HomeMy WebLinkAbout2020-04-22 Steering Committee Supplemental AgendaOrange County Sanitation District Regular Meeting of the STEERING COMMITTEE
Wednesday, April 22, 2020 5:00 P.M. Administration Building
10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433
SUPPLEMENTAL
AGENDA
The addition of the following item was received from the General Manager after the publication of the Steering Committee Agenda: INFORMATION ITEM:
5. COVID-19 FINANCIAL IMPACT UPDATE RECOMMENDATION:
Information Item.
I hereby certify under penalty of perjury under the laws of the State of California that the foregoing Supplemental Agenda was posted outside the main gate of the Districts’
Administration Building located at 10844 Ellis Avenue, Fountain Valley, California not less
than 72 hours prior to the meeting. Dated this 17th day of April 2020.
Tina Knapp, MMC Assistant Clerk of the Board
Orange County Sanitation District
STEERING COMMITTEE
Agenda Report
Administration Building
10844 Ellis Avenue
Fountain Valley, CA 92708
(714) 593-7433
File #:2020-1046 Agenda Date:4/22/2020 Agenda Item No:5.
FROM:James D. Herberg, General Manager
Originator: Lorenzo Tyner, Assistant General Manager
SUBJECT:
COVID-19 FINANCIAL IMPACT UPDATE
GENERAL MANAGER'S RECOMMENDATION
RECOMMENDATION:
Information Item.
BACKGROUND
The Board of Directors requested a staff report on potential financial impacts related to COVID-19.
Staff has summarized the potential financial impacts to date.
ADDITIONAL INFORMATION
Revenues
The Orange County Sanitation District (Sanitation District)has a broad-based revenue program.
Although 85%of its income comes from two sources (65%from general user fees and 20%from
property taxes),the income is collected from nearly one million different users.This distribution
reduces the potential impact on the Sanitation District by any individual ratepayer.Additionally,both
of these revenues are collected through the County of Orange (County)semi-annual property tax
collection process.At present,the County has announced no change to its collection of these fees or
the disbursement of funds to the Sanitation District as a result of COVID-19.We anticipate receiving
our next County apportionment later this month.
The Sanitation District does receive 15%of its revenues from other sources that may be negatively
impacted.However,those revenues are also broad-based,split between various permittees,other
government agencies,and interest income.As such,any risk to Sanitation District revenue should
be manageable. However, should the pandemic continue, this risk would increase.
Investment Portfolio
The Sanitation District portfolios remain conservatively positioned and are weathering the volatility in
the markets fairly well given the circumstances.
However,all indications are that the short-term impact of the shutting down of major portions of the
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File #:2020-1046 Agenda Date:4/22/2020 Agenda Item No:5.
However,all indications are that the short-term impact of the shutting down of major portions of the
US economy due to the COVID-19 virus are going to be material.
We have already seen a large monetary policy response from the Federal Reserve,and we expect a
significant fiscal response,both domestically and globally,to help mitigate the economic impact of the
virus on the global economy.
The US consumer and overall US economy was in a solid position prior to the impact of the virus which
should also help the markets recover when we get past the volatility and uncertainty, which is likely to
last for several more weeks.
With respect to portfolio,the Sanitation District’s positioning is conservatively positioned,with
approximately 60%of the holdings in government securities and 5-year government securities that
were purchased as a hedge against interest rate drops.
At present,there are no underlying concerns with the portfolio holdings.Chandler Assets,our
portfolio manager,is monitoring the market and portfolio with the ongoing volatility.Our Finance
Division and our portfolio manager,Chandler Assets,are both set up to work remotely to ensure all
transactions are completed and monitored.
Pension Liability
Due to the lag in evaluating actuarial results,we do not anticipate any changes to our contribution
rates as a result of COVID-19 until July 1, 2021.
Orange County Employees Retirement System (OCERS)actuarial funding policy calls for investment
gains/losses to be smoothed in over five years and are then amortized over 20 years.So,
investment returns below 7%as of December 31,2020 will create an actuarial loss.Those losses
will be smoothed into the valuation over the subsequent five years (as the investment gains from
2019 will be smoothed in over five years as well).
This summer,OCERS will complete its triennial study where all assumptions will be re-evaluated.
Changes in assumptions will also impact the UAAL and contribution rates.Those new assumptions,
once approved by the OCERS board,will be incorporated into the actuarial valuation as of December
31, 2020.
The rates from the 2020 valuation will go into effect July 2022,the soonest employers will start to see
this year’s events (and changes in assumptions)hit their contribution rates.However,staff has
already started to project these changes and will build in our assumptions in to the next two fiscal
budgets.Attached is a message from the OCERS Chief Executive Officer regarding their response
to COVID-19.
Expenditures
Staff is tracking all COVID-19 related expenditures.While there have been both staffing and material
expenditures directly related to the pandemic,these have been minimal in relation to the Sanitation
District’s full operating budget.However,as the pandemic continues,we anticipate additional
expenses to increase.
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File #:2020-1046 Agenda Date:4/22/2020 Agenda Item No:5.
Potential State Actions and History
The impacts of COVID-19 will undoubtedly affect the US and California economies.As such,there
have been concerns that the State may elect to temporarily fill any of its revenue gaps by borrowing
from or otherwise changing its financial relationships with other government entities.
In 1992/93 and 1993/94,to resolve serious budget deficits,the State legislature permanently shifted
$3.6 billion of annual property tax revenue from counties,cities,and special districts to the
Educational Revenue Augmentation Fund (ERAF I and ERAF II).
In 2004/05 and 2005/06,a temporary (2 year)shift of an additional $1.3 billion was enacted by the
legislature (ERAF III).Approximately $16 million of Sanitation District funding was taken as a result
of that shift.Subsequently,State legislation was passed that prevented future reallocations without
repayment to the special districts (Proposition 1A 2004).
In 2009/10,the State borrowed $1.9 billion of property tax revenue from counties,cities,and special
districts.Approximately $5 million was borrowed from the Sanitation District.Approximately $2.5
million was taken from the first installment of property taxes and $2.5 million was taken from the
second installment of property taxes and each amount was repaid within a month of being taken.
In 2010,Proposition 22 was approved,which prohibits the state from redirecting property tax revenue
as it did in 2009-10.
Proposition 22 (2010)
In 2010, voters approved Proposition 22, which, among other things, prohibits the State from
redirecting property tax revenue as it did in 2009-10. Specifically, Proposition 22 eliminates the
State’s authority to borrow property tax revenue from local governments as previously allowed under
Proposition 1A and prohibits the State from requiring redevelopment agencies to shift revenue to K-
14 districts or other agencies. As discussed in the link below (also included as an attachment), the
prohibition on shifting redevelopment funds contributed indirectly to the dissolution of redevelopment
agencies in February 2012.<https://lao.ca.gov/reports/2012/tax/property-tax-primer-112912.aspx>.
RELEVANT STANDARDS
·Protect Orange County Sanitation District assets
·Ensure the public’s money is wisely spent
ATTACHMENT
The following attachment(s)may be viewed on-line at the OCSD website (www.ocsd.com)with the complete agenda
package:
·Memo from OCERS
·Understanding California’s Property Taxes Information
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A Message from OCERS Chief Executive Officer Steve Delaney on the OCERS Response to COVID-19
One of the more frustrating aspects of this COVID-19 crisis is the uncertainty that comes with dealing with something so new and so dangerous. I’m writing to reassure all OCERS members about certain facts of which you can be confident.
Your Benefit is Secure
The most important fact that you need to know is if you are retired, you will get your benefit, paid in full, paid on time. That’s a fact.
OCERS Benefits are determined by the length of time you served the citizens of Orange County. They do not fluctuate with the ups and downs of the financial markets.
The OCERS Investment Portfolio is Sound
In recent weeks, the spread of COVID-19 has increased the volatility of global stock and bond markets. While markets remain unstable, it is important to note that OCERS is a long-term investor and has a history of protecting assets in market downturns.
OCERS’ investment pool is a well-diversified, global portfolio that is built to weather short-term disruptions with an emphasis on securing benefits for OCERS’ members. In 2019, OCERS’ Investment Division took the initiative to protect a portion of its portfolio against a stock market sell-off. Those measures were in place before COVID-19 emerged and have been working to preserve capital in these uncertain markets.
In the coming weeks, there will be talk of some pension funds lacking the cash they need to fully pay benefits. OCERS is not suffering a liquidity crisis and member benefit payments are not at risk. OCERS is cash flow positive, which means that we take in more cash than we need in order to pay benefits. It is an enviable position for us and we appreciate the flexibility that this affords us in turbulent markets. Our focus on delivering timely, accurate and secure benefits continues.
The OCERS Team is Here to Serve You
Our offices may be closed to visitors through April 17th for everyone’s safety, but the entire OCERS team is working remotely processing monthly payroll and getting new retirement applications processed. You can call (714.558.6200), or write (info@ocers.org) – we will receive your comments and requests however you may send
them – we will answer, and we will assist. Our web service portal, myOCERS, is available 24 hours a day and is full of important news as well as the information and facts you need to know in order to retire with confidence or simply continue confident in the retirement you have already begun.
In closing, I’ve had the privilege to serve as OCERS’ Chief Executive Officer for more than a dozen years. When I arrived in January 2008, everyone was afraid of what the financial future might hold as the Great Recession was just beginning. OCERS came through with flying colors. We were ranked among the best, most secure pension systems in the entire country. We still have many of the same staff as well as several OCERS board trustees who were with us during those challenging times and are still here today providing the same sound guidance.
OCERS is celebrating 75 years of dedicated service to you our members. There’s no doubt that times are challenging but one thing you do not need to worry about is OCERS; we’re here, secure, sound and ready to serve.
November 29, 2012
Understanding California’s Property Taxes
Executive Summary
The various taxes and charges on a California property tax bill are complex and often not well understood.This report provides an overview of this major source of local government revenue and highlights key policy
issues related to property taxes and charges.
A Property Tax Bill Includes a Variety of Different Taxes and Charges. A typical California property
tax bill consists of many taxes and charges including the 1 percent rate, voter–approved debt rates, parceltaxes, Mello–Roos taxes, and assessments. This report focuses primarily on the 1 percent rate, which is the
largest tax on the property tax bill and the only rate that applies uniformly across every locality. The taxesdue from the 1 percent rate and voter–approved debt rates are based on a property’s assessed value. The
California Constitution sets the process for determining a property’s taxable value. Although there are someexceptions, a property’s assessed value typically is equal to its purchase price adjusted upward each year by2 percent. Under the Constitution, other taxes and charges may not be based on the property’s value.
The Property Tax Is One of the Largest Taxes Californians Pay. In some years, Californians pay morein property taxes and charges than they do in state personal income taxes, the largest state General Fund
revenue source. Local governments collected about $43 billion in 2010–11 from the 1 percent rate. Theother taxes and charges on the property tax bill generated an additional $12 billion.
The Property Tax Base Is Diverse. Property taxes and charges are imposed on many types of property.For the 1 percent rate, owner–occupied residential properties represent about 39 percent of the state’sassessed value, followed by investment and vacation residential properties (34 percent) and commercialproperties (28 percent). Certain properties—including property owned by governments, hospitals, religiousinstitutions, and charitable organizations—are exempt from the 1 percent property tax rate.
All Revenue From Property Taxes Is Allocated to Local Governments. Property tax revenue remainswithin the county in which it is collected and is used exclusively by local governments. State laws control the
allocation of property tax revenue from the 1 percent rate to more than 4,000 local governments, with K–14districts and counties receiving the largest amounts. The distribution of property tax revenue, however,
varies significantly by locality.
The Property Tax Has a Significant Effect on the State Budget. Although the property tax is a localrevenue source, it affects the state budget due to the state’s education finance system—additional propertytax revenue from the 1 percent rate for K–14 districts generally decreases the state’s spending obligation foreducation. Over the years, the state has changed the laws regarding property tax allocation many times in
order to reduce its costs for education programs or address other policy interests.
The State’s Current Property Tax Revenue Allocation System Has Many Limitations. The state’s
laws regarding the allocation of property tax revenue from the 1 percent rate have evolved over timethrough legislation and voter initiatives. This complex allocation system is not well understood, transparent,
or responsive to modern local needs and preferences. Any changes to the existing system, however, wouldbe very difficult.
California’s Property Tax System Has Strengths and Limitations. Economists evaluate taxes using fivecommon tax policy criteria—growth, stability, simplicity, neutrality, and equity. The state’s property taxsystem exhibits strengths and limitations when measured against these five criteria. Since 1979, revenue
from the 1 percent rate has exceeded growth in the state’s economy. Property tax revenue also tends to beless volatile than other tax revenues in California due to the acquisition value assessment system. (Falling
real estate values during the recent recession, however, caused some areas of the state to experiencedeclines in assessed value and more volatility than in the past.) Although California’s property tax system
provides governments with a stable and growing revenue source, its laws regarding property assessmentcan result in different treatment of similar taxpayers. For example, newer property owners often pay a
higher effective tax rate than people who have owned their homes or businesses for a long time. In addition,the property tax system may distort business and homeowner decisions regarding relocation or expansion.
HOME POLICY AREAS PUBLICATIONS THE 2014-15 BUDGET PROPOSITIONS AND INITIATIVES STAFF CAREERS ABOUT THE LAO
Introduction
For many California taxpayers, the property tax bill is one of the largest tax payments they make each year.For thousands of California local governments—K–12 schools, community colleges, cities, counties, and specialdistricts—revenue from property tax bills represents the foundation of their budgets.
Although property taxes and charges play a major role in California finance, many elements of this financing
system are complex and not well understood. The purpose of this report is to serve as an introductoryreference to this key funding source. The report begins by explaining the most common taxes and charges on
the property tax bill and how these levies are calculated. It then describes how the funds collected fromproperty tax bills—$55 billion in 2010–11—are distributed among local governments. Last, because California’s
property taxation system has evoked controversy over the years, the report provides a framework forevaluating it. Specifically, we examine California property taxes relative to the criteria commonly used by
economists for reviewing tax systems, including revenue growth, stability, simplicity, neutrality, and equity.The report is followed with an appendix providing further detail about the allocation of property tax revenue.
What Is on the Property Tax Bill?
A California property tax bill includes a variety of different taxes and charges. As shown on the sample property
tax bill in Figure 1, these levies commonly include:
The 1 percent rate established by Proposition 13 (1978).Additional tax rates to pay for local voter–approved debt.
Property assessments.Mello–Roos taxes.
Parcel taxes.
The Constitution establishes a process for determining a property’s taxable value for purposes of calculating tax
levies from the 1 percent rate and voter–approved debt. In our sample property tax bill, “Box A” identifies thetaxable value of the property and “Box B” shows the property’s tax levies that are calculated based on this
value. Levies based on value—such as the 1 percent rate and voter–approved debt rates—are known as “advalorem” taxes.
Under the Constitution, other taxes and charges on the property tax bill (shown in “Box C”) may not be based
on the property’s taxable value. Instead, they are based on other factors, such as the benefit the propertyowner receives from improvements.
As shown in “Box D,” the total amount due on most property tax bills is divided into two equal amounts. The
first payment is due by December 10 and the second payment is due by April 10.
How Are Property Taxes and Charges Determined?
Ad valorem property taxes—the 1 percent rate and voter–approved debt rates—account for nearly 90 percentof the revenue collected from property tax bills in California. Given their importance, this section begins with an
overview of ad valorem taxes and describes how county assessors determine property values. Later in thechapter, we discuss the taxes and charges that are determined based on factors other than property value.
Taxes Based on Property Value
The 1 Percent Rate. The largest component of most property owners’ annual property tax bill is the 1 percent
rate—often called the 1 percent general tax levy or countywide rate. The Constitution limits this rate to 1percent of assessed value. As shown on our sample property tax bill, the owner of a property assessed at
$350,000 owes $3,500 under the 1 percent rate. The 1 percent rate is a general tax, meaning that localgovernments may use its revenue for any public purpose.
Voter–Approved Debt Rates. Most tax bills also include additional ad valorem property tax rates to pay forvoter–approved debt. Revenue from these taxes is used primarily to repay general obligation bonds issued forlocal infrastructure projects, including the construction and rehabilitation of school facilities. (As described in
the nearby box, some voter–approved rates are used to pay obligations approved by local voters before 1978.)Bond proceeds may not be used for general local government operating expenses, such as teacher salaries and
administrative costs. Most local governments must obtain the approval of two–thirds of their local voters inorder to issue general obligation bonds repaid with debt rates. General obligation bonds for school and
community college facilities, however, may be approved by 55 percent of the school or community collegedistrict’s voters. Local voters do not approve a fixed tax rate for general obligation bond indebtedness. Instead,
the rate adjusts annually so that it raises the amount of money needed to pay the bond costs.
Debt Approved by Voters Prior to 1978
The California Constitution allows local governments to levy voter–approved debt rates—ad valorem ratesabove the 1 percent rate—for two purposes. The first purpose is to pay for indebtedness approved by voters
prior to 1978, as allowed under Proposition 13 (1978). Proposition 42 (1986) authorized a second purposeby allowing local governments to levy additional ad valorem rates to pay the annual cost of general
obligation bonds approved by voters for local infrastructure projects. Because most debt approved before1978 has been paid off, most voter–approved debt rates today are used to repay general obligation bonds
issued after 1986 as authorized under Proposition 42.
Some local governments, however, continue to levy voter–approved debt rates for indebtedness approvedby voters before 1978. While most bonds issued before the passage of Proposition 13 have been paid off,state courts have determined that other obligations approved by voters before 1978 also can be paid withan additional ad valorem rate. Two common pre–1978 obligations paid with voter–approved debt rates are
local government employee retirement costs and payments to the State Water Project.
Voter–Approved Retirement Benefits. Voters in some counties and cities approved ballot measures or
city charters prior to 1978 that established retirement benefits for local government employees. TheCalifornia Supreme Court ruled that such pension obligations represent voter–approved indebtedness that
could be paid with an additional ad valorem rate. Local governments may levy the rate to cover pensionbenefits for any employee, including those hired after 1978, but not to cover any enhancements to pension
benefits enacted after 1978. Local governments may adjust the rate annually to cover employee retirementcosts, but state law limits the rate to the level charged for such purposes in 1982–83 or 1983–84, whicheveris higher. A recent review shows that at least 20 cities and 1 county levy voter–approved debt rates to paysome portion of their annual pension costs. The rates differ by locality. For example, the City of Fresno’svoter–approved debt rate for employee retirement costs is 0.03 percent of assessed value in 2012–13, whilethe City of San Fernando’s rate is 0.28 percent.
State Water Project Payments. Local water agencies can levy ad valorem rates above the 1 percent rate
to pay their annual obligations for water deliveries from the State Water Project. State courts concluded thatsuch costs were voter–approved debt because voters approved the construction, operation, and
maintenance of the State Water Project in 1960. As a result, most water agencies that have contracts withthe State Water Project levy a voter–approved debt rate.
Property tax bills often include more than one voter–approved debt rate. In our sample property tax bill, for
example, the property owner is subject to four additional rates because local voters have approved bond fundsfor the city and water, school, and community college districts where the property is located. These rates tend
to be a small percentage of assessed value. Statewide, the average property tax bill includes voter–approveddebt rates that total about one–tenth of 1 percent of assessed value.
Calculating Property Value for Ad Valorem Taxes
One of the first items listed on a property tax bill is the assessed value of the land and improvements. Assessed
value is the taxable value of the property, which includes the land and any improvements made to the land,such as buildings, landscaping, or other developments. The assessed value of land and improvements is
important because the 1 percent rate and voter–approved debt rates are levied as a percentage of this value,meaning that properties with higher assessed values owe higher property taxes.
Under California’s tax system, the assessed value of most property is based on its purchase price. Below, wedescribe the process county assessors use to determine the value of local “real property” (land, buildings, and
other permanent structures). This is followed by an explanation of how assessors determine the value of“personal property” (property not affixed to land or structures, such as computers, boats, airplanes, andbusiness equipment) and “state assessed property” (certain business properties that cross county boundaries).
Local Real Property Is Assessed at Acquisition Value and Adjusted Upward Each Year. The processthat county assessors use to determine the value of real property was established by Proposition 13. Under this
system, when real property is purchased, the county assessor assigns it an assessed value that is equal to itspurchase price, or “acquisition value.” Each year thereafter, the property’s assessed value increases by 2
percent or the rate of inflation, whichever is lower. This process continues until the property is sold, at whichpoint the county assessor again assigns it an assessed value equal to its most recent purchase price. In other
words, a property’s assessed value resets to market value (what a willing buyer would pay for it) when it issold. (As shown in Figure 2, voters have approved various constitutional amendments that exclude certain
property transfers from triggering this reassessment.)
Figure 2
Property Transfers That Do Not Trigger Reassessment
Proposition Year Description
3 1982 Allows property owners whose property has been taken by eminent domain proceedings totransfer their existing assessed value to a new property of similar size and function.
50 1986 Allows property owners whose property has been damaged or destroyed in a naturaldisaster to transfer their existing assessed value to a comparable replacement propertywithin the same county.
58 1986 Excludes property transfers between spouses or between parents and children fromtriggering reassessment.
60 1986 Allows homeowners over the age of 55 to transfer their existing assessed value to a newhome, of equal or lesser market value, within the same county.
90 1988 Extends Proposition 60 by allowing homeowners to transfer their existing assessed value toa new home, of equal or lesser market value, in a different participating county.
110 1990 Allows disabled homeowners to transfer their existing assessed value from an existinghome to a newly purchased home of equal or lesser market value.
171 1993 Extends Proposition 50 by allowing property owners affected by a natural disaster totransfer their existing assessed value to a comparable replacement property in a differentparticipating county.
193 1996 Excludes property transfers between grandparents and grandchildren (when the parentsare deceased) from triggering reassessment.
1 1998 Allows property owners whose property is made unusable by an environmental problem totransfer their existing assessed value to a comparable replacement property.
In most years, under this assessment practice, a property’s market value is greater than its assessed value.This occurs because assessed values increase by a maximum of 2 percent per year, whereas market valuestend to increase more rapidly. Therefore, as long as a property does not change ownership, its assessed valueincreases predictably from one year to the next and is unaffected by higher annual increases in market value.For example, Figure 3 shows how a hypothetical property purchased in 1995 for $185,000 would be assessed in2012. Although the market value of the property increased to $300,000 by 2002, the assessed value was
$200,000 because assessed value grew by only up to 2 percent each year. Upon being sold in 2002, theproperty’s assessed value reset to a market value of $300,000. Because of the large annual increase in home
values after 2002, however, the market value was soon much greater than the assessed value for the newowner as well.
Property Improvements Are Assessed Separately. When property owners undertake propertyimprovements, such as additions, remodeling, or building expansions, the additions or upgrades are assessed
at market value in that year and increase by up to 2 percent each year thereafter. The unimproved portion ofthe property continues to be assessed based on its original acquisition value. For example, if a homeowner
purchased a home in 2002 and then added a garage in 2010, the home and garage would be assessedseparately. The original property would be assessed at its 2002 acquisition value adjusted upward each year
while the garage would be assessed at its 2010 market value adjusted upward. The property’s assessed valuewould be the combined value of the two portions. (As shown in Figure 4, voters have excluded certain property
improvements from increasing the assessed value of a property.)
Figure 4
Property Improvements That Do Not Increase a Property’s Assessed Value
Constitutional Amendments Approved After June 1978
Proposition Year Type of Improvement
8 1978 Reconstruction following natural disaster
7 1980 Solar energy construction
31 1984 Fire–safety improvements
110 1990 Accessibility construction for disabled homeowners
177 1994 Accessibility construction for any property
1 1998 Reconstruction following environmental contamination
13 2010 Seismic safety improvements
Assessed Value May Be Reduced When Market Values Fall Significantly. When real estate values declineor property damage occurs, a property’s market value may fall below its assessed value as set by Proposition
13. Absent any adjustment to this assessed value, the property would be taxed at a greater value than it isworth.
In these events, county assessors may automatically reduce the Proposition 13 assessed value of a property toits current market value. If they do not, however, a property owner may petition the assessor to have his orher assessed value reduced. These decline–in–value properties are often called “Prop 8 properties” afterProposition 8 (1978), which authorizes this assessment reduction to market value. Figure 5 illustrates theassessment of a hypothetical decline–in–value property over time. The market value of the property purchasedin 1995 stays above its Proposition 13 assessed value through 2007. A significant decline, however, drops theproperty’s market value below its Proposition 13 assessed value. At this time, the property receives a decline–
in–value assessment (equal to its market value) that is less than its Proposition 13 assessment. For threeyears, the property is assessed at market value, which may increase or decrease by any amount. By 2012, the
property’s market value once again exceeds what its assessed value would have been absent Proposition 8(acquisition price plus the 2 percent maximum annual increase). In subsequent years, the property’s assessed
value is determined by its acquisition price adjusted upward each year.
Homeowners Are Eligible for a Property Tax Exemption. Homeowners may claim a $7,000 exemption
from the assessed value of their primary residence each year. As shown in “Box A” of the sample property taxbill in Figure 1, this exemption lowers the assessed value of the homeowner’s land and improvements by$7,000, reducing taxes under the 1 percent rate by $70 and reducing taxes from voter–approved debt rates bya statewide average of $8.
Two Types of Property Are Assessed at Their Market Value. Two categories of property are assessed at
their current market value, rather than their acquisition value: personal property and state– assessed property.(We provide more information about these properties in the nearby box.)Combined, these types of properties
accounted for 6 percent of statewide–assessed value in 2011–12. Most personal property and state–assessedproperty is taxed at the 1 percent rate plus any additional rates for voter–approved debt.
Properties Assessed at Current Market Value
Personal Property. Personal property is property other than land, buildings, and other permanent
structures, which are commonly referred to as “real property.” Most personal property is exempt fromproperty taxation, including business inventories, materials used to manufacture products, household
furniture and goods, personal items, and intangible property like gym memberships and life insurancepolicies. Some personal property, however, is subject to the property tax. These properties consist mainly of
manufacturing equipment, business computers, planes, commercial boats, and office furniture. Whendetermining the market value of personal property, county assessors take into account the loss in value due
to the age and condition of personal property—a concept known as depreciation. Unlike property taxes onreal property, which are due in two separate payments, taxes on personal property are due on July 3.
State–Assessed Property. The State Board of Equalization is responsible for assessing certain real
properties that cross county boundaries, such as pipelines, railroad tracks and cars, and canals. State–
assessed properties are assessed at market value and, with the exception of railroad cars, taxed at the 1percent rate plus any additional rates for voter–approved debt. (As part of a federal court settlement
decades ago, railroad cars are taxed at a rate that is somewhat lower than 1 percent. The railcar tax ratevaries each year and currently is about 0.8 percent.)
Determining Other Taxes and Charges
All other taxes and charges on the property tax bill are calculated based on factors other than the property’s
assessed value. For example, some levies are based on the cost of a service provided to the property. Othersare based on the size of a parcel, its square footage, number of rooms, or other characteristics. Below, we
discuss three of the most common categories of non–ad valorem levies: assessments, parcel taxes, and Mello–Roos taxes. In addition to these three categories, some local governments collect certain fees for service on
property tax bills, such as charges to clear weeds on properties where the weeds present a fire safety hazard.These fees are diverse and relatively minor, and therefore are not examined in this report.
Assessments. Local governments levy assessments in order to fund improvements that benefit real property.
For example, with the approval of affected property owners, a city or county may create a street lightingassessment district to fund the construction, operation, and maintenance of street lighting in an area. Under
Proposition 218 (1996), improvements funded with assessments must provide a direct benefit to the propertyowner. An assessment typically cannot be levied for facilities or services that provide general public benefits,
such as schools, libraries, and public safety, even though these programs may increase the value of property.Moreover, the amount each property owner pays must reflect the cost incurred by the local government to
provide the improvement and the benefit the property receives from it. To impose a new assessment, a localgovernment must secure the approval of a weighted majority of affected property owners, with each property
owner’s vote weighted in proportion to the amount of the assessment he or she would pay.
Parcel Taxes. With the approval of two–thirds of voters, local governments may impose a tax on all parcels intheir jurisdiction (or a subset of parcels in their jurisdiction). Local governments typically set parcel taxes at
fixed amounts per parcel (or fixed amounts per room or per square foot of the parcel). Unlike assessments,parcel tax revenue may be used to fund a variety of local government services, even if the service does not
benefit the property directly. For example, school districts may use parcel tax revenue to pay teacher salariesor administrative costs. The use of parcel tax revenue, however, is restricted to the public programs, services,
or projects that voters approved when enacting the parcel tax.
Mello–Roos Taxes. Mello–Roos taxes are a flexible revenue source for local governments because they (1)
may be used to fund infrastructure projects or certain services; (2) may be levied in proportion to the benefit aproperty receives, equally on all parcels, by square footage, or by other factors; and (3) are collected within ageographical area drawn by local officials.
Local governments often use Mello–Roos taxes to pay for the public services and facilities associated withresidential and commercial development. This occurs because landowners may approve Mello–Roos taxes by a
special two–thirds vote—each owner receiving one vote per acre owned—when fewer than 12 registered votersreside in the proposed district. In this way, a developer who owns a large tract of land could vote to designate
it as a Mello–Roos district. After the land is developed and sold to residential and commercial property owners,the new owners pay the Mello–Roos tax that funds schools, libraries, police and fire stations, or other public
facilities and services in the new community. Mello–Roos taxes are subject to two–thirds voter approval whenthere are 12 or more voters in the proposed district.
What Properties Are Taxed?
Property taxes and charges are imposed on many types of properties. These properties include common types
such as owner–occupied homes and commercial office space, as well as less common types like timeshares andboating docks. In the section below, we describe the state’s property tax base—the types of real properties that
are subject to the 1 percent rate and the share of total assessed value that each property type represents.
Due to data limitations, we do not summarize the tax bases of other taxes and charges. We note, however,that the property tax base for other taxes and charges is different from the tax base for the 1 percent rate. This
is because the 1 percent rate applies uniformly to all taxable real property, whereas other taxes and chargesare levied at various levels and on various types of property throughout the state (according to local voter or
local government preferences). For example, if a suburban school district levies a parcel tax on each parcel in aresidential area, the owners of single–family homes would pay a large share of the total parcel taxes.
Accordingly, the school district’s parcel tax base would be more heavily residential than the statewide propertytax base under the 1 percent rate (which applies to all taxable property).
What Properties Are Subject to the 1 Percent Rate?
Although most real property is taxable, the Constitution exempts certain types of real property from taxation.
In general, these are government properties or properties that are used for non–commercial purposes,including hospitals, religious properties, charities, and nonprofit schools and colleges. California properties that
are subject to the property tax, however, can be classified in three ways:
Owner–occupied residential—properties that receive the state’s homeowner’s exemption, which
homeowners may claim on their primary residence.
Investment and vacation residential—residential properties other than those used as a primary residence,including multifamily apartments, rental condominiums, rental homes, vacant residential land, and
vacation homes.Commercial—retail properties, industrial plants, farms, and other income–producing properties.
Distribution of the Tax Base for the 1 Percent Rate
Owner–Occupied Residential. In 2010–11, there were 5.5 million owner–occupied homes in California with a
total assessed value of $1.6 trillion. As shown in Figure 6, owner–occupied residential properties accounted forthe largest share—39 percent—of the state’s tax base for the 1 percent rate.
Investment and Vacation Residential. Although the majority of residential properties are owner occupied,many others are investment or vacation properties such as multifamily apartments, rental condominiums,
rental homes, vacant residential land, and vacation homes. (We classify vacant residential land and vacationhomes as investment properties because they are an investment asset for the owner, even if he or she doesnot receive current income from them.) In 2010–11, there were 4.2 million investment and vacation residentialproperties. The assessed value of these properties was about $1.4 trillion, which represents 34 percent of thestate’s total assessed value.
Commercial. In 2010–11, there were approximately 1.3 million commercial properties in California. Thisamount includes about 600,000 retail, industrial, and office properties (such as stores, gas stations,
manufacturing facilities, and office buildings). It also includes 500,000 agricultural properties and 200,000other properties (gas, oil, and mineral properties and the private use of public land). While commercial
properties represent a relatively small share of the state’s total properties, they tend to have higher assessedvalues than other properties. Therefore, as shown in Figure 6, these properties (which have a total assessed
value of $1.2 trillion) account for 28 percent of the state’s property tax base.
Has the Distribution of the Property Tax Base Changed Over Time?
There is little statewide information regarding the composition of California’s property tax base over time.Based on the available information, however, it appears that homeowners may be paying a larger percentage
of total property taxes today than they did decades ago. We note, for example, that the assessed value ofowner–occupied homes has increased from a low of 32 percent of statewide assessed valuation in 1986–87 to a
high of 39 percent in 2005–06. (The share was 36 percent in 2011–12.) It also appears likely that owners ofcommercial property are paying a smaller percentage of property taxes than they did decades ago. For
example, Los Angeles County reports that the share of total assessed value represented by commercial
property in the county declined from 40 percent in 1985 to 30 percent in 2012. In addition, the assessed valueof commercial property in Santa Clara County has declined (as a share of the county total) from 29 percent to
24 percent since 1999–00.
What Factors May Have Contributed to Changes in the Property Tax Base?
Various economic changes that have taken place over time probably have contributed to changes to California’sproperty tax base. For example, investment in residential property has increased significantly since the mid–
1970s. Newly built single–family homes have become larger and are more likely to have valuable amenitiesthan homes built earlier. As a result, new homes are more expensive to build and assessed at higher amounts
than older homes. Over the same period, commercial activity in California has shifted away from traditionalmanufacturing, which tends to rely heavily on real property. Newer businesses, on the other hand, are more
likely to be technology and information services based. These businesses tend to own less real property thantraditional manufacturing firms do. (Technology and information services firms, however, rely heavily on
business personal property—for example, computing systems, design studios, and office equipment—that aretaxed as personal property and not included in the distribution of the state’s real property tax base.)
It also is possible that Proposition 13’s acquisition value assessment system has played a role in the changes to
California’s tax base. Specifically, under Proposition 13, properties that change ownership more frequently tendto be assessed more closely to market value than properties that turn over less frequently. (Because properties
are assessed to market value when they change ownership, properties that have not changed ownership inmany years tend to have larger gaps between their assessed values and market values.) It is possible that
some categories of properties change ownership more frequently than others and this could influence thecomposition of the overall tax base. The limited available research suggests that investment and vacation
residential properties change ownership more frequently than commercial or owner–occupied residentialproperty, indicating that they may be assessed closer to market value than other types of property.
How Much Revenue Is Collected?
In 2010–11, California property tax bills totaled $55 billion. As shown in Figure 7, this amount included $43.2billion under the 1 percent rate and $5.7 billion from voter–approved debt rates, making ad valorem propertytaxes one of California’s largest revenue sources.
Comparatively little is known about the remaining $6 billion of other taxes and charges on the property tax bill.
From various reports summarizing local government finances, elections, and bond issuances, it appears thatmost of this $6 billion reflects property assessments, parcel taxes, and Mello–Roos taxes, though statewide
data are not available on the exact amounts collected for each of these funding sources.
How Is the Revenue Distributed?
California property owners pay their property tax bills to their county tax collector (sometimes called the countytreasurer–tax collector). The funds are then transferred to the county auditor for distribution. The countyauditor distributes the funds collected from the 1 percent rate differently than the funds collected from theother taxes and charges on the bill. Specifically, the 1 percent rate is a shared revenue source for multiple localgovernments.
This section describes the distribution of revenue raised under the 1 percent rate and summarizes the limitedavailable information regarding the distribution of voter–approved debt rates and non–ad valorem property
taxes and charges.
Revenue From the 1 Percent Rate Is Shared by Many Local Governments
The 1 percent rate generates most of the revenue from the property tax bill—roughly $43 billion in 2010–11.On a typical property tax bill, however, the 1 percent rate is listed as the general tax levy or countywide rate
with no indication as to which local governments receive the revenue or for what purpose the funds are used.In general, county auditors allocate revenue from the 1 percent rate to a variety of local governments within
the county pursuant to a series of complex state statutes.
More Than 4,000 Local Governments Receive Revenue From the 1 Percent Rate. All property tax
revenue remains within the county in which it is collected to be used exclusively by local governments. Asshown in Figure 8, property tax revenue from the 1 percent rate is distributed to counties, cities, K–12 schools,
community college districts, and special districts. Until recently, redevelopment agencies also received propertytax revenue. As described in the nearby box, redevelopment agencies were dissolved in 2012, but a largeamount of property tax revenue continues to be used to pay the former agencies’ debts and obligations.
Figure 8
How Many Local Governments Receive Revenue From the 1 Percent Rate?
Type of Local Government Number
Counties 58
Cities 480
Schools and Community Colleges
K–12 school districts 966
County Offices of Education 56
Community college districts 72
Special Districts
Fire protection 348
County service area 316
Cemetery 241
Community services 201
Maintenance 136
Highway lighting 117
County water 100
Recreation and park 85
Hospital 64
Sanitary 60
Irrigation 46
Mosquito abatement 43
Public utility 43
Othera 400
Redevelopment Agenciesb 422
Total 4,254
a Thirty three other types of special districts report receiving property
tax revenue from the 1 percent rate. These include county sanitation,municipal water, memorial, water authority, drainage, and library
districts.
b Dissolved in 2012. A portion of property tax revenue continues to pay
these agencies’ debts and obligations.
Figure 9 shows the share of revenue received by each type of local government from the 1 percent rate andvoter–approved debt rates. (As described later in the report, however, these shares vary significantly by
locality.)
Redevelopment and Successor Agencies
More than 60 years ago, the Legislature established a process whereby a city or county could declare an
area to be blighted and in need of redevelopment. After this declaration, most property tax revenue growthfrom the redevelopment “project area” was distributed to the redevelopment agency, instead of the other
local governments serving the project area. As discussed in our report, The 2012–13 Budget: UnwindingRedevelopment, redevelopment agencies were dissolved in February 2012. Prior to their dissolution,
however, redevelopment agencies received over $5 billion in property tax revenue annually. These monieswere used to pay off tens of billions of dollars of outstanding bonds, contracts, and loans.
In most cases, the city or county that created the redevelopment agency is managing its dissolution as itssuccessor agency. The successor agency manages redevelopment projects currently underway, pays existingdebts and obligations, and disposes of redevelopment assets and properties. The successor agency is fundedfrom the property tax revenue that previously would have been distributed to the redevelopment agency. Asa result, even though redevelopment agencies have been dissolved, some property tax revenue continues to
be used to pay redevelopment’s debts and obligations. Over time, most redevelopment obligations will beretired and the property tax revenue currently distributed to successor agencies will be distributed to K–14
districts, counties, cities, and special districts.
Property Taxes Also Affect the State Budget. Although the state does not receive any property tax revenue
directly, the state has a substantial fiscal interest in the distribution of property tax revenue from the 1 percentrate because of the state’s education finance system. Each K–12 district receives “revenue limit” funding—thelargest source of funding for districts—from the combination of local property tax revenue under the 1 percentrate and state resources. Thus, if a K–12 district’s local property tax revenue is not sufficient to meet itsrevenue limit, the state provides additional funds. Community colleges have a similar financing system, in
which each district receives apportionment funding from local property tax revenue, student fees, and stateresources. In 2010–11, the state contributed $22.5 billion to K–12 revenue limits and community college
apportionments, while the remainder ($14.5 billion) came from local property tax revenue (and student fees).
State Laws Direct Allocation of Revenue From the 1 Percent Rate. The county auditor is responsible forallocating revenue generated from the 1 percent rate to local governments pursuant to state law. The allocationsystem is commonly referred to as “AB 8,” after the bill that first implemented the system—Chapter 282,Statutes of 1979 (AB 8, L. Greene). In general, AB 8 provides a share of the total property taxes collectedwithin a community to each local government that provides services within that community. Each local
government’s share is based on its proportionate countywide share of property taxes during the mid–1970s, atime when each local government determined its own property tax rate and property owners paid taxes based
on the sum of these rates. (The average property tax rate totaled about 2.7 percent.) As a result, localgovernments that received a large share of property taxes in the 1970s typically receive a relatively large share
of revenue from the 1 percent rate under AB 8. (More detail on the history of the state’s property tax allocationsystem—including AB 8—is provided in the appendix of this report.)
Revenue Allocated by Tax Rate Area (TRA). The county auditor allocates the revenue to local governmentsby TRA. A TRA is a small geographical area within the county that contains properties that are all served by aunique combination of local governments—the county, a city, and the same set of special districts and schooldistricts. A single county may have thousands of TRAs. While there is considerable variation in the steps countyauditors use to allocate revenue within each TRA, typically the county auditor annually determines how muchrevenue was collected in each TRA and first allocates to each local government in the TRA the same amount ofrevenue it received in the prior year. Each local government then receives a share of any growth (or loss) in
revenue that occurred within the TRA that year. Each TRA has a set of growth factors that specify theproportion of revenue growth that goes to each local government. These factors—developed by county auditors
pursuant to AB 8—are largely based on the share of revenue each local government received from the TRAduring the late 1970s.
Figure 10 shows sample growth factors for TRAs in two California cities. As the figure indicates, 23 percent ofany growth in revenue from the 1 percent rate in the sample TRA for Norwalk would be allocated to the county,
7 percent would go to the city, and the rest would be allocated to various educational entities and specialdistricts. The percentage of property tax growth allocated to each type of local government can varysignificantly by TRA. For example, Walnut Creek’s K–12 school district receives 33 percent of the growth inrevenue within its TRA while Norwalk’s school district receives only 19 percent from its TRA. As noted above,this variation is based largely on historical factors specified in AB 8.
Figure 10
Allocation of Property Tax Growth in Sample Tax Rate Areas
Norwalk, Los Angeles Countya PercentShare
Los Angeles County 23%
Educational Revenue Augmentation Fund 20
Norwalk–La Mirada Unified School District 19
Los Angeles County Fire Protection District 18
City of Norwalk 7
Norwalk Parks and Recreation District 3
Los Angeles County Library 2
La Mirada Parks and Recreation District 2
Cerritos Community College District 2
Los Angeles County Flood Control District 1
Los Angeles County Sanitation District 1
Greater Los Angeles County Vector Control —b
Water Replenishment District of Southern California —b
Little Lake Cemetery District —b
Los Angeles County Department of Education —b
100%
Walnut Creek, Contra Costa Countyc PercentShare
Mount Diablo Unified School District 33%
Educational Revenue Augmentation Fund 17
Contra Costa County 13
Contra Costa County Fire 13
City of Walnut Creek 9
Contra Costa Community College District 5
East Bay Regional Park District 3
Contra Costa County Library 2
Central Contra Costa Sanitary District 2
Contra Costa County Office of Education 1
Contra Costa County Flood Control 1
Bay Area Rapid Transit 1
Contra Costa Water District 1
Contra Costa County Water Agency —b
Contra Costa County Resource Conservation District —b
Contra Costa County Mosquito Abatement District —b
Contra Costa County Service Area R–8 —b
Bay Area Air Management District —b
100%
a Percentages indicate allocation of the growth in property taxes in Los Angeles
County tax rate area 06764.
b Less than 0.5 percent.
c Percentages indicate allocation of the growth in property taxes in Contra Costa
County tax rate area 09025.
Some Revenue Is Allocated to a Countywide Account—ERAF. Most of the revenue from the 1 percent ratecollected within a TRA is allocated to the city, county, K–14 districts, and special districts that serve theproperties in that TRA. State law, however, directs the county auditor to shift a portion of this revenue to acountywide account that is distributed to other local governments that do not necessarily serve the taxed
properties. The state originally established this account—the Educational Revenue Augmentation Fund (ERAF)—to provide additional funds to K–14 districts that do not receive sufficient property tax revenue to meet their
minimum funding level. State laws later expanded the use of ERAF to include reimbursing cities and countiesfor the loss of other local revenue sources (the vehicle license fee and sales tax) due to changes in state policy.
For example, Figure 10 shows that 20 percent of any revenue growth within Norwalk’s TRA is deposited intoERAF. It is possible that some or all of this revenue could be allocated to a city or K–14 district in a different
part of Los Angeles County.
Most Revenue From Voter–Approved Debt Distributed to Schools
Voter–approved debt rates are levied on property owners so that local governments can pay the debt serviceon voter–approved general obligation bonds (and pre–1978 voter–approved obligations). The state’s K–12
school districts receive the majority of the revenue from voter–approved debt rates ($3.1 billion of $5.2 billionin 2009–10). The amount received by cities ($520 million), special districts ($470 million), and counties ($320
million) is significantly less. The amount of taxes collected to pay voter–approved debt varies considerablyacross the state. For example, the average amount paid by an Alameda County property owner for voter–
approved debt rates is about $2 for each $1,000 of assessed value, while the average amount paid in somecounties is less than 10 cents per $1,000 of assessed value.
Limited Information About Distribution Of Other Property Taxes and
Charges
Less information is available about the statewide distribution of the revenue from parcel taxes, Mello–Roos
taxes, and assessments.
Parcel Taxes. Recent election reports and financial data suggest that parcel taxes represent a significant and
growing source of revenue for some local governments. Specifically, between 2001 and 2012, local votersapproved about 180 parcel tax measures to fund cities, counties, and special districts, and about 135 measures
to fund K–12 districts. The most recent K–12 financial data (2009–10) indicate that schools received about$350 million from this source. We were not able to locate information on the statewide amount of parcel taxrevenue collected by cities, counties, and special districts.
Mello–Roos Taxes. Mello–Roos districts are required to report on their bond issuance, which provides someinformation about the types of local governments that receive Mello–Roos tax revenue. It is likely that local
governments issuing a large amount of Mello–Roos bonds also are collecting a large amount of Mello–Roos taxrevenue. Between 2004 and 2011, cities issued about 50 percent of the bonds issued by Mello–Roos districts in
California, followed by K–12 districts at about 30 percent. During the same time period, the issuance of Mello–Roos bonds was concentrated in specific regions, as more than 60 percent of the bonds were issued by local
governments in four counties—Riverside, Orange, San Diego, and Placer.
Assessments. Most of the property improvements funded by assessments are provided by cities and specialdistricts. In 2009–10, cities and special districts reported receiving $760 million and $650 million, respectively,in revenue from assessments. In contrast, counties reported $11 million in such revenues.
Why Do Local Government Property Tax Receipts Vary?
The share of revenue received by each type of local government from the 1 percent rate varies significantly bylocality. County governments, for example, receive as little as 11 percent (Orange) and as much as 64 percent
(Alpine) of the ad valorem property tax revenue collected within their county. As shown in Figure 11, revenueraised from the 1 percent rate also varies considerably by locality when measured by revenue per resident.
Orange County receives about $175 per resident, while four counties receive more than $1,000 per resident.Although cities, on average, receive about $240 per resident in revenue from the 1 percent rate, some receive
more than $500 per resident and many receive less than $150 per resident. School districts also receive widelydifferent amounts of property taxes per enrolled student, with an average of just under $2,000. (As noted
above, the state “tops off” school property tax revenue with state funds to bring most schools to similarrevenue levels.) Finally, special districts also receive varying amounts of property tax revenue, though data
limitations preclude us from summarizing this variation on a statewide basis.
Figure 11
Property Tax Receipts From the 1 Percent Rate for Selected Local Governments
2009–10
Cities
PropertyTaxesperResident Counties
PropertyTaxesperResident Schoolsa
PropertyTaxesperStudent
Industry $2,541 San Franciscob $1,411 Mono $10,683
Malibu 559 Sierra 1,126 San Mateo 5,432
Mountain View 344 Inyo 876 Marin 5,213
Los Angeles 332 Napa 522 San Francisco 4,020
Long Beach 268 El Dorado 464 Orange 3,315
Oakland 250 Los Angeles 359 San Diego 2,760
State Average 242 State Average 320 State Average 1,960
San Jose 200 Alameda 301 Yolo 1,765
Fresno 183 Sacramento 286 Sacramento 1,344
Anaheim 167 Contra Costa 271 San Joaquin 1,163
Santa Clarita 140 San Diego 261 Los Angeles 1,142
Chico 129 Riverside 200 Fresno 810
Modesto 119 Orange 174 Kings 379
a Countywide average for K–12 schools.
b San Francisco is a city and a county.
Three factors account for most of this variation in local government property tax receipts. We discuss thesefactors below.
Variation in Property Values
California has a diverse array of communities with large variation in land and property values. Some
communities are extensively developed and have many high–value homes and businesses, whereas others donot. Because property taxes are based on the assessed value of property, communities with greater levels of
real estate development tend to receive more property tax revenue than communities with fewerdevelopments. For example, high–density cities generally receive more property tax revenue than rural areas
due to the greater level of development. Coastal and resort areas also typically receive more property taxesdue to the high property values. Certain high–value properties—such as a power plant or oil refinery—alsoincrease property tax revenue. Alternatively, localities with large amounts of land owned by the federalgovernment, universities, or other organizations that are not required to pay property taxes may receive lessrevenue.
Prior Use of Redevelopment
Prior decisions by cities and counties to use redevelopment also influences the amount of property tax revenuelocal governments receive. Prior to the dissolution of redevelopment agencies in 2012, most of the growth in
property taxes from redevelopment project areas went to the redevelopment agency, rather than other localgovernments. A large share of property tax revenue now goes to successor agencies to pay the former
redevelopment agencies’ debts and obligations. The use of redevelopment varied extensively throughout thestate. In those communities with many redevelopment project areas, the share of property tax revenue goingto other local governments is less than it would be otherwise. In places with large redevelopment project areas—such as San Bernardino and Riverside counties—more than 20 percent of the county’s property tax revenuemay go to pay the former redevelopment agencies’ debts and obligations.
State Allocation Laws Reflecting 1970s Taxation Levels
Finally, the amount of property taxes allocated to local governments depends on state property tax allocationlaws, principally AB 8. As discussed earlier in this report (and in more detail in the appendix), the AB 8 systemwas designed, in part, to allocate property tax revenue in proportion to the share of property taxes received bya local government in the mid–1970s. Under this system, local governments that received a large share ofproperty taxes in the 1970s typically continue to receive a relatively large share of property taxes today.Although there have been changes to the original property tax allocation system contained in AB 8, theallocation system continues to be substantially based on the variation in property tax receipts in effect in the
1970s.
This variation largely reflects service levels provided by local governments in the 1970s. Local governments
providing many services generally collected more property taxes in the 1970s to pay for those services. As aresult, those local governments received a larger share of property taxes under AB 8. For example, cities and
counties that provided many government services, including fire protection, park and recreation programs, andwater services, typically receive more property tax revenue than governments that relied on special districts to
provide some or all of these services.
Are There Concerns About How Property Taxes Are
Distributed?
While no system for sharing revenues among governmental entities is perfect, the state’s system for allocatingproperty tax revenue from the 1 percent rate raises significant concerns about local control, responsiveness tomodern needs, and transparency and accountability to taxpayers. We discuss these concerns separately belowand then address the question: Could the state change the allocation system?
Lack of Local Control
Unlike local communities in other states, California residents and local officials have virtually no control over
the distribution of property tax revenue to local governments. Instead, all major decisions regarding propertytax allocation are controlled by the state. Accordingly, if residents desire an enhanced level of a particular
service, there is no local forum or mechanism to allow property taxes to be reallocated among localgovernments to finance this improvement. For example, Orange County currently receives a very low share ofproperty taxes collected within its borders—about 11 percent. If Orange County residents and businesseswished to expand county services, they have no way to redirect the property taxes currently allocated to otherlocal governments. Their only option would be to request the Legislature to enact a new law—approved by two–
thirds of the members of both houses—requiring the change in the property tax distribution. In other words,local officials have no power to raise or lower their property tax share on an annual basis to reflect the
changing needs of their communities. As a result, if residents wish to increase overall county services, theywould need to finance this improvement by raising funds through a different mechanism such as an assessment
or special tax.
Limited Transparency and Accountability
The state’s current allocation system also makes it difficult for taxpayers to see which entities receive their taxdollars. Property tax bills note only that a bulk of the payment goes to the 1 percent general levy. Even iftaxpayers do further research and locate the AB 8 local government sharing factors for their TRA, it is difficultto follow the actual allocation of revenue because the fund shifts related to ERAF and redevelopment complicate
this system.
In addition to making it difficult for taxpayers to determine how their tax dollars are distributed, the AB 8
system reduces government accountability. The link between the level of government controlling the allocationof the tax (the state) and the government that spends the tax revenue (cities, counties, special districts, and
K–14 districts) is severed. For example, if a taxpayer believes the level of services provided by an independentpark district is inadequate, it is difficult to hold the district entirely accountable because the state is responsible
for determining the share of property taxes allocated to the district.
Limited Responsiveness to Modern Needs and Preferences
An effective tax allocation system ensures that local tax revenue is allocated in a way that reflects modernneeds and preferences. In many ways, California’s property tax allocation system—which remains largely based
on allocation preferences from the 1970s—does not meet this criterion. California’s population and thegovernance structure of many local communities have changed significantly since the AB 8 system was
enacted. For example, certain areas with relatively sparse populations in the 1970s have experiencedsubstantial growth and many local government responsibilities have changed. One water district in San Mateo
County—Los Trancos Water District—illustrates the extent to which the state’s property tax allocation systemcontinues to reflect service levels from the 1970s. Specifically, this water district sold its entire water
distribution system to a private company in 2005, but continues to receive property tax revenue for a service itno longer provides.
Changing the Allocation System Is Difficult
Over the years, the Legislature, local governments, the business community, and the public have recognizedthe limitations inherent in the state’s property tax allocation system. Despite the large degree of consensus onthe problems, major proposals to reform the allocation system have not been enacted due to their complexityand the difficult trade–offs involved. Because California has thousands of local governments—many withoverlapping jurisdictions—reorienting the property tax allocation system would be extraordinarily complex.Updating the AB 8 property tax sharing methodology would require the Legislature to determine the needs andpreferences of each California community and local government. This would be a difficult—if not impossible—
task to undertake in a centralized manner. Alternatively, the state could allow the distribution of the propertytax to be carried out locally, but there is no consensus about what process local governments would use to
allocate property taxes among themselves. Whether done centrally or locally, any reallocation is difficultbecause providing additional property tax receipts to one local government would require redirecting it from
another local government or amending the Constitution. In addition, any significant change to the allocation ofproperty tax revenue would require approval by two–thirds of the Legislature due to provisions in the
Constitution added by Proposition 1A (2004). (These issues are discussed further in the appendix.)
What Are the Strengths and Limitations of California’s
Property Tax System?
For many years, California’s overall property tax system—the types of taxes paid by property owners and thedetermination of property owner tax liabilities—has evoked controversy. Some people question whether the
distribution of the tax burden between residential and commercial properties is appropriate and whether theamount of taxes someone pays should depend, in part, on how long he or she has owned the property. Other
people praise the financial certainty that the tax system gives property owners. From one year to the next,property owners know that their tax liabilities under the 1 percent rate will increase only modestly. In thissection, we do not attempt to resolve this long–standing debate. Instead, we review property taxes by lookingat how they measure according to five common tax policy criteria—growth, stability, simplicity, neutrality, andequity. Using this framework, we highlight particular aspects of the state’s property tax system, both its
strengths and limitations, for policymakers and other interested parties.
Economists use the five common tax policy criteria summarized in Figure 12 to objectively compare particular
taxes. These criteria relate to how taxes affect people’s decisions, how they treat different taxpayers, and howthe revenue raised from taxes performs over time. In practice, all taxes involve trade–offs. Sometimes the
trade–offs are between two tax policy criteria. For example, revenue sources that grow quickly may be lessstable from one year to the next than other revenue sources. Other times, the trade–offs are between tax
policy criteria and other governmental policy objectives that may not be directly related to one of the five taxcriteria. For example, one such trade–off might be that ensuring that a property owner’s taxes do not increase
dramatically from one year to the next (a reasonable governmental policy objective) can result in a tax systemin which the owners of similar properties are taxed much differently (contrary to the equity criteria of taxpolicy).
Figure 12
Common Economic Criteria for Evaluating Tax Systems
Growth—Does revenue raised by the tax grow along with the economy or the program responsibilities it is expected to fund?
Stability—Is the revenue raised by the tax relatively stable over time?
Simplicity—Is the tax simple and inexpensive for taxpayers to pay and for government to collect?
Neutrality—Does the tax have little or no impact on people’s decisions about how much to buy, sell, and invest?
Equity—Do taxpayers with similar incomes pay similar amounts and do tax liabilities rise with income?
What Factors Affect Property Tax Growth Each Year?
Most of the annual change in property tax revenues is the result of large changes in assessed value thataffect a small number of properties, including:
Recently Sold Properties. When a property sells, its assessed value resets to the purchase price.
This represents additional value that is added to the tax base because the sale price of the property isoften much higher than its previous assessed value.
Newly Built Property and Property Improvements. New value is added to the county’s tax basewhen new construction takes place or improvements are made—mainly additions, remodels, and
facility expansions—because structures are assessed at market value the year that they are built.
Proposition 8 (1978) Decline–in–Value Properties. These properties contribute significantly togrowth or decline in a county’s tax base because their assessed values may increase or decrease
dramatically in any year. A particularly large impact on assessed valuation tends to occur in yearswhen a large number of these properties transfer from Proposition 13 assessment to reduced
assessment.
As shown by the dark bars in the figure below, recently sold, newly built, and decline–in–value propertiestypically account for more than two–thirds of total changes in countywide assessed value in Santa ClaraCounty. Other properties, although they represent most of the properties in the county’s tax base,contribute less because the growth of these properties’ assessed values is limited to 2 percent per year.
What Factors Affect Property Tax Stability?
Acquisition Value Assessment System Contributes to Revenue Stability.The main reason California’sproperty tax revenue is stable is that the assessed value of most properties increases each year by a
maximum of 2 percent. In any given year, only a small fraction of properties are sold and reset to marketvalue. This means that real estate conditions affect a relatively small portion of the tax base each year,insulating property tax revenue from year–to–year real estate fluctuations.
Proposition 8 (1978) Decline–in–Value Properties Reduce Revenue Stability. As noted earlier in thereport, county assessors may reduce a property’s assessed value in the event that its market value falls
below its assessed value. Each year thereafter, the property is assessed at market value until it rises abovewhat its assessed value would have been had it remained at its acquisition value adjusted upward each year
at a maximum of 2 percent. During 2010–11, more than one in four properties in California was temporarilyassessed to market value. Because these properties are assessed each year at market value, they link the
property tax base more closely to the local real estate market than other properties, thereby reducing theproperty tax’s stability somewhat.
Revenue Growth
From government’s perspective, revenue sources that grow along with the economy are preferable because
they can provide resources sufficient to maintain current services. This can help governments avoid increasingexisting taxes or taxing additional activities in order to meet current service demands.
The Property Tax Has Grown Faster Than the Economy. Personal income in California—an approximate
measure of the size of the state’s economy—has grown at an average annual rate of 6.3 percent since 1979.Over the same period, revenue from the 1 percent property tax rate has grown at an average annual rate of
7.3 percent. As we describe in the nearby box, much of the growth in property tax revenue depends on newconstruction and property sales.
The Growth of Parcel and Mello–Roos Tax Revenues Depends on the Structure of the Tax. The termsof parcel taxes and Mello–Roos taxes vary by locality. Some local governments have taxes with escalation
clauses or other provisions that modify the amount of the tax as local government costs change. Other parceltaxes and Mello–Roos taxes are set at fixed amounts per parcel. Depending on their structure, these taxes mayor may not provide local governments with a growing source of revenue.
Revenue Stability
Revenue sources that remain relatively stable from one year to the next help governments manage economicdownturns, which tend to reduce revenue and at the same time increase demand for certain public services.
Stable revenue sources also may help governments plan more effectively for future needs, including long–terminvestments in transportation, education, and public safety.
The Property Tax Is a Stable Revenue Source. Despite being linked to the volatile real estate market, theproperty tax is California’s most stable major revenue source. Since 1979, as shown in Figure 13, personalincome tax revenue has been three times more volatile, on average, than property tax revenue from the 1
percent rate. During the same period, statewide property tax revenue has declined in only three years, 1994–95, 2009–10, and 2010–11.
The Property Tax Was More Stable Than Other Revenue Sources During the Recent Recession. Asshown in Figure 14, revenue from the 1 percent property tax rate fared comparatively well during the most
recent recession. (In the nearby box, we discuss why the property tax is stable.) Changes in property taxrevenue tend to lag economic trends by one or more years because of the state’s acquisition value assessment
system and the lengthy period between when most properties are assessed (January) and when property taxpayments are due (December of that year and April of the next).
Parcel Taxes and Mello–Roos Taxes Also Are Stable. Because most parcel and Mello–Roos taxes are set atfixed amounts per parcel, there is minimal year–to–year fluctuation in the revenues that they raise.
Assessed Valuation in Some Counties, However, Has Declined Significantly. Though statewide propertytax revenue has remained comparatively stable throughout the recent recession, some areas of the state have
experienced considerable declines in their property tax base. These counties tend to have a large proportion oftheir properties under Proposition 8 decline–in–value assessments and have high foreclosure rates. For
example, Riverside County had the second highest number of foreclosures (17,000) among counties and morethan 400,000 decline–in–value properties in 2011. Partly as a result of these trends, total assessed value in
Riverside County declined by 15 percent between 2008 and 2011.
Simplicity
A well–designed tax system should be simple for taxpayers to understand and easy and inexpensive forgovernments to administer. Complex tax systems can be expensive for governments to administer effectively
and may be confusing, time–consuming, and costly for taxpayers.
Most of the costs associated with administering the state’s property tax system (ad valorem property taxes,
parcel taxes, and Mello–Roos taxes) reflect the activities by county assessors, tax collectors, and auditors.While comprehensive data on these costs are not available, total property tax administration costs likely are
between 1.5 percent and 2 percent of collections, a somewhat higher level than that of state tax agencies thatperform similar functions. A significant component of the property tax’s administrative cost is from counties’responsibility to allocate property taxes to local governments pursuant to increasingly complex state laws.County costs related solely to determining property values, the other main component of administration, wereslightly less than 1 percent of total revenues collected in 2010–11—a percentage similar to that of state taxagencies.
From the taxpayers’ perspective, the property tax is generally a simple tax with which to comply. Tax payments
are due in equal installments twice per year. And, in most years, the assessed value of real property growsautomatically by a maximum of 2 percent. Reassessments based on market value (which taxpayers are more
likely to appeal) occur infrequently for most property owners.
The property tax assessed on personal property is typically more administratively cumbersome for owners andassessors. This is because personal property is assessed annually at market value using complex depreciationschedules. These assessments, therefore, are more likely to be appealed, a process that can take more than ayear to resolve.
Neutrality
Nearly all taxes alter taxpayer behavior to some degree. Economists agree, however, that in most cases theideal tax system is one that alters decisions—about what goods to buy, what products to make, and where towork or live—as little as possible. Economists prefer these “economically neutral” taxes because they assumethat people and businesses are in the best position to make consumption, savings, and investment decisionsthat meet their economic and personal needs. Tax policies that influence what people buy and what businessesproduce tend to distance people and businesses from their preferred choices, leaving them less well off thanthey would be if the tax system were economically neutral. Policymakers design some taxes, on the other hand,
to influence taxpayer behavior in a way that promotes or discourages particular activities. In general, theseshould be well targeted and have strong justifications so that they achieve their policy goals with as little
interference as possible in other personal decision making. Below, we describe how ad valorem property taxesmay influence taxpayer behavior and then discuss the possible effects of parcel and Mello–Roos taxes.
Some Homeowners and Businesses May Move Less Frequently. California’s ad valorem property taxesmay affect an individual’s decision to move because longer ownership results in a lower effective property tax
rate. (An effective property tax rate differs from the 1 percent basic rate in that it is the amount of propertytaxes paid divided by the current market value of the property.) As shown in Figure 15, effective tax rates can
vary considerably. New Owner A, for example, has an effective tax rate of 1 percent because the assessedvalue of his or her property is the same as its market value. Owners B and C, who have owned their propertieslonger than Owner A, have assessed values below their market values because their market values increasedby more than 2 percent each year (and therefore faster than assessed values). As a result, most owners whohave owned a property for many years pay an effective tax rate well below 1 percent. For those choosing to
move, however, their effective tax rate is reset to 1 percent, producing a moving penalty that may influencesome property owners’ relocation decisions. For example, established firms that benefit from their
comparatively low effective property tax rates could be dissuaded from relocating—decisions that, absent themoving penalty, could benefit the companies financially. (As we discuss below, differing effective tax rates also
affect the equity of the property tax.)
Figure 15
Hypothetical Effective Property Tax Rates for Three Property Owners
YearPurchased MarketValue AssessedValue
PropertyTaxRate PropertyTax Paid
EffectiveTaxRate
Owner A 2012 $300,000 $300,000 1%$3,000 1.0%
Owner B 2002 300,000 180,000 1 1,800 0.6
Owner C 1986 300,000 110,000 1 1,100 0.4
Homeowners and Businesses May Invest Less in Property Improvements. When a property undergoes
improvements, the newly constructed portion of the property is assessed at its full market value. The existingproperty, on the other hand, is typically assessed below its current market value, meaning that improvements
are taxed at a higher effective rate than existing property. Because improvements are subject to highereffective tax rates, the return on investment that businesses receive from new improvements is lower and the
taxes that homeowners pay on them are higher than they would be if all property—new and existing—weretaxed uniformly. This may lead some businesses and homeowners to invest less than they otherwise would in
new property improvements.
Homeowners May Change Behavior in Response to Assessment Exclusions. Voters have approvedballot propositions that exclude some types of property transfers from triggering reassessment to market value.
(These exclusions are summarized earlier in this report in Figure 2.) For example, residential property transfersbetween certain family members do not trigger reassessment. These exclusions could alter decisions
homeowners make about their property. For example, a homeowner might transfer property to his or her child(thereby passing on his or her low effective property tax rate) when, absent the exclusion, the owner might
have sold the property to a nonrelative. In turn, that child could find it more economical to rent the property(and benefit from the low effective property tax rate) than to sell (and forego the benefit of his or her low
effective rate).
Equity
Equity relates to how taxes affect taxpayers with different levels of income or wealth. Economists use twodifferent standards of equity—vertical and horizontal—to evaluate taxes. Vertical equity occurs when wealthier
taxpayers pay a greater amount in taxes than less wealthy taxpayers. Horizontal equity, on the other hand,occurs when similar taxpayers—those with similar incomes or wealth—pay the same amount in taxes. Under an
equitable property tax system (1) owners of highly valuable property pay more in taxes than owners of lessvaluable property and (2) the owners of two similar properties pay a similar amount in property taxes. Put
differently, an equitable system would tax property owners at the same effective rate. As we discussed in theprevious section, however, property owners often are subject to different effective tax rates. Therefore,
California’s ad valorem property taxes, parcel taxes, and Mello–Roos taxes often do not meet these standardsof equity.
Equity Reduced by Acquisition Value Assessment and 2 Percent Assessed Value Cap. California’sproperty tax system does not consistently meet the standards of horizontal or vertical equity. As discussed
earlier in this report, two owners with identical properties may pay different amounts of property taxes if one
owner bought the property a decade before the other. In a tax system with horizontal equity, both ownerswould pay similar amounts. In relation to vertical equity, the tax system’s reliance on acquisition value and the
2 percent cap on assessed valuation growth can result in owners of valuable property paying less than ownersof (recently acquired) less valuable property. In a tax system with vertical equity, owners of valuable property
would pay more in taxes because owners of valuable property generally are wealthier than owners of lessvaluable property.
Homeowners Who Are Mobile Pay Higher Effective Tax Rates. Homeowners who move often—military
families, younger homeowners, or those with jobs that require them to relocate frequently—tend to have highereffective ad valorem tax rates than homeowners who move less frequently because newly purchased properties
are assessed at market value. Relocation decisions may result from circumstances that households may nothave foreseen, such as employment changes, divorce, or other changes in family composition. Under horizontal
equity, in contrast, taxpayers pay similar taxes unless their household income, wealth, or consumption patternsdiffer.
Fixed–Rate Taxes Do Not Meet Vertical Equity Standard. Parcel taxes and Mello–Roos taxes typicallymeet the criteria of horizontal equity but not vertical equity because property owners typically are charged thesame amounts—regardless of their wealth or their properties’ value.
Summary
Our comparison of California’s property tax system with common tax policy criteria found mixed results. The advalorem taxes generally meet the goals of administrative simplicity and providing governments with a growing
source of stable revenue, but often do not meet the goals of neutrality and equity. Specifically, California’s advalorem tax system (1) may influence decisions property owners make about relocations and expansions and
(2) treat similar taxpayers differently and wealthier taxpayers the same as less wealthy taxpayers.
California’s other property taxes (parcel taxes and Mello–Roos taxes) generally perform well relative to thegoals of stability, administrative simplicity, and horizontal equity, but may perform less well in regard to the
other objectives.
Appendix 1: The History of California’s Property Tax
Allocation System
California’s system for allocating property tax revenue from the 1 percent rate among local governments iscomplex and has changed over time. The most significant change was voter approval of Proposition 13 in 1978,
which shifted the control over the allocation of property taxes from local communities to the state. Since thattime the state has made several major changes that affect the amount of property tax revenue from the 1
percent rate distributed to counties, cities, K–14 districts, and special districts. Some of these changes havebenefited the state fiscally (by indirectly reducing state costs for education). Others have benefited local
governments or taxpayers. This appendix describes the evolution of the state’s property tax allocation system.The key events are highlighted in Figure A–1, and described in more detail below.
Figure A–1
History of California’s Property Tax Allocation
1972 SB 90—Establishes school “revenue limit” funding system, giving the state a significant fiscal interest in theallocation of local property tax revenue.
1978 Proposition 13—Voters cap the basic property tax rate at 1 percent and give the state new responsibilitiesfor allocating property tax revenue.
SB 154—State’s first law allocating property tax revenue. Amounts based on share of property tax receivedprior to Proposition 13, with state providing grants for some of local revenue loss.
1979 AB 8—State changes property tax allocations in SB 154, establishes system for allocating future growth inproperty tax revenue, and absorbs costs of some local programs.
1992 First ERAF Shift—State permanently shifts some property tax revenue from counties, cities, and specialdistricts into a fund for K–14 districts.
1993 Second ERAF Shift—State permanently shifts additional property tax revenue into a fund for K–14 districts.
2004 Triple Flip—State uses some local sales tax revenue to repay deficit–financing bonds. Reimburses countiesand cities with property tax revenue from ERAF and K–14 districts.
The VLF Swap—State permanently shifts some property tax revenue from ERAF and K–14 districts toreimburse cities and counties for the state’s reductions to their VLF revenue.
Temporary ERAF Shift—State shifts some property tax revenue from noneducational local agencies to K–14districts for two years.
Proposition 1A—Voters restrict the state’s authority to shift property tax revenue away from cities, counties,and special districts.
2009 Proposition 1A (2004) Borrowing—State borrows $1.9 billion of property tax revenue from cities, counties,and special districts as authorized by Proposition 1A.
2010 Proposition 22—Voters eliminate the state’s authority to borrow property tax revenue and to shiftredevelopment agencies’ property tax revenue.
2012 Dissolution of Redevelopment Agencies—Redevelopment agencies are abolished. Over time, their share of
the property tax will revert to other local governments.
ERAF = Educational Revenue Augmentation Fund; VLF = vehicle license fee.
Tax Allocation Prior to Proposition 13
Tax Allocation Determined Locally Until 1978. Prior to voter approval of Proposition 13 in 1978, each localgovernment authorized to levy a property tax set its own rate (within certain statutory restrictions). Each local
government annually determined the amount of revenue necessary to finance the desired level of services andset its property tax rate to collect that amount. A property owner’s property tax bill reflected the sum of the
individual rates set by each taxing entity. Under this system, schools and community colleges received over 50percent of statewide property tax revenue, counties about 30 percent, and cities about 10 percent. (At the local
level, however, the share of property tax revenue supporting each type of local government varied. Somecommunities, for example, provided a greater percentage of total property tax revenue to schools and othersprovided more to their county or city.)
Property Tax Allocation Linked to State Budget in 1972. Although local governments had control over theproperty tax during this period, property tax revenue had an effect on the state’s budget beginning in 1972.
Chapter 1406, Statutes of 1972 (SB 90, Dills), started an education finance system in which the stateguarantees each school district an overall level of funding. For K–12 districts, each district receives an overall
level of funding—a “revenue limit”—from local property taxes and state resources combined. Communitycollege districts receive apportionment funding from local property taxes, student fees, and state resources.
Thus, if a district’s local property tax revenue (and student fee revenue in the case of community colleges) isnot sufficient, the state provides additional funds. If a district’s nonstate resources alone exceed the district’s
revenue limit or apportionment funding level, the district does not receive state aid and can keep the excesslocal property tax revenue for educational programs and services at their discretion. These districts are
commonly referred to as “basic aid” districts because historically they have received only the minimum amountof state aid required by the California Constitution (known as basic aid). This system of school finance gives thestate a significant fiscal interest in the distribution of local property tax revenue.
Proposition 13 and the State’s Response
Proposition 13 fundamentally changed local government finance and assigned the state responsibility forproperty tax allocation. Property tax receipts fell by more than 60 percent because Proposition 13 lowered thestatewide property tax rate to a constitutional maximum of 1 percent. Additionally, the measure required the
state, rather than local communities, to determine the allocation of property tax revenue among the localgovernments within a county. In response to Proposition 13, the Legislature enacted two major bills: Chapter
292, Statutes of 1978 (SB 154, Petris) and then Chapter 282, Statutes of 1979 (AB 8, L. Greene). In general,these bills established methods for allocating the new lower amount of property tax revenue and shifted certain
county and school district costs to the state.
First State Allocation System—SB 154
Shortly after the passage of Proposition 13, the Legislature approved SB 154 in an effort to avoid major localgovernment service reductions and significant fiscal distress from the decrease in property tax revenue. SenateBill 154 was the state’s first attempt to allocate property taxes among counties, cities, special districts, and K–14 districts. Under SB 154, a local government’s share of the 1 percent property tax rate in 1978–79 was based
on the share of countywide property tax revenue going to that local government before Proposition 13. Forexample, if a city received 10 percent of the property taxes collected by all local jurisdictions in the county prior
to the passage of Proposition 13, the city would receive 10 percent of the property taxes collected in the countyat the 1 percent rate. This was a significant change from the allocation of property taxes prior to Proposition
13, when a local government received property tax revenue only from the properties located within itsjurisdiction. In addition, to partially offset the revenue loss resulting from the reduction in the property tax
rate, SB 154 used state funds to relieve counties of a portion of their obligation to pay for certain health andwelfare programs and to provide block grants to counties, cities, and special districts.
The Current Property Tax Allocation System—AB 8
A year after enacting SB 154, the Legislature adopted AB 8, a long–term policy to allocate property taxes and
provide fiscal relief to local governments. The legislation (1) directed county auditors to allocate 1979–80property tax revenue in a manner similar to SB 154 but with some modifications and (2) established a method
for allocating property tax growth in future years.
New Base Property Tax Allocation. Assembly Bill 8 established a new base property tax allocation for 1979–
80. The new base allocations in AB 8 resembled those in SB 154—a local government’s share was based on theshare of the countywide property tax going to that local government before Proposition 13—with some
modification. Specifically, rather than continue the state block grants included in SB 154, AB 8 increased thebase share of property taxes allocated to most counties, cities, and special districts by reducing the base sharegoing to K–14 districts. (Under the state’s school finance system, K–14 district losses were in turn made upwith increased state funds for education.) For cities and special districts, the increase in the base property taxallocation was derived from the block grant amount provided in SB 154. Cities received increased propertytaxes equivalent to about 83 percent of their SB 154 block grant amount and special districts 95 percent oftheir block grant amount. Counties received a combination of increased property taxes, reduced expenditure
obligations for health and social services programs, and a state block grant for indigent health programs. Thereduced county expenditure obligations included complete state assumption of the costs for Medi–Cal and the
State Supplementary Payment Program, as well as an increased state share of costs for the Aid to Families withDependent Children program (the predecessor to California Work Opportunities and Responsibility to Kids).
(These changes resulted in an increased share of property tax revenue for most counties. As discussed in thenearby box, six counties ended up as so–called negative bailout counties.) In summary, AB 8 shifted property
tax revenue away from K–14 districts in order to provide cities, special districts, and most counties with agreater amount of property tax revenue than they received the previous year under SB 154. As shown in Figure
A–2, this greatly reduced K–14 districts’ share of the statewide property tax.
What Are “Negative Bailout Counties?”
Assembly Bill 8 did not provide additional property tax revenue to six counties (Alpine, Lassen, Mariposa,Plumas, Stanislaus, and Trinity). Under the provisions of AB 8, the increased share of the base property tax
allocation to counties was calculated as the value of the SB 154 block grant plus a small adjustment for thecost of the Aid to Families with Dependent Children program less the amount of the indigent health block
grant. In these six counties, the value of the indigent health block grant was so great that it exceeded thevalue of the adjusted SB 154 block grant. In order for these counties to be treated in the same way as all
other counties, the amount of property taxes allocated to these counties was reduced. Because thesecounties received a smaller percentage of total property taxes collected after implementation of AB 8
relative to their pre–Proposition 13 shares, these counties are termed negative bailout counties.
New Method for Allocating Property Tax Growth. Assembly Bill 8 also established a new process forallocating growth (or decline) in property tax revenue in future years. In contrast to the property tax allocation
process in 1978–79 and 1979–80 (that distributed revenue on a countywide basis without regard to where theproperty was located), the legislation specified that future growth in property tax revenue would be allocated
only to those local governments serving the property where the revenue increase took place. Accordingly,beginning in 1980–81, AB 8 required that each local government receives the same amount of property tax it
received in the prior year plus its share of any growth or decline in property tax revenue that occurred in itsjurisdiction.
To ensure that each local government receives the property tax growth from the properties it serves, eachcounty is divided into tax rate areas (TRAs). Each local government represented in a TRA receives a share of
the property tax growth that occurs within that TRA. As required by AB 8, county auditors developed a
methodology to determine the percentage of property tax growth—known as TRA factors—to allocate to each
local government in each TRA. These TRA factors were based largely on the 1979–80 base allocationestablished by AB 8 (including the shift of property tax revenue from K–14 districts to other local
governments). In most counties, these TRA factors remain constant. Thus, if a city received 25 percent of theproperty tax revenue growth generated in a TRA in 1980–81 (the first year TRA factors were used to distribute
property tax revenue growth), it continued to receive 25 percent of the growth in property taxes in futureyears. As a result, the distribution of property tax revenue among local governments continued to closelyresemble the 1979–80 distribution until the first major changes to the AB 8 system occurred in the 1990s.
In summary, the AB 8 property tax allocation system provides each local government with the same amount ofproperty tax revenue it received in the prior year (the base), plus its share of any growth or decline in property
tax revenue that occurred in its jurisdiction in the current year.
Changes to the AB 8 System
The state property tax allocation system set up in AB 8 continues to be the basis for property tax allocationamong local governments today. Since 1979, however, there have been some significant changes to the
original property tax allocation system contained in AB 8. In most cases, the changes reflect the complex fiscalrelationship between the state and local governments. Because of the state’s role in allocating property tax
revenue after Proposition 13 and in funding K–14 districts and other local programs, decisions regarding thestate budget and other policy issues have led the Legislature and Governor to occasionally change how
property tax revenue is distributed. We highlight the major changes in property tax allocation below. It isimportant to note, however, that these changes in property tax allocation do not explain the entire scope of the
state–local fiscal relationship—a relationship that also has involved the realignment of many governmentprograms and changes in other revenue sources such as the sales tax and the vehicle license fee (VLF). Someof these decisions have benefited the state fiscally, and others have benefited local governments or taxpayers.
No and Low Property Tax Cities
One change in property tax allocation relates to so–called “no and low property tax cities.” Cities that did notlevy a property tax, levied only a very low property tax, or were not incorporated as cities prior to the passage
of Proposition 13 typically received few property taxes under AB 8. During the 1980s the Legislature directedcounty auditors to modestly increase the amount of property taxes going to some of these cities by shifting a
share of county property tax revenue to them.
Property Taxes Shifted to Schools
Ongoing Property Tax Shifts Started in 1990s. In 1992–93 and 1993–94, in response to serious budgetaryshortfalls, the Legislature and Governor permanently redirected almost one–fifth of statewide property tax
revenue—over $3 billion in 1993–94—from cities, counties, and special districts to K–14 districts. (Thelegislation also temporarily required redevelopment agencies to make payments to K–14 districts.) Under the
changes in property tax allocation laws, the redirected property tax revenue is deposited into a countywidefund for schools, the Educational Revenue Augmentation Fund (ERAF). The property tax revenue from ERAF is
distributed to non–basic aid schools and community colleges, reducing the state’s funding obligation for K–14school districts.
The amount transferred into ERAF from each city, county, and special district was based on many factors,
including the magnitude of the fiscal relief that the state provided the local government in AB 8 and, forcounties, the level of taxable sales within its borders. As a result, individual local government ERAF obligations
varied widely. For example, the ERAF shifts from cities formed after 1978 typically were lower than those forolder cities because the newer cities did not receive any AB 8 benefits. Similarly, counties with many retail
developments typically had larger ERAF shifts than rural counties because the state anticipated that extensivelydeveloped counties would receive more relief from the state’s primary ERAF mitigation measure: a half–cent
sales tax for local public safety (Proposition 172, 1993). As shown in Figure A–2, after the ERAF transfer of theearly 1990s, schools and community colleges once again received more than 50 percent of the state’s property
tax revenue, while other local governments received less.
“Excess ERAF” Shifted Back. In the late 1990s, some county auditors reported that their ERAF accounts hadmore revenue than necessary to offset all state aid to non–basic aid K–14 districts. In response, the Legislatureenacted a law requiring that some of these surplus funds be used for countywide special education programsand the remaining funds be returned to cities, counties, and special districts in proportion to the amount of
property taxes that they contributed to ERAF. The ERAF funds that are returned to non–education localgovernments are known as excess ERAF.
Additional Temporary Property Tax Shift. The 2004–05 budget package also shifted $1.3 billion of propertytaxes from noneducation local agencies (cities, counties, special districts, and redevelopment agencies) to ERAF
in 2004–05 and again in 2005–06. This temporary ERAF shift reduced the state’s funding responsibilities for K–14 districts to help address the budget shortfalls in those two years.
Changes to ERAF
The Triple Flip. In 2004, state voters approved Proposition 57, a deficit–financing bond to address the state’s
budget shortfall. The state enacted a three–step approach—commonly referred to as the triple flip—that
provides a dedicated funding source to repay the deficit bonds:
Beginning in 2004–05, one–quarter cent of the local sales tax is used to repay the deficit–financing bond.During the time these bonds are outstanding, city and county revenue losses from the diverted local salestax are replaced on a dollar–for–dollar basis with property taxes shifted from ERAF.The K–14 tax losses from the redirection of ERAF to cities and counties, in turn, are offset by increasedstate aid.
The triple flip increases the amount of property tax revenue going to cities and counties and reduces theamount of ERAF provided to K–14 districts. Overall, however, cities, counties, and K–14 districts do not
experience any net change in revenue from the triple flip. Cities and counties receive more property taxrevenue, but this revenue gain is offset by the reduction in sales tax revenue. K–14 districts receive less
property tax revenue, but this is offset with increased state aid. The flip of sales taxes for property taxes endsafter the deficit–financing bonds are repaid (currently estimated to occur in 2016).
The VLF Swap. The VLF—a tax on vehicle ownership—provides revenue to local governments. In 1999, the
state began reducing the VLF rate and backfilling city and county revenue losses from this tax reduction withstate aid. The 2004–05 budget package permanently replaced the state VLF backfill by diverting property tax
revenue from ERAF and, if necessary, non–basic aid K–14 districts to cities and counties. In 2004–05, cities andcounties did not experience a change in overall revenue from the VLF swap, as the amount of property tax
shifted to them was equal to the VLF backfill amount. In subsequent years, state law specifies that each localgovernment’s VLF swap payment grows based on the annual change in its assessed valuation. As a result, most
cities and counties benefit fiscally from the VLF swap because assessed valuation typically grows more quicklythan VLF revenue. Similar to the triple flip, K–14 districts’ property tax revenue losses are made up with
increased state aid.
Distributing ERAF
The triple flip and VLF swap further expanded the use of ERAF and changed the priorities governing how itsresources are used. As shown in Figure A–3, the original purpose of ERAF was to supplement the property tax
revenue of non–basic aid K–14 districts. Under current law, however, funding K–14 districts falls to the fourthpriority. As a result, non–basic aid school districts do not receive any ERAF resources unless additional funds
remain after the county auditor (1) returns excess ERAF, (2) reimburses the triple flip, and (3) make paymentsfor the VLF swap. This change in priorities has a significant effect on the amount of ERAF available for school
districts. In 2010–11, for example, auditors in 33 counties reported using all ERAF resources for the first threepriorities, leaving no ERAF for schools.
Figure A–3
Uses of ERAF Listed in Priority Order
Priority Early 1990s Late 1990s to 2004 2004 to Present
First Fund non–basic aid K–14districts Return excess ERAF Return excess ERAF
Second Fund non–basic aid K–14districts Reimburse triple flip
Third Make payments for VLF swap
Fourth Fund non–basic aid K–14districts
ERAF = Educational Revenue Augmentation Fund; VLF = vehicle license fee.
Figure A–4 displays the complex process county auditors follow to allocate ERAF and to reimburse cities andcounties for the triple flip and VLF swap. This figure also shows that, under certain circumstances, it is possible
that the auditor could determine that there are not enough funds to fully compensate cities and the county forthe triple flip and/or the VLF swap. These funding insufficiencies are referred to as “insufficient ERAF.”
Step 1: Return Excess ERAF. As shown in the figure, the first step is for each county auditor to determine
whether the funds deposited into the countywide account exceed the amount needed by all non–basic aid K–14districts in the county, plus a specified amount for special education. If so, the excess ERAF is returned to
cities, special districts, and the county in proportion to the amount of property taxes they contributed to ERAF.This calculation of excess ERAF was modified recently to reflect the increased revenue that K–14 districts and
ERAF receive from the dissolution of redevelopment agencies. Specifically, to maximize the state fiscal benefitrelated to redevelopment dissolution, Chapter 26, Statues of 2012 (AB 1484, Committee on Budget) directs
county auditors to exclude property taxes related to the dissolution of redevelopment agencies in thecalculation of excess ERAF.
Step 2: Reimburse Triple Flip. Following the calculation and distribution of excess ERAF, state law directs
county auditors to reimburse local governments for their revenue losses associated with the triple flip. Thisreimbursement is shown in the figure as step two. If the county auditor uses all available ERAF, but determines
that the local governments have not been fully reimbursed for the triple flip, the county has insufficient ERAF.
In this situation, additional state action is required if cities and counties are to be fully reimbursed for the triple
flip.
Steps 3 and 4: Pay for VLF Swap. After reimbursing the triple flip, the next use of ERAF is to makepayments to local governments for the VLF swap. If the county auditor determines that ERAF resources are notsufficient to fully pay cities and the county for the VLF swap, the county auditor redirects some property taxesfrom non–basic aid K–14 districts for this purpose, as shown in step 4. The redirection of school property taxes
is commonly referred to as negative ERAF because it decreases K–14 property taxes rather than supplementingthem (the original purpose of ERAF). If the amount of property taxes deposited in ERAF and allocated to non–
basic aid school district is not enough to make the payments required under the VLF swap, then the county hasinsufficient ERAF. In this situation, additional state action is required for cities and counties to receive the full
VLF swap payment. In 2012–13, the first time this issue came before the Legislature, the state included $1.5million in the budget to compensate the county and cities in Amador County for insufficient ERAF.
Step 5: Distribute Remaining ERAF to K–14 Districts. Any funds remaining in ERAF after the other useshave been satisfied are distributed to schools and offset state education spending.
Limits on the State’s Authority Over Property Tax
Allocation
The state’s use of property tax shifts to help resolve its severe budget difficulties—as well as other actionsaffecting the state–local fiscal relationship—have been a source of considerable friction between state and local
government. In response, local government advocates have sponsored initiatives to limit the state’s authorityover local finances, including two constitutional measures reducing the state’s authority over property tax
allocation. As a result, much of the authority granted to the state in Proposition 13 and used to establish AB 8,ERAF, the VLF swap, and the triple flip is now restricted.
Proposition 1A (2004)
In 2004, voters approved Proposition 1A, amending the State Constitution to prohibit the state from shiftingproperty tax revenue from cities, counties, and special districts to K–14 districts. The measure, however,provided an exception to its restrictions. Beginning in 2008–09, the measure allowed the state to shift a limitedamount of local property tax revenue to schools and community colleges provided that the state repaid localgovernments for their property tax losses, with interest, within three years. The measure also specified that
any change in how property tax revenue is shared among cities, counties, and special districts must beapproved by two–thirds of both houses of the Legislature (instead of by majority vote). For example, state
actions that shift a share of property tax revenue from one local special district to another, or from the countyto a city, require approval by two–thirds of both houses of the Legislature.
The state utilized Proposition 1A’s exception for shifting property tax revenue to provide state fiscal relief in its2009–10 budget package. Specifically, the state borrowed $1.9 billion of property tax revenue from cities,
counties, and special districts—revenue equal to roughly 8 percent of each local agency’s property tax revenue.(Under Proposition 1A, the state was required to repay these funds by 2012–13. Companion legislation,however, allowed local governments to borrow against the state’s future repayments so that local governmentbudgets were not negatively affected in 2009–10.) The 2009–10 budget package also required redevelopmentagencies to make payments totaling $1.7 billion (2009–10) and $350 million (2010–11) to K–12 school districtsserving students living in or near their redevelopment areas. Unlike the borrowing from cities, counties, andspecial districts, the state did not reimburse redevelopment agencies for these required payments.
Proposition 22 (2010)
In 2010, voters approved Proposition 22, which, among other things, prohibits the state from redirectingproperty tax revenue as it did in 2009–10. Specifically, Proposition 22 eliminates the state’s authority to borrow
property tax revenue from local governments as previously allowed under Proposition 1A and prohibits thestate from requiring redevelopment agencies to shift revenue to K–14 districts or other agencies. As discussedin the nearby box, the prohibition on shifting redevelopment funds contributed indirectly to the dissolution ofredevelopment agencies in February 2012.
The Dissolution of Redevelopment Agencies
As discussed in our report, The 2012–13 Budget: Unwinding Redevelopment, redevelopment had the overall
effect of increasing state costs for K–14 education. For this reason, the state frequently requiredredevelopment agencies to shift some funds to support K–14 education. Under Proposition 22 (2010),however, the state no longer had the authority to require redevelopment agencies to shift property taxrevenue to school districts. Facing considerable fiscal constraints and not authorized to shift funds fromredevelopment for state fiscal relief as it had done in the past, the Legislature took a new approach as partof the state’s 2011–12 budget. Specifically, the Legislature approved and the Governor signed Chapter 5,Statutes of 2011 (ABX1 26, Blumenfield), which dissolved all redevelopment agencies. They also approved
Chapter 6, Statutes of 2011 (ABX1 27, Blumenfield), allowing redevelopment agencies to avoid dissolutionby voluntarily agreeing to make annual payments to school districts. The Supreme Court later ruled ABX1 27
unconstitutional, meaning all redevelopment agencies were subject to ABX1 26’s dissolution requirement.
Under the dissolution process, the property tax revenue that formerly went to redevelopment agencies is
first used to pay off redevelopment debts and obligations and the remainder is distributed to localgovernments in accordance with AB 8.
Looking Forward
Proposition 1A and Proposition 22 limit the state’s authority to change property tax allocation laws. Measuresthat reallocate property tax revenue among counties, cities, and special districts require a two–thirds vote ofthe Legislature and measures that change state laws to increase the percentage of property taxes allocated toschools are prohibited. Even without additional legislative action, however, the distribution of property tax
revenue will change in the near future for two reasons.
End of Redevelopment. As the debts and obligations of former redevelopment agencies are paid off,
property tax revenue that previously was allocated to redevelopment agencies will be distributed to K–14districts, counties, cities, and special districts.
The End of the Triple Flip. We estimate that the state’s deficit–financing bonds will be paid off in 2016–17. At that time, the state sales tax rate will decline by one–quarter cent and the local sales tax rate will
increase by one–quarter cent. Because the local sales tax rate is restored in full, the property taxrevenue currently used to backfill cities and counties for the loss in sales tax revenue will be allocated to
K–14 districts. Although none of these entities will experience any change in overall revenue, cities, andto a lesser extent counties, will receive a smaller share of the property tax than they do today. Inaddition, the property tax revenue allocated to K–14 districts will reduce the state’s education costs.
Appendix 2: Property Tax and Local Government
Publications
Property Taxes
Property Tax Agents at the Local Level in California: An Overview (June 20, 2012)
Discusses the role of property tax agents in appealing property assessments.
Reconsidering AB 8: Exploring Alternative Ways to Allocate Property Taxes (February 3, 2000)
Examines the problems in the current property tax allocation system and discusses the tensions and trade–offsinherent in five reform proposals.
Reversing the Property Tax Shifts (April 2, 1996)
Explains the mechanics of the Educational Revenue Augmentation Fund shift and the formulas whichimplemented it.
Local Finance
Major Milestones: Over Four Decades of the State–Local Fiscal Relationship (November 29, 2012)
Provides a timeline summarizing major changes in the state–local relationship.
Local Government Bankruptcy in California: Questions and Answers (August 7, 2012)
Addresses some common questions about the Chapter 9 process for local governments.
The 2012–13 Budget: Unwinding Redevelopment (February 17, 2012)
Reviews the history of redevelopment agencies, the events that led to their dissolution, and the process
communities are using to resolve their financial obligations.
The 2011–12 Budget: Should California End Redevelopment Agencies? (February 8, 2011)
Examines the Governor’s proposal to end redevelopment.
Ten Events That Shaped California State–Local Fiscal Relations (December 16, 2009)
Discusses key events and measures that influenced state–local relations.
Overview of California Local Government (June 17, 2010)
Summarizes key issues related to local government.
Understanding Proposition 218 (December 17, 1996)
Examines the constitutional requirements related to property assessments and fees.
Acknowledgments This report was prepared by Chas
Alamo and Mark Whitaker and reviewed by Marianne
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