GOVERNOR'S ADMINISTRATION WARNS: THE STATE MAY BORROW $2 BILLION FROM LOCAL GOVERNMENTS IF MAY 19TH BALLOT MEASURES FAIL

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May 7, 2009

Yesterday the State Department of Finance informed several local government organizations that, with the possibility that the May 19th ballot initiatives may not be successful, one of the options to address the potential Budget shortfall would be to borrow approximately $2 billion in property taxes from local governments.

The background paper provided during the briefing by the Department of Finance states:

"The constitution allows that up to 8% of local governments' property tax revenues can be borrowed by the state and repaid within three budget years with interest. The amount that can be borrowed is determined by the amount of property taxes received by cities, counties, and special districts in the preceding year. Borrowing from local government in the 2009-10 fiscal year would provide $2.006 billion in solutions.

Local governments could borrow against the state's constitutional obligation to repay, thereby mitigating the impact of this reduction. However, in the current economic landscape, local governments are not easily finding available short term financing and could face difficulties borrowing these funds from the market. If they borrow, local government will incur substantial borrowing costs."

The Department of Finance also acknowledges that there would be varying affects on local governments as it "will, in part, depend on the ability of local government to obtain borrowing from the market. This reduction could result in cuts to locally funded services such as police and fire, waste collection, road maintenance, libraries and other services."

As you will recall, Proposition 1A in 2004, provided certain protections for cities, counties, and special districts against future raids of their property taxes, for the purpose of balancing the state Budget. However, contained in Proposition 1A was a caveat, which allows the state, beginning in 2008-09, to "suspend" the prohibition on taking local property taxes if the Governor proclaims a "significant State fiscal hardship" and gets the Legislature to agree by a 2/3rds vote. If you are interested, the legislation spelling out the terms of Proposition 1A is contained in SCA 4 (2004) and SB 1096 - a Budget trailer bill from 2004.

Last year, during the very difficult and protracted Budget deliberations, there was an ongoing threat that the Budget deal would include borrowing property taxes from cities, counties, and special districts. Thanks to opposition from affected groups, the proposal was not included in the final Budget agreement. As you may be reading, and it is particularly indicative in early polling data, there is a strong likelihood that several, if not all of the ballot measures will fail on May 19th, resulting in a $6 billion loss in revenue, primarily from the loss of $5 billion in lottery securitization funds (Proposition 1C). Coupled with the $8 billion shortfall already projected by the Legislative Analyst's Office, there will be an immediate $14 billion hole in the state Budget. Some Republican members of the legislature have stressed that "taxes will not be an option this time around" and thus, the legislature will be looking to solutions such as cuts, borrowing, and increased fees.


Submitted by Michael Dillon and Christina DiCaro, CLA Lobbyists