Officials Grapple With New Tax Law

The next time a wind-driven firestorm races across the brush toward homes, the water-dropping Super Scooper airplane may not be on hand to douse the flames.

The doors of your nearest Los Angeles County library branch could be closed half the week.

And street lights in countless communities could go dark.

With the passage of anti-tax Proposition 218, these and other municipal services could be in jeopardy unless property owners approve continued assessments, voters agree to raise taxes or money somehow can be found elsewhere.

Not since the passage of the property tax-slashing Proposition 13 in 1978 have such sweeping constraints been imposed on the ability of local governments to raise money to pay for local services.

In city halls and county seats across the state, officials are struggling to understand Proposition 218’s complicated new rules for taxes, assessments, fees and charges that pay for everything from fire protection and libraries to parks and street lights.

“It is a huge problem,” said Judi Smith, lobbyist for the League of California Cities. “It puts us in the state of trying to manage city finances and not knowing what the rules are.”

The influence of the latest anti-tax initiative is already being felt. Inglewood officials pulled back a financial package for a new arena complex at Hollywood Park because of fear that voters would reject higher hotel taxes, a parking tax and a ticket tax.

The Los Angeles City Council recently voted to challenge the new law in court, particularly provisions that allow only property owners, including absentee owners and foreign companies, to decide the fate of assessments.

The constitutional amendment, which applies to all cities, counties, school districts, redevelopment agencies and special districts, requires voters’ approval for any general tax by a majority vote and any special purpose tax by a two-thirds vote. In addition, property owners must decide the fate of fees and assessments on them.

The goal of the Howard Jarvis Taxpayers Assn., which drafted the measure, was simple: to stop cities and counties from imposing taxes, fees and assessments without going to the voters.

“Our view is the voters should have a chance to vote on tax increases,” said Joel Fox, the association’s president. “Frankly, the cities and counties don’t want that.”

Los Angeles County Supervisor Zev Yaroslavsky has a decidedly different view. “What Proposition 218 has done is basically shut the door, locked the door and thrown away the key to local government’s ability to manage its own affairs,” he said. “It incapacitates government’s ability to act.”

Marianne O’Malley, a principal analyst with the legislative analyst’s office in Sacramento, takes a middle ground. “This is not like Proposition 13,” she said. “If you look at local government as a whole, it is a relatively moderate reduction in their revenues.”

Her office predicted before the election that local governments could lose more than $100 million annually in the short term under the measure and potentially hundreds of millions of dollars in revenue a year in the long term.

Property taxes, sales taxes and motor vehicle license fees are not affected. But agencies that rely on certain kinds of revenue to provide services such as fire protection, libraries, landscaping and lighting stand to feel a painful pinch, if not an outright squeeze.

The extraordinarily complex measure rewrites the rules of local government finance on a variety of fronts.

GENERAL TAXES

Under Proposition 218, no local government may impose, increase or extend any general tax--such as one on hotel rooms, business licenses, utility bills and the like--unless a majority of voters approve.

The measure affects some existing taxes, requiring a vote within two years on any general tax imposed, increased or extended since Jan. 1, 1995.

As a result, small cities from Bell to Hawaiian Gardens that imposed or increased their utility taxes since the beginning of last year now must seek voters’ approval, and fast.

Hawaiian Gardens instituted its 6% utility tax in early 1995 as the prime funding source for the city’s 18-officer Police Department, with the emphasis on driving gangs from the square-mile city.

City Manager Leonard Chaidez said the city is planning a vote in March, and hopes that the widespread support shown in an earlier advisory vote still exists.

Bell increased its longtime utility tax from 8% to 10% this year. The city has seen its financial fortunes rise and fall with the repeated opening and closing of its card club. Still unanswered is whether Proposition 218 would affect only the increase, or the entire tax.

In Los Angeles, a business license tax surcharge extended in July 1995 is likely to be placed before the voters next April in an effort to save the $10 million that it generates for the city each year.

And in Whittier, an increase in the hotel tax from 6% to 10% may also be headed for the ballot.

Proposition 218’s major impact on general and special taxes is felt most in cities run by charter, a minority of cities in Los Angeles County and the state. But general law cities already had started going through a similar process under Proposition 62, which was passed in 1986. A recent Supreme Court decision upholding that measure’s constitutionality has cities from Bellflower to El Monte planning elections on taxes that those cities had come to rely on to finance a broad array of municipal services.

Getting voters’ approval might prove difficult. Already, in the Nov. 5 election, voters in Artesia have shown their reluctance to approve even a modest utility tax. They rejected one of the county’s lowest utility taxes--a 2% levy on gas, electric and telephone bills. The defeat of the 4-year-old tax will cost that city 7% of its general fund revenues.

ASSESSMENTS

Proposition 218 takes direct aim at special assessment districts that levy charges for everything from street lighting and landscaping to parks and libraries. Most of these were assessed without voter approval.

Jonathan Coupal, director of legal affairs for the Jarvis group, said abuse of the assessment system led to Proposition 218.

“We had no choice,” he said. “Local governments created a bastardized hybrid of the assessment that is really a tax.”

Rather than going to the voters with a tax, Coupal said, cities and counties assessed property instead.

Proposition 218 clamps down hard on such assessments by requiring local governments to hold a mail-in election for each new or increased assessment and some existing assessments with certain exceptions. Those elections must be held by July 1.

The most common assessment, for landscaping and lighting districts, will have to come before voters for approval. At least 29 cities in Los Angeles County have such districts.

In recent years, as the county’s budget crisis threatened to force either the closure of libraries or sharp reductions in their operating hours, the Board of Supervisors established a special library assessment district. In unincorporated areas and a dozen cities that agreed to become part of the assessment district, the average homeowner pays $22 a year.

Altogether, the assessment raises $9 million annually to keep 44 of the 88 county library branches operating on healthy schedules.

But under Proposition 218, the supervisors might have to hold a mail-in election to retain the assessment.

“It’s clear that we will have to go to the ballot with something,” said County Librarian Sandra Reuben. “This is a serious problem we need to deal with.”

Reuben said it is uncertain whether the county will pursue a vote of property owners or change course and seek a special tax, which would require a two-thirds voter majority.

The county’s assessment for fire protection in unincorporated areas and 48 cities is in similar danger, potentially jeopardizing $53 million a year, 15% of the Fire Department’s budget. The money pays for fire stations, firefighting staff and equipment from hoses to the Super Scooper plane. The average homeowner pays just under $51 a year.

“It definitely puts us in a situation of taking it to a vote,” said county Fire Chief P. Michael Freeman. “We’re still trying to decipher all the implications.”

And then there are all those obscure landscape and lighting districts in many cities whose assessments pay for street lights and maintaining the landscaping of median strips or parks. Before the assessments, many of those expenses often were paid out of local government general funds.

Proposition 218 prevents local governments from charging more than the cost to provide an improvement or service to the owner’s property. And any benefit to non-landowners must be paid out of other local government funds. For instance, if a road is built to serve a specific area, but is also used by the general community, only a portion of the cost can be charged to property owners.

Only property owners directly responsible for paying assessments are eligible to vote. The ballots would be weighted based on the amount of the assessment the property owner would pay. To win approval, a majority of those voting by mail must approve the assessment.

Public officials worry that this could skew elections to serve what is good for business, not necessarily for residents or the city as a whole, especially in communities where a few large landowners dominate property ownership.

“If you are a shopping center, you have huge clout,” Supervisor Yaroslavsky said. “If you’re a single-family home, you have very little clout.”

This is the basis on which the Los Angeles City Council plans to challenge the law. But Coupal of the Jarvis organization said he gives such a lawsuit “zero chance” of success because for nearly a century, owners of big spreads have had more of a voice on assessments than owners of small lots do.

Bellflower City Manager Linda Lowry said officials are concerned about whether the city’s many absentee landowners would vote to pay for street lighting.

She said such a vote would raise unprecedented questions. “Who is your constituency?” Lowry asked. “Is it the people who live here and sleep here, or is it the people who have investments here?”

School and community college districts, state agencies, cities, counties and other public agencies would have to pay their share of assessments.

All existing, new or increased assessments must comply with the new procedures, but the initiative exempted assessments for sidewalks, streets, sewers, flood control, drainage systems and such services as mosquito abatement. Exceptions were provided for assessments already approved by voters and those used to repay bond debt.

SPECIAL TAXES

Proposition 218 imposes a much tougher two-thirds vote requirement for any special tax used to pay for a specific service.

“It’s going to be very difficult, if not impossible, to get a two-thirds vote,” said Keith Comrie, Los Angeles city administrative officer. “You have to have unanimity that’s hard to achieve. It’s going to make local government’s job much more difficult.”

If the special assessment for fire protection in unincorporated areas of Los Angeles County and four dozen cities is not approved by property owners, county Fire Chief Freeman said, he may seek a special tax.

“We’re looking at the pros and cons of a special tax as an alternative. A lot of things are attractive about a special tax,” he said. “The biggest hurdle there is the two-thirds majority.”

FEES AND CHARGES

Proposition 218 says no property-related fee or charge can be imposed for general government services, including police, fire, ambulance or library services, if that service is available to the public at large in the same manner as it is to property owners.

Beginning July 1, the proposition also prohibits any property-related fee or charge to be imposed or increased unless it has been approved by a majority of the property owners or two-thirds of the voters. Fees and charges for sewer, water and garbage collection are exempt.

The amount of the fee cannot exceed the actual cost of providing that service. In other words, local governments are not supposed to be subsidizing other general fund programs.

City officials are studying whether this could cost the Los Angeles city general fund $21 million a year, the amount in water fees the city transfers to its budget each year.

BOND RATINGS

The measure also grants the voters the ability to use the initiative process to repeal or reduce local taxes, assessments, fees and charges, a provision that has drawn the attention of Wall Street.

Analysts with Moody’s Investors Service say the new restrictions on local governments raise a number of concerns about their ability to raise money to pay off bonds, and might eventually cause a downward revision in credit ratings.

“Certainly cities, counties and special districts now have less financial flexibility than in the past,” said Ken Kurtz, a public finance analyst with the bond rating agency in San Francisco.

Kurtz said the proposition is incredibly complex, not particularly well worded and leaves many unanswered questions.

In a report on the measure’s passage, Moody’s said that because of the measure’s complexity and ambiguity, “the full impact of the new fiscal restrictions will not manifest itself for years, most likely during a future recession.”

Contributing to this story and graphic were Deborah Belgum, John Cox, Matea Gold, Tracy Johnson, Sylvia L. Oliande, Mayrav Saar, Darrell Satzman, Douglas P. Shuit and Richard Winton.

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Proposition 218 Hits Home

Municipal leaders throughout Los Angeles County have identified a wide range of taxes and fees that may be threatened under Proposition 218.

LOS ANGELES COUNTY

A $9-million annual assessment for library services in unincorporated areas and a dozen cities is in danger. So is a $53-million property assessment for fire protection in unincorporated areas and 48 cities.

CITY OF LOS ANGELES

The City Council has directed the city attorney to challenge Proposition 218 in court. A $21-million transfer from water revenues to general programs is under review. Officials are examining the potential effect on street lighting and landscaping districts that raise $42 million a year.

WESTSIDE

Malibu: May affect takeover of business license program from the county.

Santa Monica: Property-related fees, including fire inspection and false burglar alarm charges, may be affected.

SOUTH BAY

Inglewood: Forced city to pull back offer to arena developers because of concerns about ability to implement a proposed increase in the hotel tax, a parking lot tax and a ticket tax. City also has a landscaping and lighting district that generates $5 million a year and another assessment district for police services that brings in $2 million.

Hawthorne: Voters may have to decide the fate of the 10% utility tax that provides one-sixth of the city’s general fund budget.

Manhattan Beach: Street lighting and landscaping district generates $275,000 a year.

Hermosa Beach: Street lighting and landscaping district generates about $580,000 a year.

Redondo Beach: Street lighting and landscaping district generates almost $1.5 million a year.

Torrance: City evaluating what to do about street lighting assessment.

Lomita: Business license tax was increased last year. Library assessment in question.

Rancho Palos Verdes: Street lighting and landscaping district raises $800,000 annually.

LONG BEACH/SOUTHEAST

Long Beach: City may have to go to voters for approval of refuse and recycling fees, which have increased $800,000 since January 1995.

Artesia: Landscaping and street lighting district raises $275,000 a year

Bell: Utility tax raised this year from 8% to 10%. Entire tax potentially affected.

Bellflower: Street lighting district raises $500,000 a year.

SOURCE: Interviews with city and county officials

Cerritos: Landscaping district brings in about $1 million annually.

Downey: Street lighting district raises $684,000 a year.

Hawaiian Gardens: Fate of 6% utility tax on March ballot.

Huntington Park: Street lighting and landscaping district raises $1.2 million a year.

La Habra Heights: Fire assessment district raises $700,000 a year.

Lakewood: Concerned about county fire and library assessments. City attorney recommends placing 3% utility tax on ballot.

Maywood: Street lighting district raises up to $200,000 yearly.

Montebello: Business license tax increased slightly in June, produces almost $1 million a year.

Santa Fe Springs: Street lighting district raises $250,000 per year.

South Gate: Street lighting district brings in $2 million annually. Street sweeping assessment district raises $250,000 a year.

Whittier: Hotel tax was raised from 6% to 10% last year.

SAN GABRIEL VALLEY

Alhambra: Landscape and street lighting assessments.

Arcadia: Street lighting assessments.

Claremont: Lighting and landscaping district brings in $1.4 million annually.

Diamond Bar: Lighting and landscaping districts produce a total of $500,000 annually.

Duarte: Lighting and landscaping district raises $600,000 a year.

Monrovia: May have to put assessment that provides funding for parks and paramedic services to a vote.

Monterey Park: Street lighting and landscaping district generates $900,000 a year.

South Pasadena: Street lighting and landscaping assessment generates $1.1 million annually.

Rosemead: Street lighting assessment that generates $250,000 annually will have to be approved by voters.

San Dimas: Lighting and landscaping district generates $840,000 a year.

Temple City: Voter approval may be sought for landscaping and lighting district that raises $637,000 a year.

West Covina: Landscaping and lighting district generates about $3 million a year.

SAN FERNANDO VALLEY

Agoura Hills: Small landscape district is threatened.

Glendale: City could lose $2.8 million in garbage, sewer and hazardous waste fees that could not be transferred to the general fund.

San Fernando: Street lighting assessment may be affected.

Westlake Village: Landscaping and lighting district raises about $300,000 annually.