COMMENTARY : Taxpayers Will Eventually Balk at Burgeoning County Budget : Despite Prop. 13 constraints, county spending has increased markedly in the past 10 years. In the long run, residents will vote with their feet.

Now that the Orange County Board of Supervisors is in the final stages of approving the county’s 1991 (1990-91 fiscal year) budget, an analysis of the growth in government expenditures might give us a better perspective of the relative magnitude of that budget. Such an analysis during the post-Proposition 13 period might prove to be particularly instructive because that proposition was intended to limit increases in property taxes and thereby constrain the growth of local government spending.

In fact, Prop. 13 did have a sharp impact on county spending but only for a short time. While general county and countywide expenditures declined from $451 million in 1978 to $395 million in 1979, spending was back up to $482 million in 1980. And by 1990, expenditures reached $1.6 billion, more than 3 1/2 times greater than spending levels immediately preceding Prop. 13.

When government spending levels are adjusted for changes in population and inflation, the figures still point in the long run to a rapidly growing county government. For example, in a four-year period after passage of Prop. 13, per capita, price-adjusted general county and countywide expenditures declined from $380 in 1978 to $280 in 1982. But after 1982, spending quickly rose from the $280 trough in 1982 to $525 in 1990. Since 1978, per capita, price-adjusted general county and countywide expenditures increased 38%.

Compared to this increase of 38%, per capita price-adjusted personal income in Orange County was growing at a slower rate of 28% over the same period. Hence, general county and countywide expenditures are now absorbing a larger portion of personal income than before passage of Prop. 13.

These numbers represent only the tip of the iceberg. When county expenditures for fire, safety and library and other special service and assessment districts such as flood control, sanitation, waste management and the airport are added, the increase in total county expenditures is even more dramatic--from roughly $600 million in 1978 to $2.8 billion in 1990. In the last two fiscal years alone, total county expenditures increased from $1.8 billion to $2.8 billion.

In light of the tax constraints imposed by Prop. 13, one might ask how the county funded these sharp spending increases. The answer at least in part involves identifying the government’s response to Prop. 13 and then analyzing the fiscal consequences of that response.

Soon after the passage of Prop. 13, most public infrastructure costs for new residential and non-residential developments were passed on to property developers in the form of special development fees and assessments. This effectively pushed up the price of new developments that in turn increased the price of existing properties. While the price increases for newly developed properties increased assessments on those properties, the price increases on pre-Prop. 13 developments were “paper” gains only and could not be converted into higher assessments until those developments were resold in the marketplace. Recall that politically attractive features of Prop. 13 included a rollback in assessments to those that existed three years earlier and a 2% cap on increases in assessed valuation for unsold properties.

Initially, these fiscal features led to a drop in property tax revenue since increases in the bulk of assessed parcels were capped by Prop. 13 constraints. Indeed, the government spending analysis presented above points out that county expenditures did decrease in per capita, price-adjusted terms for several years after passage of Prop. 13. Over time, however, as more properties were resold at inflated prices, assessments and county revenue increased accordingly. Countywide, approximately half of all assessed parcels have changed hands since 1983.

Consider this example: Given an average appreciation for resale homes in Orange County of 313% between 1978 and 1990, a home that cost $80,000 in 1978 would on average have a market value of $250,000 in 1990. With a Prop. 13 annual cap of 2% on the increase in assessed valuation for unsold homes, the assessment on that home would increase from $80,000 in 1978 to approximately $100,000 in 1990. But if that home is resold at its current market value in 1990, the assessment would increase to $250,000. At a tax rate of 1%, government revenue would increase from $1,000 per year to $2,500 per year. It should be clear, therefore, that local governments over time share in the gains to be made from housing appreciation.

It seems ironic that the fiscal strategies inspired by Prop. 13 lead to higher rates of housing appreciation that eventually bring higher returns to local governments in the form of increased property assessments.

But property taxes and Prop. 13 tell only part of the story. Higher county appropriations are also funded from other sources such as increases in gas taxes, user fees, Mello-Roos special assessment districts, entitlement fees and transfer payments from the state and federal government. For example, Mello-Roos assessments that were non-existent several years ago now account for more than $400 million in annual appropriations. User fees from the airport and waste management district represent almost $450 million in appropriations while the state and federal governments contribute another $640 million to the pie.

An important lesson to be learned from all of this is that Prop. 13 is no longer an effective constraint on local spending. This has important economic and political implications. With governments’ ability and resourcefulness in finding new and innovative sources of revenue such as entitlement fees and Mello-Roos assessments, a rapidly growing stream of government revenue will continue. As a result, continued growth in the share of local government spending is virtually assured.

The version of the budget being reviewed by the Board of Supervisors this week calls for an increase in appropriations from $2.8 billion in 1990 to $3.2 billion in 1991, an increase of 17%. This follows increases in total county spending of 22% between 1989 and 1990 and 23% between 1988 and 1989. If the current version of the budget is approved, per capita, price-adjusted spending would increase from $890 in 1990 to $980 in 1991.

In the short run, individuals and corporations find ways to live with the taxes that fund these rapidly growing expenditure levels. In the longer run, individuals and corporations tend to vote with their feet and move to areas where costs and taxes are lower. The Board of Supervisors should be mindful of this.