Comments by Llewellyn Miller, Council Member before the California Assembly Committee on Local Government March 5, 2003

By Llewellyn "Lew" Miller

As we explore reforms, whether we go as far as revisiting Prop 13 or making adjustments on the edges, we will be risking yet more unintended consequences. The lack of local discretion in our current system (essentially limited to developing sales tax or increase taxes) prevents even a good management team led by strong elected officials blessed with cooperative constituents from pursuing effective recovery or development strategies.

Introduction and Summary

Proposition 13 and its early offspring created a fiscal environment with reduced powers of taxation and spending by local governments. The state further constrained local discretion by shifting property tax flows and restraining own-source revenue, some of which was replaced with subventions. Since then revenue flows for all cities have been less reliable and more vulnerable to recession.

When inevitable recession came in the late 1980s, a new generation of propositions and reforms emerged that had several unintended consequences. Among them, even more fiscal control concentrated in Sacramento and a system so complex that very few people can comprehend. In fact a good fraction of them have been in this room today.

At the same time as these changes to state finance, the "New Federalism" was evolving in Washington (see note on New Federalism). The Reagan era reforms sought to put a cap on federal flows to local governments and place more decision-making in the hands of state governments.

From a community's point of view, these reforms reduced money flows into their general funds from revenue sharing and set up a complex and expensive scramble for grants distributed at the state and federal levels. From a political sense, the state is positioned correctly to distribute funds between federal and local governments.

Further, the theoretical justification for a dominant state role in the financing of local governments is:

· To equalize access to resources so that no community is left to fail because of an inadequate tax base. The Vehicle License Fee is a prime but uncommon example.

· To even out the tax effort required by the community to reach acceptable levels of service + for example, by compensating for regional differences in cost of living

However, this did not happen in our state. Instead, in California's case the state has used local resources to secure its own health, sometimes increasing disparity among cities in the process. By way of a recent example, the confiscation of VLF would have a much greater impact on small poor communities than others + not only does it eliminate one of the few equitable distributions, it is a much higher fraction of the general funds for stressed small communities when compared to other types.

But more generally, the lack of local discretion in our current system (essentially limited to developing sales tax or increase taxes) prevents even a good management team led by strong elected officials blessed with cooperative constituents from pursuing effective recovery or development strategies.

As we explore reforms, whether we go as far as revisiting Prop 13 or making adjustments on the edges, we will be risking yet more unintended consequences. We have an obligation to guard against making things worse, especially for the most vulnerable communities, the small and/or poor ones.

To that end, I am suggesting adoption of a community budget impact statement requirement for all state budget adjustments, voter initiatives, and program re-authorizations. This statement would go into greater detail than the existing fiscal impact statement. This document would determine and disclose the specific marginal fiscal impacts on city and county budgets. Even if we can't predict the political will for real reform or its consequences, we can at least safeguard against the worst foreseeable detrimental effects.

A budget impact statement would serve at least two purposes. First it would set forth the degree to which the measure being considered is relatively stress neutral across city types and conditions. Second, if designed properly, it would be sufficiently intuitive so that typical interested voters could know whether it is likely to help or hurt their community. (see note on Budget impact statement)

This second point is important because we need to introduce some voter transparency to the funding process. We should also help residents not to vote against their own interests.

Some examples of funding features, whether by ballot or legislative action that may impact local governments differently depending on their fiscal conditions are:

· Matching fund requirements for grants

· Temporary programs or other funding vehicles with unspecified terminations

· Grants that do not fully cover administrative costs

· Grants that favor previous recipients

· Highly competitive grants that require elaborate application but have subjective acceptance criteria draining grant writing resources

· and, of course unfunded mandates

Using Proposition 49 (The After School Education and Safety Program Act) as a recent example, we can see some features that are unfavorable to small and/or poor communities.

· 50% matching fund

· Preference to current grant recipients

· Lack guaranteed continued support + this may build service constituencies that outlive funding

The budget impact statement would clarify these issues and provide disclosure to legislators and voters alike.

Achieving Equity with Reform

So what would such an assessment look like? Right now, there are no universally accepted standards but there has been some progress by various professional groups toward that end (see notes Financial Condition). The true objective is to measure the gap between spending requirements and the capacity to generate the revenue. That gap is not easy to measure directly but it always depends on:

· The concentration of high need constituents · The ability to pursue further self taxation · Reliance on inter-government transfers · Predictability/reliability of future revenue sources

Reforms will have some effect on all of these in some measurable way. They should be calibrated not only to target neutrality, but also to facilitate improvement where most needed.

Any successful reform will require a measurement of fiscal impact to help determine the extent of alleviation or exacerbation of financial stress to cities and counties.

Suggested reforms have typically come in the form of:

· Re-allocation of revenue streams · Adjustment of vote requirements for taxes · Re-assignment responsibility for government-provided services to different levels

Some reform proposals have tended to have revision of Prop 13 as a common thread (see in notes Reform Proposals). The single most consistent underlying theme has been financing services from locally levied taxes.

It should also be acknowledged that due to many factors, including state policies, disparity in the financial conditions among communities and the income distribution of state residents has increased over the last few decades.

So merely increasing discretion over local taxation and spending might have the effect of locking inequity in place or making it worse. Towns that have experienced serious declines in their local tax base will have a much less robust escape route to recovery.

So what have I said? I don't pretend, at least not yet, to have the complete solution to reform question. And I don't know how deeply any new Sacramento reform effort will go. I am convinced that, funding can be more effectively targeted if the following criteria are applied:
1. Sensitive to community type and fiscal condition;
2. Increased discretion so that even small or poor communities have a better chance at self-redemption; and,
3. Financial and administrative burden of chasing competitive block grants is reduced so that size and wealth does not drive funding opportunities the way it does today.

Thank you for receiving my comments. I would be pleased to answer any questions.

Notes:

Reform Proposals: Excerpted from The State-Local Fiscal Relationship in California: A Changing Balance of Power, J. Fred Silva and Elisa Barbour,1999, Public Policy Institute of California - Reform efforts of the 1990s:

California Constitution Revision Commission: Recommended increasing home rule power by amending Proposition 13 to give local governments control over the allocation of the property tax. California Legislative Analyst's Office: Recommended a sorting out of state-local programmatic responsibilities and an increase in local control by amending Proposition 13 to allow greater local control of the property tax. Business Higher Education Forum: Recommended strengthening local government by revising Proposition 13 to provide more local control of the property tax. California Business Roundtable: Recommended revising Proposition 13 to allow for more power to raise and spend local taxes. California Planning Roundtable: Recommended providing a stable share of the property tax for local services and permitting local governments to work together to allocate tax revenue. California Council on an Economic and Environmental Balance--CPR Project: Recommended providing greater control of local taxes to local governments.

Budget impact statement

Purpose: To highlight detrimental funding features by establishing fiscal equity criteria against which urban funding and anti-poverty program creation or modifications are measured for their effect on city budgets. I suggest a device analogous in function to environmental impact reports required by federal and state agencies, and fiscal impact statements performed for localities to measure the net revenue implications of proposed developments. Such an urban budget impact statement would, among other findings, indicate a) the effect on city financial flexibility through constraints on budget line items, b) degree of mismatch in time horizon between funding and expected program life to indicate funding stability, c) likely affect on bond rating d) implications of matching fund provisions. A methodology would be developed that met government fund accounting standards, required only readily available inputs and would be sufficiently intuitive for "mass" public consumption.

Financial condition is assessed by comparing a government's results with those for similar-sized governments. One beginning point might be 10-point test of financial condition based on key the ratios as developed by Professor Ken Brown (retired) of Southwest Missouri State University:
1. Total revenues/ Population (all governmental funds)
2. Total general fund revenues from own sources/Total general fund revenues
3. General fund sources from other funds/Total general fund sources
4. Operating expenditure/Total expenditures
5. Total revenues/Total expenditures
6. Unreserved general fund balance/Total general fund revenues
7. Total general fund cash and investments/Total general fund liabilities
8. Total general fund liabilities/Total general fund revenues
9. Direct long-term debt/Population
10. Debt service/Total revenues

These would have to be synthesized into a smaller set of indicators easier comparisons. The resulting set would be applied with emphasis specific to program type and city category.

New Federalism effects

· Funding has transformed in ways that make the stable and predictable revenue streams necessary for effective projects less likely. Sources such as revenue sharing, public works, job training and mass transit, have generally not kept up with needs at best or have almost disappeared at worst.

· Programs allocated by "place" and that could be used to supplement discretionary city budgets such as community development block grants, mass transit, and water and sewage grants, have declined, sometimes dramatically. Flows that follow people such as Medicare and social security continue to grow.

· Federal programs are increasingly administered at the state level dispersed among many agencies. Resources are significantly less targeted to their original poor recipients and more loosely monitored. The acquisition process requires disadvantaged cities and districts to contest each other and wealthier towns in arenas such as capped competitive block grants.

· Most grant programs are designed to encourage new programs on a temporary basis. They typically require administrative costs that are only partly covered.