A no-win proposition for Orange County

May 19, 2003

Orange County Register

Decades after Prop. 13, politicians are seeking parity for their local governments with little success.



By MARTIN WISCKOL
The Orange County Register

The words spill out like honey as Joel Fox explains the grand success of Proposition 13, the landmark 1978 initiative that dramatically reduced and capped then-spiraling property taxes.

But the enthusiasm drains from his voice as the conversation turns to how those cuts are distributed. Under the system, Orange County's local governments and special districts share 37 percent of property taxes collected within its borders, while San Francisco's get 67 percent and Los Angeles' get 60 percent.

"The distribution system needs some work," said Fox, an aide to Prop. 13 author Howard Jarvis and later president of the Jarvis Taxpayers Association. "It was just the quickest, smoothest way to get something in place at the time."

June 6 marks the 25th anniversary of voters' overwhelming approval of Prop. 13. For the past 10 years, there has been a growing clamor to change how the property taxes are divvied up, with proposals for reform being presented – and rejected – at an ever-faster clip.

"Everybody knows (the distribution system) is obsolete," said Chris McKenzie, executive director of the California League of Cities. "The devil is in the details."

Not surprisingly, a good share of proposed reforms carry the fingerprints of Orange County officials. The inequity means less money for services here – services like recreation, child care and health care.

Orange County spends $57 per capita annually on health care, compared with the average of $192 per capita for the state's 26 counties – generally the largest ones – that run their own programs for the medically indigent.

"In other counties, you don't have to be sick to get help," said Nancy Rimsha, a legal-aid attorney who represents the county's medically indigent. "If we had more money in the system, we could provide preventative and diagnostic health care, rather than being an emergency-room reimbursement program."

If you can't afford health care, the county will pull your decayed tooth – but not fill it. In many cases, it will fix one eye with cataracts, but not both. It can take two months to apply and be approved for treatment.

Take the case of Joe Tessitore, a Fullerton window installer with no health insurance. Constant headaches and shooting pains from his neck into his skull – possibly the delayed effect of a car accident – became so bad that by the beginning of this month he could no longer work.

An emergency-room visit to St. Jude Medical Center on May 3 got him some painkillers – and a May 19 appointment to apply for county-funded medical care. A definitive diagnosis and treatment still could be a month away while the county processes the application.

"There's not much I can do but lay on the couch, waiting," said Tessitore, 38. "I've called everywhere I can think of (for help). It's frustrating."

'The long knives'

While Howard Jarvis knew how he wanted property taxes cut – slashed to 1 percent of assessed value – Prop. 13 did not address distribution of the smaller pool of revenue to the governments that use it.

So legislative consultants drew up a number of plans, including one in which each city and county government would get an equal percentage. But because some cities and counties had much higher property-tax rates than others before Prop. 13, the plan would hit some hard while leaving low-taxing governments relatively unscathed.

It was a tense time.

"We referred to it as the night of the long knives," said Fred Silva, then a Senate consultant working on the plan, Assembly Bill 8. "Cities were coming up and saying this plan or that plan would destroy them."

The Legislature agreed on a formula in which the percentage of property taxes was tied to the level of property taxes levied before Prop. 13. San Francisco had high taxes, so it got a bigger percentage. Dana Point and Irvine had low taxes, so they got smaller percentages.

Percentages varied, but the degree of pain was, at least in theory, equal.

The property-tax revenue that remained – after shelling out shares to local government and special districts – was given to schools. Because the state guarantees a minimum funding to schools on a per-student basis, the state made up the difference – and ended up channeling a lot more education money to cities like San Francisco than it did to those in Orange County.

"Has it turned out to be unfair to Orange County? Absolutely," said David Doerr, another AB8 consultant. "But it was the only practical way to do it."

By the 1990s, proposals for reform were popping up more frequently. In 1996, both the Constitutional Revision Commission and the Legislative Analyst's Office came to the same conclusion for reform: Let local governments decide how split up the money raised in their jurisdiction once the state has extracted a share for schools.

The problem was not only opposition from high-percentage cities like San Francisco but also the likelihood of local governments fighting among themselves as they tried to figure out how to share the taxes.

Anaheim Mayor Curt Pringle, an assemblyman in the 1990s, said these conflicts have prevented the sweeping reform that's needed.

"It's a dysfunctional taxing system, but very few people are looking at a global reform," he said. "They're looking at parochial protection."

Housing crisis

Orange County Supervisor Chris Norby is one of those looking at large-scale reform – a redistribution of property taxes that would give all cities 60 percent of what they generate and that would encourage building homes instead of stores. But even Norby still is tinkering to find a formula that would win enough support for approval.

More common are piecemeal proposals like Assembly Bill 1568 by Assemblyman Lou Correa, D-Anaheim, which would increase the property-tax percentage for counties receiving the least. But this is a tough sell in deficit-ridden Sacramento, which would have to make up the difference.

Slightly better odds for passage are given to Assembly Bill 1221 by Assemblymen Darrell Steinberg, D-Sacramento, and John Campbell, R-Newport Beach. Like Norby, the assemblymen are concerned with the existing incentives to build stores rather than homes.

Because of the low amount of property taxes generated by homes – particularly condominiums and apartments – cities rarely receive enough to cover the cost of services. But retail uses – particularly the big-box stores and auto malls – generate sales taxes that go directly to the cities, paying several times over for local government costs associated with the businesses.

"Young families just starting out can't find apartments to live in," Campbell said. "But cities go backward economically to provide them."

AB1221 would redirect half of the cities' sales taxes to the state then give the cities an equal amount back by increasing their share of property taxes. This diminishes the incentives to build stores and provides a less-volatile revenue source.

But AB1221 does not deal with the fundamental distribution inequity – and still is running into opposition, including that from cities committed to attracting as much retail as possible. It has yet to go before the full Assembly.

When it comes to achieving a fully equitable solution, Sacramento veterans say somebody would have to lose money, making that prospect unlikely to ever win approval.

"Aside from little incremental steps, it's going to take some kind of guided missile to blow up (if there is to be substantial change)," said Silva, who now works for the Public Policy Institute. "Something like a Supreme Court ruling deciding what the system should be, although previous lawsuits have failed.

"With the current system, we're like a dysfunctional family, and we just can't get it together."