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Fair warning. What you are about to read is the briefest possible summary of one of the most arcane features of government finance in California, albeit one that involves hundreds of millions of taxpayer dollars and illustrates how financial decisions over four decades interact to create quagmires that defy rationality.

To begin at the beginning, in 1978 California voters overwhelmingly passed Proposition 13, which limits property taxes on homes and other real estate. It reduced property taxes that had supported local agencies and shifted the primary burden of financing schools and community colleges to the state government.

Dan Walters

Opinion

A decade later, in 1998, voters also passed Proposition 98, a very complex measure aimed at giving each school district a guaranteed revenue stream. Generally, the state would add enough money to each school district’s share of local property axes to meet a minimum revenue floor based mostly on student enrollment.

Just a few years later, Republican Pete Wilson became governor and almost immediately faced a severe economic recession. As state revenues declined sharply, Wilson and the Legislature struggled to meet their Proposition 98 obligations to schools and some demented genius dreamed up the Educational Revenue Augmentation Fund (ERAF) as a way out of the dilemma.

It Was a Political Shell Game, of Course

It required county auditors to give their local school districts much bigger slices of their property tax pools, thereby reducing what the state budget had to contribute under Proposition 98 and forcing counties, cities and other local agencies to eat the resulting revenue reductions. Eventually the state’s voters, at Wilson’s behest, somewhat offset their losses by approving a statewide boost in sales taxes that were given to local governments under the guise of improving public safety services.

It was a political shell game, of course, but nevertheless, ERAF remains in law to this day, although occasionally tweaked to ease the perpetual conflict between state and local officials over money. It’s also spawned a political tug-of-war between state officials and five Bay Area counties over how ERAF’s division of property taxes is being administered.

The five counties — San Francisco especially — have enjoyed soaring property tax revenues in recent years as the taxable values of homes and other property rocketed skyward. Thus they experience what is known as “excess ERAF,” since property taxes are often sufficient to finance their schools without additional state aid.

It’s a Conflict 42 Years in the Making

The Legislature’s budget analyst, Gabe Petek, issued a report in March alleging that auditors in those five counties have been violating state rules on how local property tax revenues are divided, shifting additional funds into local government coffers by shorting schools.

“We recently learned that a few counties have made changes to the way they calculate excess ERAF,” Petek wrote. “The changes would increase the amount of property tax revenue shifted from schools to other local agencies by hundreds of millions of dollars per year.”

Mostly, Petek says, the five county auditors are not counting charter school students in their calculations, as state law requires, and miscalculating the additional property taxes that resulted from the abolition of redevelopment, a program to improve blighted neighborhoods. He pegs the erroneous shift at $350 million a year.

A provision of Gov. Gavin Newsom’s revised state budget, released last month, would expose the errant counties to lawsuits and impose steep financial penalties on those that don’t follow the state’s rules on property tax allocations. The affected counties are trying to derail it.

It’s a conflict 42 years in the making.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.

One Response

  1. Jennifer Bestor

    Two crucial facts are missing from this exposition — but you’re forgiven because you caught this wonky, vitally important report. First, a year after Proposition 13 passed, an average of 30% of the property tax share remaining to schools and community colleges was taken. The Legislature handed it to county and city governments. (AB-8 Shift, 1979). San Francisco Unified was among the worst cuts, going from 30% to 8% of SF property tax revenue. So this was not a takeaway but a giveback. Second, the demented genius who clawed the money back for education in 1992-94, did much to solve the Serrano v. Priest equity issue, accidentally. The countywide pools of the most stable, reliable form of public revenue flow first to the schools with the least of their own. Beverly Hills residents pay a dollar into the fund for every dollar they pay to BHUSD — but the fund goes to Compton & Inglewood, none to BHUSD. Elsewhere, between 25-50¢ on the dollar flows from high wealth areas (Carmel, Palo Alto, Woodside, Laguna Beach) to their less well endowed neighboring school districts (Gonzales, Gilroy, Daly City, Santa Ana). ERAF is almost unknown, though, because cities and counties moved back in and grabbed much of it back — the $9.4B VLF Swap and ‘excess’ ERAF are just two examples.

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