Arrival of New Cities Puts Counties on a Starvation Diet : * The revenue imbalance has caused a crisis. Sacramento must place a high priority on a realignment of relationships between local governments.

On March 5, the residents of two Orange County communities--Laguna Hills and El Toro--will vote on whether to become the county’s 30th and 31st cities. If successful, as expected, they will then elect city councils, form planning commissions and begin exercising local control over land use, the chief motivation for staking a claim for municipal independence.

That graduation to full-fledged cityhood ought to be a cause for celebration for all. But it will be another dark day in the County Hall of Administration. There, the Board of Supervisors is grappling with a budget that refuses to balance. Incorporations only add to the board’s woes, because they shift sales and property tax revenue away from the county. Nor is this a dilemma that affects only Orange County. Squeezed at all levels, cities and counties are engaged in desperate competition with each other for the same tax dollars.

To meet the problem, unprecedented new levels of cooperation between state and local government will be necessary in the next few years. The new governor has begun to look at the situation, which is good, but few in government have yet begun to come to grips with the scope of the problem, either at the local or state level. They must do so soon.

DISTRESS SIGNALS: In Orange County, the two newest cities are expected to cost the county $7.8 million annually in lost revenue. The recent incorporations of Mission Viejo, Dana Point and Laguna Niguel deprived the county of another $10 million annually. Then there is the prospect of cityhood elections in Aliso Viejo, Rancho Santa Margarita and other communities. All of these problems make it clear why county administrators shudder at the word cityhood.

Such incorporations have hit the county when it is already under great stress from the recession, which has decreased revenue while creating a rising demand for health, welfare and other services. The recession has exacerbated fiscal woes caused by years of shortfalls and by historic inequities in funding formulas for programs the county must administer for the state. The county has repeatedly cheated its local programs to pay the difference. It already has a $13-million shortfall in its current budget and is scrambling to find ways to cut next year’s in anticipation of an even tighter state budget in the 1991-92 fiscal year.

Orange County’s problem is part of a larger trend. Last year, Butte County sent shock waves across the state by declaring itself on the edge of bankruptcy, in part because of annexations. Yolo County lost 75% of its sales tax revenue when just one city, West Sacramento, incorporated; it’s close behind Butte County in declaring financial collapse. The effects of incorporations and annexations are also aggravating budget crises of other counties.

So alarming are county budget woes that the Legislature last year passed a controversial measure giving counties the right to impose jail booking fees on cities and to charge cities and special districts for collecting property taxes for them. The measure also gave counties for the first time the right to raise utility and business license fees--revenue sources long available to cities--and to ask voters for approval of sales tax increases to pay for general services. But most of these measures are politically difficult. For example, cities are up in arms over Orange County’s jail booking fee and want it repealed. And countywide sales tax increases are impossible sells, because the electorate seems unwilling to raise its taxes, except for specific purposes such as transportation.

SHIFTING BALANCE: At one time, municipal incorporations were a different business altogether. In 1878, Anaheim, then home to 881 people, became the first to vote itself a city in Orange County. The bulk of incorporations came in the 1950s and ‘60s, as freeways, housing projects and Disneyland ushered in a new era of suburbanization. However, the recent wave of incorporations occurred after Proposition 13 changed all the rules on local government financing.

Approved in 1978, Proposition 13 slashed property tax revenue--the major source of funding for local government. That precipitated a complete restructuring of the fiscal relationships between the state and its cities and counties. Cities fared much better than counties, partly because they have had more ways to raise revenue to replace property taxes and shift costs to counties and other government agencies. By contrast, counties, as administrative arms of the state, had little flexibility.

Even among counties, however, the effects of Proposition 13 varied widely. For example, many counties retained about 40% of their property taxes, while Orange County retained only 19%--lowest in the state. That was because the legislation passed after Proposition 13 to pay for local government was based on previous funding levels--low in Orange County because it had yet to undergo its greatest population expansion. There also was a political reason: Previous boards of supervisors in conservative Orange County had wanted to avoid federal and state intervention, and kept government funding to a minimum. That strategy backfired when Sacramento carved up the tax pie.

Also, in some areas a robust economy and rapid growth masked many of the negative effects of Proposition 13. That was especially true in Orange County, where skyrocketing housing values helped create a large property tax pool that paid for programs that were mandated by the state but not fully funded.

Now property values have stagnated, and the true condition of the county is becoming all too evident.

Meanwhile, even as funding formulas were hurting the county, many communities discovered advantages to incorporation--if they included lucrative shopping centers or other businesses. This led to a depletion of tax monies needed to pay for criminal justice, health care and other vital services that remain the responsibility of all county taxpayers.

A case in point: Laguna Hills, in proposing incorporation, wants to include within its boundaries the lucrative Laguna Hills Mall. To do this, cityhood proponents configured boundaries that connected a residential area to the mall by the width of Avenida de la Carlotta. County Administrator Officer Ernie Schneider said that will probably result in per-capita sales tax revenue of $225 per year--more than twice that of any other south Orange County city and nearly eight times the unincorporated average of $27 per person. Schneider is correct in observing that it “takes the issue of equity to extreme levels.” It points out the need for reform, and a problem with gerrymandering new cities to include attractive revenue sources.

As part of a major review of local government, Gov. Pete Wilson and the Legislature must find ways to give counties safeguards against such incursions on their general funds, perhaps by requiring new cities to share new tax revenue with counties. It’s heartening to note that the governor has already signaled that he wants to reduce financial incentives to cities for building shopping malls merely for the sales tax income. In addition, Wilson has proposed that certain mental health and health programs be turned over to counties, an idea that deserves serious consideration, provided that ways can be found to provide an adequate source of revenue to run them.

Meanwhile, the Orange County Board of Supervisors has no choice but to brace itself for more cityhood elections. Board Chairman Gaddi H. Vasquez, who recently asked county staff members to assess the county’s future in light of incorporations, can be commended for making this topic a priority early in his tenure. But problems are bigger than one county (see “Malibu Watch” in Opinion). With the desperate situation in Butte and other counties, statewide attention has now been focused. The much-needed restructuring of relationships between levels of government must receive a high priority in Sacramento. Orange and many other counties can wait no longer.

IF LAGUNA HILLS INCORPORATES

Sales tax generated in unincorporated county outside Laguna Hills: $11,4988,530

Sales tax generated in Laguna Hills: $4,951,655

Total sales tax: $16,450,185

Population of unincorporated county outside Laguna Hills: 245,559

Population of Laguna Hills: 26,000

Total unincorporated population: 271,559

Source: Local Agency Formation Commission, Orange County chief administrative officer