State could take city taxes

Laguna’s financial picture for this fiscal year is rosy even if the state is in the red.

The state’s budget crisis will have no immediate effect on Laguna’s finances, but that could change in the next fiscal year if the legislature dips into the property taxes to cure its economic ills, the city’s top administrator said.

“At this moment, the governor’s preliminary budget doesn’t have any cuts for cities,” said City Manager Ken Frank. “The governor has told some key city officials that he will not be proposing that. But when it gets down to June or July or August or September and they are trying to adopt a budget, I wouldn’t bet on anything.

“I think anything is possible and they could pick up [$3 billion to $4 billion] by taking some of the property taxes from cities.

“We are not preparing for that, other than the City Council stuck another $ 1.5 million in the reserve fund in case it does happen.”

It has happened before.

Starting in the early 1990s and continuing through fiscal year 2005-06, the state shifted property taxes from the cities and counties to finance state services.

Frank railed against the state actions in strong language. He called it “shift and shaft Federalism,” and denounced every year in his proposed city budgets the state practice of balancing its spending by “usurping” property taxes from cities and counties.

In the 2004-05 proposed city budget, Frank wrote, “Next year, the governor proposes to purloin another $1.3 billion in property taxes to support the state’s profligate spending, coupled with a substantial cut in the motor vehicle fees for which state officials have graciously accepted full credit [popular with voters, but not with local governments which lost more income from the reduction]. Under the governor’s preliminary budget, another $550,000 in property taxes raised in Laguna Beach would be transferred out of the city to finance state obligations.”

To make matters worse, the state budget usually was not adopted until the summer or fall, after the Laguna Budget is approved by the mandated June 30 deadline.

However, in fall 2004, an overwhelming majority of California voters enacted Proposition 1A, which would not take effect until 2006, and allowed the state to “purloin” that proposed $1.3 million in the 2005-06 fiscal year, which cost the city about $650,000 in property taxes.

“On the positive side,” reported Frank in the 2005-06 budget, “Proposition 1A effectively prevents future state raids on cities, counties and special districts. This property tax transfer to the state will terminate on June 30, 2006. Thereafter, the city will enjoy unfettered discretion in balancing the municipal budget and the state will have to confront its own fiscal dilemma.”

The California legislature put Prop. 1A on the November 2004 ballot as a compromise to Proposition 65, an initiative on the same ballot.

Prop. 65 proponents helped draft the provisions of Prop. 1A and gave it their support. Prop. 1A passed with 83.7 percent of the voters in favor of it. Laguna Beach city officials supported the proposition.

Unfortunately, there is a loophole.

The provisions of Prop. 1A may be suspended if the governor declares a fiscal necessity and two-thirds of the state legislature approves the suspension.

“However, they can only do it once until they pay it back,” said Frank, who has considerable faith in the safeguards in the proposition.

“But they could get desperate and we’re keeping watch.”