Local Governments Take Hit With Calif. Budget

Local Governments Take Hit With Calif. Budget

The two most relevant factors affecting local government as a result of the newly signed State of California budget package are:

  1. The state’s borrowing of $1.935 billion from Proposition 1A local government property tax revenues in 2009-10
  2. A funding shift of $2.05 billion in redevelopment agency property tax revenues in 2009-10 and 2010-11.

The Senate passed, but the Assembly failed to approve, a measure that would have authorized the state to borrow $1 billion in HUTA funds from local governments. The Senate measure provided that the loan would be repaid over a 10-year period. This measure differed from the agreement announced earlier, which would have shifted the funds to the state with no repayment obligation.

Both the Assembly and Senate passed another measure referred to as the “City of Industry” proposal to provide a 40-year extension to redevelopment plans after they expire in exchange for an infusion of cash to the General Fund in order to help pay the state’s deficit. Nonetheless, just before sending the package of bills to the governor’s desk, the Assembly pulled the bill off the table and killed the proposal.

Suspension of Proposition 1A

Perhaps one of the most controversial provisions of the budget agreement is combined in budget trailer bills AB 14 & AB 15 — the borrowing of $1.935 billion of local government property tax revenues in 2009-10 to schools and/or counties to generate an equivalent amount of state savings.

The borrowed sums will be shifted to county level Supplemental Revenue Augmentation Funds (SRAF) where they will be used to fund K 12 schools, courts and prisons, and Medi Cal, hospital and K 12 school bond expenses that would otherwise be funded from the state General Fund. Pursuant to Proposition 1A (2004), the maximum diversion from any one jurisdiction would be 8 percent of an entity’s property tax collections and the state must repay the amount shifted, with interest, no later than June 30, 2013.

To alleviate any budget impacts the borrowing may have on local government, the legislation also authorizes a securitization mechanism through a local government-created joint powers authority (JPA) to issue bonds against the state’s repayment obligation and use the proceeds to replace the diverted property taxes of those local agencies that participate in the JPA.

Those local agencies that can sustain the 8 percent shift this year have the option of not participating in the JPA and then be repaid by the state directly at an interest rate that will be set by the Department of Finance, subject to a cap of 6 percent.

However, it is questionable that the JPA will be able to sell those notes to investors at a time when the economy is weak and the state’s credit rating is barely hovering above junk bond status. Even if the JPA can attract investors, it is uncertain whether it can sell the full note amount of $2.25 billion.

The Legislature still needs to figure out a plan should the JPA securitization plan not result in what state leaders envisioned.
AB 15 includes a hardship provision for those local agencies that are in or in danger of bankruptcy or unable to provide core services to apply to the Department of Finance for a reduction or elimination of their property tax suspension. The plan puts a cap of 10 percent of the total suspension amount in any county for the amount that can be exempt from the suspension.

In addition, those hardship amounts will be reallocated to all the other local agencies in the county to make up the difference in property tax amount shifted to the state. In other words, districts may have to pay more than 8 percent of their property tax revenue if other local agencies in the county are granted a hardship exemption. Leaders are banking on the securitization mechanism working properly so that no local agency would have to apply for a hardship provision, as their property tax shift would be replaced by notes sold through the JPA.

The plan also includes an appropriation to local government that pays back the total property tax revenue borrowed at the end of three years, as required by the Constitution, and requires the repayment of local property taxes to be third in priority, right below education and bond debt.

Given the current state of our treasury and assuming this trend continues, this appropriation is meaningless if there is no cash available to make the full repayment on time. The current language sets a June 30, 2013, repayment date. According to the California Special Districts Association, this date sets the state up for failure to pay back the property tax because of the cash payments made before that date for short term borrowing, education, bond payments and other expenses. For this reason, the repayment date should be moved up to May 1, 2013, a time when cash is plentiful in state coffers.

Diversion of Redevelopment Agency property tax revenues

Budget trailer bill AB 26 allows the state to divert up to $2.05 billion in redevelopment agency property tax revenues in 2009-10 and 2010-11. AB 26 requires redevelopment agencies to shift $1.7 billion in Fiscal Year 2009-10 and $350 million in Fiscal Year 2010-11 into a new fund to balance K 12 schools that serve the redevelopment areas and the housing built by redevelopment agencies.
This shift may be made from reserves or current income, including tax increment, proceeds of land sale or bonds, interest or other earned income, or borrowing the 20 percent of the tax increment that is normally dedicated to the low and moderate income housing fund. A redevelopment agency may also have its parent agency pay in its stead. AB 26 allows agencies to extend the life of their redevelopment plan by one year.

This shift may be made from reserves or current income, including tax increment, proceeds of land sale or bonds, interest or other earned income, or borrowing the 20 percent of the tax increment that is normally dedicated to the low and moderate income housing fund. A redevelopment agency may also have its parent agency pay in its stead. AB 26 allows agencies to extend the life of their redevelopment plan by one year.

The same amount of base school property tax is shifted to the county level Supplemental Revenue Augmentation Funds. From these funds, $850 million will be used to fund courts, prisons, and Medi Cal, hospital, and K 12 school bond expenses that would otherwise be funded from the state General Fund. The other $850 million is used to fund K 12 school costs offsetting Proposition 98 General Fund costs.