A deal lets 5 counties off the hook

Charitably, officials in five wealthy Bay Area counties erroneously – but in good faith – miscalculated how local property taxes were divvied up among local governments and schools.

A more jaundiced view is that five county auditors disregarded state law and state Department of Finance guidelines and grabbed hundreds of millions of dollars in “excess ERAF” funds that were supposed to go to schools.

ERAF stands for the Educational Revenue Augmentation Fund and “excess ERAF” occurs when local property taxes are sufficient to support local schools without major state aid, a condition that occurs in counties with high property values and relatively few school children. The property taxes unneeded for schools go to other local agencies.

Whatever their underlying motives, if any, the calculations have been providing a windfall of as much as $350 million a year for the City and County of San Francisco and Napa, Marin, San Mateo and Santa Clara counties, according to a report from the Legislature’s budget analyst, Gabe Petek.

The Department of Finance and Petek’s staff contended that beginning a few years ago, auditors in the five counties shorted schools by not counting charter school pupils and erroneously including property taxes from dissolved local redevelopment agencies in their calculations. Over three years, Petek said, more than a billion dollars were erroneously retained by the five counties.

“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. Under the constitutional formulas governing education funding, the changes would mean less revenue is available for school and community college programs in the 2020‑21 budget,” Petek wrote.

County officials were well aware that they had received many millions of unanticipated dollars and specifically earmarked them for special projects and programs. In fact, San Francisco’s Board of Supervisors and Mayor London Breed jousted openly over their $415 million windfall.

State finance officials, however, saw the money as an indirect drain on the state budget, because money not going to schools would be backfilled by the state. Gov. Gavin Newsom’s revised 2020-21 budget, released in May, proposed to expose the counties to lawsuits and levy civil penalties on those that failed to follow state procedures for ERAF calculations.

The five counties deployed their political assets to oppose what their officials labeled as a money grab by state officials.

San Francisco supervisors issued a resolution opposing Newsom’s efforts to claw back the money. Supervisor Hillary Ronen called it an “egregious and predatory attempt to grab desperately needed local revenue.”

“It is ugly, and we have to stop it,” she said. “For the state to pretend to cover its shortfall by simply taking more money from local jurisdictions doesn’t make any sense.”

However, San Francisco’s position didn’t get much sympathy from one of the city’s own legislators, Assemblyman Phil Ting, who also chairs the Assembly Budget Committee and was enmeshed in efforts to close the state’s $54 billion deficit.

“The system doesn’t work if all of the counties don’t respect and follow the same rules,” Ting told the San Francisco Chronicle. “This is about equitable school funding, and money that should have gone to schools and didn’t.”

The pushback from the five counties paid off. As the final budget was being hammered out last month, a compromise was struck. The counties can keep the money they had diverted before July 1, 2019, but would be subjected to stricter “guidance” for the 2019-20 and subsequent fiscal years to be issued by the state controller’s office, not the Department of Finance.