WCM129 guts.qk4 5/7/03 11:15 AM Page 20 The Origin & Devolution of Local Revenue Authority by Michael Coleman and Michael G. Colantuono s the population grows, new technology develops, the economy evolves, But local governments in California do not have adequate control of their new needs and priorities rise and old ones fade. The varied circumstances finances and local affairs. Over the last half-century — and especially since the that arise from these factors, over time and among different localities, are an essential adoption of Proposition 13 in 1978 — reason that control of municipal affairs and finance has always been a paramount con- California cities and counties have lost substantial control of their major fiscal cern of local governments. To respond efficiently and effectively to the needs of their resources to fund police and other law enforcement services, fire protection, customers, cities need the flexibility to change their services; they need control of their parks, libraries, schools, hospitals and public health. finances so revenues will cover costs and so they may reallocate resources to meet Today, California’s city budgets face changing priorities. greater risk and less stability, both eco- nomically and politically, than in the past. City revenues often don’t grow commensurately with service needs, which forces increases in taxes or fees or cuts in services. Moreover, unfunded Michael Coleman is principal of Coleman Advisory Services and fiscal consultant to the League. He mandates from state and federal govern- is the owner of CaliforniaCityFinance.com, an information resource on California local government ments and new judicial interpretations finance. Michael G. Colantuono is a shareholder in the Los Angeles law firm of Colantuono, Levin & Rozell, APC. He serves as city attorney of Barstow and La Habra Heights and is first vice president of of existing statutes diminish local con- the League’s City Attorneys Department. trol over expenditures as well. 20 League of California Cities www.cacities.org WCM129 guts.qk4 5/7/03 11:15 AM Page 21 This decline of local control and stability tives and finances. And cities, while more local affairs were the frequent subject of impairs good governance, reduces effi- independent from the state than coun- meddling by the Legislature. The Cali- ciency, inhibits local government’s ability ties, also face greater fiscal constraints fornia Legislature displayed a deep dis- to respond to local needs and priorities, and vulnerability to state legislative trust of local affairs, while local officials and fosters a defensive, short-term ap- intrusion than at any time since 1879. sought more latitude in municipal policy proach among local officials. Essential and public services. decisions about what is available to A Brief History of Local Thirty years after California’s admission spend and how money must be spent Fiscal Authority to the union, the second (and current) are made by higher levels of government, In California’s early years as a state, local state Constitution was adopted by the but political responsibility for the taxing government authority was strictly con- Constitutional Convention during a and spending decisions remains local. trolled by the state government, and turbulent period in the state’s political The result is a lack of accountability gen- erally, as each level of government can continued credibly blame another for shortcomings in desired government services. But the taxpayers are left with little understand- ing of how government works, much How the Decline in Local Discretion less a meaningful way to participate in our democracy and hold elected officials Has Affected Cities accountable. The City of West Hollywood has lost more than $1 million annually from the In the first century of California state- ERAF takeaway of the early 1990s. Our city has a very limited ability to gener- hood, successive constitutional amend- ate new revenues. More than 70 percent of the city’s current revenues is either ments and legislative acts provided cities restricted or controlled by state mandate (including revenues subject to Proposi- and counties with a substantial degree of tions 13, 62 and 218). With the constant threat of unilateral state revenue take- home rule, including significant local fis- aways, managing the city’s fiscal health is becoming a daunting challenge, despite cal authority. This was no accident: The our best efforts to manage our affairs in a fiscally prudent manner. home rule provisions of the California Constitution of 1879 (our much-amend- –Mayor Jeffrey Prang and Mayor Pro Tem ed, current Constitution) were political John Duran, City of West Hollywood responses to legislative decisions to hijack As one of the larger cities in Los Angeles County, with a population in excess local budgets, often for the benefit of the of 150,000 people, Pomona has been especially hard-hit in efforts to deliver then-politically dominant railroad industry. vital public services, while still acting in a fiscally prudent manner and presenting balanced budgets as required by the city charter. Since the 1992 start of property tax shifts from cities to education (thereby reducing the state’s burden to fund these programs) Pomona’s total revenue losses due to ERAF now approach Now all communities $38.5 million, with a loss of more than $4.7 million, or 7.1 percent of our gen- eral fund budget in the current year alone. If present estimates are realized, FY are constrained by taxing 2003-04 losses will top $5,000,000 for the first time since reallocations began. decisions made by leaders –Paula Chamberlain, Finance Director, of a generation ago when City of Pomona The City of Novato has had to reduce its services to the public in every depart- California was a very dif- ment by 11 percent or $1.9 million annually as a result of the ERAF property ferent place socially, eco- tax shift and state mandated programs. State-mandated programs divert limited resources from services like senior programs. Other programs, such as youth recre- nomically and politically. ation, have been curtailed for many years to help fund the mandated programs. The state establishes programs such as storm drain run-off compliance, currently costing $400,000 and expected to rise another $350,000 this year, and set stan- But in the five generations since, local dards for compliance with no understanding of or concern for costs. The city home rule in California has been sub- has also had to reduce services by an additional 8 percent to manage the financial stantially eroded. Local education is now impacts of the recession. The impacts to date have included the elimination of clearly a state obligation. Counties, as 29 positions out of a total of 220 employees, including three police officers. arms of state public service, are now –Roderick J. Wood, City Manager, Novato more dependent on state program objec- www.westerncity.com Western City, June 2003 21 WCM129 guts.qk4 5/7/03 11:15 AM Page 22 The Origin & Devolution of Local Revenue Authority, continued ing flexibility in organizational and pro- This is yet another example of an instance where the gram design, latitude to regulate certain activities, and the authority to determine courts eroded local home rule in order to accommodate spending levels and priorities. But local state and federal pressure for centralized and uniform authority in municipal affairs remained subject to state pre-emption as to matters commercial rules in our increasingly national and inter- of statewide concern. The distinctions between “municipal affairs” and “matters national economy. However, this accommodation came of statewide concern” have been the entirely at the expense of local fiscal autonomy. essential questions in the shifting bound- ary line limiting the scope of home rule. Although cities achieved greater local fis- cal authority to determine service levels history. That adoption created, for the mainstay funding source for local govern- and levy local taxes and charges, state fis- first time, substantial and meaningful ment services remains the practice in most cal rules and constraints have often dom- home rule for California’s local govern- states in the nation today; California’s inated. In 1935, the state pre-empted the ments. The 1879 Constitution included post-Prop. 13 evolution is exceptional. local taxation of motor vehicles as real five provisions limiting the power of the In 1914, the California Constitution was property and established a statewide uni- state Legislature to interfere with the amended to provide charter cities with form value-based tax on motor vehicles, affairs of cities and vested in cities exten- the authority to “make and enforce laws known as the “motor vehicle in lieu tax” sive powers of self-government. This and regulations in respect to municipal or Vehicle License Fee (VLF), which it Constitution prohibited the state from affairs, subject only to the restrictions then allocated to cities and counties imposing a tax for local purposes, but and limitations provided in their several based on their share of county popula- enabled the state to authorize local gov- charters.” It established the power of tion (and not, as commonly believed, ernments to impose them. charter cities to adopt their own laws on auto sales activity or the valuation Over the next several decades, charter with respect to municipal affairs, includ- of autos in their jurisdictions). In 1955, city authority was expanded to general law cities. In 1903, in a case upholding the City of Los Angeles’ business license tax, the California Supreme Court stated unequivocally that local taxation is a municipal affair under Article XI, section 5 of the Constitution as to which local rules control over state legislation. Later, in 1982, the Legislature conferred on general law cities by statute the authority to adopt any tax that could be adopted by a charter city.