of control over spending until recently. At first glance this is surprising, given that county own-source revenueÑthe main source of discretionary fundingÑcontracted by nearly one-half from 1978 to 1979. The key to this apparent anomaly lies in the structure of county agency revenue. This revenue has two main components: subventions and mandated county contributions of general-purpose revenue. After 1978, the local contribution to agency programs plummeted because the state government, as part of its fiscal relief plan, spent $1.3 billion to Òbuy outÓ the mandated county share of a variety of health and welfare 42 programs including Medi-Cal and Supplemental Social Security.4 Many of the stateÕs new commitments formed part of an expanding state budget for health and human services during the 1980s, but they did not appear as subventions to counties. As the county contribution to these programs declined, the state general fund budget for health and human services rose from $3.7 billion in fiscal year 1977Ð78 to $7.1 billion by fiscal year 1981Ð82. We are now in a position to explain why countiesÕ agency role remained stable as a share of total county revenue until the 1990s. Counties became a smaller unit of government in the 1980s than they were in the 1970s; county inflation-adjusted per capita revenue declined by more than a third from 1973 to 1980. This decline did not substantially affect countiesÕ agency role, when measured as a share of county revenue, because the state Òbought outÓ the equivalent of the property tax revenue lost after the passage of Proposition 13. In effect, the state balanced the equation for counties in terms of their agency role. Having argued above that control over the expenditure of local revenue is a better measure of home rule power than control over the raising of the revenue, we might conclude that the role of county government has not changed substantially since the passage of Proposition 13. An important consideration has been left out of the analysis, however. Since the overall size of county governmentÑmeasured simply by total inflation-adjusted per capita revenue levelsÑdiminished in the post-Proposition 13 environment, it is important to consider whether _________ 4See California Legislative AnalystÕs Office (1985). A certain portion of the local contribution to state-mandated health and welfare programs is actually discretionary, but it is impossible to distinguish in the data. Given that a portion is discretionary, the reduced local contribution to state-mandated programs may also reflect reduced service levels by counties. See Appendix A for more detail on this measure. 43 counties have had less revenue to spend on general-purpose functions than they did in the 1970s. In other words, we cannot measure home rule power only in terms of relative shares of discretionary versus restricted revenue. The absolute level of discretionary revenue is also critical. In the 1980s, the state took over many of the health and welfare functions that counties had funded and provided before then, but there was no similar effort to Òbuy outÓ the general-purpose functions of county government. Figure 3.9 addresses this matter. It shows the absolute per capita level of discretionary revenue for cities and counties from 1960 to 1995. It reveals that counties did lose ground in terms of per capita discretionary revenue after the passage of Proposition 13. County discretionary revenue declined by 39 percent immediately after 1978, then slowly made up ground until recently. By contrast, city discretionary revenue faltered during the early 1980s, but by 1985 it exceeded pre-Proposition 13 levels. The Property Tax Shift: A Tightening Vise for County Governments We have seen that the new property tax limits constrained local government budgets after the passage of Proposition 13. However, the full effect of the initiative was never actually imposed on local governments because the state took steps to cushion the blow. In 1979, the state adopted AB 8 as a response to Proposition 13. This bill included a fiscal relief plan to ameliorate Proposition 13Õs effects on local services. As a result, city and county expenditures were reduced only by 44 0 400 600 200 800 1960 1965 1970 1975 1980 1985 1990 1995 Revenue ($) SOURCE: Author’s calculations based on data from the California State Controller’s Office. CitiesCounties Figure 3.9ÑPer Capita Discretionary Revenue for California Counties, 1960Ð1995 (1995 dollars) about 10 percent in the year after its enactment. In the largest local assistance program in state history, the state government replaced about two-thirds of the property tax lost by local governments. This was possible because there was a state budget surplus of $3.8 billion in fiscal year 1978Ð79. 5 Approximately $1 billion was dedicated to cities, counties, and special districts to prevent major reductions in local government services, particularly police and fire protection. Most non - school aid went to counties to protect their agency role. A decade later, the cost of local fiscal relief had topped $9 billion out of a state budget of $40 billion. 6 When the economy slid into recession _________ 5Department of Finance, historical data. 6California Constitution Revision Commission (1996a). 45 in the early 1990s, the legislature and the governor partially reversed the fiscal relief program enacted in 1979. In fiscal years 1992Ð93 and 1993Ð 94, the state reduced the property tax allocation to cities and counties and transferred the revenue to the schools. In the process, the state abandoned its earlier post-Proposition 13 goal of ensuring that growth in the property tax base would be used for local services. Instead, the state aimed to take advantage of a growing property tax base by transferring a greater share of the tax to the schools, thereby reducing its own general fund commitment to education. The property tax shift was especially hard on counties, and their general-purpose functions have suffered as a result. Counties lost $2.5 billion or 23 percent of their own-source revenue because of the shift. For cities, $488 million was shiftedÑonly 2 percent of own source revenue. 7 The state replaced about half of the revenue lost as a result of the shift with funds derived from the extension of an existing 1/2 percent state sales tax raised in 1991 to help close the budget gap left by the recession. The measure, a constitutional amendment, was placed on the ballot as Proposition 172. The funds were directed only for public safety purposes, however, and the state established a Òmaintenance of effortÓ requirement to ensure that the funds from the sales tax could not replace money already committed to public safety. The state therefore traded local discretionary revenue with funds earmarked for a specific purpose. 8 _________ 7The effect was greater on many older cities with higher property tax rates before Proposition 13, such as Los Angeles, Oakland, and San Jose. 8Although the stated purpose of Proposition 172 was to help offset the property tax shift from local government to schools, it did so only partially, since the value of the 1/2¢ sales tax revenue was only $1.6 billion. In addition, there is a mismatch between the shift of the property tax from cities and counties and the allocation of the 1/2¢ sales tax for public safety. Some counties have received more in sales taxes than they lost in transferred property taxes, and others have received less. 46 Because of the property tax shift, county discretionary revenue declined by nearly a quarter between 1992 and 1995. This decline represented a loss of $2 billion in inflation-adjusted dollars, or $71 per capita. By 1995, per capita county discretionary revenue was less than three-quarters of its pre-Proposition 13 level, and restricted revenue had increased to nearly three-quarters of county revenue. Many counties have been forced to sell assets, increase debt, or substantially cut services in recent years to balance their general-purpose budgets. 9 City Government in the Post-Proposition 13 Environment: Tighter Budgets Lead to More Entrepreneurial Strategies In the 1980s, cities faced two significant new budget constraints: Not only was property tax revenue limited by the new tax rates, but subvention funding declined steadily, leaving cities with a growing budget shortfall. To address the problem, cities became more entrepreneurial. They increasingly tailored land-use policies to garner more revenue and increased revenue from sources over which they have substantial discretion. Between 1978 and 1995, per capita revenue from local sources other than property taxes, sales taxes, and public service enterprises nearly doubled. From the start of the century until the 1980s, these other local revenue sources together had formed a steady one-fifth of city revenue. After 1978, the share increased rapidly, reaching nearly a third by 1990. Much of this new local revenue has come from licenses, fees, assessments, and other sources that are more closely linked with services _________ 9Erie, Hoene, and Saxton (1998). 47 received. As a result, the cost of city services has become increasingly Òinternalized.Ó In the past, most city discretionary revenue came from two communitywide taxesÑnamely, property and sales taxesÑbut these sources have been overtaken by forms of revenue that link payments to services. City revenue from property and sales taxes declined from more than one-third of own-source revenue in 1978 to less than one-quarter in 1995. The principal components of the increase in own-source revenue to cities over the period were the utility users tax, the transient lodging tax, special benefit assessments, quasi-external transactions, other current service charges, and ÒotherÓ revenue. 10 Increases in these categories alone make up 69 percent of all revenue in categories that increased between 1980 and 1995. Revenue from interest income and investments also rose substantially until 1990 but then dropped by 30 percent by 1995. Reliance on interest earnings declined as more prudent investment strategies followed the Orange County bankruptcy. In spite of their efforts to increase local revenue, city governments have faced tighter budgets since 1978. Although city revenue was not hit as hard as county revenue during the 1970s, it has been more constrained since then. City per capita revenue nearly regained its pre-Proposition 13 level by 1986 but stagnated after that. In contrast, county revenue grew steadily as a result of the flow of state subvention funding. Per capita county revenue grew more than twice as quickly as per capita city revenue, on average, from 1979 to 1995. _________ 10See Table B.10 in Appendix B. 49 4. Conclusion The pendulum in the balance of power between the state and local governments first shifted from strong state control during the early days of statehood toward greater local control by the time of the Progressive Era at the turn of the last century. In recent decades, however, the pendulum has swung back again toward a system of stronger state control. Local governments have protested the shift, and they are seeking to reestablish the old terms of the relationship. In this chapter, we evaluate the major implications of recent changes in the state-local fiscal relationship and consider current reform proposals in light of historical expectations and standards. Current Issues in the State-Local Relationship We draw three major conclusions from the preceding analysis. ¥ The post-Proposition 13 era has been characterized by greater fiscal constraint for local governments. 50 ¥ That era has also been characterized by a shift toward greater state control over local finance, to the degree that the traditional separation of sources doctrine has been significantly undermined. ¥ The effect of these changes has been quite different for cities and counties and has deepened the structural differences between them. Although the main effect on cities has been to alter the composition of discretionary revenue, the ability of counties to raise discretionary revenue has been significantly reduced. This pattern has destabilized the general-purpose role of county government. Proposition 13 was only the beginning of a longer-term process of increasing fiscal pressure. Local governments have been squeezed in a tightening fiscal vise, constrained by voter initiatives on the one hand and by the state and federal governments on the other. A number of additional voter initiatives were passed over the years following 1978 aimed at curbing local government taxing and spending. 1 The vise tightened from the other side as federal subventions began to decline starting in the 1980s. The state government then squeezed local governments even more during the property tax shift of the early 1990s. In addition to these events, the state spent the last two decades replacing local discretionary revenue other than the property tax with funds earmarked for specific purposes. On several occasions since 1978, the state government repealed or reduced local own-source revenue and replaced it with a subvention targeted for specific purposes. 2 A number _________ 1These include Proposition 4, passed in 1979; Proposition 62, passed in 1986; and Proposition 218, passed in 1996. 2In 1979, business inventories were exempted from property taxes, and a subvention (Financial Aid to Local Agencies, or FALA) was enacted to replace the tax; in 1982, the 51 of these subventions were later repealed when the economy slid into recession. Although local government fiscal power has been curtailed, the stateÕs power has grown, because voter initiatives permitted the state to raise and allocate more revenue. It took the recession of the early 1990s, however, to fully manifest the consequences of this shift in the balance of power. When the recession hit, the state government could balance its own budget at the expense of local governments. Control over the property tax has been a defining issue in the state- local relationship since the first days of statehood. The recent shift in control of the property tax threw the established relationship off balance. Both cities and counties have protested this alteration in the terms of the relationship, but the practical effects have been most destabilizing for counties, as they continued to rely on property taxes for discretionary revenue. Current Issues for Cities: Implications of the New Entrepreneurship Cities were far better prepared to respond to the new fiscal constraints. Because they have access to a variety of discretionary revenue sources, cities have maintained average per capita revenue levels that are nearly as high as before Proposition 13. Therefore, the major shift in city finance in the current period has been in the composition of revenue rather than its overall level. Although city per capita revenue has not suffered a significant decline, many observers have argued that the new system of city finance ____________________ Highway Uniform Carriers subvention and the FALA subvention were repealed; in 1993, the cigarette tax subvention was repealed. 52 has certain negative consequences. For example, it is often argued that city land-use decisionmaking has become increasingly Òfiscalized,Ó and as a result, retail development is favored over housing and industry. 3 It is also argued that the current system of finance has become so arcane that citizens are no longer able to understand the relationship between their taxes and the government services they pay for. 4 These observers tend to focus on the increasingly complex provisions for the allocation of property tax revenue, noting that as residents lose local control over this communitywide revenue source, local governments inevitably become less responsive and accountable to local needs and preferences. Finally, observers note that the constraints placed on cities in the current fiscal environment make it harder for them to respond to the needs of an expanding economy. Current Issues for Counties: Destabilization of CountiesÕ General-Purpose Government Function County finance has been affected more fundamentally in the recent period. The key to understanding the growing crisis of counties is their dependence on property taxes for discretionary revenue. When property taxes were cut, and control passed to the state, the general-purpose government role of counties was endangered. Especially since the tax shift in the early 1990s, county discretionary revenue has suffered. Although the general-purpose role of county government has been undermined, expectations regarding county functions have remained largely unchanged since the 1930s. Counties are still expected to _________ 3Lewis and Barbour (1999). 4Chapman (1998), California Legislative Analyst's Office (1993a, b), Sokolow (1998). 53 maintain libraries, run transportation services, and supply the myriad other general-purpose government services they are currently responsible for. As it stands, however, there is a growing mismatch between countiesÕ traditional responsibilities and their ability to fulfill them. The role of county government is being redefined on an ad hoc basis as counties cut back services to stay afloat. Although counties are increasingly unable to meet their existing general-purpose government responsibilities, some observers argue that their general-purpose role should actually be expanded. Problems such as transportation, urban sprawl, affordable housing, and health care are now regional concerns. The state has established categorical funding mechanisms and single-purpose planning bodies to address many of these concerns, but no planning bodies have emerged at the regional level capable of integrating these responsibilities. Although urban regions donÕt always coincide with county boundaries, counties could help fill the current regional planning vacuum. Review of Contemporary Thinking: Proposals for Reform Meet Resistance Every California governor since Edmund G. ÒPatÓ Brown has reviewed the status of state-local relations and attempted reforms, but with limited success. Local governmentsÕ frustration increased with the stateÕs property tax shift of the early 1990s, and since then pressure for reform has mounted. Some recent reform proposalsÑall made between 1993 to 1997Ñare outlined below. 5 _________ 5Full citations are included in the bibliography. 54 California Constitution Revision Commission: Recommended increasing home rule power by amending Proposition 13 to give local governments control over the allocation of the property tax. California Legislative AnalystÕs Office: Recommended a sorting out of state-local programmatic responsibilities and an increase in local control by amending Proposition 13 to allow greater local control of the property tax. Business Higher Education Forum: Recommended strengthening local government by revising Proposition 13 to provide more local control of the property tax. California Business Roundtable: Recommended revising Proposition 13 to allow for more power to raise and spend local taxes. California Planning Roundtable: Recommended providing a stable share of the property tax for local services and permitting local governments to work together to allocate tax revenue. California Council on an Economic and Environmental BalanceÑCPR Project: Recommended providing greater control of local taxes to local governments. These groups concur that control over the financing of local services has gravitated from the local to the state level and that this trend should be reversed. However, the state government has been slow to address major reforms of the distribution of fiscal and programmatic power. The standard argument made against proposed reforms at the state level, aside from concerns about a loss of state power, is that the effects of the proposed reforms are uncertain. In opting for the evils of a current condition to prevent an uncertain future, state policymakers are confirming MachiavelliÕs admonition to the PrinceÑthat there is nothing more difficult to undertake than to change the order of things. 55 Reforms are especially slow to arrive when the groups or interests whose power would be curtailed have the ability to slow or stop the reform process, as is true in the case at hand. Given that any redistribution will necessarily harm some agency, it has been difficult to build a statewide coalition in favor of change. The state-local relationship is now at a juncture as tense as at the turn of the last century, when state-level reformers restructured the relationship by establishing home rule powers and the separation of sources. However, the constellation of forces and policy priorities has shifted since then. Home rule reforms at the turn of the century represented a victory by Progressive activists seeking to counteract the power of big business in the state legislature. Since the 1960s, however, the state policy agenda has been dominated by urban activists who have increased the role of the state in health, social services, and environmental protection. The state government views itself as the arbiter of an ever-expanding list of statewide interests. Today, the agenda of state activists seeking to expand state power coincides with efforts by voters to limit local government spending. As a result, the local finance system has been returned to the condition in which it operated before 1910. A variety of groups, some created by statute and some by proclamation, have set about the task of figuring out where the state-local balance of power should be set. These efforts include the State Assembly SpeakerÕs Commission on State and Local Government Finance, the Local Finance Forum of the Senate Budget and Fiscal Review Committee, the Commission on Local Governance for the 21st Century, the ControllerÕs State Municipal Advisory Reform Team (SMART), and 56 the Commission on Building for the 21st Century. In the following sections, we evaluate the main policy choices that these groups must face. Policy Choices Current reform proposals focus on two areas: the need to restore accountability by delineating the responsibilities of different levels of government more clearly, and the need to restore local fiscal authority, or the ability of local governments to finance services from locally levied taxes. The first issue is especially important in relation to the state- county relationship, and the second applies to both cities and counties. Rethinking the Role of County Government If counties are to maintain their traditional general-purpose government functions, let alone provide any new services, some type of fiscal and governance reform will be necessary. The task of defining county responsibilities is closely tied to the issue of fiscal authority. As counties find it harder to fund their current general-purpose responsibilities, policymakers must evaluate the need for those services and determine which level of government should be responsible for providing them. To determine how this is to be accomplished, it will be necessary to reconsider countiesÕ proper role. As their primary role is increasingly one of administering state programs, the time has come to re-evaluate the need for counties as a component of local general-purpose government. Reform efforts can take two basic approaches to address the current mismatch between county responsibility and financing authority. One would be to change county finance so as to make it match county obligations as currently configured. This essentially means restoring the 57 status quo ante for counties by restoring the level of local fiscal control counties experienced before the passage of Proposition 13. This reform would enable counties to maintain their dual role as agents of the state and local general-purpose governments. Various options exist to make this possible. For example, the state could allocate a larger portion of the property tax to counties. Or, the current 1 percent local sales tax could be converted from a tax levied by each city to one levied by counties and used to fund countywide services. In exchange, cities might receive a larger share of the property tax to replace the lost sales tax. This option does not require a fundamental reformulation of governmental responsibility. If citizens want local governments to control the financing of local services, then a restoration of the status quo ante for county governments may be a relatively easy way to resolve the current dilemma. However, the ever-increasing agency role of counties has progressed to the stage where this may be difficult. We have reached a point where it would be useful to reevaluate the role of county government altogether. Another option is to redistribute countywide responsibilities to the state or to cities. For example, the state could assume responsibility for such countywide functions as property tax assessment and prosecutorial functions. This type of reform is especially persuasive in relation to countywide functions where equity considerations are salient. For example, it is unclear why local preferences should hold sway over such functions as administering justice. Functions that are countywide but considered local in nature could be administered through cooperative agreements among cities. This entails just the opposite solution to the first option described above by calling for a reconfiguration of 58 governmental responsibilities to more closely match the current county fiscal reality. This second option does little to increase governmental capacity to organize, finance, and govern services and programs that have a scope that exceeds the territory of cities. At a time when many observers point to a growing gap in governmentÕs ability to conduct adequate regional planning and development, it would be a mistake to leave all decisions to the state or to rely on voluntary agreements between cities. The best solution to the problem of countywide government may be to evaluate all general-purpose functions separately to devise the most appropriate solution for each case. In such a thorough reevaluation, even the efficacy of current county boundaries should be reexamined. In urban areas, the boundaries of counties have little to do with the geography of modern urban development. Reforms should be considered to designate regional agencies to administer state programs and undertake general-purpose functions for urban regions in the state. Such designations would have to be accomplished in consultation with current general-purpose governments. In some cases the territory of a county may have sufficient scope to cover the responsibility. Fiscal powers of such regional agencies would have to be assigned in a manner that coincides with their designated level of responsibility. Rethinking Fiscal Authority The question at the heart of the continuing debate about the state- local fiscal relationship is this: What is the proper balance between the stateÕs interest in achieving consistency in statewide policy and a local communityÕs interest in establishing a level of services and activity that meets its needs? There is an inherent tension between the goals of 59 increasing accountability at the local level and maximizing equity in the allocation of resources for the state as a whole. A strong state role in local finance makes sense if the primary objective of CaliforniaÕs citizens is to maximize equity in the allocation of public resources at the state level. However, if the citizens of the state also value local accountability, flexibility, and innovation, then it is useful for local governments to control the financing of local services. In this section we consider the advantages and disadvantages of moving in either of these directions. There are several advantages to maintaining state control over local fiscal affairs. First, the state is able to act as an arbiter, equalizing resources to ensure that no community is left without a tax base sufficient to provide an adequate level of services. For example, a residential community with a limited retail or industrial base can be assisted with state subventions that are allocated on a population basis. Second, the state can also play a role in equalizing resources on the basis of Òtax effort,Ó so that a group of citizens in one community does not bear a larger burden than another group to achieve the same level of services. The state has played such an equalizing function when it comes to many state taxes, such as the vehicle license fee, which is collected based on the value of cars and trucks but is distributed based on population. 6 The state could perform this type of equalizing role in relation to the property tax. It could devise a new allocation system using a standard of need as a baseline for local finance. Such a system might be based on a standardized measure of fiscal health, taking into account factors such as _________ 6As of 1998, the state had concluded that it was time to phase out the tax, leaving the local government subvention to be financed out of the state general fund. 60 local residentsÕ income, exported tax burdens, public service costs, service responsibilities, and intergovernmental aid. 7 The state could use its redistributive power to allocate property taxes based on a standard of fiscal need, but it has not done so. Furthermore, the current allocation system, based on local tax liability before the enactment of Proposition 13, increasingly fails to reflect local preferences. Rather than using its power to devise a new system to match local needs or preferences, or some combination of the two, the state in recent years has exerted its power over the tax primarily for the purpose of maintaining its own fiscal health in a time of economic stress. In relation to the property tax, the state in recent years has acted more like a competitor with local governments than an impartial arbiter. Reflecting concern that the state government has used the property tax primarily as a fiscal shock absorber, many current reform proposals would separate local property tax revenue from the state budget. Local governments could be provided a certain amount of ÒroomÓ within the 1 percent property tax cap that now limits the property tax rate. To return control over the property tax to the local level, a constitutional amendment would be required to allow the property tax to be allocated by local agreement. If such a change were accomplished only by statute, it would run the risk that the legislature could change it at will. To give local governments the ability to determine the allocation of the property tax, the following two elements would be necessary. ·The amount of local government property tax revenue required for KÐ12 education funding would have to be determined by the state. Through a combination of long-held state policy, court _________ 7See Ladd and Yinger (1989) for an example of such a method. 61 decisions, and constitutional standards, the financing of KÐ12 education is a shared responsibility with the state setting the parameters. The state share of school funding could be determined only at the state level, thereby determining what portion of local property tax revenue would be required for education. ·Within each county, a process would be required to determine the amount of property tax revenue that would be made available for community and areawide (countywide) services. Then general purpose government tax rates within the current Proposition 13 limits would be set for each community by mutual agreement. Voters could participate in such a process by approving tax allocation plans within each county. This is not an uncommon practice in other states. The model for this process would be similar to that used for joint powers agreements currently undertaken by cities, counties, and special districts. Restoring the old doctrine of separating sources of revenue would reestablish a stronger connection between the level of government that levies a tax and the level of government providing services funded by the tax revenue. Under a scenario such as the one described above, it would be easier for taxpayers to understand how property taxes are divided between education, community, and areawide services. This awareness could help increase accountability in local government. Before Proposition 13, the property tax was the principal community-controlled source of discretionary revenue, and as such it was the subject of a certain amount of debate at the local level. It has been argued that this level of civic engagement served to hold local elected officials more accountable 62 to their constituencies.8 Efficiency and innovation in local service provision were also enhanced, since local governments could respond more easily to local preferences. However, critics of this perspective argue that local accountability and innovation can be enhanced, even if fiscal authority is limited. Efforts along those lines are currently being implemented in relation to local education expenditures, for example. The current state of local finance is in need of repair. It reflects neither the potential benefits of a state-run system based on a set of commonly defined principles, nor the benefits of a more decentralized system with a clear separation of sources. Rather, it reflects efforts to cope with fiscal stress through cost-shifting and competition between levels of government. The last major constitutional overhaul of our governance and finance system was made at the turn of the last century. It may be necessary to begin the next century with a similar civic debate about how the governance and finance system should work. _________ 8Sokolow (1998). 63 Appendix A Notes on Data and Methodology This appendix discusses the data used in this report and provides more detailed descriptions of our analytical definitions and measures than were provided in the introductory chapter. Revenue and Expenditure Data Revenue and expenditure data used in this study come from the Annual Financial Transactions series issued by the State ControllerÕs Office. 1 Revenue data for cities and counties aggregated at the state level were available for each fiscal year from 1915Ð16 to 1994Ð95. Certain revenue line items in the city revenue data were moved from the categories in which they appear in the ControllerÕs Office reports to _________ 1The data were organized according to the revenue categories outlined in Appendix B, Table B.1, and in greater detail in Appendix C, Tables C.1 and C.2. 64 other revenue categories when that was considered appropriate to achieve consistency between time periods. 2 The State ControllerÕs Office did not maintain a consistent method for recording data on public service enterprise revenue over the century. For purposes of this report, values for public service enterprise revenue were calculated in different ways for different time periods. For the time period from 1916 to 1958, the data used in this report for public service enterprise revenue were taken from two sources: the line item for Òpublic service enterprisesÓ in the State ControllerÕs revenue reports, and ÒsanitationÓ fees moved from the service charge category. Between 1959 and 1981, data on public service enterprise revenue are not available in the general operating budgets in the State ControllerÕs Office reports. We calculated this revenue as the sum of the following components: (1) public service enterprise operating and nonoperating revenue as recorded by the State ControllerÕs Office in separate reports for public utilities, (2) Òsewer charges,Ó Òrefuse collection,Ó and Òsale of refuseÓ recorded during the period under current service charges, (3) Òsewer connection feesÓ and Òcity-owned enterprises,Ó recorded as ÒotherÓ revenue, and (4) revenue from ÒparkingÓ included in the licenses and permits category. During the period from 1982 to 1995, public service enterprise revenue was calculated as the sum of the following service charges, which were subtracted from the service charge category: sewer service charges and connection fees, parking facilities, water service charges and connection fees, and electric, gas, airport, cemetery, housing, port and harbor, hospital, and transit revenue. _________ 2When budget line items have been moved to categories other than those in which they appear in the original ControllerÕs Office data, it has been noted in Appendix C Tables C.1 and C.2 after the line item. 65 A number of revenue line items that appear in the ControllerÕs Office reports were not included in our analysis. For cities, the items not included were receipts from debt obligations for the years 1916 to 1958 and sale of bonds between 1982 and 1995. For counties, the revenue line items not included in our analysis were more extensive, and they pertain in many cases to district revenue. The items not included were school district subventions from 1916 to 1934, sale of bonds from 1916 to 1957 and 1985 to 1995, agency transactions from 1916 to 1957, trust funds and accounts from 1935 to 1957, and district taxes from 1935 to 1957. Adjusting for Inflation and Population Revenue values were adjusted for inflation based on the California Consumer Price Index. This index is a variant of the Consumer Price Index for Urban Consumers (CPI-U) produced by the U.S. Bureau of Labor Statistics (BLS). BLS calculates the CPI-U for three metropolitan areas in CaliforniaÑthe Los Angeles, San Francisco, and San Diego Consolidated Metropolitan Statistical Areas. The California Department of Industrial Relations, Division of Labor Statistics and Research, publishes a version for the state based on a population-weighted sum of the CPI-U for San Francisco, Los Angeles, and San Diego. The California CPI-U is available for the years from 1955 to 1995. For the years from 1916 to 1954, we employed an average of the CPI-U for Oakland and Anaheim. Per capita revenue values were calculated using data from the California Department of Finance as well as the U.S. Census. The population of cities and counties in the state from 1970 to 1995 is based on data for each of those years from the Demographic Research Unit 66 of the California Department of Finance, Reports 84-E4, 90-E4, and 97-E4. The population of counties in the state from 1940 to 1970 is based on yearly data from the Department of Finance, Report E-7A. The population of cities before 1970 and counties before 1940 is based on the decennial U.S. Census, with values interpolated. Analytical Definitions Used in This Report Subvention Funding Subventions are funds received by local governments from other governments. We categorize subventions into four types, which entail different amounts of external control over the way the funds may be expended. 3 We also break subventions down by their government of origin, either the state or federal government (we include county subventions to cities under state subventions). ÒAgencyÓ subventions entail strict restrictions on the way the money may be spent and include funding for state and federal health and welfare programs. ÒCategoricalÓ subventions are earmarked by the sending government for a certain type of function, but decisions on specific projects are left up to the receiving government. An example of a categorical subvention is gas tax revenue, which is sent to local governments to be spent for transportation purposes to be defined by local governments. ÒGeneral-purposeÓ subventions, such as vehicle license fee revenue, may be spent in any manner by receiving governments. Finally, some subventions are labeled as ÒotherÓ subventions by the State Controller. These tend to be categorical, with _________ 3In Appendix C, Tables C.1 and C.2, we have organized the particular subvention line items recorded by the State ControllerÕs Office over time into these four categories. 67 the exception of Òother in-lieu tax revenue,Ó which is provided for general purposes. Restricted and Discretionary Revenue It is difficult to arrive at a precise definition of local discretion over the expenditure of revenue. Any revenue that local governments elect to raise and spend could be called discretionary. However, the expenditure of some locally levied revenue is restricted to specific functions. For example, some cities operate quasi-independent public service enterprises such as hospitals and utilities. Although those cities originally made the decision to build and operate the ventures, the expenditure of the revenue they generate, generally on a fee-for-service basis, is restricted primarily to covering the costs of ongoing operation and maintenance of the ventures themselves. Certain transfers are made between public service enterprises and city and county general operating funds, but these amounts have not been tracked consistently over time by the State Controller. Benefit assessments are another source of revenue whose expenditure is restricted for certain purposes, usually construction of infrastructure or public facilities. To the degree that local governments are compelled to maintain current service levels, the majority of local revenue could be considered nondiscretionary. If discretion over local revenue is a matter of degree, the question becomes where to draw the line. In measuring discretion, we seek to define the share of revenue that best measures local governmentsÕ ability to choose between competing priorities. We exclude public service enterprise revenue, since it is reserved for ongoing maintenance of quasi-independent functions and therefore reflects minimal discretion in the local budgeting process. 68 However, we include almost all other main sources of own-source revenue. We include revenue from benefit assessments, although it is also earmarked for specific purposes, because it reflects local decisions to improve infrastructure whose cost is often generalized over the entire population and which represents a one-time cost rather than ongoing fees for specific services. We define discretionary revenue as the share of local revenue whose expenditure is not earmarked for purposes strictly mandated by another level of government or for ongoing maintenance of quasi-independent enterprises. For cities, this is all revenue from locally levied sources except public service enterprises and all general-purpose subventions. The components of county discretionary revenue are slightly different. Counties do not operate public service enterprises within their general operating budgets, so that revenue plays no part in the county analysis. However, unlike cities, counties are required to provide a portion of their general-purpose revenue to fund state-mandated programs. We describe this county role in more detail in the next section. County discretionary revenue is composed of all locally levied revenue except the portion devoted to state-mandated programs, and, in addition, general-purpose subvention funding. Restricted revenue comprises two components: restricted subventions and restricted own-source revenue. Restricted subventions comprise agency and categorical subventions, and ÒotherÓ subventions with the exception of Òother in-lieu taxes.Ó For cities, restricted own-source revenue comprises revenue from public service enterprises, the transportation tax (levied from 1982 to 1995), and contributions from nongovernmental sources. For counties, restricted own-source revenue comprises transportation tax revenue and the local contribution of 69 general-purpose revenue used to fund state-mandated agency functions (described in the next section). County Contribution of General-Purpose Funds for Agency Programs The state and federal governments require that counties provide certain health and welfare services in strict accordance with explicit guidelines. However, the state and federal governments do not provide all of the funding that counties need to carry out these programs. Counties are obligated to commit a certain portion of their general - purpose revenue toward these Òstate-mandated local programs.Ó The constitution was amended in 1979 to require that the state reimburse local governments for costs of carrying out state programs (California State Constitution, Article XIII B, Section 5). However, this provision included an exemption for programs enacted before 1975 and in effect created a blanket exemption for the health and welfare agency functions established over the prior 75 years. We estimate the local county contribution for agency functions as the difference between the total for agency subvention revenue received from the state and federal governments for public assistance and health programs and the total for county expenditures for health and public assistance functions, as detailed in the State ControllerÕs Office county expenditure reports. 4 Certain county agency functions, such as running the court system, are not included in our analysis because the data are not sufficiently detailed over time. _________ 4See Appendix C, Table C.3, for a list of the county expenditure categories we include in this measure. 70 Unfortunately, expenditure data from the State ControllerÕs Office do not distinguish between agency functions that counties must fund to comply with state law and the same countiesÕ discretionary spending for similar health and welfare programs. Counties may exceed the minimum levels of service required by state law, and many do. As a result, we cannot determine the exact share of county general-purpose revenue that should properly be included as part of restricted revenue in our analysis. Although the bulk of the local contribution from general-purpose revenue for health and welfare programs is properly regarded as agency revenue, the category also includes some discretionary spending. 71 Appendix B Supplementary Data This appendix provides tabular data on the revenue trends described in this report. Table B.1 lists the components of own-source revenue to cities and counties. Tables B.2 through B.7 list amounts and percentages for the main revenue sources to cities and counties for critical years during the century. Table B.8 does the same but only for the components of restricted revenue to counties. Table B.9 lists results from our measure of revenue variability over time. Finally, Table B.10 lists detailed components of city own-source revenue in 1980 and 1995 and identifies which components increased most significantly over that period. Table B.1 Components of Own-Source Revenue for California Cities and Counties Revenue Categories in This ReportItems IncludedGeneral property taxes Single line item for cities and counties. Not considered own-source revenue in our analysis after 1978Sales and use taxesSingle line item for cities and counties Public service enterprises Applies only to cities. Includes sewer service charges and connection fees, sanitation (solid waste revenues, refuse collection), parking facilities, water service charges and connection fees, electric revenues, gas revenues, airport revenues, cemetery revenues, public housing revenues, ports and harbor revenues, hospital revenues, transit and transportation revenues Licenses, fees, and assessments Other taxesFor cities: franchise, lodging taxes, utility users tax, property transfers, other taxes For counties: franchises, transportation and lodging taxes, property transfers, voter approved indebtedness, other Special assessments For cities: fire, paramedics, police, lighting, other For counties: operations, capital outlays Licenses and permits For cities: liquor, business, animal, construction, streets and curbs, other For counties: liquor, business, construction, road, zoning, other Table B.1 (continued) Revenue Categories in This ReportItems IncludedFeesFor cities: general government, protection, health conservation, highways, sanitation, education, recreation For counties: clerk, recorder, law library, treasurer, jury fees, courts, sheriff, tax collectionCurrent service charges For cities: zoning, subdivision, maps and plan preparation, special police and fire service, animal shelter, weed and lot cleaning, vital statistics, first aid, health inspection, library fines, parks and recreation, golf course fees, quasi-external transactions For counties: tax assessment and collection, auditing, communication, elections, legal, planning, civil process, courts, estate fees, recording fees, road and street service, health, sanitation, institutional care, libraries, parks and recreation, care of inmates and prisoners Fines and penalties For cities: vehicle code fines, other For counties: vehicle code fines, court fines, forfeiture and penalties Other revenueFor cities: interest, rents and concessions, royalties, sale of property For counties: interest, rents and concessions, royalties, premium and accrued interest on bonds, sales of fixed assets, receipts to correct errors, canceled warrants ExcludedFor cities: debt (bond issuance, receipts from debt obligations, proceeds from bond sales) For counties: debt (receipt from debt obligations, bond sales, deposits), agency transactions, trust funds Table B.2 Revenue by Source for California Cities, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Revenue in millions of 1995 dollarsTotal own-source revenue775 553 2,335 2,083 2,531 2,610 12,325 14,665 13,729 23,143 23,817 General property taxes501 356 1,221 1,015 1,115 1,024 3,081 3,117 1,381 3,130 2,580 Sales taxes — — — — — —1,711 2,188 2,247 2,540 2,607 Public service enterprises127 108 692 708 1,081 1,230 4,736 6,012 6,344 8,857 9,916 Licenses, fees, assessments, and other revenue 147 89 422 360 335 356 2,797 3,348 3,757 8,617 8,714 Other taxes and special assessments 10 22 154 106 58 32 771 1,159 1,236 2,774 3,121 Licenses, permits, fees, service charges 90 46 118 129 157 148 1,199 1,261 1,335 2,749 3,120 Othera 47 21 150 125 120 176 827 929 1,186 3,094 2,473 Subventions23 15 80 185 342 246 3,342 4,729 4,808 3,545 4,761 Total revenue798 569 2,415 2,268 2,873 2,856 15,667 19,394 18,537 26,688 28,577 Percentage change in revenue since previous year listed in the table Total own-source revenue–29 322 –11 21 3 372 19 –6 69 3 General property taxes–29 243 –17 10 –8 201 1 –56 127 –18 Sales taxesna na na na na na 28 3 13 3 Public service enterprises–15 540 2 53 14 285 27 6 40 12 Licenses, fees, assessments, and other revenue –40 375 –15 –7 6 685 20 12 129 1 Other taxes and special assessments109 606 –31 –45 –45 2,320 50 7 124 13 Licenses, permits, fees, service charges–48 154 9 21 –5 710 5 6 106 13 Othera –56 630 –17 –4 47 369 12 28 161 –20 Subventions–34 418 132 85 –28 1,257 41 2 –26 34 Total revenue–29 325 –6 27 –1 448 24 –4 44 7SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.3 Per Capital Revenue by Source for California Cities, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Per capita revenue in 1995 dollarsTotal own-source revenue364 232 532 458 505 429 822 852 788 936 929 General property taxes235 149 278 223 223 168 205 181 79 127 101 Sales taxes0 0 0 0 0 0 114 127 129 103 102 Public service enterprises60 45 158 156 216 202 316 349 364 358 38 Licenses, fees, assessments, and other revenue 69 37 96 79 67 58 186 194 216 349 340 Other taxes and special assessments5 9 35 23 12 5 51 67 71 112 12 Licenses, permits, fees, service charges42 19 27 28 31 24 80 73 77 111 122 Othera 22 9 34 28 24 29 55 54 68 125 9 Subventions11 6 18 41 68 40 223 275 276 143 186 Total revenue375 238 550 499 574 469 1,045 1,126 1,064 1,080 1,114 Percentage change in per capita revenue since previous year listed in the table Total own-source revenue–36 130 –14 10 –15 92 4 –7 19 –1 General property taxes–37 86 –20 0 –24 22 –12 –56 60 –21 Sales taxesna na na na na na 11 1 –20 –1 Public service enterprises–24 248 –1 39 –6 56 11 4 –2 8 Licenses, fees, assessments, and other revenue–46 159 –18 –16 –13 219 4 11 62 –3 Other taxes and special assessments86 284 –34 –50 –55 883 31 5 58 8 Licenses, permits, fees, service charges–54 38 6 10 –22 229 –8 5 45 9 Othera –61 297 –19 –13 20 91 –2 26 84 –23 Subventions–41 182 124 67 –41 451 23 0 –48 29 Total revenue–37 131 –9 15 –18 123 8 –6 1 3SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.4 Revenue by Source as a Percentage of Total Revenue for California Cities, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1991 1995Total own-source revenue97 97 97 92 88 91 79 76 74 87 83General property taxes63 63 51 45 39 36 20 16 7 12 9 Sales taxes0 0 0 0 0 0 11 11 12 10 9 Public service enterprises16 19 29 31 38 43 30 31 34 33 35 Licenses, fees, assessments, and other revenue 18 16 17 16 12 12 18 17 20 32 30 Other taxes and special assessments1 4 6 5 2 1 5 6 7 10 11 Licenses, permits, fees, service charges 11 8 5 6 5 5 8 6 7 10 11 Othera 6 4 6 6 4 6 5 5 6 12 9 Subventions3 3 3 8 12 9 21 24 26 13 17SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.5 Revenue by Source for California Counties, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Revenue in millions of 1995 dollarsTotal own-source revenue379 296 1,047 1,003 1,241 1,009 9,787 9,878 6,069 10,946 9,209 General property taxes320 249 878 842 1,112 847 6,899 6,607 2,847 5,837 3,349 Sales taxes— — — — — — 288 487 438 341 313 Licenses, fees, assessments, and other revenue 59 47 169 160 129 162 2,600 2,783 2,784 4,768 5,547 Other taxes and special assessments — — — — — — 115 159 164 383 396 Licenses, permits, fees, service charges 25 17 66 70 73 102 1,809 1,888 1,636 2,675 2,630 Othera 34 30 103 90 55 60 676 736 984 1,710 2,521 Subventions24 19 237 276 865 961 10,214 10,056 10,811 14,957 17,399 Total revenue403 314 1,284 1,278 2,106 1,970 20,002 19,934 16,880 25,903 26,607 Percentage change in revenue since previous year listed in the table Total own-source revenue–22 254 –4 24 –19 870 1 –39 80 –16 General property taxes–22 253 –4 32 –24 715 –4 –57 105 –43 Sales taxesna na na na na na 69 –10 –22 –8 Licenses, fees, assessments, and other revenue –20 261 –5 –20 26 1,506 7 0 71 16 Other taxes and special assessmentsna na na na na na 38 3 134 3 Licenses, permits, fees, service charges–32 286 7 4 39 1,674 4 –13 63 –2 Othera –11 246 –13 –38 8 1,028 9 34 74 47 Subventions–21 1,153 16 214 11 963 –2 8 38 1 Total revenue–22 308 0 65 –6 915 0 –15 53 3SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.6 Per Capita Revenue by Source for California Counties, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1991 1995Per capita revenue in 1995 dollarsTotal own-source revenue126 89 177 163 180 108 473 438 264 355 289 General property taxes107 75 148 137 161 91 333 293 124 189 105 Sales taxes0 0 0 0 0 0 14 22 19 11 10 Licenses, fees, assessments, and other revenue 19 14 29 26 19 17 126 123 121 155 174 Other taxes and special assessments0 0 0 0 0 0 6 7 7 12 12 Licenses, permits, fees, service charges 8 5 11 11 11 11 87 84 71 87 82 Othera 11 9 17 15 8 6 33 33 43 55 79 Subventions8 6 40 45 125 103 493 445 469 485 545 Total revenue134 95 217 207 305 211 966 883 733 840 834 Percentage change in per capita revenue since previous year listed in table Total own-source revenue–29 99 –8 11 –40 338 –7 –40 35 –19 General property taxes–30 98 –8 18 –44 268 –12 –58 53 –45 Sales taxesna na na na na na 55 –12 –42 –11 Licenses, fees, assessments, and other revenue –27 102 –9 –28 –7 625 –2 –2 28 12 Other taxes and special assessmentsna na na na na na 26 1 74 0 Licenses, permits, fees, service charges–38 117 3 –7 3 700 –4 –15 22 –5 Othera –19 94 –16 –45 –20 409 0 31 30 42 Subventions–28 603 12 180 –18 380 –10 5 3 12 Total revenue–29 129 –4 47 –31 358 –9 –17 15 –1SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.7 Revenue by Source as a Percentage of Total Revenue for California Counties, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Total own-source revenue94 94 82 78 59 51 49 50 36 42 35General property taxes80 79 68 66 53 43 34 33 17 23 13 Sales taxes0 0 0 0 0 0 1 2 3 1 1 Licenses, fees, assessments, and other revenue 15 15 13 13 6 8 13 14 16 18 21 Other taxes and special assessments0 0 0 0 0 0 1 1 1 1 1 Licenses, permits, fees, service charges6 5 5 6 3 5 9 9 10 10 10 Othera 8 10 8 7 3 3 3 4 6 7 9 Subventions6 6 18 22 41 49 51 50 64 58 65SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.8 Components of Restricted Revenue for California Counties, 1916–1995 1916 1932 1934 1940 1945 1973 1978 1979 1984 1992 1995Revenue in millions of 1995 dollarsAgency revenue64 440 727 1,191 1,215 11,602 10,392 8,862 8,651 13,860 15,008 Agency subventions5 17 52 556 743 7,053 5,568 5,610 7,240 10,214 11,171 Local contribution of general-purpose revenue59 423 675 634 472 4,550 4,823 3,252 1,411 3,647 3,838 Categorical subventions and other restricted state funds18 220 224 300 210 1,243 2,349 3,546 1,371 2,725 4,231 Total restricted revenue82 659 951 1,491 1,424 12,845 12,741 12,408 10,023 16,586 19,239 Percentage change in revenue since previous year listed in the table Agency revenue Agency subventions222 199 977 33 850 –21 1 29 41 9 Local contribution of general-purpose revenue622 60 –6 –26 863 6 –33 –57 158 5 Categorical subventions and other restricted state funds1,090 2 34 –30 493 89 51 –61 99 55 Total restricted revenue700 44 57 –4 802 –1 –3 –19 65 16 Per capita revenue in 1995 dollars Agency revenue21 74 118 172 130 560 460 385 338 449 470 Agency subventions2 3 8 81 79 341 247 244 283 331 350 Local contribution of general-purpose revenue19 71 109 92 51 220 214 141 55 118 120 Table B.8 (continued) 1916 1932 1934 1940 1945 1973 1978 1979 1984 1992 1995Categorical subventions and other restricted state funds6 37 36 43 22 60 104 154 54 88 133Total restricted revenue27 111 154 216 152 620 564 539 392 538 603 Percentage change in per capita revenue since previous year listed in the table Agency revenue249 59 46 –25 331 –18 –16 –12 33 5 Agency subventions63 187 862 –1 329 –28 –1 16 17 6 Local contribution of general-purpose revenue266 53 –16 –45 335 –3 –34 –61 114 2 Categorical subventions and other restricted state funds504 –2 20 –48 167 73 48 –65 65 50 Total restricted revenue306 38 40 –29 307 –9 –5 –27 37 12 Revenue by source as a percentage of total revenue Agency revenue16 34 57 57 62 58 52 53 50 54 56 Agency subventions1 1 4 26 38 35 28 33 42 39 42 Local contribution of general-purpose revenue15 33 53 30 24 23 24 19 8 14 14 Categorical subventions and other restricted state funds5 17 18 14 11 6 12 21 8 11 16 Total restricted revenue20 51 74 71 72 64 64 74 58 64 72SOURCE: Authors’ calculations based on data from the State Controller’s Office, Annual Financial Transactions series. NOTE: Transportation tax revenue is included as “other restricted state funds.” Table B.9 Variability of Revenue Sources over Time for California Cities and Counties Variation in the growth ratea in local revenue streams during different time periods 1917–19951917–19321933–19951956–1995, Excluding 1979Revenue SourceCounties Cities Both Counties Cities Both Counties Cities Both Counties Cities Both Own-source revenue1.9 1.4 1.5 1.4 1.5 1.4 2.2 1.1 1.4 1.1 0.5 0.7Property tax2.9 3.5 3.1 1.3 1.6 1.4 3.9 5.2 4.3 2.2 1.4 1.8 Sales tax4.0 1.6 1.6 na na na 4.0 1.6 1.6 3.2 1.8 1.8 Public service enterprisesna 1.4 na na 1.2 na na 1.1 na na 0.8 na Licenses, fees, assessments, and other 1.8 2.3 1.8 2.2 2.7 2.1 1.6 1.7 1.5 1.4 0.9 0.9 Subventions1.7 2.3 1.6 1.3 2.3 1.4 1.8 2.3 1.7 1.4 1.8 1.4 Total revenue1.3 1.4 1.3 1.2 1.5 1.3 1.4 1.1 1.2 1.1 0.6 0.8Variation in the growth ratea of subventions to local governments, 1959–1995 Subventions by TypeTo Counties To CitiesAgency1.6naCategorical2.82.0 General purpose4.63.9SOURCE: Authors’ calculations based on date from the State Controller’s Office, Annual Financial Transactions series. a The table lists the coefficient of variation (the standard deviation divided by the mean) of the growth rate (the percentage change in revenue since the prior year) in inflation-adjusted revenue for each revenue source during the time period designated. Table B.10 Components of City per Capita Own-Source Revenue for California, 1980 and 1995 198019951980–19951980–1995CategoryPer Capita Revenue (1995 dollars)% of Own- Source RevenuePer Capita Revenue (1995 dollars)% of Own- Source Revenue % ChangePercentage Point Change Property taxes96.0 12.0 100.610.85–1.1Sales taxes125.2 15.6 101.610.9 –19–4.7 Public service enterprises 369.5 46.1 386.741.65–4.4 Taxes (not property or sales) Transient lodging12.21.522.22.4 820.9 Franchises9.31.215.71.7 690.5 Property transfers5.70.75.60.6 –1–0.1 Utility users tax0.00.046.04.9 1004.9 Other39.64.919.12.1 –52–2.9 Total66.88.3 108.611.7 1983.4 Special benefit assessments3.40.413.11.4 2851.0 Use of money and property Interest income/investments 35.84.541.24.4 150.0 Rents and concessions4.80.66.30.7 330.1 Royalties2.20.30.40.0 –82–0.2 Other0.40.10.60.1 380.0 Total43.35.448.65.2 12–0.2 Licenses, permits, and fees Construction8.81.18.00.9 –9–0.2 Business licenses22.12.825.22.7 140.0 Other2.40.33.90.4 640.1 Total33.24.137.14.0 69–0.2 Table B.10 (continued) 198019951980–19951980–1995CategoryPer Capita Revenue (1995 dollars)% of Own- Source RevenuePer Capita Revenue (1995 dollars)% of Own- Source Revenue % ChangePercentage Point Change Current service chargesZoning and subdivision fees 2.20.32.30.240.0 Special police services1.20.13.00.3 1550.2 Special fire services1.00.12.60.3 1530.2 Plan checking fees2.60.33.30.4 260.0 Animal shelter fees0.20.00.20.0 –40.0 Engineering fees3.40.44.90.5 470.1 Street and curb repair1.30.20.90.1 –28–0.1 Lot cleaning0.30.00.40.0 120.0 First aid and ambulance0.60.11.90.2 2160.1 Library fines and fees0.90.10.90.1 –80.0 Parks and recreation10.01.28.70.9 –12–0.3 Quasi-external transactions0.00.024.52.6 1002.6 Other current service charges14.11.831.13.3 1211.6 Total37.74.784.69.1 1244.4 Fines and penalties Vehicle code fines10.01.25.00.5 –50–0.7 Other3.70.57.70.8 1070.4 Total13.71.712.61.4 –7–0.3 Table B.10 (continued) 198019951980–19951980–1995CategoryPer Capita Revenue (1995 dollars)% of Own- Source RevenuePer Capita Revenue (1995 dollars)% of Own- Source Revenue % ChangePercentage Point Change OtherSale of property3.70.55.20.6 410.1 Nongovernmental sources 1.90.25.40.6 1820.3 Other7.40.924.62.6 2311. Total13.01.635.23.8 1702.SOURCE: State Controller’s Office Annual Financial Transactions series. NOTE: Categories that increased the most as a share of total revenue from 1980 to 1995 appear in boldface. 87 Appendix C Data Organization Table C.1 lists all categories of revenue for cities in the Annual Report on Financial Transactions Concerning Cities of California series published yearly by the California State ControllerÕs Office from 1916Ð 1995. The State ControllerÕs Office reports listed different revenue sources during different time periods and these are distinguished below. Boldface denotes broad categories for which data were aggregated in the original report. The first column in the table lists the revenue categories used in this report. Each section of the list includes all the ControllerÕs Office revenue line items that were aggregated from the revenue categories analyzed in this report. Table C.2 lists the same information for counties. Table C.3 lists the revenue line items that we consider to be components of county expenditures for health and welfare functions, as detailed in the Annual Report on Financial Transactions Concerning Cities of California series during different time periods. Table C.1 Revenue Line Items Listed in the Annual Financial Transactions Series for Cities in California, Organized into Revenue Categories Used in This Report PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 Property taxes General property taxes General property taxes Current-year taxes Delinquent taxes IntangiblesProperty taxes Current yearÑsecured Current yearÑunsecured Prior years Interest and penalties Solvent creditsProperty taxes Current yearÑsecured Current yearÑunsecured Prior years Other property taxes Interest and penaltiesProperty taxes Secured and unsecured Voter approved indebtedness Prior years Other property taxes Interest and penaltiesSales taxes Sales and use taxes (from 1949Ñmoved from miscellaneous)Sales and use taxes Sales and use taxes Sales and use taxes Subventions Subventions and grants Subventions and grants From other agencies From other agencies From other agencies/ intergovernmental Categorical State (Not detailed) (Not detailed) Gas tax Other state grantsGas taxes Other state grantsState gas tax Other state grants Transportation tax (moved from other taxes) County County grants of gas tax Other county grantsCounty grants of gas tax Other county grantsCounty grants of state gas tax County grants Federal Federal grants Federal grants Other federal grants 88 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 General purposeState Alcoholic beverage fees Trailer coach license Vehicle in-lieu tax Other in-lieu taxAlcoholic beverage fees Trailer in-lieu taxes Vehicle in-lieu taxes Other taxes in-lieu Homeowner tax relief Business inventory tax relief Cigarette taxesState trailer coach in-lieu tax State motor vehicle in-lieu tax Other taxes in-lieu State homeowner property tax relief State business inventory property tax relief State cigarette tax FederalFederal revenue sharing (1972)Federal revenue sharing Public service enterprisesPublic service enterprises (single line item) Sanitation (moved from service charges)Public service enterprises (single line item) Sanitation (moved from service charges) Parking lots and parking meters (moved from Òother revenueÓ)Public service enterprise revenue data were not included in the State ControllerÕs Office reports during these two time periods. For purposes of this report, public service enterprise revenue was based on the sum of five components: (1) public service enterprise operating and nonoperating revenue taken from separate tables for public service enterprises in the ControllerÕs books, (2) three service charges, namely, sewer charges, refuse collection, and sale of refuse, which were subtracted from the total for service charges, (3) Òcity-owned enterprises,Ó which was moved from the Òother revenueÓ category, (4)Public service enterprise rev - enue is calculated as the sum of the following service char- ges, which are subtracted from the total for that category: Sewer service charges and connection fees Parking facilities Water service charges and connection fees Electric revenues Gas revenues 89 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 sewer connections fees, moved from the Òother revenueÓ category, and (5) revenue from parking permits, moved from licenses and permits. Airport revenue Cemetery revenue Housing revenue Ports and harbor revenue Hospital revenue Transit revenue Solid waste revenues Licenses, fees, and assessments Other taxesOther taxes Franchises OtherOther taxes Franchises Transient lodging Property transfers OtherOther taxes Franchises Transient lodging Property transfers Utility users tax Other AssessmentsSpecial assessments Special assessments Local assessments (moved from service charges)Local assessments (moved from service charges)Special benefit assessment Fire Paramedics Police Lighting Other Licenses and permitsLicenses and permits Liquor Other businessLicenses and permits Liquor Other businessLicenses and permits BusinessLicenses and permits Business license (moved from other taxes)Licenses and permits Business license (moved from other taxes) 90 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 Dog Departmental receiptsDog Departmental receiptsAnimal Bicycle Building Plumbing Electrical Sewer Street and curbs Sales tax OtherAnimal Bicycle Construction Street and curbs OtherConstruction OtherFees and service chargesFees, charges for services and minor sales General government Protection to person and property Conservation of health Highways Charities and corrections Education RecreationFees, charges for services and minor sales General government Protection to person and property Conservation of health Highways Charities and corrections Education RecreationCurrent service charges Zoning and subdivision Sale of maps Other filing fees Special police services Special fire services Plan checking fees Animal shelter fees Engineering fees Street and curb repairs Vital statistics First aid and ambulance Health inspection Library fines and fees Parks and recreationCurrent service charges Zoning fees Subdivision fees Sale of maps Other filing fees Special police services Special fire services Plan checking fees Animal shelter fees Engineering fees Street and curb repairs Vital statistics First aid and ambulance Health inspection fees Library fines and fees Parks and recreation Lot cleaningCurrent service charges Zoning fees and subdivision fees Special police services Special fire services Plan checking fees Animal shelter fees Engineering fees Street and curb repairs First aid and ambulance Library fines and fees Parks and recreation Weed and lot cleaning 91 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 Other OtherGolf course fees Quasi-external transactions OtherFines and penaltiesFines and penalties Fines and penalties Fines and penalties Vehicle code fines Other court finesFines and penalties Vehicle code fines Other fines Other penaltiesFines and penalties Vehicle code fines Other fines, forfeiture, and penalties Use of money and propertyUse of money and property Receipts in error and interest on bonds Privileges Rent of properties Interest receiptsUse of money and property Receipts in error and interest on bonds Privileges Rent of properties Interest receiptsUse of money and property Interest income Rents and concessions Royalties OtherUse of money and property Interest income/investment earnings Rents and concessions Royalties OtherUse of money and property Interest income/investment earnings Rents and concessions Royalties Other Other revenueOther revenue Sale of real property Gifts, donations, pension duties MiscellaneousOther revenue Sale of real property Gifts, donations, pension duties MiscellaneousOther revenue Sale of property Nongovernmental sources Other revenueOther revenue Sale of property Nongovernmental sources OtherOther revenue Sale of property Contributions from nongovernmental sources Other Excluded Receipts from debt obligations (bond issuance), depositsReceipts from debt obligations (bond issuance), depositsOther financing sources Sale of bonds Notes and others 92 Table C.2 Revenue Line Items Listed in the Annual Financial Transactions Series for Counties in California, Organized into Revenue Categories Used in This Report PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Property taxesGeneral county taxes A portion is subtracted that was allocated for schools, based on data from The Tax Digest (1946), p. 298General county taxesProperty taxes Current year—secured Current year— unsecured Prior years and penalties Solvent creditsProperty taxes Current year—secured Current year— unsecured Prior year—secured Prior year—unsecured Solvent credits Penalties and costs on delinquent taxesProperty taxes Current year—secured Current year— unsecured Prior year—secured Prior year—unsecured Solvent credits Penalties and costs on delinquent taxesProperty taxes Countywide—secured Countywide—unsecured Prior year—secured Prior year—unsecured Penalties and costs on delinquent taxes Less than countywide fundsSales taxSales and use taxes Sales and use taxes Sales and use taxes Sales and use taxes Subventions Subventions and grantsSubventions and grantsSubventions and grantsSubventions and grantsSubventions and grantsSubventions and grants Agency State Relief fundsa Support of orphansaRelief fundsa Support of orphansa Relief of blindaAid to children—state Aid to blind—stateState—welfare administration State aid for children State aid for blindState—welfare administration State public assistance administration State aid—public assistance programs State aid for children State aid for blindState—public assistance administration State—public assistance programs Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Relief of needy ageda TB subsidiesAid to aged—state Aid to needy disabled Administration of adoption program— state Aid to partially self- supporting blind— state Aid to children in boarding homes Public health—stateState aid for aged State aid for disabled State aid—crippled children State aid for medical assistance to aged State aid for medical care State health administration State aid for TB State aid for cerebral palsy State aid for mental health Other state aid for healthState aid for aged State aid for disabled State aid for crippled children State health administration State aid for TB State aid for cerebral palsy State aid for mental health Other state aid for healthState—aid for mental health State—other aid for health Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 FederalWelfare administration— federal Aid to needy disabled— federal Aid to children—federal Aid to blind—federal Aid to aged—federal Public health—federalState aid for agriculture Federal welfare administration Federal aid for disabled Federal aid for children Federal aid for blind Federal aid for aged Federal aid for medical assistance Federal aid for medical care Federal health administrationState aid for agriculture Federal welfare administration Federal—public assistance administration Federal aid—public assistance programs Federal aid for disabled Federal aid for children Federal aid for blind Federal aid for aged State/federal aid for medical assistance Federal health administrationHealth—AB 8 Health—MIA Alcohol and drug abuse State—aid for agriculture Federal—public assistance administration Federal—public assistance programs Federal health administrationCategorical State Motor vehicle $ apportionedMotor vehicle license fees, gas tax and truck/bus taxMotor vehicle license fees, gas tax and truck/bus tax Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 FederalUnrefunded taxes on aviation gasoline—state Federal grants for buildings, etc.State—aviation fuel tax Civil defense—state Inspection of boarding homes—state Highway user tax—state Civil defense—federalState—aviation fuel tax State aid for civil defense State aid for construction State aid for corrections State aid for county fairs State aid for disaster State aid for veterans affairs State—highway users tax Federal aid for construction Federal aid for disasterState aid for civil defense State aid for construction State aid for corrections State aid for county fairs State aid for disaster State aid for veterans affairs State—highway users tax Federal aid for construction Federal aid for disasterState—aid for construction State—aid for corrections State—aid for county fairs State—aid for disaster State—highway users tax SB 90 mandated costs Trial court funding Public Safety Fund Federal—aid for construction Federal—aid for disaster Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 General purposeStateLiquor tax apportionmentLiquor license fees Trailer coach license fees—stateState—alcoholic beverage license State—trailer coach in- lieu State—motor vehicle in-lieu tax Other state in-lieu taxState—alcoholic beverage license State—trailer coach in- lieu State—motor vehicle in-lieu tax Other state in-lieu tax State homeowners tax relief State business inventory property tax reliefState—trailer coach in- lieu tax State—motor vehicle in-lieu tax Other state in-lieu taxes State homeowners tax relief Highway property rentals Cigarette tax Open space tax relief FederalForest reserve apportionmentForest reserve—federal Federal forest reserve revenue Federal grazing fees Federal in-lieu taxesFederal forest reserve revenue Federal grazing fees Federal in-lieu taxes Federal revenue sharingFederal forest reserve revenue Federal—in-lieu taxes Federal—revenue sharing Other StateOther state funds State other State other State other FederalOther federal funds Federal other Federal other Federal other Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Both or un- determinedOthers OthersOther governmental agenciesOther governmental agenciesOther governmental agenciesOther in- lieuOther in-lieu taxes Other in-lieu taxes Other in-lieu taxes Licenses, fees, and assessments Licenses and permitsLicenses and permits Liquor Other PermitsLicenses and permits (county only)Licenses and permits Licenses PermitsLicenses and permits Animal licenses Business licenses Construction permits Road and privileges and permits Zoning permits OtherLicenses and permits Animal licenses Business licenses Construction permits Road and privileges and permits Zoning permits Franchises OtherLicenses and permits Animal licenses Business licenses Construction permits Road and privileges and permits Zoning permits Franchises Other Fees and commissionsFees Auditor Clerk Recorder Sheriff Justice of the peace Tax collectorFees and commissionsb Clerk Law library Recorder Sheriff Constables Jury fees Justices of the peace/JudicialFees and commissions Clerk Law library Recorder Sheriff, marshals, constables Jury fees Courts Tax collection service Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Fines and penaltiesSuperintendent of schools Others Fines and penalties Superior courts Justice courts Probation courts OthersSuperintendent Others Candidates’ filing fees Fines and penalties (county only) Superior courts Justice courts Traffic fines OthersOther fees and commissions Treasurer Fines and penalties Fish and game fines Superior courts Justice courts Traffic fines OthersFines, forfeits, and penalties Other court fines Vehicle code fines Forfeitures and penaltiesFines, forfeits, and penalties Other court fines Vehicle code fines Forfeitures and penaltiesFines, forfeits, and penalties Municipal court fines Superior court fines Justice court fines Vehicle code fines Forfeitures and penaltiesCurrent service chargesSpecial services Care in county hospital Care of insane Care of minors Care in reform schoolsSpecial services rendered Care in county institutions Care in state institutions Care of juvenile court wards Care of indigentsSpecial services rendered Care in county institutions Care in state and private institutions Care of juvenile court wardsCharges for current services Institutional care and services Assessment and tax collection Auditing and accounting fees Communication services Election servicesCharges for current services Institutional care and services Assessment and tax collection Auditing and accounting fees Communication services Election servicesCharges for current services Institutional care and services Assessment and tax collection Auditing and accounting fees Communication services Election services Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Transport of pupils and tuition—other counties OthersCare of prisoners Schools, cafeterias, and day nurseries OthersCare of prisoners OthersInheritance tax fees Legal services Personnel services Planning and engineering Purchasing fees Agricultural services Civil process services Court fees and costs Estate fees Humane services Law enforcement fees Recording fees Road and street services Health fees Mental health services Sanitation services Adoption fees Crippled children’s servicesInheritance tax fees Legal services Personnel services Planning and engineering Purchasing fees Agricultural services Civil process services Court fees and costs Estate fees Humane services Law enforcement fees Recording fees Road and street services Health fees Mental health services Sanitation services Adoption fees Crippled children’s servicesLegal services Planning and engineering Agricultural services Civil process services Court fees and costs Estate fees Humane services Law enforcement fees Recording fees Road and street services Health fees Mental health services Sanitation services CA children’s servicesEducational services Library services Park and recreation fees Other chargesEducational services Library services Park and recreation fees Other chargesLibrary services Park and recreation fees Other charges Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Other taxes Road poll, hospital poll, etc.Other taxes OtherOther taxes Other FranchisesOther taxes Other FranchisesOther taxes Transportation tax Property transfer Transient lodging Timber yield Aircraft Other Voter approved indebtedness Special benefit assessments Operations Capital outlaysOther revenuePrivileges Interest receipts From miscellaneous real property Others RentsPrivileges (county only) Interest From current deposits From other sources (general county) Rent of property (general county)Privileges Franchises Other privileges Interest From current deposits From other sources Rent of property Land and building EquipmentFrom use of money and property Interest Rents and concessions RoyaltiesFrom use of money and property Interest Rents and concessions RoyaltiesFrom use of money and property Interest Rents and concessions Royalties Miscellaneous Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Sale of real property Gifts and donations From current deposits From invested funds Receipts to correct errors Candelled warrants Miscellaneous For expenses For outlaysSale of property (general county) Miscellaneous (general county)Sale of property Land and buildings Equipment Produce from county operations Other sales Miscellaneous Cancellations, rebates, and refunds Other miscellaneousOther revenue Premium and accrued interest on bond issued Revenue from discontinued districts Revenue applicable to prior years Sale of fixed assets Other sales OtherOther revenue Premium and accrued interest on bond issued Revenue from discontinued districts Revenue applicable to prior years Sale of fixed assets Other sales OtherFrom other financing sources Sale of fixed assets Total transfers in Miscellaneous revenue Other sales Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 ExcludedReceipts to correct errors Cancelled warrants School district subventions Refund on bonds HS $ apportioned Elementary school $ apportioned Sale of bonds County DistrictSchool district subventions Elementary school apportionment HS apportionment Junior college apportionment County school service funds apportionment Other educational money Sale of bonds Receipts from debt obligations(Sale of bonds not included in general operating budget)(Sale of bonds not included in general operating budget)(Sale of bonds not included in general operating budget)Proceeds from sale of bonds Other long-term debt proceedsAgency transactions For state Inheritance taxesAgency transactions For state Inheritance taxes Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Poll taxes State land sales State taxes State’s portion of redemption and sales Interest on state highways Others For districts (district special taxes) Roads Schools High schools Reclamation Others For municipalities (single line item) Teachers’ retirement fund Funds for administration and disbursement of blind and aged program Fish and game licenses Others For cities, other counties, and districts (single line item) Table C.2 (continued) PPIC State Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Trust funds and accounts Public adminis- trators fund Overpaid taxes subject to refund Others District taxes Elementary schools High schools Junior colleges School taxes Parks and recreation Lighting Cemetery Reclamation Sanitary, sanita- tion, and sewer Fire Hospitals Roads Mosquitoa State and federal combined. b Fees are allocated between the county and districts. Only the general county line item is included. 106 Table C.3 Components of County Agency Expenditures for Health and Welfare 1916Ð1934 1935Ð1957 1958Ð1962 Conservation of health Health and sanitation except: Sanitary services Other expenses and outlaysHealth and sanitation except: Current expenses Capital outlays Charities and corrections except: Probation officers and courts Care of inmates, reform schoolCharities and corrections (county only) except: Probation expenses Reform schoolsCharities and corrections except: Probation department Juvenile hall 1963Ð1984 1985Ð1995 Health and sanitation except: SanitationHealth Public assistance Public assistance 107 Bibliography Business Higher Education Forum, California Fiscal Reform: A Plan for Action, Sacramento, 1994. California Business Roundtable, Agenda for Governance and Fiscal Reform, Sacramento, 1995. California Constitution Revision Commission, Final Report and Recommendation to the Governor and the Legislature, Sacramento, March 1996a. California Constitution Revision Commission, History and Perspective, Sacramento, March 1996b. California Council for Environmental and Economic Balance, California Prosperity Through ReformÑProject CPR, Sacramento, 1995. California Legislative AnalystÕs Office, Making Government Make Sense: A More Rational Structure for State and Local Government, Sacramento, February 1993. California Legislative AnalystÕs Office, 1984Ð85 Budget Perspectives and Issues, Sacramento, 1985. 108 California Planning Roundtable, Restoring the Balance: Managing Fiscal Issues and Land-Use Planning Decisions in California, Sacramento, 1997. California State Board of Equalization, Annual Report 1996Ð97, Sacramento, 1997. California State ControllerÕs Office, Annual Report on Financial Transactions Concerning Cities of California, Sacramento, 1916 to 1995. California State ControllerÕs Office, Annual Report on Financial Transactions Concerning Counties of California, Sacramento, 1916 to 1995. Chapman, Jeffrey, Proposition 13: Some Unintended Consequences, Public Policy Institute of California, San Francisco, September 1998. Detwiler, Peter M., ÒCreatures of Statute . . . Children of Trade: The Legal Origins of California Cities,Ó in California Constitution Revision Commission, History and Perspective, 1996. Doerr, David R., ÒCapsule History of the California Tax Structure,Ó Cal- Tax Digest, November 1997. Erie, Steven, Christopher Hoene, and Gregory Saxton, ÒCoping with Loss of Fiscal Autonomy,Ó white paper for Metropolitan Governance 2000 Project, Claremont Graduate University Research Institute, Claremont, California, presented at the annual meeting of the American Political Science Association, September 2Ð6, 1998. Grodin, Joseph R., Calvin R. Massey, and Richard B. Cunningham, The State of California Constitution: A Reference Guide, Greenwood Press, Westport, Connecticut, 1993. Hartley, James E., Steven M. Sheffrin, and J. David Vasche, ÒReform During Crisis: The Transformation of CaliforniaÕs Fiscal System During the Great Depression,Ó in California Constitution Revision Commission, History and Perspective, 1996. 109 Ladd, Helen, and John Yinger, AmericaÕs Ailing Cities: Fiscal Health and the Design of Urban Policy, Johns Hopkins University Press, Baltimore, Maryland, 1989. Lewis, Paul, and Elisa Barbour, California Cities and the Local Sales Tax, Public Policy Institute of California, San Francisco, July 1999. Shires, Michael, Patterns in California Government Revenues Since Proposition 13, Public Policy Institute of California, San Francisco, March 1999. Shires, Michael, John Ellwood, and Mary Sprague, Has Proposition 13 Delivered? The Changing Tax Burden in California, Public Policy Institute of California, San Francisco, September 1998. Sokolow, Alvin D., ÒThe Changing Property Tax and State-Local Relations,Ó PubliusÑThe Journal of Federalism, Vol. 28, No. 1, Winter 1998, pp. 165Ð187. Tax Digest, ÒIncome and Expenditures of Government in CaliforniaÑ 1900 to 1945,Ó September 1946. Van Alstyne, Aro, Background Study Relating to Article XI: Local Government, California Constitution Revision Commission, San Francisco, 1966. 111 About the Authors J. FRED SILVA J. Fred Silva is Advisor, Governmental Relations, at PPIC. He has been involved for over 30 years in the development of public policy in state and local government. He has worked with the California Council on Intergovernmental Relations, the Office of Planning and Research, and the Senate Local Government Committee. In 1981, he was appointed to the position of Chief Fiscal Advisor to the President Pro Tempore of the Senate; and in 1994, he accepted a position as Executive Secretary to the California Constitution Revision Commission. He is currently advising a number of major committees and task forces involved in reforming the fiscal relationship between state and local governments. ELISA BARBOUR Elisa Barbour is a research assistant at the Public Policy Institute of California. She works on projects dealing with California governance issues. Before coming to PPIC, she did research examining local labor markets, welfare reform, and urban poverty. She also worked for a number of community and advocacy organizations. She holds a B.A. in political science from Oberlin College and a Master's in city planning from the University of California, Berkeley. 112" } ["___content":protected]=> string(104) "

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" ["_permalink":protected]=> string(121) "https://www.ppic.org/publication/the-state-local-fiscal-relationship-in-california-a-changing-balance-of-power/r_1299fsr/" ["_next":protected]=> array(0) { } ["_prev":protected]=> array(0) { } ["_css_class":protected]=> NULL ["id"]=> int(8078) ["ID"]=> int(8078) ["post_author"]=> string(1) "1" ["post_content"]=> string(0) "" ["post_date"]=> string(19) "2017-05-20 02:34:43" ["post_excerpt"]=> string(0) "" ["post_parent"]=> int(3162) ["post_status"]=> string(7) "inherit" ["post_title"]=> string(9) "R 1299FSR" ["post_type"]=> string(10) "attachment" ["slug"]=> string(9) "r_1299fsr" ["__type":protected]=> NULL ["_wp_attached_file"]=> string(13) "R_1299FSR.pdf" ["wpmf_size"]=> string(6) "552030" ["wpmf_filetype"]=> string(3) "pdf" ["wpmf_order"]=> string(1) "0" ["searchwp_content"]=> string(168480) "The State-Local Fiscal Relationship in California: A Changing Balance of Pow e r• • • J. Fred Silva Elisa Barbour 1999PUBLIC POLICY INSTITUTE OF CALIFORNIA Library of Congress Cataloging-in-Publication Data Silva, J. Fred (John Fred), 1943– The state-local fiscal relationship in California : a changing balance of power / J. Fred Silva, Elisa Barbour. p. cm. Includes bibliographical references. ISBN: 1-58213-020-5 1. Intergovernmental fiscal relations—California. 2. Fiscal policy—California. I. Barbour, Elisa, 1961– II. Title. HJ325.S55 1999 336.3'09794—dc2199-057670 CIP Research publications reflect the views of the authors and do not necessarily reflect the views of the staff, officers, or Board of Directors of the Public Policy Institute of California.Copyright © 1999 by Public Policy Institute of California All rights reserved San Francisco, CAShort sections of text, not to exceed three paragraphs, may be quoted without written permission provided that full attribution is given to the source and the above copyright notice is included. iii Foreword Thirty years ago, students of U.S. government took the concept of home rule for granted. It was a self-evident truth that local governments had the authority to tax residents and to fund services with the revenue. Students in the latter part of the century, however, know that the fiscal foundation of home rule in California has shifted enormously. In The State-Local Fiscal Relationship in California: A Changing Balance of Power, Fred Silva and Elisa Barbour trace nearly a century of budgetary shifts between state and local government. They also note the importance of Proposition 13Ñthe fiscal earthquake of 1978Ñwhich, among other things, shifted control over property tax revenue to the state. As the authors note, home rule was itself the result of a ground shift that occurred in the 1910s, when Progressive Era advocates pressed successfully for local autonomy and a division of state and local revenue streams. Before home rule and the separation of sources, local governments were regarded as mere creatures of the state. Although the authors do not argue that California has come full circle with Proposition iv 13, they do call attention to the diminishing fiscal authority of local governments, especially counties. The lack of a clean separation of tax revenuesÑproperty tax for local government, income and sales tax for the stateÑhas aggravated the chronic tension in the state-local fiscal relationship. This tension, in turn, endangers the smooth and efficient delivery of local services and undermines local officialsÕ sense of accountability. In an earlier PPIC study, Why Government Fails, Mark Baldassare concluded that it was this very confusion over revenue expectations that led in part to the bankruptcy of Orange County. The authors conclude that the current fiscal relationship between state and local government reflects neither the potential benefits of a state-run system nor those of a more decentralized one. The redistributive function of a broad-based tax has lost out to a rapid growth in licenses, fees, and assessments. Property taxes, a traditional source of discretionary income for local governments, shrank to a mere 10 percent of total county revenues in the 1990s. In sum, the authors describe a system that manages to meet the expectations of local residents but that also stands in need of a substantial overhaul. They conclude with several options for creating a less risky way to finance the business of state and local government. David W. Lyon President and CEO Public Policy Institute of California v Summary The evolution of public finance in California is the story of a shifting balance of power between the state and local governments. Local governmentsÕ resistance to state control has been a constant source of policy conflict throughout the century. As California has grown and developed, however, its different forms of government have evolved along different lines, and this has modified the outcome of the struggle between them. This study identifies two major turning points in the evolution of fiscal authority in California. The first is 1910, when the Progressive movement pushed for greater local control after two generations of untempered state power. The second is the passage of Proposition 13 in 1978, when voters awarded (or rather, reawarded) powers to the state that Progressives had successfully assigned to local governments. Proposition 13 heightened the chronic tension between the state and local governments, so much so that advocates for these local governments are now calling for another round of reforms. The need for such reforms vi becomes especially clear when the matter is viewed against a historical backdrop, for as we hope to show, that landmark initiative magnified a growing distinction between city and county governments, throwing their different strengths and weaknesses into relief. It is only when these historical patterns are acknowledged that the full effects of Proposition 13 can be gauged, because only then do we understand its varying effects. At the center of this study is the matter of fiscal power and how it is shared. In addition to providing historical analysis, this report develops several measures for assessing the changing nature of the state-local fiscal relationship in California. In particular, we use revenue and expenditure data between 1916 and 1995 to gauge federal and state control over local governmentsÕ ability to tax and spend freely. We also test the vulnerability of various local government revenue streams to economic and political shocks at the state and national levels. After exploring recent shifts in city and county governments and their respective fiscal structures, we conclude the report with a discussion of current proposals for reform and their policy implications. Home Rule Is Established: Finance in California Before Proposition 13 The relationship between the state and local governments in California has been contentious since the stateÕs inception in 1849. During the Progressive Era, reformers gradually won independent political and fiscal authority for local governments. By the start of World War One, two legal principles had been established: home rule power, or the right of cities to draw up and establish their own charters and govern municipal affairs; and the separation of sources, which formally marked off state and local revenue streams. vii Home rule power, and the local fiscal authority that underpins it, became a watchword during the Progressive Era. Local power was limited, however, by two constraints: the stateÕs interest in the uniform application of its policies, and federal constitutional law, which grants state government the right to strike the balance of power between itself and local governments. The balance began to shift when the Separation of Sources Act of 1910 granted local governments exclusive control over property taxes. Because most public revenue at that time came from this tax, the exclusivity was especially important. The separation of sources doctrine ensured that the fiscal powers of local governments were aligned with their responsibilities. In particular, the doctrine endorsed the notion that the governmental body that levied taxes or fees would determine how that revenue would be spent. This balance shifted even further toward local government in 1914, when California voters approved a constitutional amendment allowing communities to adopt charters, which permitted cities to enact local ordinances without state authorization. Taken together, these two developmentsÑcharter cities and the separation of sources doctrineÑgranted local governments a degree of fiscal autonomy within the stateÕs overarching control. Although this legal framework for the state-local fiscal relationship remained stable until 1978, city and county governments changed considerably over the century and along different lines. Beginning with the New Deal and continuing through the postwar period, counties assumed a more prominent role in administering state and federal programs in areas such as health care and welfare. As county governments increasingly became Òagents of the state,Ó their revenue profiles also changed. In 1932, 82 percent of county funds came from own-source revenue; by the end of World War Two, subventions, or viii funds sent by the state or federal government, formed about 50 percent of that total. An even higher proportion of county revenueÑmore than two-thirdsÑwas spent according to state or federal guidelines. In addition to their role as agents of the state, counties also acted as local general-purpose governments, providing services in areas such as transportation, corrections, tax collection, and public safety. Most of the discretionary revenue for these services came from property taxes, which were cut dramatically by Proposition 13. Much more than counties, cities achieved and maintained fiscal independence from the state. Subvention funding has rarely constituted more than one-fifth of city revenue, and an even smaller shareÑseldom more than a tenthÑhas ever been restricted by state or federal spending guidelines. As cities adopted the role of provider of local utility and public safety services, they gained increasing amounts of revenue from locally levied sources intended to fund those services. Cities came to rely less and less on property taxes, which made up 36 percent of city revenue in 1945 but only 16 percent in 1978. The Era of Limits: Proposition 13 and Its Aftermath From the perspective of local government, the fiscal shock of Proposition 13 was unlike any event during the century, including the Great Depression. In one year, property tax revenue to local governments was cut in half. Counties were affected most, because they still relied almost solely on the property tax for discretionary revenue. Their budgets contracted 24 percent from 1978 to 1980, whereas city revenue, which was tied more closely to public services, dropped less than 10 percent. ix In addition to reducing the size of county government, Proposition 13 changed the terms of the state-local fiscal relationship. Although the initiative reflected growing public dissatisfaction with government in general, it had the effect of enhancing state power at the expense of local governments by giving the state control over distribution of the property tax. Because the property tax rate is now set by statute, and revenue distribution is controlled by the state, the property tax now resembles a state-controlled revenue source rather than a local one. This development has undermined the traditional separation of sources doctrine. The passage of Proposition 13, however, was not solely responsible for the transformation of the property tax. If the state had continued to allocate property tax revenue based on local preferences, the separation of sources would not have been so significantly eroded. But the state began to allocate property tax revenue in response to political and economic pressure. First it attempted to cushion the effects of Proposition 13 by enacting a fiscal relief program in 1979, replacing about two-thirds of the property tax revenue lost to local governments with various forms of state aid. Faced with constitutionally mandated spending guarantees for education enacted in 1988, however, the state revised its fiscal relief plan when the economy slid into recession during the early 1990s. During 1993 and 1994, the state changed the allocation formula to direct more property tax revenue toward school districts and away from cities, counties, and special districts. The state replaced a portion of the lost property tax revenue with funds dedicated for law enforcement, thereby trading local discretionary revenue with funds earmarked for a specific purpose. The Òproperty tax shiftÓ angered local governments, giving rise to calls for reform. The shift was particularly hard on county x governments, whose per capita discretionary revenue declined by nearly 25 percent from 1992 to 1995. Cities and counties have responded differently to increasing fiscal constraints in recent decades. Cities were better prepared to cope with the constraints because they had broader local revenue bases. In particular, they increased revenue from sources closely tied to the cost of services, such as user charges and fees. Communitywide taxing power has declined as a result. Counties, on the other hand, have come to rely more than ever on state aid, and their general-purpose functions have been undermined. Many counties have sold assets, taken on debt, or substantially cut services to balance their general-purpose budgets. The Future of the State-Local Relationship: The Need for Reform Many government observers are concerned that the recent trend toward more state control over local finance has gone too far and should be reversed. Current reform proposals focus on two primary areas of concern: the need to define more clearly the responsibilities of local governments, and the need to restore local fiscal authority. Redefining Local Government Sorting out state and local responsibilities is especially important for counties, whose traditional responsibilities outstrip their financial capacity. County government is increasingly subsumed by state priorities, but expectations regarding its general-purpose role have remained largely unchanged since the 1930s. The appropriate role for county government is being determined in a de facto fashion as counties cut local services to remain solvent. xi County fiscal authority could be realigned with county responsibilities in a number of ways. One solution is to return to the status quo ante by restoring the level of fiscal control counties experienced before the passage of Proposition 13. This reform would enable counties to maintain their dual role as agents of the state and local general-purpose governments. A different solution would call on the state to take on even greater responsibility for county functions, further reducing the county general-purpose role. The best solution may be a combination, in which the state takes on greater responsibility for certain current county functions, for example, in the area of courts and justice, and counties gain greater authority over other functions, such as transportation planning. At a time when many observers point to a growing need for regional policymaking, the underlying functions of counties and even their geographical boundaries would benefit from a thorough reexamination. Redefining Fiscal Authority A strong state role in local finance makes sense if the primary objective of CaliforniaÕs citizens is to maximize equity in the allocation of public resources. However, the state government has not exercised its redistributive power to devise an effective system for property tax allocation. The system that the state government established in 1979, based on the relative tax shares in place before Proposition 13, increasingly fails to reflect local needs and preferences. The problem was compounded when the state used the tax to maintain its own fiscal health in the early 1990s by redirecting property tax revenue toward schools. Viewed as a policy choice, the state opted to avoid state xii expenditure reductions or tax increases at the expense of countywide services. Reflecting concern that the state government is using the property tax as a fiscal shock absorber, many current reform proposals would separate local property tax revenue from the state budget to restore the traditional separation of sources. Proponents argue that such reforms would enhance efficiency, accountability, and innovation in local government. Opponents counter that local control over the raising of revenue is not a prerequisite for accountability in relation to expenditure. Regardless, the current state of local finance in California is in need of repair. It reflects neither the potential benefits of a state-run system based on commonly defined principles nor those of a more decentralized system based on a separation of sources. Instead, the current system reflects efforts to cope with fiscal stress through cost-shifting and competition between levels of government. Once again, control over the property tax dominates current debate about the state-local fiscal relationship. This same issue lay at the heart of the two major popular reform movements of this century: the movement to establish home rule powers and the tax revolt of the 1970s. Even as local governments diversified their revenue base over the century, the property tax remained the local revenue source that provided the greatest level of flexibility, discretion, and accountability. Progressive Era reforms wrested control of the property tax from the state. Proposition 13 did the opposite, thereby returning the state-local relationship to the situation that existed before the Progressive Era. Local governments have resisted the recent shift, and current reform proposals reflect the need to reestablish a sustainable relationship between the state and local governments. xiii Citizens have yet to achieve consensus about what that relationship should look like. Although Proposition 13 reflected their desire to limit local government taxing and spending, their views are less distinct when it comes to the virtue of home rule as opposed to state control over local affairs. To find the proper resting point for the state-local balance, governance and finance issues must be reviewed together. xv Contents Foreword................ iii Summary.......... v Figures........... xvi Tables............ xix Acknowledgments.......... xxi 1. INTRODUCTION......... 1 The Legal Framework of the State-Local Relationship.. 3 From Local Control to State Power: Proposition 13 Shifts the Balance........... 6 Assessing the Effects of Proposition 13 on Local Governments........... 9 Measuring the State-Local Relationship..... 10 Measuring Local Control over the Raising of Revenue.... 11 A Second Measure of Control over the Raising of Revenue: Revenue Predictability........... 12 Measuring Local Control over the Expenditure of Revenue.. 13 Agency Funding: The Measure of CountiesÕ Role as Agents of the State............ 13 Organization of the Report........... 14 xvi 2. THE HISTORY OF LOCAL FINANCE IN CALIFORNIA BEFORE PROPOSITION 13........... 17 The Era of Expanding Power and Separation of Sources: 1911 to 1932........... 17 The New Deal Transforms County Governments: 1932 to 1945.............. 19 The Roles of City and County Governments in the Postwar Period............ 24 The Era of Growth: 1946 to 1978....... 24 3. THE ERA OF LIMITS: 1978 TO 1995..... 31 The Immediate Fiscal Effect of Proposition 13.... 32 The Deepening Distinction Between Cities and Counties... 32 The Effect of Proposition 13 on Counties: Greater Dependence Leads to a Growing Crisis..... 40 The Property Tax Shift: A Tightening Vise for County Governments............ 43 City Government in the Post-Proposition 13 Environment: Tighter Budgets Lead to More Entrepreneurial Strategies.............. 46 4. CONCLUSION.............. 49 Current Issues in the State-Local Relationship....... 49 Current Issues for Cities: Implications of the New Entrepreneurship................ 51 Current Issues for Counties: Destabilization of CountiesÕ General-Purpose Government Function........ 52 Review of Contemporary Thinking: Proposals for Reform Meet Resistance.............. 53 Policy Choices............... 56 Rethinking the Role of County Government.... 56 Rethinking Fiscal Authority............ 58 Appendix A. Notes on Data and Methodology........... 63 B. Supplementary Data.............. 71 C. Data Organization .................. 87 Bibliography................... 107 About the Authors.................. 111 xvii Figures 2.1. Per Capita Revenue by Type for California Cities, 1916 Ð 1945............... 19 2.2. Per Capita Revenue by Type for California Counties, 1916Ð1945.......... 20 2.3. Own-Source Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð1945... 21 2.4. Restricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1945.. 22 2.5. Revenue by Type as a Percentage of Total Revenue for California Counties, 1916Ð1975...... 27 2.6. Revenue by Type as a Percentage of Total Revenue for California Cities, 1916Ð1975........ 28 3.1. Per Capita Revenue for California Cities and Counties, 1916Ð1995............. 33 3.2. Per Capita Revenue by Type for California Cities, 1916 Ð 1995............... 34 3.3. Revenue by Type for California Cities as a Percentage of Total Revenue, 1916Ð1995.......... 35 3.4. Per Capita Revenue by Type for California Counties, 1916Ð1995............. 36 xviii 3.5. Revenue by Type for California Counties as a Percentage of Total Revenue, 1916Ð1995........... 37 3.6. Externally Controlled Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð 1995.............. 38 3.7. Per Capita State and Federal Subventions for California Cities and Counties, 1960Ð1995 ..... 39 3.8. Restricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1995... 41 3.9. Per Capita Discretionary Revenue for California Counties, 1960Ð1995 ......... 44 xix Tables 2.1. CountiesÕ Dual Role as Agents of the State and as Local Governments.............. 25 2.2. City Government Functions....... 25 B.1. Components of Own-Source Revenue for California Cities and Counties......... 72 B.2. Revenue by Source for California Cities, 1916Ð1995... 74 B.3. Per Capital Revenue by Source for California Cities, 1916Ð1995........... 75 B.4. Revenue by Source as a Percentage of Total Revenue for California Cities, 1916Ð1995....... 76 B.5. Revenue by Source for California Counties, 1916Ð 1995................ 77 B.6. Per Capita Revenue by Source for California Counties, 1916Ð1995............ 78 B.7. Revenue by Source as a Percentage of Total Revenue for California Counties, 1916Ð1995....... 79 B.8. Components of Restricted Revenue for California Counties, 1916Ð1995............ 80 B.9. Variability of Revenue Sources over Time for California Cities and Counties............ 82 xx B.10. Components of City per Capita Own-Source Revenue for California, 1980 and 1995........... 83 C.1. Revenue Line Items Listed in the Annual Financial Transactions Series for Cities in California, Organized into Revenue Categories Used in This Report.... 88 C.2. Revenue Line Items Listed in the Annual Financial Transactions Series for Counties in California, Organized into Revenue Categories Used in This Report.... 93 C.3. Components of County Agency Expenditures for Health and Welfare................ 106 xxi Acknowledgments The authors wish to thank a number of people who were invaluable in helping complete this work. In particular, the project would not have been possible without Elizabeth BerkoÕs monumental efforts to record and disentangle decades of revenue and expenditure data published by the California State ControllerÕs Office. Four people reviewed the report and provided many helpful comments: Juliet Musso, at the University of Southern California; Steven Erie, at the University of California, San Diego; and Michael Teitz and Paul Lewis, at PPIC. Peter Richardson helped edit the report and Michael Shires provided technical assistance and inspiration. Although these individuals helped improve our report, the authors are solely responsible for its content. 1 1. Introduction Although the state-local fiscal relationship has become a matter of much concern and debate in recent years, tension between the state and local governments is nothing new. In fact, current controversies are an extension of debates that long pre-date 1978. TodayÕs policy debates can be viewed as only the most recent expression of a much older struggle to define the proper balance between local governmentsÕ desire for fiscal and political autonomy and the state governmentÕs desire to exert its policy authority. This report places current issues in their historical context by assessing the changing nature of the state-local fiscal relationship throughout CaliforniaÕs history. From the first days of statehood in 1849 to the present, legislators, governors, and local officials have argued over their respective roles and the amount of autonomy that local communities should possess. In spite of significant shifts over the last century and a half in the structure of government finance, this fundamental struggle has persisted. The ability of local governments to act on their own behalf, or Òhome rule power,Ó 2 ends where the state expresses an interest in the uniform application of a statewide policy interest. And therein lies the dilemmaÑwhere should the line be drawn? The focus of this study is the relationship between the state government and general-purpose local governments, by which we mean local governments that provide a range of services in response to local voter preferences. There are two forms of general-purpose government at the local level: cities and counties. Other governmental entities such as school districts and utility service districts also form part of the fabric of local government. The essential purpose of such districts, however, is to provide specific services in a given geographic area. In fact, special- purpose districts are often dependent agencies of cities or counties, governed by the respective city council or county board. Because we are primarily interested in evaluating the general-purpose and state agency functions of local government, districts are not addressed in our study. The state government has always played the primary role in determining the amount of power local governments may exercise. Throughout the stateÕs history, however, local governments have sought to carve out and maintain a sphere of influence within the stateÕs overarching control. The degree of control exerted by the state over local government has changed over time, depending on the backdrop of state politics. Furthermore, local governments have evolved in different ways over time, affecting their ability to respond to constraints imposed by the state. We hope to show that current debates about the proper balance between state and local power can be properly understood only when recent developments are viewed in relation to the history of the conflict. We start with an overview of the legal framework of the state-local relationship over the century. This legal framework sets the structure 3 within which the struggle between local governments and the state plays out. However, the framework itself has changed over time as a result of the struggle and also as a result of broader political shifts. An overview of this history highlights some of the most fundamental issues involved in the state-local relationship. The Legal Framework of the State-Local Relationship The state government ultimately determines the amount of power local governments may exercise, whether through the legislature, the courts, or voter initiatives that change the constitution or state statutes. Local governments have no status under federal constitutional law, which leaves the state to determine the balance of power. The doctrine that establishes the allocation of local powers is called ÒDillonÕs rule,Ó which refers to the name of the judge in a pair of 1868 rulings that narrowly constructed the powers of municipal corporations. As interpreted by the Supreme Court in 1903, the doctrine establishes that local governments are Òthe creatures, mere political subdivisions of the state for the purpose of exercising a part of its powers. They may exert only such powers as are expressly granted to them, or such as may be necessarily implied from those stated.Ó 1 The first decades after statehood was established in 1849 reflected this unilateral construction of the state-local power balance. Those years were marked by mistrust and attempts by the California legislature to intervene in the affairs of local communities. Gradually, local _________ 1Merriam v. MoodyÕs Executors, 25 Iowa 163, 170 (1868). 4 governments won independent political and fiscal authority, but it would take 60 years to firmly establish new terms for the state-local relationship. The first state constitution of 1849 kept local governments on a tight leash. The current constitution, established in 1879, first introduced the principle of home rule, or the right of cities to draw up and establish their own charters, but the power to raise local resources was still tightly held by the state. The new constitution granted San Francisco the ability to adopt a home rule charter to govern its affairs. Other cities wanted the same advantage, but this new power was granted slowly. In 1887, the ability to frame a charter was granted to cities larger than 10,000. Three years later the right was extended to cities of 3,500 or more. 2 An 1896 constitutional amendment provided that cities would be subject to general laws except in municipal affairsÑa more liberal grant of power than had been originally provided. A 1914 amendment to the state constitution finally cemented home rule power by providing that chartered cities could Òmake and enforce laws and regulations in respect to municipal affairs, subject only to the restrictions and limitations provided in their several charters.Ó These Òcharter citiesÓ could enact local ordinances without seeking state authority to do so. This affirmed the power of cities to take independent action regarding municipal affairs. The amendment reflected a desire to establish a basis for local control that extended beyond the narrow confines of ÒDillonÕs rule.Ó It granted protection from legislative interference in municipal affairs by establishing a standard for reviewing this delegation of power. _________ 2Detwiler (1996). 5 Local fiscal authorityÑthe ability to levy taxes at the local level for services determined locallyÑhas long been viewed as a critical underpinning of home rule power. The right to levy property taxes was first established in 1850. This tax formed the primary revenue base for both the state and local governments for the next 50 years. By the turn of the century, about 20 percent of the local property tax bill went to the state. 3 A 1910 ballot measure, known as the ÒSeparation of Sources Act,Ó changed that. It provided that the property tax was to be used exclusively for local purposes. Given that the property tax formed the bulk of local government revenue, the ballot initiative established the principle that state and local revenue sources should be separated. From then on, the state would derive the bulk of its revenue from other state - levied taxes. Taken together, the establishment of charter cities and the separation of sources provided a measure of autonomy for local governments. However, although we tend to lump cities and counties into the same category of general-purpose local government, each has been given a distinct role in CaliforniaÕs government structure and a different constitutional status. The constitution grants counties the authority to provide municipal services in unincorporated areas, and counties are also expected to provide certain services at the county level, but counties have not been granted the same home rule powers as cities. Cities enjoy a greater degree of protection in governing municipal affairs under the provisions of the 1914 state constitutional amendment; countiesÕ legal status is still governed principally by the narrower provisions of ÒDillonÕs rule.Ó _________ 3Tax Digest (1946). 6 From Local Control to State Power: Proposition 13 Shifts the Balance The framework for the state-local relationship established during the Progressive Era remained largely unchanged for 70 years until the passage of Proposition 13 in 1978. It is widely understood that Proposition 13 reduced property tax rates, but fewer Californians recognize that the state-local relationship changed in some fundamental ways as a result of its passage. The initiative transferred control over the distribution of property tax revenue from local governments to the state. By giving the state the authority to determine how property taxes are allocated among different governments, Proposition 13 substantially undid the provisions of the 1910 separation of sources doctrine. The passage of Proposition 13 alone did not guarantee that property tax revenue would become a state-controlled revenue stream. Another important source of local government revenueÑthe 1 percent local sales taxÑis a state-authorized locally levied tax, for which the state sets a maximum rate. Revenue from the local sales tax is considered to be under local control in spite of the stateÕs role, however. That is because a stable nexus between the receipt of the revenue and the local activity that generated it has been preserved through the situs rule, which ensures that the tax is levied locally and the revenue is returned to the jurisdiction in which the sale took place. Cities and counties retain a certain amount of discretion in relation to levying the taxÑwhether to levy it at all, and in the case of counties since the 1980s, whether to adopt add-on rates for a variety of countywide services that exceed the statewide rate. These 7 special countywide sales taxes now represent about one-third of locally levied sales tax revenue. 4 In implementing Proposition 13, the state legislature might have protected the property tax as a locally controlled revenue source in a fashion similar to the sales tax. Instead, the state legislature repeatedly shifted property tax revenue allocations in response to political and economic pressures. First, the state attempted to cushion the effects of the initiative by providing fiscal relief. Assembly Bill 8 (AB 8) was enacted in 1979 as an effort to provide relief and establish a long-term local finance system in the wake of Proposition 13. It is still the basic operating legislation, although it continues to be tinkered with. Local fiscal relief was financed by shifting property tax revenue from schools to cities, counties, and special districts. The state cost of KÐ12 education increased by the amount of the shift. In its final report to the governor and the legislature, the California Constitution Revision Commission noted that the action taken by the state to replace lost property tax revenue was the beginning of the end of a locally controlled finance system independent of the state. 5 In effect, local own-source revenue used for local services was replaced with state funds. AB 8 also established the formula by which property taxes are allocated to the local governments in each county based on the proportional shares that were in place before 1978. So, for example, a city with a relatively high tax rate based on decisions made by local voters before 1978 receives a larger share of the countyÕs now fixed property tax revenue pool than a city that had a lower rate. After AB 8 was adopted, _________ 4California State Board of Equalization (1997). 5California Constitution Revision Commission (1996a). 8 the only way that local governments could affect property tax receipts was through annexation, incorporation, or economic development under the special provisions of redevelopment law. Two problems have emerged over time that served to disconnect property tax allocation from local fiscal needs and preferences. First, the AB 8 property tax shares were locked into place permanently. As communities have continued to grow and develop, the allocation system increasingly fails to reflect current realities. The effect of the current system is to provide large older cities with a larger share of the property tax than growing suburbs, because the older cities tended to have higher tax rates when the system was instituted. Second, the state altered the distribution of property tax revenue in response to economic and political pressure, thereby reversing the 70- year trend of separating the basic sources of state and local revenue. It was only when California fell into severe recession in the early 1990s, however, that the consequences of the shift in the balance of power toward the state level became fully apparent. When the recession hit, the state government was in a position to balance its own budget by reversing the fiscal relief program instituted in 1979. Had the state maintained a stable allocation mechanism for property tax revenue based on local preferences, rather than shifting property taxes in response to fiscal pressure, the separation of sources would not have been eroded so significantly. By the time of the recession, the cost of local fiscal relief represented nearly one-quarter of the state budget. 6 The state government faced new statutory mandates for education spending as a result of Proposition 98, _________ 6California Constitution Revision Commission (1996a). 9 passed by voters in 1988. When the economy soured, the legislature and the governor partially reversed the fiscal relief program enacted in 1979 to solve the stateÕs fiscal crisis. In fiscal years 1992Ð93 and 1993Ð94, the state reduced the property tax allocation to cities and counties and transferred the revenue to the schools, thereby reducing the state general fund commitment to KÐ12 education. Although the state returned a portion of the lost funds to local governments in the form of revenue earmarked for public safety, the Òproperty tax shiftÓ ended the stateÕs commitment to provide discretionary fiscal assistance in response to Proposition 13. For all practical purposes, the property tax is now treated as a state tax used for the purpose of financing that portion of the state budget allocated to KÐ12 education. Thus, although property tax revenue is still levied locally, the stateÕs manipulation of this revenue stream has tended to transform its character. The property tax more closely resembles a state-controlled revenue stream than a stable local revenue source that the state merely administers. 7 Assessing the Effects of Proposition 13 on Local Governments Proposition 13 undermined the traditional doctrine of the separation of sources by providing the state government with control over the property tax. This development has prompted calls to restore the old arrangement. Many reformers argue that a separation of state and local revenue sources is necessary to ensure that fiscal responsibility is aligned with fiscal authority. _________ 7See Shires (1999) for further discussion of this issue. 10 By the time that Proposition 13 passed in 1978, however, local government finance was much more complex than it had been when the original doctrine of the separation of sources was established in law in 1910. That doctrine reflected the common fiscal structure of cities and counties at the time: Local government general-purpose functions were funded primarily by property taxes. By 1978, however, cities and counties had developed very distinct fiscal structures, both from their own beginnings and from each other. As a result, the effects of Proposition 13 have been different for cities and counties, and proposals for reform need to accommodate those differences. Proposition 13 not only affected cities and counties differently, it intensified the differences between them. By tracing the different historical trajectories of cities and counties over the century, we can better understand why this occurred. In certain fundamental ways, the struggle between local governments and the state has changed little. Control over the property tax continues to dominate governance debates, even as it did at the turn of the last century. In other ways, however, the struggle has indeed changed, because the actors themselves have changed. The roots of todayÕs policy obstacles and controversies are to be found in the past. The purpose of this report is to find them. Measuring the State-Local Relationship To trace the evolution of local finance, we analyze shifts in the major sources of local government revenue between 1916 and 1995, using data compiled by the State ControllerÕs Office. We develop measures for assessing local fiscal control on two principal dimensions: 1. How much control do local governments have over how their revenue is raised and how much to raise? 11 2. How much control do they have over the way their revenue is spent? Both dimensions of control are important in evaluating local fiscal autonomy. The second measure, however, is perhaps more important in evaluating home rule power. Local power depends especially on being able to control how revenue is spent, regardless of its origin. Measuring Local Control over the Raising of Revenue City and county governments receive revenue from many sources. Ultimately, they all fall under state control. However, the state exerts varying levels of functional control over the different local revenue sources that it has authorized. In some cases, the amount of state control over a particular revenue source has also changed over time. Attempts to define local control over the raising of revenue usually seek to distinguish which level of governmentÑfederal, state, or local Ñ controls whether and how much revenue is levied. To fund local activities, the state has authorized local governments to levy revenue in various ways, including taxes, fees, assessments, services charges, and fines. In each case, it takes an action of the voters or the governing body of the city or county to raise this local revenue. Revenue from such sources, often called own-source revenue, is usually considered to be under local control. Own-source revenue is usually contrasted with subvention revenue. Subventions are local shares of revenue levied by the state or federal government and then allocated to local governments on a formula basis. Examples include federal funding for health and welfare programs, revenue from gas taxes, and motor vehicle license fees that the state government allocates to local governments. Some subventions come 12 with restrictions imposed by the sending government on how the money may be spent; others have no restrictions. From the point of view of local fiscal autonomy over the raising of revenue, however, subventions represent revenue over which local governments have no control. Since the passage of Proposition 13 in 1978, the traditional distinction between own-source revenue and subvention funding has become less useful as a measure of local control over the raising of revenue. As we have discussed, Proposition 13 transferred control over the allocation of property taxes to the state. Our measure of locally controlled revenue is based, in general, on the traditional distinction between own-source revenue and subvention funding, except in the case of property tax revenue. We designate 1978 as the year when property tax revenue shifted in character from being locally controlled to externally controlled. 8 A Second Measure of Control over the Raising of Revenue: Revenue Predictability As an additional measure of local fiscal control over the raising of revenue, we evaluate the stability of the main components of local revenue over time. Stable revenue sources lend another measure of fiscal control to local governments, since they enable local governments to plan more effectively. Some local revenue streams have been stabler than others, because they have been less susceptible to external shocks of either economic or political origin. For example, city revenue derived from public service enterprises such as utilities or hospitals has been relatively _________ 8Table B.1 in Appendix B provides a breakdown of the main components of own- source revenue for cities and counties in the state. The more detailed tables in Appendix C provide a breakdown of all revenue line items recorded by the State ControllerÕs Office from 1916 to 1995. 13 stable because it is not as heavily affected by swings in the business cycle as other sources. On the opposite end of the stability scale, subvention revenue can be volatile, since it is particularly subject to political shifts at the state and national level. However, some subvention funding has been quite stable, in particular, funding sent to counties for health and welfare programs. Measuring Local Control over the Expenditure of Revenue A thorough evaluation of local fiscal control must consider whether restrictions have been placed on how revenue may be spent by local governments, not just how it is raised and allocated. In measuring discretion, we seek to define the share of revenue that best measures local governmentsÕ ability to choose between competing priorities. We define discretionary revenue as the share of local revenue whose expenditure is not earmarked for purposes strictly mandated by another level of government or for ongoing maintenance of quasi-independent enterprises such as hospitals and utilities. 9 Agency Funding: The Measure of CountiesÕ Role as Agents of the State Since the time of the Depression in the 1930s, counties have been given a major role as agents of the state, administering state and federally mandated services. These services are funded in large part by agency subventions sent by the state and federal governments to counties. Although both cities and counties receive subventions that are targeted _________ 9Appendix A discusses the components of discretionary and restricted revenue used in our analysis. 14 for certain program areas such as transportation improvements, only counties receive agency subventions. Agency subventions entail the greatest degree of external control, requiring that the recipient government carry out programs in a specific manner subject to detailed regulatory oversight by the sending government. Most agency funding is provided for health and welfare programs, including programs such as Temporary Assistance for Needy Families (TANF) and food stamps. Although the state government requires that counties provide these strictly defined services (and the federal government through the state), it does not provide all of the funding that counties need to carry them out. Counties are obligated by law to commit a certain portion of their general-purpose revenue toward agency functions or, as they are often called, state-mandated local programs. This county contribution to agency programs is considered restricted revenue in our analysis. We define the degree to which counties act as agents of the state or federal government by their level of agency funding, which consists of agency subventions on the one hand and the required local contribution of general-purpose revenue on the other. 10 Organization of the Report In the following chapters of this report, we review the history of local finance in California during two time periods over this century: ¥ 1911 to 1978: the era of separation of sources and home rule power, and ¥ 1978 to 1995: the era of fiscal constraint and state control. _________ 10For a description of the different types of subventions that local governments receive, as well as the manner in which we calculated the local county contribution of general-purpose revenue required for agency programs, see Appendix A. 15 Finally, we discuss the policy implications that arise from our findings in relation to current efforts to restructure the state-local fiscal relationship. 17 2. The History of Local Finance in California Before Proposition 13 The Era of Expanding Power and Separation of Sources: 1911 to 1932 By 1916,1 the basic legal framework for the state-local relationship had been established. Progressive Era reformers had instituted home rule for charter cities and local fiscal autonomy through the separation of sources. The property tax was the principal source of revenue for both cities and counties, and after the passage of the Separation of Sources Act in 1910, it was reserved for that purpose alone. From this similar starting point, the fiscal structure of cities and counties then began to diverge. _________ 1Our data analysis starts in 1916, when the State Controller began collecting revenue data from local governments in a systematic way. 18 As cities became the main provider of utility services, revenue from Òpublic service enterprises,Ó namely, quasi-independent public entities such as utilities and hospitals, began to rise. From 1919 to 1932, per capita city revenue from this source more than tripled, as Figure 2.1 reveals. Counties could not diversify their own-source revenue base in this fashion. Counties manage dependent special districts, but they do not operate public service enterprises within their general operating budgets, as cities do. Instead, counties began to receive more and more subvention funding for administration of state and federal programs, as Figure 2.2. indicates. Revenue from public service enterprises and subvention funding grew more quickly than other revenue streams during the first few decades of the century, and this largely accounts for the diverging fiscal structure of cities and counties. Figures 2.1 and 2.2 depict the main revenue components to cities and counties in California from 1916 to 1945. 2 Own-source revenue is broken down into three categories: property taxes, public service enterprises, and a category labeled Òlicenses, fees, assessments, and other income.Ó This last category includes revenue from licenses, permits, fees, service charges, other taxes, assessments, and use of money and property. The figures convey the growing importance of public service enterprise revenue for cities and subvention funding for counties during the early decades of the century. 3 _________ 2In our graphs, revenue levels from fiscal year 1915Ð16 are labeled as Ò1916,Ó and so forth. Revenue is depicted in per capita dollars, adjusted for inflation to 1995 levels, for all cities and counties in the state. 3Figures for revenue by category to cities and counties at critical junctures between the time periods discussed in this report are presented in Tables B.2 through B.7 in Appendix B. 19 0 150 300 1915 1925 1935 1945 Revenue ($) Public service enterprises Property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.1ÑPer Capita Revenue by Type for California Cities, 1916Ð1945 (1995 dollars) The New Deal Transforms County Governments: 1932 to 1945 The onset of the Great Depression marked a key turning point in local finance. Own-source revenue for cities and counties declined by about one-tenth from 1932 to 1934. State and federal subventions to local governments increased rapidly from 1932 to 1937 as New Deal programs were established to alleviate the shock to local economies. Although subventions to cities would be reduced after the worst effects of the Depression had subsided, subventions to counties would continue to 20 0 100 200 1915 1925 1935 1945 Revenue ($) Property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.2ÑPer Capita Revenue by Type for California Counties, 1916Ð1945 (1995 dollars) rise, transforming counties into agents of the state and federal governments. The state legislature took steps in response to the Depression that set the stage for a larger state role in local finance. In 1933, the legislature placed a plan before the voters to change the structure of the state-local finance system. Known as the Riley-Stewart Act, it introduced a new era of larger state involvement in school finance, laying the foundation for major growth in state and local spending over the next 45 years. The state took on greater responsibility for funding schools, and soon levied new taxes, including a 2¢ sales tax for education and a new state income tax. 4 _________ 4Hartley, Sheffrin, and Vasche (1996). 21 The period from the Depression to the end of World War Two was critical for county government. In 1932, four-fifths of county funds came from own-source revenue; by 1945, that share had dropped to only one-half. Figure 2.3 portrays the widening gap between the structure of city and county finance over the period. It shows own-source revenue as shares of total city and county revenue. Even when public service enterprise revenue is subtracted from city revenueÑto ensure greater comparability with the county fiscal structureÑthe greater independence of the city revenue structure is evident. 50 75 100 1915 1925 1935 1945 Revenue (%) City own-source revenue City own-source revenue without public service enterprises County own-source revenue SOURCE: Author’s calculations based on data from the California State Controller’s Office. Figure 2.3ÑOwn-Source Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð1945 22 If another level of government controls the raising of local revenue, local governments might be said to be dependent. However, if another level of government also mandates how the revenue can be spent, then local governments are truly constrained. At the extreme, local governments may become agents of the controlling government. Although half of county revenue was derived from external sources by the start of World War Two, an even higher shareÑmore than 70 percentÑwas restricted in terms of how counties could spend the funds, as Figure 2.4 reveals. Restricted revenue forms a higher share because we include the portion of county general-purpose revenue devoted to health and welfare programs. It is misleading to characterize the county role in providing such relief as an agency role before the Depression, since counties provided the assistance with little state or federal oversight. 0 50 100 1915 1925 1935 1945 Revenue (%) County restricted revenue County agency revenue SOURCE: Author’s calculations based on data from the California State Controller’s Office. Figure 2.4ÑRestricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1945 23 Starting with the Depression years, the amount of such oversight has increased over the course of the century. Therefore, the county relief role represents a case where a revenue and expenditure stream has remained relatively constant while the level of external control has shifted over time .5 During the Depression, counties adopted a major role as agents of the state and federal governments, as agency subventions for health and welfare programs began to increase sharply. Figure 2.4 reveals that most of the rise in restricted revenue to counties over the period was due to a rise in agency funding. By the start of World War Two, more than half of all county revenue reflected this new agency role. A key long-term pattern in subvention funding emerged during the years after the Great Depression. Over the century, city subvention funding has been more volatile, subject to external political shifts, whereas county subvention funding has been relatively stable. New Deal programs were not geared just toward county governments. In fact, subventions to cities increased more rapidly than those for counties from 1932 to 1937. That pattern reversed completely by the onset of World War Two, however, when city subventions began to decline. In contrast, subventions to counties continued to rise as a share of county revenue even during the war years. 6 The new county revenue structure emerged rapidly because subventions to counties increased whereas local government own-source _________ 5See Appendix A for a description of our measure of the required county contribution for agency programs. Figures on the components of restricted revenue to counties at critical junctures over the century are presented in Table B.8 in Appendix B. 6Table B.9 in Appendix B presents a statistical measure of variability in revenue streams over time. It confirms that city subventions have been more unstable than county subventions over the century. 24 revenue suffered a long decline over the period between the Depression and the end of World War Two. Just as subventions helped stabilize county revenue over the period, public service enterprise revenue provided a stable source for cities. By 1945, nearly half of city revenue (43 percent) came from public service enterprises. This revenue is generally earmarked for the ongoing maintenance and operation of the enterprises themselves. Thus, we see that during the long decline of the Depression and war years, the most restrictive forms of local government revenue also remained the most stable. By end of World War Two, a fiscal pattern was established that would prevail until the passage of Proposition 13. Subventions formed half of county revenue but only one-tenth of city revenue. Counties had shifted in a matter of three decades from almost complete revenue independence to a situation in which nearly three-quarters of county expenditure was externally restricted. Although cities had maintained revenue independence by developing a more diverse own-source revenue base, counties increasingly relied on subventions. The Roles of City and County Governments in the Postwar Period By 1945, the responsibilities of city and county governments had stabilized into a pattern that persists to this day. Tables 2.1 and 2.2 outline the responsibilities assigned to city and county governments by the end of World War Two, which still hold half a century later. The Era of Growth: 1946 to 1978 In comparison with other periods, the time between 1945 and the passage of Proposition 13 in 1978 was characterized by stable 25 Table 2.1 CountiesÕ Dual Role as Agents of the State and as Local Governments a. County Functions as Agents of the State Temporary income maintenance Mental health and employment training Public health General relief Social services Health care for indigents and Alcohol and drug program services related activities Courts and court-related activities Elections b. County Functions as Countywide Government General administration Treasury/tax collector Assessor District attorney Sealer of weights and measures Local Agency Formation Commission Youth and adult corrections Probation Transportation c. County Functions as Local Government in Unincorporated Areas or Undertaken on Behalf of Cities Land use planning Development regulation Recreation and parks Library services Fire protection Police protection County roads Waste disposal Flood control Table 2.2 City Government Functions Public Safety Culture and Leisure Utility Services Police Park and recreation Water/sewer Fire Libraries Street lighting Community centers Waste disposal Gas and electric Community Development Planning and development regulation Development and maintenance Economic development of community infrastructure Redevelopment uninterrupted growth. The stateÕs population grew from 9.5 million in 1946 to 22.6 million in 1978. During this period, 135 new cities were formed. Local government authority to levy local taxes expanded with 26 the stateÕs growth. Inflation-adjusted per capita local government revenue more than tripledÑfrom $516 in 1945 to $1,742 in 1978. 7 This period is often referred to as the ÒTax and SpendÓ period in CaliforniaÕs fiscal history. The basic structure of local finance was stabler over the period than earlier in the century. Counties continued to receive about half their revenue from external sources; for cities, the share was less than one - quarter. Although this basic structure remained stable, cities continued to diversify their own-source revenue base. Counties did not do so, relying primarily on property taxes for discretionary revenue. Cities began levying a sales tax under their home rule authority. In 1946, six cities levied a sales tax; by 1951, 141 cities were doing so. Each city set its own tax rate and collected the tax until 1955, when the legislature enacted the Bradley-Burns Uniform Local Sales Tax Act in response to complaints from retailers. 8 The Bradley-Burns Act established a uniform locally levied sales tax rate of 1 percent. The local agency that levied the tax received the proceeds of the tax paid within its jurisdiction. Sales tax revenue to cities climbed until it leveled off at about 13 percent of city revenue after 1957. As more and more cities levied the sales tax, the county share dwindled to the small portion levied in unincorporated areas. Counties received only one-tenth the amount that cities did. In 1948, the motor vehicle in-lieu tax, first instituted in 1935, was increased. A vehicle registration fee and a 2¢ per gallon tax on fuels had been enacted in the 1930s, and the state subvened a portion of the _________ 7These figures are calculated as the sum of combined total revenue to cities and counties divided by the total population of the state. 8Doerr (1997). 27 revenue to cities and counties for streets and roads. With the flood of new automobiles, these became important revenue sources. Economic conditions often provide the backdrop for changes in the state local finance system, as in this example. Figures 2.5 and 2.6 portray the development of local finance during the postwar growth years. Figure 2.5 confirms that the story of county revenue is largely the story of only two revenue streams: property taxes and subventions. Property taxes declined steadily as a share of county revenue as subvention funding increased. Figure 2.6 indicates that although property tax revenue also declined steadily as a share of city 0 50 100 1915 1925 1935 1945 1955 1965 1975 Revenue (%) Sales taxes General property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.5ÑRevenue by Type as a Percentage of Total Revenue for California Counties, 1916Ð1975 28 0 50 25 75 1915 1925 1935 1945 1955 1965 1975Revenue (%) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Public service enterprises SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 2.6ÑRevenue by Type as a Percentage of Total Revenue for California Cities, 1916Ð1975 revenue, cities replaced that funding with new own-source revenue instead of subventions. During the immediate postwar growth years, local governments became more self-reliant. Subvention funding leveled off from 1950 to 1963, and own-source revenue grew more consistently. With the advent of Great Society programs in 1963, however, subventions began to rise again. Subventions to cities rose especially quickly, repeating the pattern of the New Deal period. From 1963 to 1979, subventions to cities nearly quadrupled in per capita terms, outpacing other revenue sources. Federal grants to cities increased 20 times, accounting for most of the rise. Subventions to counties also increased rapidly, but only about half 29 as much as for cities. By 1978, subventions formed a quarter of city revenue. In spite of the sharp rise in subventions to cities, own-source revenue still dominated city finance by the end of the period, because cities generated so much revenue from new locally levied sources. As a result, their reliance on property taxes declined from 36 percent of city revenue in 1945 to only 16 percent by 1978. Counties, unable to diversify their own-source revenue base, remained dependent on property taxes, which still formed two-thirds of county own-source revenue by the 1970s. 31 3. The Era of Limits: 1978 to 1995 The passage of Proposition 13 in 1978 introduced a new era of fiscal constraint and increasing state control over local governments. In this chapter, we consider the effect on the structure of local finance. Proposition 13 had three primary elements that affected local finance: ¥ It limited the general property tax rate to 1 percent of the full value of property and limited the reassessment of property to no more than 2 percent annually, except for cases of a change in ownership or new construction. ¥ It assigned the state the responsibility of allocating the proceeds of the property tax. ¥ It increased the ability of the electorate to vote on certain local tax increases. Any special taxes (which were not defined) needed to be approved by two-thirds of the voters. No new ad valorem property taxes could be imposed. 32 The Immediate Fiscal Effect of Proposition 13 The most immediate effect of Proposition 13 was a drastic reduction in local government resources, as property tax revenue was cut in half because of the new tax rate limits. The shock experienced by local governments was unlike any event during the century, including the Great Depression. Because counties were more reliant on property tax revenue than cities, they were hit the hardest. County own-source revenue declined by 39 percent in one year, whereas city own-source revenue declined only by 6 percent. Following on the heels of the property tax cuts, the federal government began to reduce subvention funding, as federal ÒdevolutionÓ to the states began to accelerate. The double blow was most severe for counties. County government contracted in size by one-quarter from 1978 to 1980 but city per capita revenue dropped only by a tenth. Figure 3.1 shows the steep drop in revenue to cities and counties from 1978 to 1980. Figures 3.2 through 3.5 break down the underlying revenue components, revealing the decline in property tax revenue and subvention funding that explain the overall pattern. The Deepening Distinction Between Cities and Counties Proposition 13 and declines in federal subvention funding over the 1980s affected cities and counties differently. By 1978, cities and counties had different revenue bases, affecting their abilities to cope with increasing fiscal pressure. New constraints brought the contrasting strengths and weaknesses of city and county fiscal structures to the surface. 33 0 600 1,200 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue ($) City revenueCounty revenue SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.1ÑPer Capita Revenue for California Cities and Counties, 1916Ð1995 (1995 dollars) Proposition 13 revealed the relative fragility of county finance. Counties have been more vulnerable to external forces than cities, not only because of their greater reliance on subvention funding, but because of their heavy dependence on property tax revenue to fund their general- purpose functions. By 1978, property taxes had declined to one-fifth of city own-source revenue, and cities no longer relied on the property tax for discretionary revenue. By contrast, county general-purpose finance had not changed much at all over the century. As a result, counties were more fundamentally destabilized by Proposition 13. In 1978, property tax revenue still represented two-thirds of county own-source revenue. 34 0 200 400 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue ($) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Public service enterprises SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.2ÑPer Capita Revenue by Type for California Cities, 1916Ð1995 (1995 dollars) Other than the property tax, counties have always had limited countywide taxing power. Although they are expected to provide such services as property tax assessment, jails, and transportation at the countywide level, their power to raise revenue is generally restricted to unincorporated areas. As the state continues to develop, less area remains unincorporated, which serves only to compound the problem. Figure 3.6 shows our measure of local control over the raising of revenue for cities and counties. It is a variation on the traditional breakdown between own-source revenue and subvention funding. The only change is the way we categorize property tax revenue, which is considered locally controlled before 1978, and externally controlled after 35 0 50 25 75 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Public service enterprises SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.3ÑRevenue by Type for California Cities as a Percentage of Total Revenue, 1916Ð1995 then. We recategorize property taxes at that point because Proposition 13 gave control over their allocation to the state. The figure reveals that Proposition 13 dramatically altered the basic structure of county revenue, while leaving the city revenue structure less changed. Because of Proposition 13, county governments effectively lost control over the way the majority of their revenue is raised. Externally controlled revenue jumped from one-half to four-fifths of total revenue overnight, because of the drop in property tax revenue as well as the transfer of control over the property tax to the state. Cities, on the other hand, remained largely revenue-independent, with externally controlled 36 0 400 200 600 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue ($) Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions SOURCE: State Controller’s Office, Annual Financial Transactions series. Figure 3.4ÑPer Capita Revenue by Type for California Counties, 1916Ð1995 (1995 dollars) revenue generally forming about one-quarter of total city revenue in the most recent period. Cities were vulnerable in a different way, however, in the aftermath of Proposition 13. Although they had a more robust own-source revenue base, cities paid a price for their independence. They faced a problem during the 1980s that counties were not forced to contend with: a steady decline in subvention funding. Figure 3.7 tracks per capita subventions to cities and counties over time by their government of origin: either state or federal. (Cities also receive subventions from counties, which are included with state subventions to cities.) 1 Immediately after the passage _________ 1The State ControllerÕs Office began to track city subventions by type only in 1959. 37 0 50 100 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) SOURCE: State Controller’s Office, Annual Financial Transactions series. Sales taxes Property taxes Licenses, fees, assessments, and other revenue Subventions Figure 3.5ÑRevenue by Type for California Counties as a Percentage of Total Revenue, 1916Ð1995 of Proposition 13, federal subventions to both cities and counties began to decline precipitously, as the graph indicates. Federal subventions to California cities dropped by over three-quarters in per capita terms from 1978 to 1992 and by about one-quarter to counties. The stateÕs increasing commitment to counties more than made up for the loss of federal subvention funding during the 1980s. As a result, per capita county subventions kept rising. In contrast, state subventions to cities have remained flat since 1978. 2 Therefore, the loss of federal _________ 2In part, the reduction in state subventions to cities was due to Proposition 13 itself. When faced with tight budgets during the recessions of the early 1980s and 1990s, the state reduced a variety of general-purpose subventions to local governments and eliminated others entirely. Subventions from homeownersÕ tax relief were reduced (one of the effects of Proposition 13) as was the cigarette tax subvention and the motor vehicle 38 0 50 100 25 75 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) County revenueCity revenue(Externally-controlled revenue without property taxes) SOURCE: Author’s calculations based on data from the California State Controller’s Office. Figure 3.6ÑExternally Controlled Revenue as a Percentage of Total Revenue for California Cities and Counties, 1916Ð1995 funding over the decade produced a sharp drop in the share of city revenue derived from subventions. Earlier in the century, subventions to cities and counties had always risen and fallen during the same periods. The new pattern after 1980 helped to deepen the structural distinction between cities and counties, as cities became increasingly self-reliant, and counties relied more than ever on external funding. ____________________ in-lieu tax subvention. Liquor license funds were eliminated in 1982 and business inventory tax relief in 1985. Subventions from trailer in-lieu taxes and cigarette taxes were eliminated in 1994. 39 0 200 400 1960 1965 1970 1975 1980 1985 1990 1995 Revenue ($) SOURCE: State Controller’s Office, Annual Financial Transactions series. State subventions to counties Federal subventions to counties State subventions to cities Federal subventions to cities Figure 3.7ÑPer Capita State and Federal Subventions for California Cities and Counties, 1960Ð1995 (1995 dollars) Our statistical measure of the predictability of different local revenue streams over time helps to confirm these conclusions about the relative strengths and weaknesses of city and county fiscal structures. 3 It indicates that county revenue has been more volatile in general than city revenue since the 1930s. This volatility has been due to the greater variability of county own-source revenue. The pattern for subventions is the mirror opposite; county subventions, especially agency subventions, have been stabler than city subventions. Since the mid-1950s, city revenue has been composed of higher shares of more predictable sources, in particular, revenue from public _________ 3Table B.9 in Appendix B lists the results. 40 service enterprises and licenses, fees, and assessments. The property tax has been a relatively unstable revenue source, even when the effect of Proposition 13 on its variability is not considered. Since the passage of Proposition 13, variability in property tax revenue based on fluctuations in the economy has been reduced, as property taxes are now levied according to a set formula. However, the passage of Proposition 13 itself and manipulations of the property tax by the state demonstrate that property taxes continue to be particularly susceptible to external shocks, although now the shocks may be considered as primarily political rather than economic. The Effect of Proposition 13 on Counties: Greater Dependence Leads to a Growing Crisis Like the implementation of the New Deal, the passage of Proposition 13 fundamentally altered the fiscal structure of county governments in the state. County government contracted by a quarter from 1978 to 1980 as the new property tax limits shrank county own - source revenue. Counties have spent the last 20 years trying to make up the lost ground. Although city per capita revenue nearly regained its pre - 1978 level by 1986, counties were still slightly below pre-1978 revenue levels by 1995, the endpoint of our analysis. Because of Proposition 13, county governments effectively lost control over the way the majority of their revenue is raised. However, we must also consider whether counties lost control over the expenditure of their revenue. In fact, countiesÕ role as agents of the state remained fairly stable immediately after the passage of Proposition 13, as Figure 3.8 (an extension of Figure 2.4) reveals. It began to rise substantially only during 41 0 50 100 25 75 1915 1925 1935 1945 1955 1965 1975 19951985 Revenue (%) SOURCE: Author’s calculations based on data from the California State Controller’s Office. County restricted revenue County agency revenue Figure 3.8ÑRestricted and Agency Revenue as a Percentage of Total Revenue for California Counties, 1916Ð1995 the 1990s. Thus, our two principal measures of local fiscal power indicate that although counties lost control over the raising of their revenue following the passage of Proposition 13, they retained roughly the same degree of control over spending until recently. At first glance this is surprising, given that county own-source revenueÑthe main source of discretionary fundingÑcontracted by nearly one-half from 1978 to 1979. The key to this apparent anomaly lies in the structure of county agency revenue. This revenue has two main components: subventions and mandated county contributions of general-purpose revenue. After 1978, the local contribution to agency programs plummeted because the state government, as part of its fiscal relief plan, spent $1.3 billion to Òbuy outÓ the mandated county share of a variety of health and welfare 42 programs including Medi-Cal and Supplemental Social Security.4 Many of the stateÕs new commitments formed part of an expanding state budget for health and human services during the 1980s, but they did not appear as subventions to counties. As the county contribution to these programs declined, the state general fund budget for health and human services rose from $3.7 billion in fiscal year 1977Ð78 to $7.1 billion by fiscal year 1981Ð82. We are now in a position to explain why countiesÕ agency role remained stable as a share of total county revenue until the 1990s. Counties became a smaller unit of government in the 1980s than they were in the 1970s; county inflation-adjusted per capita revenue declined by more than a third from 1973 to 1980. This decline did not substantially affect countiesÕ agency role, when measured as a share of county revenue, because the state Òbought outÓ the equivalent of the property tax revenue lost after the passage of Proposition 13. In effect, the state balanced the equation for counties in terms of their agency role. Having argued above that control over the expenditure of local revenue is a better measure of home rule power than control over the raising of the revenue, we might conclude that the role of county government has not changed substantially since the passage of Proposition 13. An important consideration has been left out of the analysis, however. Since the overall size of county governmentÑmeasured simply by total inflation-adjusted per capita revenue levelsÑdiminished in the post-Proposition 13 environment, it is important to consider whether _________ 4See California Legislative AnalystÕs Office (1985). A certain portion of the local contribution to state-mandated health and welfare programs is actually discretionary, but it is impossible to distinguish in the data. Given that a portion is discretionary, the reduced local contribution to state-mandated programs may also reflect reduced service levels by counties. See Appendix A for more detail on this measure. 43 counties have had less revenue to spend on general-purpose functions than they did in the 1970s. In other words, we cannot measure home rule power only in terms of relative shares of discretionary versus restricted revenue. The absolute level of discretionary revenue is also critical. In the 1980s, the state took over many of the health and welfare functions that counties had funded and provided before then, but there was no similar effort to Òbuy outÓ the general-purpose functions of county government. Figure 3.9 addresses this matter. It shows the absolute per capita level of discretionary revenue for cities and counties from 1960 to 1995. It reveals that counties did lose ground in terms of per capita discretionary revenue after the passage of Proposition 13. County discretionary revenue declined by 39 percent immediately after 1978, then slowly made up ground until recently. By contrast, city discretionary revenue faltered during the early 1980s, but by 1985 it exceeded pre-Proposition 13 levels. The Property Tax Shift: A Tightening Vise for County Governments We have seen that the new property tax limits constrained local government budgets after the passage of Proposition 13. However, the full effect of the initiative was never actually imposed on local governments because the state took steps to cushion the blow. In 1979, the state adopted AB 8 as a response to Proposition 13. This bill included a fiscal relief plan to ameliorate Proposition 13Õs effects on local services. As a result, city and county expenditures were reduced only by 44 0 400 600 200 800 1960 1965 1970 1975 1980 1985 1990 1995 Revenue ($) SOURCE: Author’s calculations based on data from the California State Controller’s Office. CitiesCounties Figure 3.9ÑPer Capita Discretionary Revenue for California Counties, 1960Ð1995 (1995 dollars) about 10 percent in the year after its enactment. In the largest local assistance program in state history, the state government replaced about two-thirds of the property tax lost by local governments. This was possible because there was a state budget surplus of $3.8 billion in fiscal year 1978Ð79. 5 Approximately $1 billion was dedicated to cities, counties, and special districts to prevent major reductions in local government services, particularly police and fire protection. Most non - school aid went to counties to protect their agency role. A decade later, the cost of local fiscal relief had topped $9 billion out of a state budget of $40 billion. 6 When the economy slid into recession _________ 5Department of Finance, historical data. 6California Constitution Revision Commission (1996a). 45 in the early 1990s, the legislature and the governor partially reversed the fiscal relief program enacted in 1979. In fiscal years 1992Ð93 and 1993Ð 94, the state reduced the property tax allocation to cities and counties and transferred the revenue to the schools. In the process, the state abandoned its earlier post-Proposition 13 goal of ensuring that growth in the property tax base would be used for local services. Instead, the state aimed to take advantage of a growing property tax base by transferring a greater share of the tax to the schools, thereby reducing its own general fund commitment to education. The property tax shift was especially hard on counties, and their general-purpose functions have suffered as a result. Counties lost $2.5 billion or 23 percent of their own-source revenue because of the shift. For cities, $488 million was shiftedÑonly 2 percent of own source revenue. 7 The state replaced about half of the revenue lost as a result of the shift with funds derived from the extension of an existing 1/2 percent state sales tax raised in 1991 to help close the budget gap left by the recession. The measure, a constitutional amendment, was placed on the ballot as Proposition 172. The funds were directed only for public safety purposes, however, and the state established a Òmaintenance of effortÓ requirement to ensure that the funds from the sales tax could not replace money already committed to public safety. The state therefore traded local discretionary revenue with funds earmarked for a specific purpose. 8 _________ 7The effect was greater on many older cities with higher property tax rates before Proposition 13, such as Los Angeles, Oakland, and San Jose. 8Although the stated purpose of Proposition 172 was to help offset the property tax shift from local government to schools, it did so only partially, since the value of the 1/2¢ sales tax revenue was only $1.6 billion. In addition, there is a mismatch between the shift of the property tax from cities and counties and the allocation of the 1/2¢ sales tax for public safety. Some counties have received more in sales taxes than they lost in transferred property taxes, and others have received less. 46 Because of the property tax shift, county discretionary revenue declined by nearly a quarter between 1992 and 1995. This decline represented a loss of $2 billion in inflation-adjusted dollars, or $71 per capita. By 1995, per capita county discretionary revenue was less than three-quarters of its pre-Proposition 13 level, and restricted revenue had increased to nearly three-quarters of county revenue. Many counties have been forced to sell assets, increase debt, or substantially cut services in recent years to balance their general-purpose budgets. 9 City Government in the Post-Proposition 13 Environment: Tighter Budgets Lead to More Entrepreneurial Strategies In the 1980s, cities faced two significant new budget constraints: Not only was property tax revenue limited by the new tax rates, but subvention funding declined steadily, leaving cities with a growing budget shortfall. To address the problem, cities became more entrepreneurial. They increasingly tailored land-use policies to garner more revenue and increased revenue from sources over which they have substantial discretion. Between 1978 and 1995, per capita revenue from local sources other than property taxes, sales taxes, and public service enterprises nearly doubled. From the start of the century until the 1980s, these other local revenue sources together had formed a steady one-fifth of city revenue. After 1978, the share increased rapidly, reaching nearly a third by 1990. Much of this new local revenue has come from licenses, fees, assessments, and other sources that are more closely linked with services _________ 9Erie, Hoene, and Saxton (1998). 47 received. As a result, the cost of city services has become increasingly Òinternalized.Ó In the past, most city discretionary revenue came from two communitywide taxesÑnamely, property and sales taxesÑbut these sources have been overtaken by forms of revenue that link payments to services. City revenue from property and sales taxes declined from more than one-third of own-source revenue in 1978 to less than one-quarter in 1995. The principal components of the increase in own-source revenue to cities over the period were the utility users tax, the transient lodging tax, special benefit assessments, quasi-external transactions, other current service charges, and ÒotherÓ revenue. 10 Increases in these categories alone make up 69 percent of all revenue in categories that increased between 1980 and 1995. Revenue from interest income and investments also rose substantially until 1990 but then dropped by 30 percent by 1995. Reliance on interest earnings declined as more prudent investment strategies followed the Orange County bankruptcy. In spite of their efforts to increase local revenue, city governments have faced tighter budgets since 1978. Although city revenue was not hit as hard as county revenue during the 1970s, it has been more constrained since then. City per capita revenue nearly regained its pre-Proposition 13 level by 1986 but stagnated after that. In contrast, county revenue grew steadily as a result of the flow of state subvention funding. Per capita county revenue grew more than twice as quickly as per capita city revenue, on average, from 1979 to 1995. _________ 10See Table B.10 in Appendix B. 49 4. Conclusion The pendulum in the balance of power between the state and local governments first shifted from strong state control during the early days of statehood toward greater local control by the time of the Progressive Era at the turn of the last century. In recent decades, however, the pendulum has swung back again toward a system of stronger state control. Local governments have protested the shift, and they are seeking to reestablish the old terms of the relationship. In this chapter, we evaluate the major implications of recent changes in the state-local fiscal relationship and consider current reform proposals in light of historical expectations and standards. Current Issues in the State-Local Relationship We draw three major conclusions from the preceding analysis. ¥ The post-Proposition 13 era has been characterized by greater fiscal constraint for local governments. 50 ¥ That era has also been characterized by a shift toward greater state control over local finance, to the degree that the traditional separation of sources doctrine has been significantly undermined. ¥ The effect of these changes has been quite different for cities and counties and has deepened the structural differences between them. Although the main effect on cities has been to alter the composition of discretionary revenue, the ability of counties to raise discretionary revenue has been significantly reduced. This pattern has destabilized the general-purpose role of county government. Proposition 13 was only the beginning of a longer-term process of increasing fiscal pressure. Local governments have been squeezed in a tightening fiscal vise, constrained by voter initiatives on the one hand and by the state and federal governments on the other. A number of additional voter initiatives were passed over the years following 1978 aimed at curbing local government taxing and spending. 1 The vise tightened from the other side as federal subventions began to decline starting in the 1980s. The state government then squeezed local governments even more during the property tax shift of the early 1990s. In addition to these events, the state spent the last two decades replacing local discretionary revenue other than the property tax with funds earmarked for specific purposes. On several occasions since 1978, the state government repealed or reduced local own-source revenue and replaced it with a subvention targeted for specific purposes. 2 A number _________ 1These include Proposition 4, passed in 1979; Proposition 62, passed in 1986; and Proposition 218, passed in 1996. 2In 1979, business inventories were exempted from property taxes, and a subvention (Financial Aid to Local Agencies, or FALA) was enacted to replace the tax; in 1982, the 51 of these subventions were later repealed when the economy slid into recession. Although local government fiscal power has been curtailed, the stateÕs power has grown, because voter initiatives permitted the state to raise and allocate more revenue. It took the recession of the early 1990s, however, to fully manifest the consequences of this shift in the balance of power. When the recession hit, the state government could balance its own budget at the expense of local governments. Control over the property tax has been a defining issue in the state- local relationship since the first days of statehood. The recent shift in control of the property tax threw the established relationship off balance. Both cities and counties have protested this alteration in the terms of the relationship, but the practical effects have been most destabilizing for counties, as they continued to rely on property taxes for discretionary revenue. Current Issues for Cities: Implications of the New Entrepreneurship Cities were far better prepared to respond to the new fiscal constraints. Because they have access to a variety of discretionary revenue sources, cities have maintained average per capita revenue levels that are nearly as high as before Proposition 13. Therefore, the major shift in city finance in the current period has been in the composition of revenue rather than its overall level. Although city per capita revenue has not suffered a significant decline, many observers have argued that the new system of city finance ____________________ Highway Uniform Carriers subvention and the FALA subvention were repealed; in 1993, the cigarette tax subvention was repealed. 52 has certain negative consequences. For example, it is often argued that city land-use decisionmaking has become increasingly Òfiscalized,Ó and as a result, retail development is favored over housing and industry. 3 It is also argued that the current system of finance has become so arcane that citizens are no longer able to understand the relationship between their taxes and the government services they pay for. 4 These observers tend to focus on the increasingly complex provisions for the allocation of property tax revenue, noting that as residents lose local control over this communitywide revenue source, local governments inevitably become less responsive and accountable to local needs and preferences. Finally, observers note that the constraints placed on cities in the current fiscal environment make it harder for them to respond to the needs of an expanding economy. Current Issues for Counties: Destabilization of CountiesÕ General-Purpose Government Function County finance has been affected more fundamentally in the recent period. The key to understanding the growing crisis of counties is their dependence on property taxes for discretionary revenue. When property taxes were cut, and control passed to the state, the general-purpose government role of counties was endangered. Especially since the tax shift in the early 1990s, county discretionary revenue has suffered. Although the general-purpose role of county government has been undermined, expectations regarding county functions have remained largely unchanged since the 1930s. Counties are still expected to _________ 3Lewis and Barbour (1999). 4Chapman (1998), California Legislative Analyst's Office (1993a, b), Sokolow (1998). 53 maintain libraries, run transportation services, and supply the myriad other general-purpose government services they are currently responsible for. As it stands, however, there is a growing mismatch between countiesÕ traditional responsibilities and their ability to fulfill them. The role of county government is being redefined on an ad hoc basis as counties cut back services to stay afloat. Although counties are increasingly unable to meet their existing general-purpose government responsibilities, some observers argue that their general-purpose role should actually be expanded. Problems such as transportation, urban sprawl, affordable housing, and health care are now regional concerns. The state has established categorical funding mechanisms and single-purpose planning bodies to address many of these concerns, but no planning bodies have emerged at the regional level capable of integrating these responsibilities. Although urban regions donÕt always coincide with county boundaries, counties could help fill the current regional planning vacuum. Review of Contemporary Thinking: Proposals for Reform Meet Resistance Every California governor since Edmund G. ÒPatÓ Brown has reviewed the status of state-local relations and attempted reforms, but with limited success. Local governmentsÕ frustration increased with the stateÕs property tax shift of the early 1990s, and since then pressure for reform has mounted. Some recent reform proposalsÑall made between 1993 to 1997Ñare outlined below. 5 _________ 5Full citations are included in the bibliography. 54 California Constitution Revision Commission: Recommended increasing home rule power by amending Proposition 13 to give local governments control over the allocation of the property tax. California Legislative AnalystÕs Office: Recommended a sorting out of state-local programmatic responsibilities and an increase in local control by amending Proposition 13 to allow greater local control of the property tax. Business Higher Education Forum: Recommended strengthening local government by revising Proposition 13 to provide more local control of the property tax. California Business Roundtable: Recommended revising Proposition 13 to allow for more power to raise and spend local taxes. California Planning Roundtable: Recommended providing a stable share of the property tax for local services and permitting local governments to work together to allocate tax revenue. California Council on an Economic and Environmental BalanceÑCPR Project: Recommended providing greater control of local taxes to local governments. These groups concur that control over the financing of local services has gravitated from the local to the state level and that this trend should be reversed. However, the state government has been slow to address major reforms of the distribution of fiscal and programmatic power. The standard argument made against proposed reforms at the state level, aside from concerns about a loss of state power, is that the effects of the proposed reforms are uncertain. In opting for the evils of a current condition to prevent an uncertain future, state policymakers are confirming MachiavelliÕs admonition to the PrinceÑthat there is nothing more difficult to undertake than to change the order of things. 55 Reforms are especially slow to arrive when the groups or interests whose power would be curtailed have the ability to slow or stop the reform process, as is true in the case at hand. Given that any redistribution will necessarily harm some agency, it has been difficult to build a statewide coalition in favor of change. The state-local relationship is now at a juncture as tense as at the turn of the last century, when state-level reformers restructured the relationship by establishing home rule powers and the separation of sources. However, the constellation of forces and policy priorities has shifted since then. Home rule reforms at the turn of the century represented a victory by Progressive activists seeking to counteract the power of big business in the state legislature. Since the 1960s, however, the state policy agenda has been dominated by urban activists who have increased the role of the state in health, social services, and environmental protection. The state government views itself as the arbiter of an ever-expanding list of statewide interests. Today, the agenda of state activists seeking to expand state power coincides with efforts by voters to limit local government spending. As a result, the local finance system has been returned to the condition in which it operated before 1910. A variety of groups, some created by statute and some by proclamation, have set about the task of figuring out where the state-local balance of power should be set. These efforts include the State Assembly SpeakerÕs Commission on State and Local Government Finance, the Local Finance Forum of the Senate Budget and Fiscal Review Committee, the Commission on Local Governance for the 21st Century, the ControllerÕs State Municipal Advisory Reform Team (SMART), and 56 the Commission on Building for the 21st Century. In the following sections, we evaluate the main policy choices that these groups must face. Policy Choices Current reform proposals focus on two areas: the need to restore accountability by delineating the responsibilities of different levels of government more clearly, and the need to restore local fiscal authority, or the ability of local governments to finance services from locally levied taxes. The first issue is especially important in relation to the state- county relationship, and the second applies to both cities and counties. Rethinking the Role of County Government If counties are to maintain their traditional general-purpose government functions, let alone provide any new services, some type of fiscal and governance reform will be necessary. The task of defining county responsibilities is closely tied to the issue of fiscal authority. As counties find it harder to fund their current general-purpose responsibilities, policymakers must evaluate the need for those services and determine which level of government should be responsible for providing them. To determine how this is to be accomplished, it will be necessary to reconsider countiesÕ proper role. As their primary role is increasingly one of administering state programs, the time has come to re-evaluate the need for counties as a component of local general-purpose government. Reform efforts can take two basic approaches to address the current mismatch between county responsibility and financing authority. One would be to change county finance so as to make it match county obligations as currently configured. This essentially means restoring the 57 status quo ante for counties by restoring the level of local fiscal control counties experienced before the passage of Proposition 13. This reform would enable counties to maintain their dual role as agents of the state and local general-purpose governments. Various options exist to make this possible. For example, the state could allocate a larger portion of the property tax to counties. Or, the current 1 percent local sales tax could be converted from a tax levied by each city to one levied by counties and used to fund countywide services. In exchange, cities might receive a larger share of the property tax to replace the lost sales tax. This option does not require a fundamental reformulation of governmental responsibility. If citizens want local governments to control the financing of local services, then a restoration of the status quo ante for county governments may be a relatively easy way to resolve the current dilemma. However, the ever-increasing agency role of counties has progressed to the stage where this may be difficult. We have reached a point where it would be useful to reevaluate the role of county government altogether. Another option is to redistribute countywide responsibilities to the state or to cities. For example, the state could assume responsibility for such countywide functions as property tax assessment and prosecutorial functions. This type of reform is especially persuasive in relation to countywide functions where equity considerations are salient. For example, it is unclear why local preferences should hold sway over such functions as administering justice. Functions that are countywide but considered local in nature could be administered through cooperative agreements among cities. This entails just the opposite solution to the first option described above by calling for a reconfiguration of 58 governmental responsibilities to more closely match the current county fiscal reality. This second option does little to increase governmental capacity to organize, finance, and govern services and programs that have a scope that exceeds the territory of cities. At a time when many observers point to a growing gap in governmentÕs ability to conduct adequate regional planning and development, it would be a mistake to leave all decisions to the state or to rely on voluntary agreements between cities. The best solution to the problem of countywide government may be to evaluate all general-purpose functions separately to devise the most appropriate solution for each case. In such a thorough reevaluation, even the efficacy of current county boundaries should be reexamined. In urban areas, the boundaries of counties have little to do with the geography of modern urban development. Reforms should be considered to designate regional agencies to administer state programs and undertake general-purpose functions for urban regions in the state. Such designations would have to be accomplished in consultation with current general-purpose governments. In some cases the territory of a county may have sufficient scope to cover the responsibility. Fiscal powers of such regional agencies would have to be assigned in a manner that coincides with their designated level of responsibility. Rethinking Fiscal Authority The question at the heart of the continuing debate about the state- local fiscal relationship is this: What is the proper balance between the stateÕs interest in achieving consistency in statewide policy and a local communityÕs interest in establishing a level of services and activity that meets its needs? There is an inherent tension between the goals of 59 increasing accountability at the local level and maximizing equity in the allocation of resources for the state as a whole. A strong state role in local finance makes sense if the primary objective of CaliforniaÕs citizens is to maximize equity in the allocation of public resources at the state level. However, if the citizens of the state also value local accountability, flexibility, and innovation, then it is useful for local governments to control the financing of local services. In this section we consider the advantages and disadvantages of moving in either of these directions. There are several advantages to maintaining state control over local fiscal affairs. First, the state is able to act as an arbiter, equalizing resources to ensure that no community is left without a tax base sufficient to provide an adequate level of services. For example, a residential community with a limited retail or industrial base can be assisted with state subventions that are allocated on a population basis. Second, the state can also play a role in equalizing resources on the basis of Òtax effort,Ó so that a group of citizens in one community does not bear a larger burden than another group to achieve the same level of services. The state has played such an equalizing function when it comes to many state taxes, such as the vehicle license fee, which is collected based on the value of cars and trucks but is distributed based on population. 6 The state could perform this type of equalizing role in relation to the property tax. It could devise a new allocation system using a standard of need as a baseline for local finance. Such a system might be based on a standardized measure of fiscal health, taking into account factors such as _________ 6As of 1998, the state had concluded that it was time to phase out the tax, leaving the local government subvention to be financed out of the state general fund. 60 local residentsÕ income, exported tax burdens, public service costs, service responsibilities, and intergovernmental aid. 7 The state could use its redistributive power to allocate property taxes based on a standard of fiscal need, but it has not done so. Furthermore, the current allocation system, based on local tax liability before the enactment of Proposition 13, increasingly fails to reflect local preferences. Rather than using its power to devise a new system to match local needs or preferences, or some combination of the two, the state in recent years has exerted its power over the tax primarily for the purpose of maintaining its own fiscal health in a time of economic stress. In relation to the property tax, the state in recent years has acted more like a competitor with local governments than an impartial arbiter. Reflecting concern that the state government has used the property tax primarily as a fiscal shock absorber, many current reform proposals would separate local property tax revenue from the state budget. Local governments could be provided a certain amount of ÒroomÓ within the 1 percent property tax cap that now limits the property tax rate. To return control over the property tax to the local level, a constitutional amendment would be required to allow the property tax to be allocated by local agreement. If such a change were accomplished only by statute, it would run the risk that the legislature could change it at will. To give local governments the ability to determine the allocation of the property tax, the following two elements would be necessary. ·The amount of local government property tax revenue required for KÐ12 education funding would have to be determined by the state. Through a combination of long-held state policy, court _________ 7See Ladd and Yinger (1989) for an example of such a method. 61 decisions, and constitutional standards, the financing of KÐ12 education is a shared responsibility with the state setting the parameters. The state share of school funding could be determined only at the state level, thereby determining what portion of local property tax revenue would be required for education. ·Within each county, a process would be required to determine the amount of property tax revenue that would be made available for community and areawide (countywide) services. Then general purpose government tax rates within the current Proposition 13 limits would be set for each community by mutual agreement. Voters could participate in such a process by approving tax allocation plans within each county. This is not an uncommon practice in other states. The model for this process would be similar to that used for joint powers agreements currently undertaken by cities, counties, and special districts. Restoring the old doctrine of separating sources of revenue would reestablish a stronger connection between the level of government that levies a tax and the level of government providing services funded by the tax revenue. Under a scenario such as the one described above, it would be easier for taxpayers to understand how property taxes are divided between education, community, and areawide services. This awareness could help increase accountability in local government. Before Proposition 13, the property tax was the principal community-controlled source of discretionary revenue, and as such it was the subject of a certain amount of debate at the local level. It has been argued that this level of civic engagement served to hold local elected officials more accountable 62 to their constituencies.8 Efficiency and innovation in local service provision were also enhanced, since local governments could respond more easily to local preferences. However, critics of this perspective argue that local accountability and innovation can be enhanced, even if fiscal authority is limited. Efforts along those lines are currently being implemented in relation to local education expenditures, for example. The current state of local finance is in need of repair. It reflects neither the potential benefits of a state-run system based on a set of commonly defined principles, nor the benefits of a more decentralized system with a clear separation of sources. Rather, it reflects efforts to cope with fiscal stress through cost-shifting and competition between levels of government. The last major constitutional overhaul of our governance and finance system was made at the turn of the last century. It may be necessary to begin the next century with a similar civic debate about how the governance and finance system should work. _________ 8Sokolow (1998). 63 Appendix A Notes on Data and Methodology This appendix discusses the data used in this report and provides more detailed descriptions of our analytical definitions and measures than were provided in the introductory chapter. Revenue and Expenditure Data Revenue and expenditure data used in this study come from the Annual Financial Transactions series issued by the State ControllerÕs Office. 1 Revenue data for cities and counties aggregated at the state level were available for each fiscal year from 1915Ð16 to 1994Ð95. Certain revenue line items in the city revenue data were moved from the categories in which they appear in the ControllerÕs Office reports to _________ 1The data were organized according to the revenue categories outlined in Appendix B, Table B.1, and in greater detail in Appendix C, Tables C.1 and C.2. 64 other revenue categories when that was considered appropriate to achieve consistency between time periods. 2 The State ControllerÕs Office did not maintain a consistent method for recording data on public service enterprise revenue over the century. For purposes of this report, values for public service enterprise revenue were calculated in different ways for different time periods. For the time period from 1916 to 1958, the data used in this report for public service enterprise revenue were taken from two sources: the line item for Òpublic service enterprisesÓ in the State ControllerÕs revenue reports, and ÒsanitationÓ fees moved from the service charge category. Between 1959 and 1981, data on public service enterprise revenue are not available in the general operating budgets in the State ControllerÕs Office reports. We calculated this revenue as the sum of the following components: (1) public service enterprise operating and nonoperating revenue as recorded by the State ControllerÕs Office in separate reports for public utilities, (2) Òsewer charges,Ó Òrefuse collection,Ó and Òsale of refuseÓ recorded during the period under current service charges, (3) Òsewer connection feesÓ and Òcity-owned enterprises,Ó recorded as ÒotherÓ revenue, and (4) revenue from ÒparkingÓ included in the licenses and permits category. During the period from 1982 to 1995, public service enterprise revenue was calculated as the sum of the following service charges, which were subtracted from the service charge category: sewer service charges and connection fees, parking facilities, water service charges and connection fees, and electric, gas, airport, cemetery, housing, port and harbor, hospital, and transit revenue. _________ 2When budget line items have been moved to categories other than those in which they appear in the original ControllerÕs Office data, it has been noted in Appendix C Tables C.1 and C.2 after the line item. 65 A number of revenue line items that appear in the ControllerÕs Office reports were not included in our analysis. For cities, the items not included were receipts from debt obligations for the years 1916 to 1958 and sale of bonds between 1982 and 1995. For counties, the revenue line items not included in our analysis were more extensive, and they pertain in many cases to district revenue. The items not included were school district subventions from 1916 to 1934, sale of bonds from 1916 to 1957 and 1985 to 1995, agency transactions from 1916 to 1957, trust funds and accounts from 1935 to 1957, and district taxes from 1935 to 1957. Adjusting for Inflation and Population Revenue values were adjusted for inflation based on the California Consumer Price Index. This index is a variant of the Consumer Price Index for Urban Consumers (CPI-U) produced by the U.S. Bureau of Labor Statistics (BLS). BLS calculates the CPI-U for three metropolitan areas in CaliforniaÑthe Los Angeles, San Francisco, and San Diego Consolidated Metropolitan Statistical Areas. The California Department of Industrial Relations, Division of Labor Statistics and Research, publishes a version for the state based on a population-weighted sum of the CPI-U for San Francisco, Los Angeles, and San Diego. The California CPI-U is available for the years from 1955 to 1995. For the years from 1916 to 1954, we employed an average of the CPI-U for Oakland and Anaheim. Per capita revenue values were calculated using data from the California Department of Finance as well as the U.S. Census. The population of cities and counties in the state from 1970 to 1995 is based on data for each of those years from the Demographic Research Unit 66 of the California Department of Finance, Reports 84-E4, 90-E4, and 97-E4. The population of counties in the state from 1940 to 1970 is based on yearly data from the Department of Finance, Report E-7A. The population of cities before 1970 and counties before 1940 is based on the decennial U.S. Census, with values interpolated. Analytical Definitions Used in This Report Subvention Funding Subventions are funds received by local governments from other governments. We categorize subventions into four types, which entail different amounts of external control over the way the funds may be expended. 3 We also break subventions down by their government of origin, either the state or federal government (we include county subventions to cities under state subventions). ÒAgencyÓ subventions entail strict restrictions on the way the money may be spent and include funding for state and federal health and welfare programs. ÒCategoricalÓ subventions are earmarked by the sending government for a certain type of function, but decisions on specific projects are left up to the receiving government. An example of a categorical subvention is gas tax revenue, which is sent to local governments to be spent for transportation purposes to be defined by local governments. ÒGeneral-purposeÓ subventions, such as vehicle license fee revenue, may be spent in any manner by receiving governments. Finally, some subventions are labeled as ÒotherÓ subventions by the State Controller. These tend to be categorical, with _________ 3In Appendix C, Tables C.1 and C.2, we have organized the particular subvention line items recorded by the State ControllerÕs Office over time into these four categories. 67 the exception of Òother in-lieu tax revenue,Ó which is provided for general purposes. Restricted and Discretionary Revenue It is difficult to arrive at a precise definition of local discretion over the expenditure of revenue. Any revenue that local governments elect to raise and spend could be called discretionary. However, the expenditure of some locally levied revenue is restricted to specific functions. For example, some cities operate quasi-independent public service enterprises such as hospitals and utilities. Although those cities originally made the decision to build and operate the ventures, the expenditure of the revenue they generate, generally on a fee-for-service basis, is restricted primarily to covering the costs of ongoing operation and maintenance of the ventures themselves. Certain transfers are made between public service enterprises and city and county general operating funds, but these amounts have not been tracked consistently over time by the State Controller. Benefit assessments are another source of revenue whose expenditure is restricted for certain purposes, usually construction of infrastructure or public facilities. To the degree that local governments are compelled to maintain current service levels, the majority of local revenue could be considered nondiscretionary. If discretion over local revenue is a matter of degree, the question becomes where to draw the line. In measuring discretion, we seek to define the share of revenue that best measures local governmentsÕ ability to choose between competing priorities. We exclude public service enterprise revenue, since it is reserved for ongoing maintenance of quasi-independent functions and therefore reflects minimal discretion in the local budgeting process. 68 However, we include almost all other main sources of own-source revenue. We include revenue from benefit assessments, although it is also earmarked for specific purposes, because it reflects local decisions to improve infrastructure whose cost is often generalized over the entire population and which represents a one-time cost rather than ongoing fees for specific services. We define discretionary revenue as the share of local revenue whose expenditure is not earmarked for purposes strictly mandated by another level of government or for ongoing maintenance of quasi-independent enterprises. For cities, this is all revenue from locally levied sources except public service enterprises and all general-purpose subventions. The components of county discretionary revenue are slightly different. Counties do not operate public service enterprises within their general operating budgets, so that revenue plays no part in the county analysis. However, unlike cities, counties are required to provide a portion of their general-purpose revenue to fund state-mandated programs. We describe this county role in more detail in the next section. County discretionary revenue is composed of all locally levied revenue except the portion devoted to state-mandated programs, and, in addition, general-purpose subvention funding. Restricted revenue comprises two components: restricted subventions and restricted own-source revenue. Restricted subventions comprise agency and categorical subventions, and ÒotherÓ subventions with the exception of Òother in-lieu taxes.Ó For cities, restricted own-source revenue comprises revenue from public service enterprises, the transportation tax (levied from 1982 to 1995), and contributions from nongovernmental sources. For counties, restricted own-source revenue comprises transportation tax revenue and the local contribution of 69 general-purpose revenue used to fund state-mandated agency functions (described in the next section). County Contribution of General-Purpose Funds for Agency Programs The state and federal governments require that counties provide certain health and welfare services in strict accordance with explicit guidelines. However, the state and federal governments do not provide all of the funding that counties need to carry out these programs. Counties are obligated to commit a certain portion of their general - purpose revenue toward these Òstate-mandated local programs.Ó The constitution was amended in 1979 to require that the state reimburse local governments for costs of carrying out state programs (California State Constitution, Article XIII B, Section 5). However, this provision included an exemption for programs enacted before 1975 and in effect created a blanket exemption for the health and welfare agency functions established over the prior 75 years. We estimate the local county contribution for agency functions as the difference between the total for agency subvention revenue received from the state and federal governments for public assistance and health programs and the total for county expenditures for health and public assistance functions, as detailed in the State ControllerÕs Office county expenditure reports. 4 Certain county agency functions, such as running the court system, are not included in our analysis because the data are not sufficiently detailed over time. _________ 4See Appendix C, Table C.3, for a list of the county expenditure categories we include in this measure. 70 Unfortunately, expenditure data from the State ControllerÕs Office do not distinguish between agency functions that counties must fund to comply with state law and the same countiesÕ discretionary spending for similar health and welfare programs. Counties may exceed the minimum levels of service required by state law, and many do. As a result, we cannot determine the exact share of county general-purpose revenue that should properly be included as part of restricted revenue in our analysis. Although the bulk of the local contribution from general-purpose revenue for health and welfare programs is properly regarded as agency revenue, the category also includes some discretionary spending. 71 Appendix B Supplementary Data This appendix provides tabular data on the revenue trends described in this report. Table B.1 lists the components of own-source revenue to cities and counties. Tables B.2 through B.7 list amounts and percentages for the main revenue sources to cities and counties for critical years during the century. Table B.8 does the same but only for the components of restricted revenue to counties. Table B.9 lists results from our measure of revenue variability over time. Finally, Table B.10 lists detailed components of city own-source revenue in 1980 and 1995 and identifies which components increased most significantly over that period. Table B.1 Components of Own-Source Revenue for California Cities and Counties Revenue Categories in This ReportItems IncludedGeneral property taxes Single line item for cities and counties. Not considered own-source revenue in our analysis after 1978Sales and use taxesSingle line item for cities and counties Public service enterprises Applies only to cities. Includes sewer service charges and connection fees, sanitation (solid waste revenues, refuse collection), parking facilities, water service charges and connection fees, electric revenues, gas revenues, airport revenues, cemetery revenues, public housing revenues, ports and harbor revenues, hospital revenues, transit and transportation revenues Licenses, fees, and assessments Other taxesFor cities: franchise, lodging taxes, utility users tax, property transfers, other taxes For counties: franchises, transportation and lodging taxes, property transfers, voter approved indebtedness, other Special assessments For cities: fire, paramedics, police, lighting, other For counties: operations, capital outlays Licenses and permits For cities: liquor, business, animal, construction, streets and curbs, other For counties: liquor, business, construction, road, zoning, other Table B.1 (continued) Revenue Categories in This ReportItems IncludedFeesFor cities: general government, protection, health conservation, highways, sanitation, education, recreation For counties: clerk, recorder, law library, treasurer, jury fees, courts, sheriff, tax collectionCurrent service charges For cities: zoning, subdivision, maps and plan preparation, special police and fire service, animal shelter, weed and lot cleaning, vital statistics, first aid, health inspection, library fines, parks and recreation, golf course fees, quasi-external transactions For counties: tax assessment and collection, auditing, communication, elections, legal, planning, civil process, courts, estate fees, recording fees, road and street service, health, sanitation, institutional care, libraries, parks and recreation, care of inmates and prisoners Fines and penalties For cities: vehicle code fines, other For counties: vehicle code fines, court fines, forfeiture and penalties Other revenueFor cities: interest, rents and concessions, royalties, sale of property For counties: interest, rents and concessions, royalties, premium and accrued interest on bonds, sales of fixed assets, receipts to correct errors, canceled warrants ExcludedFor cities: debt (bond issuance, receipts from debt obligations, proceeds from bond sales) For counties: debt (receipt from debt obligations, bond sales, deposits), agency transactions, trust funds Table B.2 Revenue by Source for California Cities, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Revenue in millions of 1995 dollarsTotal own-source revenue775 553 2,335 2,083 2,531 2,610 12,325 14,665 13,729 23,143 23,817 General property taxes501 356 1,221 1,015 1,115 1,024 3,081 3,117 1,381 3,130 2,580 Sales taxes — — — — — —1,711 2,188 2,247 2,540 2,607 Public service enterprises127 108 692 708 1,081 1,230 4,736 6,012 6,344 8,857 9,916 Licenses, fees, assessments, and other revenue 147 89 422 360 335 356 2,797 3,348 3,757 8,617 8,714 Other taxes and special assessments 10 22 154 106 58 32 771 1,159 1,236 2,774 3,121 Licenses, permits, fees, service charges 90 46 118 129 157 148 1,199 1,261 1,335 2,749 3,120 Othera 47 21 150 125 120 176 827 929 1,186 3,094 2,473 Subventions23 15 80 185 342 246 3,342 4,729 4,808 3,545 4,761 Total revenue798 569 2,415 2,268 2,873 2,856 15,667 19,394 18,537 26,688 28,577 Percentage change in revenue since previous year listed in the table Total own-source revenue–29 322 –11 21 3 372 19 –6 69 3 General property taxes–29 243 –17 10 –8 201 1 –56 127 –18 Sales taxesna na na na na na 28 3 13 3 Public service enterprises–15 540 2 53 14 285 27 6 40 12 Licenses, fees, assessments, and other revenue –40 375 –15 –7 6 685 20 12 129 1 Other taxes and special assessments109 606 –31 –45 –45 2,320 50 7 124 13 Licenses, permits, fees, service charges–48 154 9 21 –5 710 5 6 106 13 Othera –56 630 –17 –4 47 369 12 28 161 –20 Subventions–34 418 132 85 –28 1,257 41 2 –26 34 Total revenue–29 325 –6 27 –1 448 24 –4 44 7SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.3 Per Capital Revenue by Source for California Cities, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Per capita revenue in 1995 dollarsTotal own-source revenue364 232 532 458 505 429 822 852 788 936 929 General property taxes235 149 278 223 223 168 205 181 79 127 101 Sales taxes0 0 0 0 0 0 114 127 129 103 102 Public service enterprises60 45 158 156 216 202 316 349 364 358 38 Licenses, fees, assessments, and other revenue 69 37 96 79 67 58 186 194 216 349 340 Other taxes and special assessments5 9 35 23 12 5 51 67 71 112 12 Licenses, permits, fees, service charges42 19 27 28 31 24 80 73 77 111 122 Othera 22 9 34 28 24 29 55 54 68 125 9 Subventions11 6 18 41 68 40 223 275 276 143 186 Total revenue375 238 550 499 574 469 1,045 1,126 1,064 1,080 1,114 Percentage change in per capita revenue since previous year listed in the table Total own-source revenue–36 130 –14 10 –15 92 4 –7 19 –1 General property taxes–37 86 –20 0 –24 22 –12 –56 60 –21 Sales taxesna na na na na na 11 1 –20 –1 Public service enterprises–24 248 –1 39 –6 56 11 4 –2 8 Licenses, fees, assessments, and other revenue–46 159 –18 –16 –13 219 4 11 62 –3 Other taxes and special assessments86 284 –34 –50 –55 883 31 5 58 8 Licenses, permits, fees, service charges–54 38 6 10 –22 229 –8 5 45 9 Othera –61 297 –19 –13 20 91 –2 26 84 –23 Subventions–41 182 124 67 –41 451 23 0 –48 29 Total revenue–37 131 –9 15 –18 123 8 –6 1 3SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.4 Revenue by Source as a Percentage of Total Revenue for California Cities, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1991 1995Total own-source revenue97 97 97 92 88 91 79 76 74 87 83General property taxes63 63 51 45 39 36 20 16 7 12 9 Sales taxes0 0 0 0 0 0 11 11 12 10 9 Public service enterprises16 19 29 31 38 43 30 31 34 33 35 Licenses, fees, assessments, and other revenue 18 16 17 16 12 12 18 17 20 32 30 Other taxes and special assessments1 4 6 5 2 1 5 6 7 10 11 Licenses, permits, fees, service charges 11 8 5 6 5 5 8 6 7 10 11 Othera 6 4 6 6 4 6 5 5 6 12 9 Subventions3 3 3 8 12 9 21 24 26 13 17SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.5 Revenue by Source for California Counties, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Revenue in millions of 1995 dollarsTotal own-source revenue379 296 1,047 1,003 1,241 1,009 9,787 9,878 6,069 10,946 9,209 General property taxes320 249 878 842 1,112 847 6,899 6,607 2,847 5,837 3,349 Sales taxes— — — — — — 288 487 438 341 313 Licenses, fees, assessments, and other revenue 59 47 169 160 129 162 2,600 2,783 2,784 4,768 5,547 Other taxes and special assessments — — — — — — 115 159 164 383 396 Licenses, permits, fees, service charges 25 17 66 70 73 102 1,809 1,888 1,636 2,675 2,630 Othera 34 30 103 90 55 60 676 736 984 1,710 2,521 Subventions24 19 237 276 865 961 10,214 10,056 10,811 14,957 17,399 Total revenue403 314 1,284 1,278 2,106 1,970 20,002 19,934 16,880 25,903 26,607 Percentage change in revenue since previous year listed in the table Total own-source revenue–22 254 –4 24 –19 870 1 –39 80 –16 General property taxes–22 253 –4 32 –24 715 –4 –57 105 –43 Sales taxesna na na na na na 69 –10 –22 –8 Licenses, fees, assessments, and other revenue –20 261 –5 –20 26 1,506 7 0 71 16 Other taxes and special assessmentsna na na na na na 38 3 134 3 Licenses, permits, fees, service charges–32 286 7 4 39 1,674 4 –13 63 –2 Othera –11 246 –13 –38 8 1,028 9 34 74 47 Subventions–21 1,153 16 214 11 963 –2 8 38 1 Total revenue–22 308 0 65 –6 915 0 –15 53 3SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.6 Per Capita Revenue by Source for California Counties, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1991 1995Per capita revenue in 1995 dollarsTotal own-source revenue126 89 177 163 180 108 473 438 264 355 289 General property taxes107 75 148 137 161 91 333 293 124 189 105 Sales taxes0 0 0 0 0 0 14 22 19 11 10 Licenses, fees, assessments, and other revenue 19 14 29 26 19 17 126 123 121 155 174 Other taxes and special assessments0 0 0 0 0 0 6 7 7 12 12 Licenses, permits, fees, service charges 8 5 11 11 11 11 87 84 71 87 82 Othera 11 9 17 15 8 6 33 33 43 55 79 Subventions8 6 40 45 125 103 493 445 469 485 545 Total revenue134 95 217 207 305 211 966 883 733 840 834 Percentage change in per capita revenue since previous year listed in table Total own-source revenue–29 99 –8 11 –40 338 –7 –40 35 –19 General property taxes–30 98 –8 18 –44 268 –12 –58 53 –45 Sales taxesna na na na na na 55 –12 –42 –11 Licenses, fees, assessments, and other revenue –27 102 –9 –28 –7 625 –2 –2 28 12 Other taxes and special assessmentsna na na na na na 26 1 74 0 Licenses, permits, fees, service charges–38 117 3 –7 3 700 –4 –15 22 –5 Othera –19 94 –16 –45 –20 409 0 31 30 42 Subventions–28 603 12 180 –18 380 –10 5 3 12 Total revenue–29 129 –4 47 –31 358 –9 –17 15 –1SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.7 Revenue by Source as a Percentage of Total Revenue for California Counties, 1916–1995 1916 1919 1932 1934 1940 1945 1973 1978 1979 1992 1995Total own-source revenue94 94 82 78 59 51 49 50 36 42 35General property taxes80 79 68 66 53 43 34 33 17 23 13 Sales taxes0 0 0 0 0 0 1 2 3 1 1 Licenses, fees, assessments, and other revenue 15 15 13 13 6 8 13 14 16 18 21 Other taxes and special assessments0 0 0 0 0 0 1 1 1 1 1 Licenses, permits, fees, service charges6 5 5 6 3 5 9 9 10 10 10 Othera 8 10 8 7 3 3 3 4 6 7 9 Subventions6 6 18 22 41 49 51 50 64 58 65SOURCE: California State Controller’s Office, Annual Financial Transactions series. a “Other” revenue includes fines and penalties, use of money and property, and other revenue. Table B.8 Components of Restricted Revenue for California Counties, 1916–1995 1916 1932 1934 1940 1945 1973 1978 1979 1984 1992 1995Revenue in millions of 1995 dollarsAgency revenue64 440 727 1,191 1,215 11,602 10,392 8,862 8,651 13,860 15,008 Agency subventions5 17 52 556 743 7,053 5,568 5,610 7,240 10,214 11,171 Local contribution of general-purpose revenue59 423 675 634 472 4,550 4,823 3,252 1,411 3,647 3,838 Categorical subventions and other restricted state funds18 220 224 300 210 1,243 2,349 3,546 1,371 2,725 4,231 Total restricted revenue82 659 951 1,491 1,424 12,845 12,741 12,408 10,023 16,586 19,239 Percentage change in revenue since previous year listed in the table Agency revenue Agency subventions222 199 977 33 850 –21 1 29 41 9 Local contribution of general-purpose revenue622 60 –6 –26 863 6 –33 –57 158 5 Categorical subventions and other restricted state funds1,090 2 34 –30 493 89 51 –61 99 55 Total restricted revenue700 44 57 –4 802 –1 –3 –19 65 16 Per capita revenue in 1995 dollars Agency revenue21 74 118 172 130 560 460 385 338 449 470 Agency subventions2 3 8 81 79 341 247 244 283 331 350 Local contribution of general-purpose revenue19 71 109 92 51 220 214 141 55 118 120 Table B.8 (continued) 1916 1932 1934 1940 1945 1973 1978 1979 1984 1992 1995Categorical subventions and other restricted state funds6 37 36 43 22 60 104 154 54 88 133Total restricted revenue27 111 154 216 152 620 564 539 392 538 603 Percentage change in per capita revenue since previous year listed in the table Agency revenue249 59 46 –25 331 –18 –16 –12 33 5 Agency subventions63 187 862 –1 329 –28 –1 16 17 6 Local contribution of general-purpose revenue266 53 –16 –45 335 –3 –34 –61 114 2 Categorical subventions and other restricted state funds504 –2 20 –48 167 73 48 –65 65 50 Total restricted revenue306 38 40 –29 307 –9 –5 –27 37 12 Revenue by source as a percentage of total revenue Agency revenue16 34 57 57 62 58 52 53 50 54 56 Agency subventions1 1 4 26 38 35 28 33 42 39 42 Local contribution of general-purpose revenue15 33 53 30 24 23 24 19 8 14 14 Categorical subventions and other restricted state funds5 17 18 14 11 6 12 21 8 11 16 Total restricted revenue20 51 74 71 72 64 64 74 58 64 72SOURCE: Authors’ calculations based on data from the State Controller’s Office, Annual Financial Transactions series. NOTE: Transportation tax revenue is included as “other restricted state funds.” Table B.9 Variability of Revenue Sources over Time for California Cities and Counties Variation in the growth ratea in local revenue streams during different time periods 1917–19951917–19321933–19951956–1995, Excluding 1979Revenue SourceCounties Cities Both Counties Cities Both Counties Cities Both Counties Cities Both Own-source revenue1.9 1.4 1.5 1.4 1.5 1.4 2.2 1.1 1.4 1.1 0.5 0.7Property tax2.9 3.5 3.1 1.3 1.6 1.4 3.9 5.2 4.3 2.2 1.4 1.8 Sales tax4.0 1.6 1.6 na na na 4.0 1.6 1.6 3.2 1.8 1.8 Public service enterprisesna 1.4 na na 1.2 na na 1.1 na na 0.8 na Licenses, fees, assessments, and other 1.8 2.3 1.8 2.2 2.7 2.1 1.6 1.7 1.5 1.4 0.9 0.9 Subventions1.7 2.3 1.6 1.3 2.3 1.4 1.8 2.3 1.7 1.4 1.8 1.4 Total revenue1.3 1.4 1.3 1.2 1.5 1.3 1.4 1.1 1.2 1.1 0.6 0.8Variation in the growth ratea of subventions to local governments, 1959–1995 Subventions by TypeTo Counties To CitiesAgency1.6naCategorical2.82.0 General purpose4.63.9SOURCE: Authors’ calculations based on date from the State Controller’s Office, Annual Financial Transactions series. a The table lists the coefficient of variation (the standard deviation divided by the mean) of the growth rate (the percentage change in revenue since the prior year) in inflation-adjusted revenue for each revenue source during the time period designated. Table B.10 Components of City per Capita Own-Source Revenue for California, 1980 and 1995 198019951980–19951980–1995CategoryPer Capita Revenue (1995 dollars)% of Own- Source RevenuePer Capita Revenue (1995 dollars)% of Own- Source Revenue % ChangePercentage Point Change Property taxes96.0 12.0 100.610.85–1.1Sales taxes125.2 15.6 101.610.9 –19–4.7 Public service enterprises 369.5 46.1 386.741.65–4.4 Taxes (not property or sales) Transient lodging12.21.522.22.4 820.9 Franchises9.31.215.71.7 690.5 Property transfers5.70.75.60.6 –1–0.1 Utility users tax0.00.046.04.9 1004.9 Other39.64.919.12.1 –52–2.9 Total66.88.3 108.611.7 1983.4 Special benefit assessments3.40.413.11.4 2851.0 Use of money and property Interest income/investments 35.84.541.24.4 150.0 Rents and concessions4.80.66.30.7 330.1 Royalties2.20.30.40.0 –82–0.2 Other0.40.10.60.1 380.0 Total43.35.448.65.2 12–0.2 Licenses, permits, and fees Construction8.81.18.00.9 –9–0.2 Business licenses22.12.825.22.7 140.0 Other2.40.33.90.4 640.1 Total33.24.137.14.0 69–0.2 Table B.10 (continued) 198019951980–19951980–1995CategoryPer Capita Revenue (1995 dollars)% of Own- Source RevenuePer Capita Revenue (1995 dollars)% of Own- Source Revenue % ChangePercentage Point Change Current service chargesZoning and subdivision fees 2.20.32.30.240.0 Special police services1.20.13.00.3 1550.2 Special fire services1.00.12.60.3 1530.2 Plan checking fees2.60.33.30.4 260.0 Animal shelter fees0.20.00.20.0 –40.0 Engineering fees3.40.44.90.5 470.1 Street and curb repair1.30.20.90.1 –28–0.1 Lot cleaning0.30.00.40.0 120.0 First aid and ambulance0.60.11.90.2 2160.1 Library fines and fees0.90.10.90.1 –80.0 Parks and recreation10.01.28.70.9 –12–0.3 Quasi-external transactions0.00.024.52.6 1002.6 Other current service charges14.11.831.13.3 1211.6 Total37.74.784.69.1 1244.4 Fines and penalties Vehicle code fines10.01.25.00.5 –50–0.7 Other3.70.57.70.8 1070.4 Total13.71.712.61.4 –7–0.3 Table B.10 (continued) 198019951980–19951980–1995CategoryPer Capita Revenue (1995 dollars)% of Own- Source RevenuePer Capita Revenue (1995 dollars)% of Own- Source Revenue % ChangePercentage Point Change OtherSale of property3.70.55.20.6 410.1 Nongovernmental sources 1.90.25.40.6 1820.3 Other7.40.924.62.6 2311. Total13.01.635.23.8 1702.SOURCE: State Controller’s Office Annual Financial Transactions series. NOTE: Categories that increased the most as a share of total revenue from 1980 to 1995 appear in boldface. 87 Appendix C Data Organization Table C.1 lists all categories of revenue for cities in the Annual Report on Financial Transactions Concerning Cities of California series published yearly by the California State ControllerÕs Office from 1916Ð 1995. The State ControllerÕs Office reports listed different revenue sources during different time periods and these are distinguished below. Boldface denotes broad categories for which data were aggregated in the original report. The first column in the table lists the revenue categories used in this report. Each section of the list includes all the ControllerÕs Office revenue line items that were aggregated from the revenue categories analyzed in this report. Table C.2 lists the same information for counties. Table C.3 lists the revenue line items that we consider to be components of county expenditures for health and welfare functions, as detailed in the Annual Report on Financial Transactions Concerning Cities of California series during different time periods. Table C.1 Revenue Line Items Listed in the Annual Financial Transactions Series for Cities in California, Organized into Revenue Categories Used in This Report PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 Property taxes General property taxes General property taxes Current-year taxes Delinquent taxes IntangiblesProperty taxes Current yearÑsecured Current yearÑunsecured Prior years Interest and penalties Solvent creditsProperty taxes Current yearÑsecured Current yearÑunsecured Prior years Other property taxes Interest and penaltiesProperty taxes Secured and unsecured Voter approved indebtedness Prior years Other property taxes Interest and penaltiesSales taxes Sales and use taxes (from 1949Ñmoved from miscellaneous)Sales and use taxes Sales and use taxes Sales and use taxes Subventions Subventions and grants Subventions and grants From other agencies From other agencies From other agencies/ intergovernmental Categorical State (Not detailed) (Not detailed) Gas tax Other state grantsGas taxes Other state grantsState gas tax Other state grants Transportation tax (moved from other taxes) County County grants of gas tax Other county grantsCounty grants of gas tax Other county grantsCounty grants of state gas tax County grants Federal Federal grants Federal grants Other federal grants 88 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 General purposeState Alcoholic beverage fees Trailer coach license Vehicle in-lieu tax Other in-lieu taxAlcoholic beverage fees Trailer in-lieu taxes Vehicle in-lieu taxes Other taxes in-lieu Homeowner tax relief Business inventory tax relief Cigarette taxesState trailer coach in-lieu tax State motor vehicle in-lieu tax Other taxes in-lieu State homeowner property tax relief State business inventory property tax relief State cigarette tax FederalFederal revenue sharing (1972)Federal revenue sharing Public service enterprisesPublic service enterprises (single line item) Sanitation (moved from service charges)Public service enterprises (single line item) Sanitation (moved from service charges) Parking lots and parking meters (moved from Òother revenueÓ)Public service enterprise revenue data were not included in the State ControllerÕs Office reports during these two time periods. For purposes of this report, public service enterprise revenue was based on the sum of five components: (1) public service enterprise operating and nonoperating revenue taken from separate tables for public service enterprises in the ControllerÕs books, (2) three service charges, namely, sewer charges, refuse collection, and sale of refuse, which were subtracted from the total for service charges, (3) Òcity-owned enterprises,Ó which was moved from the Òother revenueÓ category, (4)Public service enterprise rev - enue is calculated as the sum of the following service char- ges, which are subtracted from the total for that category: Sewer service charges and connection fees Parking facilities Water service charges and connection fees Electric revenues Gas revenues 89 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 sewer connections fees, moved from the Òother revenueÓ category, and (5) revenue from parking permits, moved from licenses and permits. Airport revenue Cemetery revenue Housing revenue Ports and harbor revenue Hospital revenue Transit revenue Solid waste revenues Licenses, fees, and assessments Other taxesOther taxes Franchises OtherOther taxes Franchises Transient lodging Property transfers OtherOther taxes Franchises Transient lodging Property transfers Utility users tax Other AssessmentsSpecial assessments Special assessments Local assessments (moved from service charges)Local assessments (moved from service charges)Special benefit assessment Fire Paramedics Police Lighting Other Licenses and permitsLicenses and permits Liquor Other businessLicenses and permits Liquor Other businessLicenses and permits BusinessLicenses and permits Business license (moved from other taxes)Licenses and permits Business license (moved from other taxes) 90 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 Dog Departmental receiptsDog Departmental receiptsAnimal Bicycle Building Plumbing Electrical Sewer Street and curbs Sales tax OtherAnimal Bicycle Construction Street and curbs OtherConstruction OtherFees and service chargesFees, charges for services and minor sales General government Protection to person and property Conservation of health Highways Charities and corrections Education RecreationFees, charges for services and minor sales General government Protection to person and property Conservation of health Highways Charities and corrections Education RecreationCurrent service charges Zoning and subdivision Sale of maps Other filing fees Special police services Special fire services Plan checking fees Animal shelter fees Engineering fees Street and curb repairs Vital statistics First aid and ambulance Health inspection Library fines and fees Parks and recreationCurrent service charges Zoning fees Subdivision fees Sale of maps Other filing fees Special police services Special fire services Plan checking fees Animal shelter fees Engineering fees Street and curb repairs Vital statistics First aid and ambulance Health inspection fees Library fines and fees Parks and recreation Lot cleaningCurrent service charges Zoning fees and subdivision fees Special police services Special fire services Plan checking fees Animal shelter fees Engineering fees Street and curb repairs First aid and ambulance Library fines and fees Parks and recreation Weed and lot cleaning 91 Table C.1 (continued) PPIC State ControllerÕs OfficeAll Years 1916Ð1934 1935Ð1958 1959Ð1969 1970Ð1981 1982Ð1995 Other OtherGolf course fees Quasi-external transactions OtherFines and penaltiesFines and penalties Fines and penalties Fines and penalties Vehicle code fines Other court finesFines and penalties Vehicle code fines Other fines Other penaltiesFines and penalties Vehicle code fines Other fines, forfeiture, and penalties Use of money and propertyUse of money and property Receipts in error and interest on bonds Privileges Rent of properties Interest receiptsUse of money and property Receipts in error and interest on bonds Privileges Rent of properties Interest receiptsUse of money and property Interest income Rents and concessions Royalties OtherUse of money and property Interest income/investment earnings Rents and concessions Royalties OtherUse of money and property Interest income/investment earnings Rents and concessions Royalties Other Other revenueOther revenue Sale of real property Gifts, donations, pension duties MiscellaneousOther revenue Sale of real property Gifts, donations, pension duties MiscellaneousOther revenue Sale of property Nongovernmental sources Other revenueOther revenue Sale of property Nongovernmental sources OtherOther revenue Sale of property Contributions from nongovernmental sources Other Excluded Receipts from debt obligations (bond issuance), depositsReceipts from debt obligations (bond issuance), depositsOther financing sources Sale of bonds Notes and others 92 Table C.2 Revenue Line Items Listed in the Annual Financial Transactions Series for Counties in California, Organized into Revenue Categories Used in This Report PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Property taxesGeneral county taxes A portion is subtracted that was allocated for schools, based on data from The Tax Digest (1946), p. 298General county taxesProperty taxes Current year—secured Current year— unsecured Prior years and penalties Solvent creditsProperty taxes Current year—secured Current year— unsecured Prior year—secured Prior year—unsecured Solvent credits Penalties and costs on delinquent taxesProperty taxes Current year—secured Current year— unsecured Prior year—secured Prior year—unsecured Solvent credits Penalties and costs on delinquent taxesProperty taxes Countywide—secured Countywide—unsecured Prior year—secured Prior year—unsecured Penalties and costs on delinquent taxes Less than countywide fundsSales taxSales and use taxes Sales and use taxes Sales and use taxes Sales and use taxes Subventions Subventions and grantsSubventions and grantsSubventions and grantsSubventions and grantsSubventions and grantsSubventions and grants Agency State Relief fundsa Support of orphansaRelief fundsa Support of orphansa Relief of blindaAid to children—state Aid to blind—stateState—welfare administration State aid for children State aid for blindState—welfare administration State public assistance administration State aid—public assistance programs State aid for children State aid for blindState—public assistance administration State—public assistance programs Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Relief of needy ageda TB subsidiesAid to aged—state Aid to needy disabled Administration of adoption program— state Aid to partially self- supporting blind— state Aid to children in boarding homes Public health—stateState aid for aged State aid for disabled State aid—crippled children State aid for medical assistance to aged State aid for medical care State health administration State aid for TB State aid for cerebral palsy State aid for mental health Other state aid for healthState aid for aged State aid for disabled State aid for crippled children State health administration State aid for TB State aid for cerebral palsy State aid for mental health Other state aid for healthState—aid for mental health State—other aid for health Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 FederalWelfare administration— federal Aid to needy disabled— federal Aid to children—federal Aid to blind—federal Aid to aged—federal Public health—federalState aid for agriculture Federal welfare administration Federal aid for disabled Federal aid for children Federal aid for blind Federal aid for aged Federal aid for medical assistance Federal aid for medical care Federal health administrationState aid for agriculture Federal welfare administration Federal—public assistance administration Federal aid—public assistance programs Federal aid for disabled Federal aid for children Federal aid for blind Federal aid for aged State/federal aid for medical assistance Federal health administrationHealth—AB 8 Health—MIA Alcohol and drug abuse State—aid for agriculture Federal—public assistance administration Federal—public assistance programs Federal health administrationCategorical State Motor vehicle $ apportionedMotor vehicle license fees, gas tax and truck/bus taxMotor vehicle license fees, gas tax and truck/bus tax Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 FederalUnrefunded taxes on aviation gasoline—state Federal grants for buildings, etc.State—aviation fuel tax Civil defense—state Inspection of boarding homes—state Highway user tax—state Civil defense—federalState—aviation fuel tax State aid for civil defense State aid for construction State aid for corrections State aid for county fairs State aid for disaster State aid for veterans affairs State—highway users tax Federal aid for construction Federal aid for disasterState aid for civil defense State aid for construction State aid for corrections State aid for county fairs State aid for disaster State aid for veterans affairs State—highway users tax Federal aid for construction Federal aid for disasterState—aid for construction State—aid for corrections State—aid for county fairs State—aid for disaster State—highway users tax SB 90 mandated costs Trial court funding Public Safety Fund Federal—aid for construction Federal—aid for disaster Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 General purposeStateLiquor tax apportionmentLiquor license fees Trailer coach license fees—stateState—alcoholic beverage license State—trailer coach in- lieu State—motor vehicle in-lieu tax Other state in-lieu taxState—alcoholic beverage license State—trailer coach in- lieu State—motor vehicle in-lieu tax Other state in-lieu tax State homeowners tax relief State business inventory property tax reliefState—trailer coach in- lieu tax State—motor vehicle in-lieu tax Other state in-lieu taxes State homeowners tax relief Highway property rentals Cigarette tax Open space tax relief FederalForest reserve apportionmentForest reserve—federal Federal forest reserve revenue Federal grazing fees Federal in-lieu taxesFederal forest reserve revenue Federal grazing fees Federal in-lieu taxes Federal revenue sharingFederal forest reserve revenue Federal—in-lieu taxes Federal—revenue sharing Other StateOther state funds State other State other State other FederalOther federal funds Federal other Federal other Federal other Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Both or un- determinedOthers OthersOther governmental agenciesOther governmental agenciesOther governmental agenciesOther in- lieuOther in-lieu taxes Other in-lieu taxes Other in-lieu taxes Licenses, fees, and assessments Licenses and permitsLicenses and permits Liquor Other PermitsLicenses and permits (county only)Licenses and permits Licenses PermitsLicenses and permits Animal licenses Business licenses Construction permits Road and privileges and permits Zoning permits OtherLicenses and permits Animal licenses Business licenses Construction permits Road and privileges and permits Zoning permits Franchises OtherLicenses and permits Animal licenses Business licenses Construction permits Road and privileges and permits Zoning permits Franchises Other Fees and commissionsFees Auditor Clerk Recorder Sheriff Justice of the peace Tax collectorFees and commissionsb Clerk Law library Recorder Sheriff Constables Jury fees Justices of the peace/JudicialFees and commissions Clerk Law library Recorder Sheriff, marshals, constables Jury fees Courts Tax collection service Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Fines and penaltiesSuperintendent of schools Others Fines and penalties Superior courts Justice courts Probation courts OthersSuperintendent Others Candidates’ filing fees Fines and penalties (county only) Superior courts Justice courts Traffic fines OthersOther fees and commissions Treasurer Fines and penalties Fish and game fines Superior courts Justice courts Traffic fines OthersFines, forfeits, and penalties Other court fines Vehicle code fines Forfeitures and penaltiesFines, forfeits, and penalties Other court fines Vehicle code fines Forfeitures and penaltiesFines, forfeits, and penalties Municipal court fines Superior court fines Justice court fines Vehicle code fines Forfeitures and penaltiesCurrent service chargesSpecial services Care in county hospital Care of insane Care of minors Care in reform schoolsSpecial services rendered Care in county institutions Care in state institutions Care of juvenile court wards Care of indigentsSpecial services rendered Care in county institutions Care in state and private institutions Care of juvenile court wardsCharges for current services Institutional care and services Assessment and tax collection Auditing and accounting fees Communication services Election servicesCharges for current services Institutional care and services Assessment and tax collection Auditing and accounting fees Communication services Election servicesCharges for current services Institutional care and services Assessment and tax collection Auditing and accounting fees Communication services Election services Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Transport of pupils and tuition—other counties OthersCare of prisoners Schools, cafeterias, and day nurseries OthersCare of prisoners OthersInheritance tax fees Legal services Personnel services Planning and engineering Purchasing fees Agricultural services Civil process services Court fees and costs Estate fees Humane services Law enforcement fees Recording fees Road and street services Health fees Mental health services Sanitation services Adoption fees Crippled children’s servicesInheritance tax fees Legal services Personnel services Planning and engineering Purchasing fees Agricultural services Civil process services Court fees and costs Estate fees Humane services Law enforcement fees Recording fees Road and street services Health fees Mental health services Sanitation services Adoption fees Crippled children’s servicesLegal services Planning and engineering Agricultural services Civil process services Court fees and costs Estate fees Humane services Law enforcement fees Recording fees Road and street services Health fees Mental health services Sanitation services CA children’s servicesEducational services Library services Park and recreation fees Other chargesEducational services Library services Park and recreation fees Other chargesLibrary services Park and recreation fees Other charges Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Other taxes Road poll, hospital poll, etc.Other taxes OtherOther taxes Other FranchisesOther taxes Other FranchisesOther taxes Transportation tax Property transfer Transient lodging Timber yield Aircraft Other Voter approved indebtedness Special benefit assessments Operations Capital outlaysOther revenuePrivileges Interest receipts From miscellaneous real property Others RentsPrivileges (county only) Interest From current deposits From other sources (general county) Rent of property (general county)Privileges Franchises Other privileges Interest From current deposits From other sources Rent of property Land and building EquipmentFrom use of money and property Interest Rents and concessions RoyaltiesFrom use of money and property Interest Rents and concessions RoyaltiesFrom use of money and property Interest Rents and concessions Royalties Miscellaneous Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Sale of real property Gifts and donations From current deposits From invested funds Receipts to correct errors Candelled warrants Miscellaneous For expenses For outlaysSale of property (general county) Miscellaneous (general county)Sale of property Land and buildings Equipment Produce from county operations Other sales Miscellaneous Cancellations, rebates, and refunds Other miscellaneousOther revenue Premium and accrued interest on bond issued Revenue from discontinued districts Revenue applicable to prior years Sale of fixed assets Other sales OtherOther revenue Premium and accrued interest on bond issued Revenue from discontinued districts Revenue applicable to prior years Sale of fixed assets Other sales OtherFrom other financing sources Sale of fixed assets Total transfers in Miscellaneous revenue Other sales Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 ExcludedReceipts to correct errors Cancelled warrants School district subventions Refund on bonds HS $ apportioned Elementary school $ apportioned Sale of bonds County DistrictSchool district subventions Elementary school apportionment HS apportionment Junior college apportionment County school service funds apportionment Other educational money Sale of bonds Receipts from debt obligations(Sale of bonds not included in general operating budget)(Sale of bonds not included in general operating budget)(Sale of bonds not included in general operating budget)Proceeds from sale of bonds Other long-term debt proceedsAgency transactions For state Inheritance taxesAgency transactions For state Inheritance taxes Table C.2 (continued) PPICState Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Poll taxes State land sales State taxes State’s portion of redemption and sales Interest on state highways Others For districts (district special taxes) Roads Schools High schools Reclamation Others For municipalities (single line item) Teachers’ retirement fund Funds for administration and disbursement of blind and aged program Fish and game licenses Others For cities, other counties, and districts (single line item) Table C.2 (continued) PPIC State Controller’s OfficeAll Years 1916–1934 1935–1957 1958–1961 1962–1966 1967–1984 1985–1995 Trust funds and accounts Public adminis- trators fund Overpaid taxes subject to refund Others District taxes Elementary schools High schools Junior colleges School taxes Parks and recreation Lighting Cemetery Reclamation Sanitary, sanita- tion, and sewer Fire Hospitals Roads Mosquitoa State and federal combined. b Fees are allocated between the county and districts. Only the general county line item is included. 106 Table C.3 Components of County Agency Expenditures for Health and Welfare 1916Ð1934 1935Ð1957 1958Ð1962 Conservation of health Health and sanitation except: Sanitary services Other expenses and outlaysHealth and sanitation except: Current expenses Capital outlays Charities and corrections except: Probation officers and courts Care of inmates, reform schoolCharities and corrections (county only) except: Probation expenses Reform schoolsCharities and corrections except: Probation department Juvenile hall 1963Ð1984 1985Ð1995 Health and sanitation except: SanitationHealth Public assistance Public assistance 107 Bibliography Business Higher Education Forum, California Fiscal Reform: A Plan for Action, Sacramento, 1994. California Business Roundtable, Agenda for Governance and Fiscal Reform, Sacramento, 1995. California Constitution Revision Commission, Final Report and Recommendation to the Governor and the Legislature, Sacramento, March 1996a. California Constitution Revision Commission, History and Perspective, Sacramento, March 1996b. California Council for Environmental and Economic Balance, California Prosperity Through ReformÑProject CPR, Sacramento, 1995. California Legislative AnalystÕs Office, Making Government Make Sense: A More Rational Structure for State and Local Government, Sacramento, February 1993. California Legislative AnalystÕs Office, 1984Ð85 Budget Perspectives and Issues, Sacramento, 1985. 108 California Planning Roundtable, Restoring the Balance: Managing Fiscal Issues and Land-Use Planning Decisions in California, Sacramento, 1997. California State Board of Equalization, Annual Report 1996Ð97, Sacramento, 1997. California State ControllerÕs Office, Annual Report on Financial Transactions Concerning Cities of California, Sacramento, 1916 to 1995. California State ControllerÕs Office, Annual Report on Financial Transactions Concerning Counties of California, Sacramento, 1916 to 1995. Chapman, Jeffrey, Proposition 13: Some Unintended Consequences, Public Policy Institute of California, San Francisco, September 1998. Detwiler, Peter M., ÒCreatures of Statute . . . Children of Trade: The Legal Origins of California Cities,Ó in California Constitution Revision Commission, History and Perspective, 1996. Doerr, David R., ÒCapsule History of the California Tax Structure,Ó Cal- Tax Digest, November 1997. Erie, Steven, Christopher Hoene, and Gregory Saxton, ÒCoping with Loss of Fiscal Autonomy,Ó white paper for Metropolitan Governance 2000 Project, Claremont Graduate University Research Institute, Claremont, California, presented at the annual meeting of the American Political Science Association, September 2Ð6, 1998. Grodin, Joseph R., Calvin R. Massey, and Richard B. Cunningham, The State of California Constitution: A Reference Guide, Greenwood Press, Westport, Connecticut, 1993. Hartley, James E., Steven M. Sheffrin, and J. David Vasche, ÒReform During Crisis: The Transformation of CaliforniaÕs Fiscal System During the Great Depression,Ó in California Constitution Revision Commission, History and Perspective, 1996. 109 Ladd, Helen, and John Yinger, AmericaÕs Ailing Cities: Fiscal Health and the Design of Urban Policy, Johns Hopkins University Press, Baltimore, Maryland, 1989. Lewis, Paul, and Elisa Barbour, California Cities and the Local Sales Tax, Public Policy Institute of California, San Francisco, July 1999. Shires, Michael, Patterns in California Government Revenues Since Proposition 13, Public Policy Institute of California, San Francisco, March 1999. Shires, Michael, John Ellwood, and Mary Sprague, Has Proposition 13 Delivered? The Changing Tax Burden in California, Public Policy Institute of California, San Francisco, September 1998. Sokolow, Alvin D., ÒThe Changing Property Tax and State-Local Relations,Ó PubliusÑThe Journal of Federalism, Vol. 28, No. 1, Winter 1998, pp. 165Ð187. Tax Digest, ÒIncome and Expenditures of Government in CaliforniaÑ 1900 to 1945,Ó September 1946. Van Alstyne, Aro, Background Study Relating to Article XI: Local Government, California Constitution Revision Commission, San Francisco, 1966. 111 About the Authors J. FRED SILVA J. Fred Silva is Advisor, Governmental Relations, at PPIC. He has been involved for over 30 years in the development of public policy in state and local government. He has worked with the California Council on Intergovernmental Relations, the Office of Planning and Research, and the Senate Local Government Committee. In 1981, he was appointed to the position of Chief Fiscal Advisor to the President Pro Tempore of the Senate; and in 1994, he accepted a position as Executive Secretary to the California Constitution Revision Commission. He is currently advising a number of major committees and task forces involved in reforming the fiscal relationship between state and local governments. ELISA BARBOUR Elisa Barbour is a research assistant at the Public Policy Institute of California. She works on projects dealing with California governance issues. Before coming to PPIC, she did research examining local labor markets, welfare reform, and urban poverty. She also worked for a number of community and advocacy organizations. She holds a B.A. in political science from Oberlin College and a Master's in city planning from the University of California, Berkeley. 112" ["post_date_gmt"]=> string(19) "2017-05-20 09:34:43" ["comment_status"]=> string(4) "open" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(9) "r_1299fsr" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2017-05-20 02:34:43" ["post_modified_gmt"]=> string(19) "2017-05-20 09:34:43" ["post_content_filtered"]=> string(0) "" ["guid"]=> string(51) "http://148.62.4.17/wp-content/uploads/R_1299FSR.pdf" ["menu_order"]=> int(0) ["post_mime_type"]=> string(15) "application/pdf" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" ["status"]=> string(7) "inherit" ["attachment_authors"]=> bool(false) }