Existing property tax law requires the county auditor, in each fiscal year, to allocate property tax revenue to local jurisdictions in accordance with specified formulas and procedures, and generally requires that each jurisdiction be allocated an amount equal to the total of the amount of revenue allocated to that jurisdiction in the prior fiscal year, subject to certain modifications, and that jurisdictions portion of the annual tax increment, as defined. Existing law provides for the computation, on the basis of these allocations, of apportionment factors that are applied to actual property tax revenues in each county in order to determine actual amounts of property tax revenue received by each recipient jurisdiction.

This bill would deem to be correct those property tax revenue apportionment factors that were applied in allocating property tax revenues in the County of San Benito for each fiscal year through the 200102 fiscal year. This bill would, however, require property tax apportionment factors applied in allocating property tax revenue in the County of San Benito for the 200203 fiscal year and each fiscal year thereafter to be determined on the basis of apportionment factors for prior fiscal years that have been corrected or adjusted as would be required if those prior apportionment factors were not deemed correct by this bill.

This bill would make legislative findings and declarations as to the necessity of a special statute for the County of San Benito.

Date of Hearing: April 22, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 440

Author:(Alejo) – As Introduced Ver:February 23, 2015

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY: This bill would forgive past property tax allocation errors that resulted in reduced allocations to the Educational Revenue Augmentation Fund (ERAF) in San Benito County. Specifically, this bill:

1. States the property tax apportionment factors applied in allocating property tax revenues in the County of San Benito for each fiscal year through 2001-02, inclusive, are correct.

2. Specifies for 2002-03 and each fiscal year thereafter, property tax apportionment factors applied in allocating property tax revenues in the County of San Benito shall be determined on the basis of property tax apportionment factors for that have been fully corrected or adjusted, pursuant to the review and recommendation of the Controller.

FISCAL EFFECT:

One-time foregone General Fund savings of $3.9 million in school aid. The bill would forgive a debt to the ERAF in San Benito County. Absent the bill, any repayments to ERAF would offset General Fund obligations to schools in the county, pursuant to minimum funding guarantee formulas in Proposition 98.

COMMENTS:

1. Purpose. According to the author, "This bill brings closure to a longstanding property tax allocation error inadvertently administered by San Benito County. The result of the error was miscalculation of the contribution to the county’s ERAF. The error occurred in 1997 during an attempt to address audit findings by the Controller and was not discovered until the subsequent Controller's audit in 2005. Unfortunately for the County, the “small” error that began in 1997 had grown to a significant issue."

2. Background. County auditors allocate property tax revenues to cities, county government, special districts, and schools. In addition to these allocations, existing law requires counties to shift property taxes to ERAF in each county. Allocations to ERAF offset state General Fund obligations to schools, pursuant to minimum funding guarantees related to Proposition 98. To check the accuracy of the county auditors' work and to protect the State General Fund's fiscal interests in ERAF, the State Controller (SCO) regularly audits the counties' property tax allocations.

SCO audits of San Benito County’s property tax allocations in 1998, 2005, and 2009 found that the county incorrectly apportioned property tax revenues to the ERAF from the 1993-94 fiscal year through 2001-02, resulting in an underallocation to ERAF. The 1998 audit indicated that the ERAF was underfunded by approximately $514,016, and this amount was subsequently forgiven through legislative action in SB 1096 (Budget and Fiscal Review), Chapter 211, Statutes of 2004. The 2005 audit discovered that the ERAF was also underfunded from 1997-98 through 2000-01 by an additional $3,415,673.

Existing law, enacted by AB 169 (Wiggins), Chapter 381, Statutes of 2001, limits the amount of recovery for mistakes in allocations in fiscal years after 2000-01. As a result of these caps, the 2005 SCO audit indicated that San Benito County owes the ERAF an additional $439,284 for the 2001-02 fiscal year. San Benito County officials indicate that they made an additional apportionment error when they attempted to make corrections following the 1998 audit, and this additional mistake was discovered in the 2005 audit. The 2009 SCO audit indicates that the county has fully corrected the property tax system, but the ERAF is still owed a total of $3,854,957.

3. Prior Legislation.

1. Prior to 2001, there was a precedent for deeming correct those property tax apportionment factors used in a county's calculations, and holding the local government harmless for the erroneous calculation. Prior to 2001, the Legislature forgave past mistakes for several counties including Santa Clara, Santa Barbara, Plumas and Riverside.

2. In 2001, AB 169 (Wiggins), Chapter 381, Statutes of 2001, created a standard approach to fixing these errors, declaring the Controller’s audits to be correct. If adjustments are needed, the law requires repayments but caps them at 1% of the current year’s secured tax revenues, paid in equal increments over the next three fiscal years. This approach applies only to errors uncovered on or after July 1, 2001.

3. Since 2001, following the passage of AB 169 (Wiggins), bills for several counties including Colusa, Imperial, Madera, Tuolumne, and San Benito have all stalled in the Legislature. Most recently:

1. SB 446 (Cannella) of 2013, which was substantially similar to this bill, was held on the Senate Appropriations Committee Suspense File.

2. AB 1676 (Alejo) of 2012, which was nearly identical to this bill, failed passage in the Senate Governance and Finance Committee.

Analysis Prepared by: Jennifer Swenson / APPR. / (916) 319-2081

Date of Hearing: April 15, 2015

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Brian Maienschein, Chair

ABPCA Bill Id:AB 440

Author:(Alejo) – As Introduced Ver:February 23, 2015

SUBJECT: Local government finance: property tax revenue allocations: County of San Benito.

SUMMARY: Addresses past property tax apportionment factors in San Benito County. Specifically, this bill:

1. Deems as correct the property tax apportionment factors applied in allocating property tax revenues in the County of San Benito for each fiscal year (FY) through FY 2001-02, inclusive.

2. Specifies that for FY 2002-03 and each FY thereafter, property tax apportionment factors applied in allocating property tax revenues in the County of San Benito shall be determined on the basis of property tax apportionment factors for prior FYs that have been fully corrected or adjusted, pursuant to the review and recommendation of the State Controller.

3. Finds and declares that a special law is necessary because of the uniquely severe fiscal difficulties being suffered by the County of San Benito.

EXISTING LAW:

1. Requires each county's auditor to allocate property tax revenue to local governments in accordance with specified formulas and procedures.

2. Requires, generally, that each jurisdiction be allocated an amount equal to the total received in the previous year plus its percentage of the property tax increment, as defined by law.

3. Provides for the computation of apportionment factors based on property tax allocations that are applied to actual property tax revenues in each county in order to determine actual amounts of revenue received by each jurisdiction.

FISCAL EFFECT: This bill is keyed fiscal.

COMMENTS:

1. Background. County auditors allocate property tax revenue to the county, cities, special districts, and schools pursuant to complex formulas in current law. In 1992-93 and 1993-94, in response to serious budgetary shortfalls, the Legislature and Governor permanently redirected over $3 billion of property taxes from cities, counties, and special districts to schools and community college districts. Under Proposition 98, these redirected funds reduced the state's funding obligation for K-14 school districts by a commensurate amount.

The property tax shift is accomplished through contributions that cities, counties, and special districts deposit into the Education Revenue Augmentation Fund (ERAF), the proceeds of which are then transferred to school districts within the county. These contributions grow over time in line with the property tax growth rate in each local jurisdiction.

The Controller's Office regularly audits the apportionment and allocation by counties of property tax revenues in accordance with a statutory schedule contained in the Government Code – some counties undergo annual audits, some are on three-year schedules, and those with small populations, like San Benito County, are on a five-year cycle.

San Benito County was audited by the Controller's Office in 1998, 2005, and 2009. Following an audit by the Controller, it was determined that San Benito County underfunded ERAF for the fiscal years between July 1, 1993, and June 30, 2001. The Controller's Office and the County of San Benito have had different interpretations of several sections in the Revenue & Taxation Code and their applicability to ERAF between those years. In the December 11, 1998, audit, the Controller's Office determined that ERAF was underfunded by $514,016. The county did not reimburse ERAF for this amount. In a subsequent audit issued on July 28, 2005, the same amount had grown to $3,929,689.

In 2004, the Governor signed SB 1096 (Senate Budget and Fiscal Review Committee), Chapter 211, Statutes of 2004, which forgave county property tax allocation errors and deemed correct any misapplication of apportionment factors for any Controller's audit conducted between July 1, 1993 and June 30, 2001. SB 1096 forgave the initial amount
of San Benito County's debt to ERAF of $514,016, but the difference of $3,415,673 must
be returned to ERAF.

2. Bill Summary. This bill will deem the property tax apportionment factors applied in allocating property tax revenues in San Benito County for each FY through the FY 2001-02 to be correct. This bill requires that for FY 2002-03 and each FY thereafter, property tax apportionment factors applied in allocating property tax revenues in San Benito County must be determined on the basis of property tax apportionment factors for prior FYs that have been fully corrected and adjusted, pursuant to the review and recommendation of the Controller.

This bill is sponsored by the County of San Benito.

3. Prior Legislation. There is a precedent for deeming correct those property tax apportionment factors used in a county's calculations, and the net effect is that it holds the local government harmless for the erroneous calculation. Prior to 2001, the Legislature forgave past mistakes for several counties including Santa Clara, Santa Barbara, Plumas and Riverside.

In 2001, the Legislature created a standard approach to fixing these errors, declaring the Controller’s audits to be correct. If adjustments are needed, the law requires repayments but caps them at 1% of the current year’s secured tax revenues, paid in equal increments over the next three fiscal years. This approach applies only to errors uncovered on or after July 1, 2001 [AB 169 (Wiggins), Chapter 381, Statutes of 2001].

Following the passage of AB 169 (Wiggins), bills for several counties including Colusa, Imperial, Madera, Tuolumne, and San Benito have all stalled in the Legislature. Most recently, AB 1676 (Alejo) of 2012, which is nearly identical to this bill, failed passage in the Senate Governance and Finance Committee. The Department of Finance opposed AB 1676 in the Senate Governance and Finance Committee. SB 446 (Cannella) of 2013, which failed passage in the Senate Appropriations Committee, would have declared some erroneous property tax allocations in San Benito County to be correct and would have allowed the County to repay remaining misallocated property tax revenues.

4. Author's Statement. According to the author, "This bill brings closure to a longstanding property tax allocation error inadvertently administered by San Benito County. The result of the error was miscalculation of the contribution to the county’s ERAF. The error occurred in 1997 during an attempt to address audit findings by the Controller and was not discovered until the subsequent Controller's audit in 2005.

"The 1997 Controller’s audit indicated that San Benito County underfunded ERAF due to a misinterpretation of the Code related to fire districts and which districts were required to contribute to the ERAF fund. The County disagreed with the finding, but attempted to move forward using the recommended Controller's methodology. During the process of addressing the audit findings, a subsequent accounting error was made resulting from the use of an incorrect base year. This 'new' error, which unknowingly occurred in 1997, was not detected until the subsequent Controller's audit, which did not occur until 2005. Unfortunately for the County, the “small” error that began in 1997 had grown to a significant issue by the time it was discovered in 2005.

"This bill would deem correct the property tax revenue apportionment factors used by San Benito County to apportion property tax revenues for the fiscal years between 1993 and 2002 as specified by the Revenue and Taxation Code (RTC) 96.81. This bill would, as a matter of fairness, allow San Benito County to join other counties including the Counties of Riverside, Plumas, Santa Clara and Santa Barbara, who have successfully attained legislative relief in similar disputes of interpretation of RTC that affect the apportionment and allocation of property tax revenue with the Controller."

5. Policy Consideration. Because the Legislature has forgiven more than $500,000 of the amount that San Benito County owes to ERAF, the Committee may wish to consider under what circumstances additional relief is warranted.

6. Arguments in Support. According to San Benito County, "This bill would finally take the necessary steps to relieve San Benito County of this last remaining "unforgiven" property tax allocation issue. The County appropriately adjusted the property tax allocation amounts at the time of the discovery of the error and has been issued clean audits in the cycles following the error. Allowing the county to move forward will not affect the status quo for the State, and let the county use their already scarce resources to fund critical public services for their constituents."

7. Arguments in Opposition. None on file.

REGISTERED SUPPORT / OPPOSITION:

Support Opposition

San Benito County [SPONSOR] None on file

Rural County Representatives of California

Service Employees International Union Local 521

Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958