Orange County Voices : COMMENTARY ON LOCAL GOVERNMENT : California Cheats O.C. by Giving It Less Money for Education : The state’s funding mechanism must be made more equitable. But in the face of bankruptcy, a sales tax increase is the only short-run option to avoid default this summer.

The upcoming vote on Measure R has helped focus attention on the size and scope of local government in Orange County.

Many believe that the savings generated by further reductions in local government would obviate the need for a half-cent sales tax increase, while others believe that further shrinkage in local government would seriously hamper the quality and delivery of public goods and services.

Unfortunately, most of the attention surrounding the relative size of local government spending has focused on the county’s general-fund budget, which was sharply cut 44%, from $463 million to $258 million, in order to offset the loss in interest income formerly generated by the county’s ill-fated investment pool. But the general-fund budget is a very small portion of the total pie. Local spending also includes K-12 public education and intergovernmental expenditures as well as spending by county districts, agencies and municipalities.

Although expenditure data is not readily available for the total level of local government spending on a comparable countywide basis, it is possible to use the total level of local government employment as a proxy for such spending. The following table shows that the total level of local government employment on a relative basis in Orange County is significantly lower than in other counties in the state.

Orange County’s 35.6 local government employees per 1,000 people is 16.6% lower than the statewide average of 42.7%. Notice also that while the populations of Orange County and San Diego County are about the same, Orange County’s local government employment level of 92,600 is about 13,000 lower than San Diego County’s local government work force of 105,500. Since governments are likely to spend as much as they can get, an obvious question that emerges from this data is why the local public sector in Orange County is relatively small compared to other counties.

The answer to this question is found in the state formula for distributing local property tax revenue. Since Orange County devoted a larger proportion of its property tax revenue to public education at the time of Prop. 13’s passage, it was locked into that higher percentage in subsequent years. Those counties with a lower percentage devoted to public education prior to Prop. 13 were subsequently locked into lower percentage allocations.

This was a fortuitous development for counties that contributed less to public education, since the state provides Proposition 98 subsidies to ensure the same level of public education funding per student across all counties. But this funding policy means that counties that devote a higher proportion of property taxes to public education (e.g., Orange County) receive a lower subsidy from the state.

For example, in the 1993-94 fiscal year, K-12 public education in Orange County received $884.9 million, or 70.6%, of its budget from local property tax revenue and received the remaining $368 million, or 29.4%, of its budget from state aid. This compares to K-12 public education in all other California counties receiving an average of 48.2% in property taxes and 51.8% in state aid.

If Orange County K-12 public education were to receive the same proportion of subsidy as received on average by other counties (51.8% instead of 29.4%), the county’s share of state aid would have been $649 million rather than $368 million--$281 million higher.

The fact that Orange County devotes more of its property taxes to public education means that other Orange County governmental units, like county government itself, receive a lower percentage. But unlike public education, the state does not come to the rescue to ensure that these other governmental units receive some minimum funding level.

This difference explains why the relative level of local government employment in Orange County is low. If Orange County received an equivalent pro rata share of the statewide subsidy, it would have had an additional $281 million to spend.

With Orange County government significantly underfunded even before the bankruptcy, it is unrealistic to believe that the gaping hole brought on by the collapse of the county’s investment pool can be closed by additional cutbacks in local government spending. Such cutbacks, especially in the short run, are not justified or prudent.

A more appropriate strategy could be to place pressure on state government to redress the severe inequity in the state’s funding mechanism that cheats Orange County.

In the meantime, a sales tax increase is the only short-run option to avoid default this summer. In the longer run, changing the state’s funding mechanism to make it more equitable, coupled with county asset sales and savings from privatization as well as awards or settlements from pending litigation against the county’s brokers, can bring about an early end to the tax increase, if it is enacted.

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1994 Government Employment

Goverment Government Jan. 1, 1994 employees per County employees population 1,000 residents Los Angeles 399,200 9,221,300 43.3 Orange 92,600 2,598,100 35.6 Riverside/San Bernardino 119,200 2,955,800 40.3 San Diego 105,500 2,687,800 39.3 Santa Barbara 16,300 392,000 41.6 Ventura 28,400 709,000 40.1 State of California 1,372,800 32,140,000 42.7

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K-12 Public Education Funding, 1993-94

County Property Taxes State Aid Orange 70.6% 29.4% Los Angeles 39.7 60.3 Riverside/San Bernardino 34.0 66.0 San Diego 59.4 40.6 Santa Barbara 64.5 35.5 Ventura 52.0 48.0 State of California 48.2 51.8

Source: California Department of Education