HomeMy WebLinkAbout09/27/1995, B-1 - PROPERTY TAX DISTRIBUTION BETWEEN CITIES AND OTHER ENTITIES CITY OF MORRO BAY
STAFF REPORT
AGENDA NO.
TO: HONORABLE MAYORS AND CITY COUNCILS Dale 7"#
tion
FROM: FINANCE DIRECTOR OF MORRO BAY
DATE:
September 22, 1995
SUBJECT:
PropeM Tax Distribution Between Cities and Other Entities
RECOMMENDATION
This report is provided for your information and as a starting point for further discussions on the
equity of the current method of property tax distribution. Staff recommends that each City Council
give consideration to adopting Joint Resolution 01-95 which petitions the League of California
Cities and our elected representatives in the Assembly and Senate to seek legislation to increase the
proportion of property taxes allocated to cities based upon service benefits provided, rather than on
an outdated mathematical formula.
FISCAL IMPACT
None.
BACKGROUND
On a county wide basis, the estimated property tax revenue for Fiscal Year 1994-95 was
$179,232,176. Of that amount, the City of Morro Bay was expected to receive $1,209,434. Morro
Bay's share of the total county wide property tax revenue is 0.67% (2/3 of 1 percent.) The seven
cities in San Luis Obispo County receive seven cents(7%) of every dollar of property tax collected
in the county. (It should be noted that unlike more urbanized counties, approximately 42% of the
population of San Luis Obispo County lives in unincorporated areas.) The County of San Luis
Obispo receives approximately 24% of the total property tax revenues. Property tax revenues
represent a significant funding source for the General Funds of all San Luis Obispo County cities
and it is important to understand how these revenues are distributed.
APPROVAL
Department Head
City Administrator
I
City Attorney Review
if necessary)
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Honorable Mayors and City Councils
Property Tax Distributions Between Cities and Other Entities
September 22, 1995
DISCUSSION
To understand how property taxes are currently distributed, we need to go back to pre-Proposition
13 times. Until 1977-78, each taxing agency would develop its budget for the upcoming year and
advise the counties of how much tax revenue it needed. The counties would accumulate the tax
revenue needs of all taxing agencies to determine the total revenue amount needed. The total needed
was then divided by the total of the assessed value of all properties to establish the tax rates for the
upcoming year. The property tax bills that resulted from this process were approaching a statewide
average of$13.00 to$15.00 per one-hundred dollars of assessed value. The continued increases in
tax rates led to a taxpayer's revolt and the passage of Proposition 13 that resulted in a two-thirds
reduction in property tax revenues.
Proposition 13 required two changes in assessed valuation practices; first, Proposition 13 rolled
back assessments to the 1975-76 levels;second,prior to Proposition 13,assessments were calculated
at 25%of market value and Proposition 13 mandated use of full market value. This means that to
compare pre- and post-Proposition 13 tax rates, one must convert pre-Proposition 13 rates by
dividing them by four(4). Therefore, pre-Proposition 13 tax rates were the equivalent of 3.25%to
3.75%. In 1978-79,the counties implemented Proposition 13's limitations and began collecting 1%
of the assessed value of property. The question then became how to distribute that pool of revenue
in an equitable fashion. The State Legislatures provided guidelines in the form of AB-8, also known
as, the "State Bailout." That legislation directed the counties to go back to the three-year period
immediately prior to Proposition 13 and determine the average percentage of the total tax levy that
went to each taxing agency. This percentage became known as the AB-8 Allocation Factor and that
factor was used to distribute the pool of revenue collected by each county. The attached Exhibit A
shows an example of the AB-8 Allocation Factor. In the example, the County of San Luis Obispo
receives 31.660690%of the taxes raised and the City of Morro Bay receives 15.861430%. Exhibit
A also introduces the concept of the Tax Rate Area(TRA.) The County of San Luis Obispo is a
large geographical area,and it contains more than 400 tax rate areas. Tax rate areas are made up of
a group of parcels of property that are served by the same group of taxing agencies. For example,
Exhibit A is TRA number 006-002 and it is served by the County, the Air Pollution Control District,
the County Library,the City of Morro Bay,the County Flood Control District,the Nacimiento Water
Control District, the Cayucos-Monro Bay Cemetery District, the San Luis Coastal Unified School
District,the San Luis Obispo County Community College District, and the County School Service
District. Each of these ten agencies receives a proportionate share of the tares collected for that
TRA. The City of Morro Bay consists of five (5) Tax Rate Areas. Other cities may have more or
less TRA's depending on the boundaries of taxing agencies providing services to the property
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Honorable Mayors and City Councils
Property Tax Distributions Between Cities and Other Entities
September 22, 1995
owners.
The above method worked in the first post-Proposition 13 year but growth in future years needed
to be distributed only in the areas where the growth had occurred. (Proposition 13 also limited the
maximum allowable percentage of growth in assessments to 2% per annum, unless the property
changed ownership or certain other events occurred, which would allow reassessment at current
market value.) To equitably distribute property tax revenues derived from growth(AB-8 tax
increment), San Luis Obispo County segregated the AB-8 tax increment by TRA and distributed
it using the AB-8 Allocation Factor. Each year the base tax revenue for each TRA is augmented by
any increase in tax increment to provide the total distribution. This process works in reverse when
there is shrinkage in the assessed value of a TRA. In such instances, a tax decrement is calculated
and distributed using the AB-8 Allocation Factor. Thus, using Exhibit A as an example, Morro Bay
receives 15.86%of the tax increment resulting from an increase in total assessed value within TRA
#006-002.
Property taxes are made up of two basic types; local levy and unitary tax. Local levy consists of the
revenues derived from the assessment of secured property (real estate and buildings), unsecured
property(business fixtures and furnishings, boats, etc.) and the homeowner's exemption(which is
a State Constitutionally provided subvention.)The unitary tax is derived from a state assessment of
the value of utilities' property within the county.The presence of the Morro Bay and Diablo Canyon
power plants makes the unitary tax revenues a significant component of the San Luis Obispo County
property tax structure.
The distribution of unitary tax proceeds differs from the above discussion,because the unitary
assessed valuation is done by the State Board of Equalization as a single value:for the county as a
whole, rather than on a situs basis. In 1988-89, the distribution of the unitary tax proceeds was
changed by AB-454. Under the AB-454 allocation method, each taxing entity receives up to 102
percent of its prior year unitary tax revenue. If the county wide unitary revenues are greater than 102
percent,the excess unitary revenues are distributed to each taxing entity in proportion to their share
of secured property taxes.This means that increases in assessed valuation of utility properties benefit
all taxing agencies proportionately. In other words, if PG & E were to build a significant plant
addition in Morro Bay, the City of Morro Bay would not receive all the property tax increment
resulting from the increased assessed value of the Morro Bay plant. Rather, all taxing agencies in
the County of San Luis Obispo would receive a proportionate share of the unitary tax increment.
As stated earlier,the AB-8 Allocation Factors were derived from the three year historical averages
for each taxing agency. As such, the relative proportion of today's property tax revenue for each
taxing agency was determined by their funding patterns from 1975 to 1977. If an agency happened
to have surplus funds available or other revenue sources during that period that caused their need for
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Honorable Mayors and City Councils
Property Tax Distributions Between Cities and Other Entities
September 22, 1995
property taxes to be reduced, then they would be receiving a relatively smaller share of the current
property tax revenues.
Annexations by cities of previously unincorporated areas or new incorporations, in general, are a
separate matter in terms of property tax distributions and are subject to negotiation with the county
and such negotiations can go beyond property taxes and address other revenue sources as well.There
is currently a standard formula for annexation of undeveloped land in San Luis Obispo County that
provides for the annexing agency to receive a predetermined share of the property tax revenues .The
issue of annexation of developed property is a different matter because such properties can be
generating additional forms of revenue, such as sales tax. In these cases, the county seems less
willing to apply its standard formula. This report does not attempt to address those matters nor tax
increment under a redevelopment district but it should be noted that the City of Atascadero was
incorporated after Proposition 13.Therefore,their share of property taxes was not determined in the
same manner as described above. It is understood that Atascadero's share of property tax revenues
in it's TRA's averages approximately 18%.
Up to this point, we have seen how the property tax distribution system worked in the context of
Proposition 13's impacts. In the early 1990's, the State of California experienced severe budgetary
problems caused by significant revenue shortfalls. The state reacted to its problems, in large part,
by transferring revenue shortfalls to the local level.The single largest revenue reduction created by
the state was the undoing of the AB-8 bailout. Basically, the state took the position that the AB-8
bailout was no longer needed since assessed values had risen enough to restore property tax revenues
to the pre-Proposition 13 levels. The state then directed that the AB-8 bailout funds be provided to
the schools, thereby reducing the state's own payments to the schools by an equal amount. This
action created the Education Revenue Augmentation Fund (ERAF) and required that the counties
reduce the distributions of property tax revenues to all taxing agencies by an amount to be
contributed to ERAF. Thus, the amounts shown in Exhibit A are not all passed on to the agencies
listed. Rather, ERAF contributions are deducted first. Those deductions vary from entity to entity
and are not an equal percentage applied to all agencies.The City of San Luis Obispo has calculated
that approximately 18% of it's property tax revenue allocation is now redirected to ERAF.
In addition to the above, cities have the capability to add other assessments to the property tax bill
for special purposes. It is becoming increasingly common to find special assessments on the tax bill
including weed abatement, landscaping and lighting districts, sanitation districts, and assessments
for infrastructure construction in new developments. Landscaping and lighting districts are a popular
method for financing the continuing maintenance costs for an area or for an entire city. The
assessments of this special type are determined by the city itself and forwarded to the county for
inclusion on the tax bills. The county currently adds a $2.00 fee to each assessment to cover its
administrative costs, thus the property owner pays the county's administrative fees, not the city.
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Honorable Mayors and City Councils
Property Tax Distributions Between Cities and Other Entities
September 22, 1995
Under SB-2557,the counties are able to recover the costs incurred in administering the property tax
system. The amount charged to each city is a proportionate share of the total cost incurred by the
counties in the prior fiscal year. This amount is withheld from tax distributions to the each city.
CONCLUSION
Referring back to the pre-Proposition 13 property tax system,the cities developed a budget which
then led to a tax rate sufficient to provide the services included in that budget. How the county
operated and what services it provided were important issues but not a significant budgetary concern
of the cities. In the post-Proposition 13 era, cities receive property taxes based on a system that
ignores services and is based on percentage factors and formulae. Such a system may have been a
equitable immediate solution, but after seventeen years could stand re-examination. There appear
to be issues of equity in the current property tax distribution system. Do citizens of the seven cities
of this county receive benefit in proportion to the amount of taxes that flow to the county as opposed
to the city? Are residents of the incorporated areas of the county paying double for property tax
administration fees and booking fees assessed against their cities? The amount of property tax
allocated to the county is nearly double that allocated to the City of Morro Bay in the example
provided(Exhibit A.) Certainly the County of San Luis Obispo provides valuable services to Morro
Bay citizens in areas such as Social Welfare,Public Health,Administration of Justice, etc. Does the
allocation system need to be re-examined in the context of how local taxpayers prioritize the services
provided by all layers of government?
The pre-Proposition 13 property tax system was far more capable of responding to service mix and
service level changes at the local level. The current property tax distribution system is much less
responsive and may be out of touch with its intended purpose.
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JOINT. RESOLUTION NO. 01-95
A JOINT RESOLUTION OF THE CITY COUNCILS OF
THE CITIES OF SAN LUIS OBISPO COUNTY
SEEKING THE SUPPORT OF OUR ELECTED OFFICIALS
IN THE CALIFORNIA ASSEMBLY AND SENATE,
THE LEAGUE OF CALIFORNIA CITIES, AND ALL
OTHER CALIFORNIA CITIES TO CREATE A MORE EQUITABLE
SYSTEM FOR THE DISTRIBUTION OF PROPERTY TAXES
WHEREAS, the cities in the County of San Luis Obispo rely
upon property taxes as a major source of revenue to the General
Fund, and the General Fund pays the costs of valuable and basic
services to their citizens; and
WHEREAS, the demands for basic services far outstrip the
revenues derived from the current level of funding by existing
property tax distribution formula; and
WHEREAS, the City Councils believe that inequities exist in
the current property tax allocation system relating to the value
of services provided by other taxing entities; and
WHEREAS, within San Luis Obispo County some 58% of the
population lives within in areas, yet only 7% of the
property tax revenues are allocated to cities.
NOW, THEREFORE, BE IT RESOLVED that the City Councils of the
Cities of San Luis Obispo County request the support of our
elected officials in the California Assembly and Senate, the
League of California Cities and all California cities in seeking
legislation to provide a more equitable system for allocating
property taxes, and to increase the proportion of property taxes
allocated to cities based upon the service benefits provided to
their citizens.
PASSED AND ADOPTED by the City Councils of the Cities of San
Luis Obispo County at a special joint meeting thereof held on the
27th day of September, 1995.
Joint Resolution No. 01-95
Page Two
ATTEST:
MAYOR A.K. "PETE" DOUGALL
City of Arroyo Grande
ATTEST:
MAYOR GEORGE HIGHLAND
City of Atascadero
ATTEST:
MAYOR GENE GATES
City of Grover Beach
ATTEST:
MAYOR WILLIAM YATES
City of Morro Bay
ATTEST:
MAYOR WALT MACKLIN
City of Paso Robles
ATTEST:
MAYOR PAUL BAILEY
City of Pismo Beach
ATTEST:
MAYOR ALLEN SETTLE
City of San Luis Obispo