Four decades of decisions on government finance created a conflict between the state and five Bay Area counties that Gov. Gavin Newsom’s budget proposes to settle.
Fair warning. What you are about to read is the briefest possible summary of one of the most arcane features of government finance in California, albeit one that involves hundreds of millions of taxpayer dollars and illustrates how financial decisions over four decades interact to create quagmires that defy rationality.
To begin at the beginning, in 1978 California voters overwhelmingly passed Proposition 13, which limits property taxes on homes and other real estate. It reduced property taxes that had supported local agencies and shifted the primary burden of financing schools and community colleges to the state government.
Decades later, in 1998, voters also passed Proposition 98, a very complex measure aimed at giving each school district a guaranteed revenue stream. Generally, the state would add enough money to each school district’s share of local property taxes to meet a minimum revenue floor based mostly on student enrollment.
Just a few years later, Republican Pete Wilson became governor and almost immediately faced a severe economic recession. As state revenues declined sharply, Wilson and the Legislature struggled to meet their Proposition 98 obligations to schools and some demented genius dreamed up the Educational Revenue Augmentation Fund (ERAF) as a way out of the dilemma.
It required county auditors to give their local school districts much bigger slices of their property tax pools, thereby reducing what the state budget had to contribute under Proposition 98 and forcing counties, cities and other local agencies to eat the resulting revenue reductions. Eventually the state’s voters, at Wilson’s behest, somewhat offset their losses by approving a statewide boost in sales taxes that were given to local governments under the guise of improving public safety services.
It was a political shell game, of course, but nevertheless, ERAF remains in law to this day, although occasionally tweaked to ease the perpetual conflict between state and local officials over money. It’s also spawned a political tug-of-war between state officials and five Bay Area counties over how ERAF’s division of property taxes is being administered.
The five counties — San Francisco especially — have enjoyed soaring property tax revenues in recent years as the taxable values of homes and other property rocketed skyward. Thus they experience what is known as “excess ERAF,” since property taxes are often sufficient to finance their schools without additional state aid.
The Legislature’s budget analyst, Gabe Petek, issued a report in March alleging that auditors in those five counties have been violating state rules on how local property tax revenues are divided, shifting additional funds into local government coffers by shorting schools.
“We recently learned that a few counties have made changes to the way they calculate excess ERAF,” Petek wrote. “The changes would increase the amount of property tax revenue shifted from schools to other local agencies by hundreds of millions of dollars per year.”
Mostly, Petek says, the five county auditors are not counting charter school students in their calculations, as state law requires, and miscalculating the additional property taxes that resulted from the abolition of redevelopment, a program to improve blighted neighborhoods. He pegs the erroneous shift at $350 million a year.
A provision of Gov. Gavin Newsom’s revised state budget, released last month, would expose the errant counties to lawsuits and impose steep financial penalties on those that don’t follow the state’s rules on property tax allocations. The affected counties are trying to derail it.
It’s a conflict 42 years in the making.