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The state of California is refusing to give San Mateo County more than $100 million in taxes that the county believes belongs with local governments.
“This is county taxpayer money that we’re talking about and the state is denying us funds that we are rightfully due,” said County Executive Mike Callagy.
It all comes back to two compromises made between the state and local governments almost 20 years ago: the triple flip (which ended in 2015) and the vehicle licensing fees swap. Essentially, in order to fix the Fiscal Crisis of 2003-04, the state cut local funding, but allowed counties to recoup the lost income from each county’s Educational Revenue Augmentation Fund. The state would provide the funds that school districts were missing from ERAF.
However San Mateo County is one of two counties in California in which this plan does not work. When a school district has enough per-pupil funding – either due to increased property taxes or fewer students – more money in the ERAF is given to counties and cities. This is called “excess ERAF.” But since the ERAF is also supposed to fund the lost revenue from VLF and triple flip, an issue arises: what happens when the ERAF does not have enough funds?
If there are not enough funds, the county can take money from schools beyond the minimum contribution the state provides. But because many schools in San Mateo County are “basic aid” – meaning they do not receive funds beyond the minimum required – this is not enough to cover the shortfall.
The impact of this nuance is shocking: the county estimates that cities and the county as a whole are losing over $100 million.
The California Legislative Analyst’s Office warned legislators about this issue in 2012, when the shortfall was less than $1 million, yet it was not addressed. In other years, the state offset this difference.
“Clearly, in the statute, all the counties and cities in the state are supposed to get this payment so the state would just add a specific appropriation [item in the budget] to cover us,” Deputy County Executive Justin Mates said.
Now, as in 2004, California has a massive deficit, $56 billion, and local governments are taking the hit. Instead of covering the shortfall, Gov. Gavin Newsom’s budget uses the money to help reduce California’s deficit. The Governor’s Office directed the Almanac to the Department of Finance, which did not respond in time for publication.
County officials were not happy about the governor’s decision and said they thought the state reneged on its 2004 deal. Audrey Ratajczak, a lobbyist on behalf of the county, told legislators in April, “Not reimbursing the shortfall would be contrary to the 2004 budget compromise in which these payments were guaranteed to us by law.”
However, the California Department of Finance thinks the state has met its obligations. “[The Department of Finance] keeps erroneously saying that ‘they backfilled every lost dollar of VLF revenue’ but it is just not true,” Callagy said.
The legislators’ budget counterproposal, released on May 29, includes the VLF funding, according to San Mateo County’s Chief Legislative Officer Connie Juarez-Diroll. However, the proposal differs significantly from Newsom’s and has not passed either house.
Assemblymember Diane Papan’s district director, David Burruto, told the Almanac that getting VLF funding for San Mateo County is Papan’s main budget priority and discussions are ongoing for a permanent solution.
VLF revenue accounts for 18% – or $41 million – of San Mateo County’s operating funds. “We can account for things like decreased property tax but catastrophic losses like this are just unsustainable,” Callagy said. “This is one of the most significant threats to our budget that we’ve ever experienced.”
San Mateo County was one of five counties that came under fire in 2020 for abusing “excess ERAF” by the Legislative Analyst’s Office. The office claimed the counties were incorrectly shifting funds out of ERAF, leading to the counties incorrectly taking a combined $350 million from schools. The California School Boards Association is currently suing the State Controller over this and the case has yet to be settled.
This is what it looks like when your government overspends and has incurable deficits.
Government doesn’t stop paying bondholders, they stop providing your most essential services. They never kill the programs that few, if any, care about – like research into avian breeding habits in Peru. They cut your police, teachers and close your parks first.
What a tragedy that our basic-aid school districts can’t “share” their property tax with our city and county governments, as Justin Mates, San Mateo County assistant executive, phrased it. Is “sharing” the permanent fix that Senator Becker’s chief of staff said he will be fighting for?
Why take more of the most reliable, stable funding away from local school districts? Does this form part of the final solution to the VLF problem? Let’s throw Ravenswood, Redwood City, Millbrae and Redwood Shores back under the state’s fiscal rollercoaster — rejoining the wild ride that Daly City, Burlingame, Pacifica and San Carlos are still on.
If not, why mention it?
County, city and state officials seem to think it is OK to leave schools struggling with the chains they themselves are trying to escape. Schools have to wait and hope for full payment of their debts from the state — days, weeks and months after each fiscal year closes. Yet the county and cities file lawsuits and hold press conferences when they are caught on the same hook.
But wait! Hoping to be reimbursed is a mere insult compared to the core injury our local officials do to the working-class school children of San Mateo County. The shell game played with school property tax funding shows how children’s well-being is subservient to another agenda. Starving working class schools seem to be OK, since they prod local votes for more revenue … “for our schools” and local governments’ large unfunded pension obligations.
The new statewide school funding formula introduced in 2013 did not include the local cost-of-living supplement that was in its blueprint for ‘equity.’ Our local school children are only offered the same dollar funding as children anywhere else in the state. This translates to 20% fewer resources for any state-funded school in our high-cost county — whose residents contribute twice the per-capita property tax and three times the personal income tax of the state average.
Our city and county governments enjoy 42% more property tax per capita — then they get to take $350 million MORE — from education property tax. This mushrooming diversion isn’t even mentioned in this article, although it is that diversion that has emptied the bucket the VLF was supposed to be funded from.
Had respect for local costs remained in the fine print of the 2013 school funding formula — or had it been introduced by any of our state electeds since then — the VLF deficit would not exist. Strange but true, such is the shell game that property tax allocation has become.
A local cost supplement would have been paid out of the $350 million of that “excess educational” property tax San Mateo County removes from the countywide educational revenue fund each year, 77% of which it keeps for itself, 18% it hands to the wealthiest cities, and the remainder to special districts (fire, harbor, ‘hospital’).
This property tax was available to level up the least wealthy of our school districts (named above). Instead it flows to cities and a county that already lay claim to 42% more property tax than the state average. Let me restate that: our county and cities already get a 42% local cost of living supplement before the first dollar of “excess” educational funding flows to them.
Impossible as this seems you need only look at the most recent County Controller’s annual Property Tax Highlights report. It details the $164 million local governments took — emptying the coffers of the Daly City, Burlingame, Pacifica and San Carlos elementary schools — to repay the state’s VLF debt to themselves. (And mentions the $119 million more in the lawsuit.)
But in the next column you see their “Excess ERAF” allocation. Note how it just covers the ‘missing’ VLF reimbursement for cities (albeit favoring some and shorting others) and dramatically overpays the county ($270 million vs. less than a $98 million VLF shortfall). And hands $20 million to the special districts gratis (gotta love the Menlo Fire museum!).
Local government officials love to call this their ERAF “rebate.” If Proposition 13 qualified as Original Sin, then the allocation of local governments’ property tax in 1993-94 was their Cain v. Abel moment. Which ignores one small lapse in memory. Assembly Bill 8, one year after Proposition 13, took 30% of the property tax that was left to schools after the Original Sin of Prop 13 … and handed it to counties and cities. The state would take care of the schools. So Prop 13 cut local school property tax funding by 50%, then the cities and counties took almost a third of what was left. The state couldn’t actually afford to make up the difference, drove school funding into the basement and had to resort to the 1993-94 grab back. Rebate? How disingenuous.
Four counties have a cost of living 10% greater than the state average. These counties have “excess” educational property tax has grown six fold, from $200 million to $1,300 million ($1.3 billion) since the ‘new’ formula. This has been available to fund a local cost of living supplement for the low-wealth schools in each of these counties. Is it allowed to? No. It’s not even mentioned.
Laughing at myself — meant to post this to the current article on this topic. Wish there were a delete function!