Refunds Possible as Costa Mesa, Irvine Near Prop. 4 Spending Limit

Irvine and Costa Mesa could become the first large cities in California to exceed government spending limits set by Proposition 4, the 1979 initiative that requires that revenues in excess of spending limits be returned to citizens by refunds or reductions in taxes and fees.

The “spirit of 13” initiative approved by California voters in 1979 puts a lid on the amount of money state or local government can appropriate and spend. So far, the initiative has had no effect in Orange County, because cities have had large “tax gaps” between appropriations and allowable spending ceilings.

But for the first time, officials in Irvine say the city will exceed its “Gann limit,” named for the initiative’s author, Paul Gann, by an estimated $524,241 in the 1985-86 fiscal year. In the next five years, budget appropriations exceeding the Gann limit could total $11 million or $39.27 per taxpayer, according to Jeffrey Niven, manager of fiscal services for the city.

Could Total Millions

The budget is based on preliminary forecasts, Niven said, and actual figures won’t be available until July of next year.

In Costa Mesa, robust retail sales and slow population growth have narrowed the gap between appropriations and the spending limit to a microscopic $75 in an estimated $30-million budget for 1985-86. Finance Director Robert Oman said the excess could total “millions” in coming years.

But city officials said excess revenues don’t automatically translate into tax cuts or refunds.

Oman said he is “brainstorming” for ways to keep excess revenue in Costa Mesa coffers, including a ballot initiative asking voters to allow the city to use the funds for “badly needed” storm drains.

Considering Moves

He may also recommend moves such as placing the city Fire Department and Police Department’s checks and forgeries investigations on an assessment basis, calling the latter “basically a check collection service for merchants.”

“That would solve the problem, because assessments aren’t taxes” and, therefore, not subject to the Gann restrictions, he said.

Oman denies that such moves are ploys for circumventing Proposition 4.

“We’re not trying to collect more money than we need. We’re just trying to maintain the level of services we may be unable to keep in the future because revenues cannot keep up with costs,” he said.

Oman said the Proposition 4 limit, which is calculated using the 1978-79 budget as a base and then recalculated each year for changes in population and the U.S. Consumer Price Index, is “based on a naive assumption.”

It is “naive” to think that “a city’s costs for urban services are directly related to the increase in population and the increase in the U.S. Consumer Price Index . . . . The CPI is based on what a family of four spends money on. It’s not at all related to what a city spends money on,” he said.

In Irvine, the City Council may also consider a November ballot initiative to keep excess funds. Niven said the city may reduce funding for some programs or just “wait and see what the actual budget excess is” at the end of the fiscal year next July.

Little Public Comment

So far, Irvine residents have been less than vocal about the fate of excess revenues under Proposition 4. “I don’t think people are aware of this,” said Irwin Alber, member of an Irvine citizen’s group. “But I do think that if there’s an issue about taxes it should go to the voters.”

Meanwhile, the city will set aside any excess revenues under Proposition 4 in a special fund, “so we don’t spend what would go to the taxpayers” until it’s determined how funds will be used, Niven said.

Cities have two years to decide what to do with excess funds under Proposition 4. In addition, voters may approve a ballot initiative allowing a city to keep extra revenues for up to four years.

Both Oman and Niven say they consider direct refunds “impractical” due to the cost of drafting and mailing individual checks to residents. Instead, they would recommend tax or fee cuts if money is to be returned to residents.

Fiscal Brier Patch

What city finance directors view as a fiscal brier patch is termed a victory by Proposition 4 author Paul Gann. Gann said the “thorny” problem of excess appropriations really signifies that the proposition has finally come of age.

Once a city exceeds its Proposition 4 limit, Gann said the law is clear about what should happen next: “The law states very simply that the money should be returned to the people it belongs to, whether in a refund or a reduction in their taxes.”

He said government officials have a strong tendency to “bury” excess funds. “They get away with it because the people themselves accept it,” he added.

State legislative officials express some sympathy for Orange County cities grappling with the complexities of Proposition 4, however. “These two are the first major cities in the state to come up against this situation,” said Kenneth Emanuels, legislative director for the California League of Cities. “They’re having to do this on their own.”

‘Many Ambiguities’

Emanuels said “you’re not going to get an answer” to whether city officials’ attempts to retain revenues in city coffers violate the state constitution. “It hasn’t been tried in court yet, and there’s very little (guiding) legislation. It is fair to say there are many ambiguities.”

“If anybody wants to point the finger, they can blame the people who drafted it for not being more specific,” he said.

Emanuels said the Orange County cities may be the first to exceed appropriation limits because “that’s most likely to happen if a big shopping center opens or tremendous growth takes place.” In Costa Mesa, the South Coast Plaza shopping mall nets the city one-quarter of its sales tax revenues yearly, while spurting growth has long characterized the city of Irvine. Niven said that over the last two years revenues from property taxes in the city jumped 50% and hotel taxes doubled. In addition, the proposed 1985-86 budget is 20% greater than last year, he said.

Required to Return Money

Emanuels said the law is clear that when a city exceeds appropriation limits, “they are required to give money back, either by reducing the property tax, the business license tax, or reducing fee charges--any way they want. But they can’t appropriate funds over the limit.” A city may also seek a ballot initiative under Proposition 4 allowing it to keep excess revenues, he said.

The outcome of Proposition 4 budget decisions in Irvine and Costa Mesa may serve as test cases for cities throughout the state, Emanuels said. Meanwhile, Huntington Beach may face problems in five to 10 years, but Finance Director Bob Franz is adopting a “wait and see” attitude. “We have time to see what the other cities do, so we can learn from them,” he said.