Understanding California's Fiscal Crises

by Scott Peters
February 2003

The news out of Sacramento about the state budget is grim at best. Governor Davis has estimated the budget deficit at $35 billion while the legislative analyst's office has projected a $26 billion deficit. Whatever the number, there are difficult decisions on the horizon that will affect our schools, police and fire safety, and our ability to complete much-needed road projects. In the Governor's proposed budget for next year, the City of San Diego faces a $70 million reduction, due mostly to the elimination of a program known as the "Vehicle License Fee backfill." This practice involved shifting property tax revenues from local government to the state government and replacing those revenues with car tax revenues. The Governor has indicated that, at least for now, he is unwilling to continue this practice, which has come to represent 10% of the City's general fund.

Before 1978 it was inconceivable that a California city could not maintain its streets, equip its libraries or build and maintain attractive parks. Everyone knows that Proposition 13 limited property tax revenues, but few citizens are aware that it also shifted power over those revenues from local governments to Sacramento. The separation of local responsibility for services from authority over the revenue needed to fund them has led to an unfair and unwise local tax policy. The state's allocation formula attempted to soften the blow of Prop 13 by freezing 1978 property tax distribution levels. This unfairly rewarded high tax cities and penalized conservative cities. Now, San Diego receives 17 cents on the property tax dollar while Los Angeles receives 26 cents. That's obviously unfair.

In 1991, Sacramento began keeping money that had gone to local governments in order to balance the State budget. The $311 million shifted from the City of San Diego since then would be enough to pave every street and fix every sidewalk in the City, with enough left over to build several parks and libraries and properly pay and equip our police and fire forces.

This unbalanced and unfair relationship is not an easy one to fix. The money that was taken from the cities is now funding worthy programs like education and healthcare and it will be difficult just to take it back. In addition to the problems of local governments, State fiscal policy has been constrained by ballot initiatives that have reduced flexibility through earmarking revenues and the fact that California is a net loser in money paid to and received from the Federal government. Governor Davis has signaled a willingness to try to fix some of these structural problems, and our current fiscal crisis may act as a catalyst for real change. I am working on many of these issues as a member of the California Commission on Tax Policy in the New Economy. This Commission was developed by the legislature to look at ways of making our economy stronger and quality of life better through fiscal policy. As I work on this Commission I intend to advocate for the right of cities to spend local dollars on local projects to preserve our quality of life. I look forward to bringing you updates on the work of the Commission throughout the year, and you can read our interim report on my web site at www.sandiego.gov/cd1.