Fiscal Reform: Equity, Stability, Harmony.
Restructuring Local Government Finance in California

California's fiscal crisis provides us a historic opportunity to structurally reform how local government is financed.

Our current system has evolved into a Byzantine maze of diversions, subventions, pass-through, subsidies and chronic finger pointing among cities, counties, school districts and the state for who deserves more money. We endlessly blame each other for taking away "our" money.

I was a public school teacher for 20 years, a member of the Fullerton City Council for 18 years, and now an Orange County Supervisor for two months. As a teacher, I saw cities take away school money through redevelopment diversions. As a city official, I saw the schools taking away city money through ERAF diversions, and neighboring cities raiding our sales tax base by stealing our auto dealerships. And we all blamed the state, especially now that I am a county supervisor.

The time to blame each other is over. The state is us. All local governments are created and empowered by the state, and it is the legislature that now must and can fix our broken system of financing local government.

How do we fix it? Two steps:

1) Change the property tax allocations to guarantee all cities and counties a greater and more equitable share of their property taxes.

2) In exchange, send the local share of the sales tax to the state general fund to help pay for public education.

Free city and county governments from their reliance on sales taxes by assuring them the property tax revenues they need. Pool state sales tax revenues to assure adequate funding for public education.

By weaning local government away from sales taxes, we end the fiscalization of land use and the subsidization and over-building of commercial development. We end the shameless shakedown of cities by big box retailers, auto dealers, and NFL team owners for even-greater public handouts. In Orange County alone, over $30 million in public dollars have been given to Costco for building new stores and an estimated $300 million has been handed to Costco statewide. Ending reliance on sales tax will break the cycle of wasteful commercial subsidies and restore these public funds to serving the public.

Costco's, Wal-Mart's, auto dealers, hotels and even pro sports franchises will continue to do business in California without these massive giveaways. As a state, California is too rich a market to ignore. With sales taxes going into a statewide pool, there will be no motive for local governments to continue the wasteful bidding wars over the next big box or car dealer. With more property taxes assured, cities and counties will welcome housing, as quality residential will pay for itself with increased property tax revenues.

In 1999, the Public Policy Institute of California issued its report "California and the Local Sales Tax". It conducted a poll of 330 city managers statewide as to their land use preferences for their cities. Their overwhelming choice was for new retail. At the bottom of the list was industrial. Second to last was residential. Cites want consumption, not production. Cities want people to buy things, not make things. Cities value people as consumers, not homeowners. But, we can change this by altering the fiscal incentives that have created these distorted priorities.

Let our fiscal system reflect our values: Quality neighborhoods. Fair treatment for all businesses, not subsidizing the large at the expense of the small. And a proper jobs-housing balance that allows people to work close to where they live and live close to where they work.

With greater reliance on property taxes, cities and counties will encourage housing, neighborhood maintenance and quality of life. With less reliance on sales taxes, we will stop subsidizing commercial development and leave business decisions up to the free market, where they belong.

A key component of this formula is to allow cities and counties to pool their redevelopment funds into their general funds. Allow redevelopment revenues to be used for operations and maintenance that benefit all. End the artificial distinction between redevelopment funds and general funds. End the wasteful shell game by which cities use redevelopment monies to subsidize retail to get sales tax.

Redevelopment agencies now divert $2.1 billion annually, or 10% of all property taxes statewide, most of it to subsidize corporate retailers, hotels, auto malls, multiplexes and even gambling casinos. It's no surprise that Governor Davis now propose to tap these funds for public education. Public money should build classrooms, not Costco's. A better solution however, is to restore the $2.1 billion to city and county general funds in exchange schools getting more sales tax revenues.

With that additional $2.1 billion in redevelopment funds flowing to their general funds, local governments will have more money for infrastructure and services. With sales taxes flowing to the state, there would be no incentives to subsidize retail. This would not simply re-slice the pie. IT would increase the size of the pie. Ending sales tax and property tax giveaways to private businesses will free more money to serve the public. I claim no personal credit for proposing this property-sales tax shift today. It has been long discussed by academics and policymakers. It was specifically recommended by the Wilson/Hertzberg Commission and Speaker Villaraigosa's Commission on State and Local Government Reform. That was in 1999. 2003 brings us a new sense of urgency, an urgency to bring rationality and equity into a broken system, and to free money once serving private interests to now serve the public interest.

Now is the time. We are the leaders. This is the vision. Lets make it happen.