California, Cities in Convoluted Fiscal Pact

One of the recurrent hallmarks of budget horse-trading in Sacramento helps explain why the state’s finances are bound to become ever more complicated as the years go by: Whenever there exists an obstacle to rational budgeting, the state’s leaders find a new way to avoid confronting it head-on.

Nowhere is this more evident than in the fiscal deal Gov. Arnold Schwarzenegger has reached with state and local governments this time around. Determined to siphon a few billion dollars from California municipalities to help balance the budget, the governor has persuaded city and county leaders to ante up now, in return for his promise to prevent a similar money grab in the future.

The problem, critics point out, is that the agreement cements in place most of the shortcomings in the way localities collect revenue.

“What we do over the next few days will have ramifications for the next 20 years,” Assemblyman Darrell Steinberg (D-Sacramento) told me last week during a break in the Budget SmackDown. “We ought to get it right.”

Indeed, the terms of the agreement were among the last-minute issues complicating the Legislature’s approval of the state budget over the weekend.

Whatever rationality had existed in the state-local relationship was, of course, overthrown in 1978 by Proposition 13. By decimating the property tax, historically the most stable local levy, Prop. 13 turned cities and counties into beggars at Sacramento’s door.

The state acquired the authority to apportion property tax money among local jurisdictions, as well as the burden of filling in gaps with cash from the general fund. The hobbling of the property tax also raised the sales tax’s profile as a local revenue tool. These days, about the only way cities and counties can fill their coffers is by turning over huge swaths of land to the likes of Wal-Mart Stores Inc. and Home Depot Inc.

Nobody likes the repercussions. Instead of encouraging home building, communities wrestle one another to harpoon these whales of retailing. (If they can be situated so that traffic jams become another town’s problem, so much the better.)

When voters pitch a fit over one levy or another, Sacramento ends up with even more fiscal power at the expense of cities and counties.

Consider the absurd story of the car tax, which recently accounted for as much as $4 billion a year in revenue for localities. Although the car tax was merely another form of property tax -- applied, fairly enough, to the most widely held form of property in the state -- it became vilified as a symbol of inequity. (This is what happens to taxes that attract the spotlight. As Chris McKenzie, executive director of the League of California Cities, says: “We certainly have a hate-hate relationship with taxes in this state.”)

After Schwarzenegger heroically rolled back the car tax last year, mayors and county officials had to threaten litigation to hold him to his promise to make up their loss from the state treasury. They then placed on the November ballot a constitutional amendment to prohibit any such state-level thievery in the future.

Schwarzenegger’s deal with the cities and counties preserves most of the terms of their proposed amendment, while allowing the state to claim $2.6 billion from them over the next two years. But the deal’s particulars only reinforce how the state-local fiscal relationship has deteriorated into an accretion of patches and ruses.

To cover the loss from the car tax, for example, the deal incorporates a three-way swap of state and local revenue among cities, counties and school districts so complicated that the nonpartisan legislative analyst’s office can’t quite figure out its rationale. I wouldn’t say the flow chart appearing in the LAO’s report on the swap is impossible to follow, but I’ve seen simpler schematics for microprocessor chips.

Local government officials say they gain a subtle advantage from this arrangement: They end up with a direct claim on property tax revenues, which is better than receiving a supposedly equivalent annual appropriation from a state Legislature that occasionally tries to shortchange them. On the bird-in-the-hand principle, McKenzie says, “We think we’re securing a lot more local control.”

But the downside is that the bargain perpetuates the complexity of the state-local fiscal relationship while obscuring its consequences.

Public school districts, for instance, believe the deal will cheat them of more than $11 million a year over the next few years because a state commitment to “backfill” some of their local revenue sources was overlooked when negotiators mapped out the transfers of money from pocket to pocket. The reason may be that the deal was crafted by cities and counties, which compete with schools for the same dollars.

“It all came together in the finest tradition of napkin deals,” says Michael Strumwasser, an attorney for the Los Angeles Unified School District. “The schools weren’t in the room.”

This sort of backroom maneuvering ensures that the prospects for reform will only recede. City and county officials are desperate to restore the traditional links between the level at which taxes are raised and the services on which they’re spent, a connection broken by Prop 13. They would like to remove existing impediments to their enactment of new local taxes, even when the money is pigeonholed for services that voters favor.

But the bargain they struck with Gov. Schwarzenegger, while relieving some of their burdens, will etch others into the state Constitution.

Local leaders say that nothing in the agreement prevents the Legislature from taking up needed reforms in the future. But they’ve missed another chance to force the issue now. And every time they allow the governor and lawmakers to wriggle off the hook, it only becomes harder to coax them back on.

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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.