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HomeMy WebLinkAbout25-City Manager CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ~rG J N A L From: Lori Sassoon Acting City Manager Subject: Resolution finding a severe financial hardship will exist if additional local property tax funds are seized and additional unfunded mandates are adopted by the State of California Date: May 13,2009 MICC Meeting Date: May 18,2009 Synopsis of Previous Council Action: Recommended Motion: Adopt resolution {!J~ Signature Contact person: Lori Sassoon Phone: 5122 Supporting data attached: staff report HttHchments Ward: All FUNDING REQUIREMENTS: Amount: None Source: (Acct. No.) (Acct. Description) Council Notes: Finance: &50 2009- /OJ~ Agenda Item No. '2. ~ 6-10-0' STAFF REPORT Subiect: Resolution finding a severe fiscal hardship will exist if additional local property tax funds are seized and additional unfunded mandates are adopted by the State of California Back!!round On May 5, the California Department of Finance announced it had proposed to the Governor that the state "borrow" over $2 billion in local property taxes from cities, counties and special districts to balance the state budget, causing deeper cuts in local public safety and other vital services. In order to start that process, the Governor would have to issue a proclamation declaring the existence of a "severe fiscal hardship." The legislature would then have to implement the "borrowing" program by passing urgency legislation (2/3 vote) which identifies how the "loan" will be repaid with interest. This procedure is provided for in Proposition IA of 2004, which allows for a suspension of funds that are otherwise protected from State. A summary of the proposed measure has been prepared by the League of California Cities' financial consultant, and is attached (Attachment A). If the State were to adopt this measure, staff estimates that it would result in a revenue loss of $3.1 million in FY 2009-10. This revenue loss has not been anticipated in our budget projections up to this point, and would obviously have a very significant and detrimental impact on our City's financial position. It is important to recall since in the early 1990's, the State of California has already been shifting property tax revenues from cities to the State. The net cumulative impact of these shifts to San Bernardino has already cost the taxpayers of San Bernardino more than $36 million in city property tax dollars, including a net of more than $3.1 million in FY 2007-08 alone (see Attachment B). In addition, millions of dollars in EDA property tax increment revenue has been lost through a similar shift of funds from redevelopment agencies. Clearly, State's financial situation is a serious one. But it is important that the State solve its own budget situation without turning again to borrow from local governments. This is especially true during these times, when cities such as San Bernardino are already struggling. Financial impact: None by this action. If the State adopts the proposal to borrow 8% of local property tax revenues pursuant to Proposition I A of 2004, this would result in an estimated revenue loss of $3.1 million in FY 2009-10. Recommendation: Adopt resolution fNkc/vN,d- ;t C.aliforniaC.it'lFi nanc.e..c.om rev ~fay 12, 2009 How to Calculate Your Agency's Impact From a Possible $2 Billion Statewide Borrowing of Local Property Taxes On May 5, the Governor's office informed local government representatives of a proposal they are considering to borrow local property tax revenues. TIlls proposal is apparently under consideration if the May 19 Propositions IA through IE fail. The result of the failure of those measures would be a substantial l11erease in the already anticipated budget shortfall for the current f7Y2008~09 and FY2009~10 budget years. In its draft proposal, the State Department of Finance estimated the current maximum statewide value of such a borrowing under Proposition lA (2004) at $2.006 Billion. Background: Proposition 1A (2004) Proposition II\. (2004) prohibits the Legislature from reducing the share of property tax revenues going to the cities, county and special districts in any county, and shifting those shares to the schools or any other non-local government function. However, the Legislature may suspend the property tax revenue protection provisions of Proposition 1 A. under the following conditions: 1. the Legislature may "borrow" not more than 8% of "total amount of ad-valorem property tax revenues that were allocated among all local agencies within (each) county for the fiscal year immediately preceding.. .," 2. the Governor must issue a proclamation declaring a "severe fiscal hardship" for the purpose of invoking the suspension provisions of Proposition lA (2004); 3. the Legislature must enact an urgency statute suspending Proposition IA (2004) property tax protection with 2/3 vote of each house; and 4. the Legislature must enacts a law providing for full repayment of the "borrowed funds" plus interest within three years. 5. The Legislature may not enact such a suspension more than twice in any ten year period and may only do so if any previous borrowing under these provisions has been repaid. "Local agencies" as used in Proposition IA (2004) is defined as cities, counties, and special districts. It does not include redevelopment agencies or school entities. "Property tax revenues allocated" includes all Proposition lA protected property tax revenues including secured & unsecured, supplemental, unitary, as well as transfers of property tax revenues allocated to agencies in the VLF Swap (the VLF Adjustment Amount) and triple flip (property tax in lieu of sales and use tax). It docs not include redevelopment property tax allocations. These are the amounts that are protected from a taking or permanent shift under Proposition L:-\.. Likewise, these are the amounts that are included in the base to which the 8% is applied for a borrowing.1 How To Estimate Your Agency's Risk of Impact From this Draft Proposal The State Department of Finance proposal indicates that the borrowing 'would be taken from agencies as a pcrccntage of property tax revcnues in f7Y2009-10. Under Proposition lA, the amount that may be shifted is limited to the total amount of property taxes allocated in the prccecding year, In other words, each agency 2-211 Is\e l2-o'ta\e Lane. Pavis, c..p... . ~7~'~-~~1~ l'hone: ?30.1?$.3q?~ . fa>: ?30.1?$.3q?~ -2- rev ~1ay 12, 2009 would lose an amount equal to 80/0 of the total propert~.r including rcg,:ular property tax revenues (secured unsecured the VLF Swap and Sales&Use Tax Triple Flip. taxes allocated to that agency in FY2008-09 supplemental etc.) and amounts allocated for These amounts would be shifted from cities, counties and special districts to local ERAF accounts in FY2009-10 (effectl11g thc December 2009 and April 2010 property tax allocarions). Although the DOF docs not say so, Proposition lA requires that the Legislature pass a law that would shift these amounts, plus interest, back to cities, counties and special districts from ERAF funds within three years (by FY2012-13). At this time cities should determine their fiscal risk from this proposal. Local elected officials should be informed of this issue and appropriate action should be taken to make tile public, the media and your local legislative representatives aware of the fiscal effects of such a proposal on your agency. HO\vever, this is just a proposal, one tiut has not been endorsed by the Governor or Legislative Leadership. As such it should not yet be reflected in property tax revenue estimates or budgeting. Frequently Asked Questions 1. I Ihollghlwe had proleded ollr property lax revenues wilh Proposilion 1/1. How can Ihey do Ihis? Proposition 1A prohibits the Legislature from reducing the share of property tax revenues going to the cities, county and special districts. However, Proposition 1A does allow the Legislature to borrow a limited amount of city, county and special district property tax revenues under certain very limited conditions (described above). Such a borrowing would have to be repaid within in three years. It would not help and would only worsen the state's fiscal problems by increasing out year budget problems and damaging economic recovery. Nevertheless, it is an option under the law and the state's fiscal and governance situation is dire. 2. IVe accollllljor Ihe lriple flip reimhllrsemenl aJ wles lax, nol property lax. The lriple flip is nol permanenl property lax: ilwill end when Ihe slales economic recovery bonds are paid off So why is il included here as property laxeJ allotaled? you are accounting for the triple flip correctly: as sales tax. But it's not accounting procedures and policies that govern here. The controlling legal language is what matters and that is found in Proposition 1A. The definitions of "local agencies" and property taxes allocated in Proposition 1A are not necessarily the same as those terms are defined for other purposes. Because the Triple Flip reimbursement is protected by Prop 1A it is also included in the calculation of the limit subject to borrowing.' :1. iJ IhiJ before ER/lF or after? The amounts that are shifted annually from your agency to ERAF are not allocated to your agency. So ERAF is not a part of "property taxes allocated" in this calculation. 4. Does thiJ include the ci(YJ' cont,iblltion to redevelopment tax increment? No. Redevelopment property tax increment that would otherwise be allocated to your agency is not included. Redevelopment agencies are not "local agencies" within the definitions of Prop1A and Ga\iforniaGit'lFinanl.e.com -3- cev May 12, 2009 ROA tax increment is not allocated to cities, counties or special districts. taxes allocated does NOT include redevelopment agency pass-throughs, allocated to redevelopment agencies, then passed-through to counties. For counties, property as these moneys are 5. Should wefactor thi.r into ollr t<r2009-/0 budget? No. This is just a proposal. In such difficult times as these, the state Oept of Finance and the LAO have a duty to explore and analyze every possible option. This has not been endorsed by the Governor or Legislative Leadership. It should not yet be reflected in your property tax revenue estimates or budgeting. 6. fJ thiJ a/lIve can e>.ped in termJ of mtJ to ary or county reVef!lfeJ? DoeJ thiJ mean we won't Jee a propoJa! to borrow Proposition 42 jilllds? No. This does not end. There will be other proposals and turns. 7. Don't they understand tbat EMF still.rhijiJ money from local agemieJ~ that we have already given? Some do, but there are certainly misperceptions and legitimate differences of perspective. The most important and effective argument you can make is to explain how this proposal would effect you - not just in terms of dollars - but in terms of public service impacts. 8. Doyon hare citJ-by-citJ estimateJ olthefiscal impact olthis propoJaI? We're working on it. I hope to have something completed very soon. 9. Wby iJ tbe number from your AI(g '08 report entitled "Local Funds at Risk in the 1:'r08-09 State Budget Stando!.." bigber than what I calcnlate baJed on what I get from thi.r calculation? Proposition 1A (2004) provides a formula for the total amount that the state may borrow but does not specify how that borrowing may be spread among individual local agencies. The scenario we ran last year assumed a ERAFIII type allocation in which the total is split evenly among cities (1/3 or $700m), counties (1/3 or $700m), and special districts (1/3 or $700m) and then among individual agencies a la ERAF III - which in the case of cities was based essentially on relative general revenues. The proposal from OOF that came to light last week suggests that they would allocate the borrowing by setting it at 8% of total property tax revenues. This is different than what we assumed last year. The numbers from Aug'08 are NOT valid with regard to this proposal and should be discarded. ~ EG:DNCJTES I Calif Const Article XIII Sec 25.5(a)(1 )(C)(iv) says "A suspension [of these property tax protections] shall not result in a total ad valorem property tax revenue loss to all local agencies within a county that exceeds 8 percent of the total amount of ad valorem property tax revenues that were allocated among all local agencies within that county for the fiscal year immediately preceeding the fiscal year for which [the property tax protections are suspended]." In Article XIII Sec 25.5{b), "Ad valorem property taxes" is defined as "all revenues derived from the tax collected by a county under subdivision (a) of Section 1 of Article XIIIA regardless of any of this revenue being otherwise classified by statute." This section aiso defines "Local agency" as having the same meaning as in Revenue and Taxation Code Section 95: city, county and special district, and special district does not include redevelopment agencies. These definitions define the scope of property tax protection but also pertain to determining the base for the 8% limit. c..a\iforniac..itiFinanc.e..tom -4- rev May 12, 2009 1 As a practical matter, that Proposition 1A 8% borrowing limit was set to approximate the $1.3 Billion ERAF 111 shift amount (with adjustment for growth over time) in the Prop 1A negotiations, so leaving out the triple flip and/or the VLF swap from the calculation would just have required a larger percent than 8% and the overall impact would have been the same with more complicated language, Ga\ifornia(..it'lfinant.e,wm '" "- l\,I 0 '2: .::: u ~. 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E o " .; " C '" C ~ ';j '" 'C '- ~ ~ V "0 Q) ro E ~ W ^ 00 o o ('oJ >. :; --, () E 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (C(Q)~l( RESOLUTION NO. A RESOLUTION OF THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BER"IARDlNO FINDING A SEVERE FISCAL HARDSHIP WILL EXIST IF ADDITIONAL LOCAL PROPERTY TAX FUNDS ARE SEIZED AND ADDlTIOl'iAL UNFUl'iDED MANDATES ARE ADOPTED BY THE STATE OF CALIFORNIA BE IT RESOLVED BY THE MAYOR A:"ID COMMON COUNCIL OF THE CITY OF SAN BERNARDINO AS FOLLOWS: WHEREAS. the current economic crisis has placed cities under incredible financial pressure and caused the city of San Bernardino and other cities to make painful cuts, including layoffs and pay reductions of city workers, decreasing maintenance and operations of public facilities, and reductions in direct services to keep spending in line with declining revenues; and WHEREAS, since the early 1990s the state government of California has seized over S8.6 billion of city property tax revenues statewide to fund the state budget even after deducting public safety program payments to cities by the state: and WHEREAS, in FY 2007-08 alone the state seized S895 million in city property taxes statewide to fund the state budget after deducting public safety program payments and an additional $350 million in local redevelopment funds were seized in FY 2008-09; and WHEREAS, the most significant impact of taking local property taxes has been to reduce the quality of public safety services cities can provide since public safety comprises the largest part of any city's general fund budget: and WHEREAS, in 2004 the voters by an 84% vote margin adopted substantial constitutional protections for local revenues, but the legislature can still "borrow" local property taxes to fund the state budget: and WHEREAS. on May 5 the Department of Finance announced it had proposed to the Governor that the state "borrow" over $2 billion in local property taxes from cities, counties and special districts to balance the state budget, causing deeper cuts in local public safety and other vital services: and WHEREAS, in the past the Governor has called such "borrowing" proposals fiscally irresponsible because the state will find it virtually impossible to repay and it would only deepen the state's structural deficit. preventing the state from balancing its budget; and WHEREAS, the Legislature is currently considering hundreds bills, many of which would impose new costs on local governments that can neither be afforded nor sustained in this economic climate: and 5 - / fj -O~ :tt;}S- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 A RESOLUTION OF THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO FI:'IIDING A SEVERE FISCAL HARDSHIP WILL EXIST IF ADDITIONAL LOCAL PROPERTY TAX FUNDS ARE SEIZED AND ADDITIONAL UNFUNDED MANDATES ARE ADOPTED BY THE STATE OF CALIFORNIA WHEREAS, state agencies are imposing, or considering, many regulations imposing unfunded mandates on local governments without regard to how local agencies will be able comply with these mandates while meeting their other responsibilities; and WHEREAS, the combined effects of the seizure of the City's property taxes, increasing unfunded state mandates, and the revenue losses due to the economic downturn have placed the city's budget under serious fiscal pressure; and WHEREAS, our city simply can not sustain the loss of any more property tax funds or to be saddled with any more state mandates as they will only deepen the financial challenge facing our city: and WHEREAS, a number of the Citv's financial commitments arise from contracts, . . including long term capital leases and debt obligations which support securities in the public capital markets. that the City must honor in full unless modified by mutual agreement of the parties. NOW, THEREFORE BE IT RESOLVED BY THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO AS FOLLOWS: SECTION I. The City of San Bernardino will experience a severe fiscal hardship if the recommendation of the Department of Finance to "borrow" $2 billion of local property taxes is supported by the Governor and the Legislature. For that reason, the Mayor and Common Council strongly and unconditionally oppose the May 5 proposal of the Department of Finance and any other state government proposals to borrow or seize any additional local funds, including the property tax, redevelopment tax increment, and the city's share of the Prop. 42 transportation sales tax. SECTION 2. The City strongly urges the state legislature and Governor to suspend the enactment of any new mandates on local governments until such time as the economy has recovered and urges the state to provide complete funding for all existing and any new mandates. SECTION 3. The City Clerk shall send copies of this resolution to the Governor, our state senator(s), our state assembly member(s) and the League of California Cities. III III III 1 2 3 4 5 6 7 8 A RESOLl'TION OF THE MAYOR AND COIW\10N COUNCIL OF THE CITY OF SA:'\ BERi'l;ARDlNO FINDING A SEVERE FISCAL HARDSHIP WILL EXIST IF ADDITIONAL LOCAL PROPERTY TAX FUNDS ARE SEIZED AND ADDITIONAL U'\Fl'NDED MA'\DATES ARE ADOPTED BY THE STATE OF CALIFOR'IIA I HEREBY CERTIFY that the foregoing Resolution was duly adopted by the Mayor and Common Council of the City of San Bernardino at a meeting thereof. held on the day of , 2009, by the following vote, to wit: 9 Council Members: AYES NAYS ABSTAIN ABSENT 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ESTRADA BAXTER BRP.\IKER SHORETT KELLEY JOHNSON MCCAMMACK City Clerk The foregoing resolution is hereby approved this day of 2009. Patrick J. Morris. Mayor City of San Bernardino Approved as to form: ,f~