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San Mateo County has filed suit against the state of California, accusing state officials of shortchanging the county and its 20 cities nearly $38 million in funding that local leaders say is essential for health care, housing and public safety.
The lawsuit, filed this week in the San Francisco Superior Court, alleges the state violated its own laws and a 2004 budget compromise known as the “VLF Swap,” which was designed to ensure counties would not lose out on vehicle license fee revenue.
“These funds are owed to San Mateo County and our 20 cities,” County Executive Mike Callagy said in a statement. “And instead of living up to its obligations, the state wants us to absorb the cost.”
The arrangement traces back to the state’s 2003–04 fiscal crisis, when local governments gave up vehicle license fee revenue to help Sacramento balance its budget. In exchange, lawmakers promised ongoing replacement funds from the county’s Educational Revenue Augmentation Fund. The state would then provide the funds that school districts were missing from ERAF.
However, San Mateo County is one of two counties where this system does not work. When a school district has enough funds from property tax, the district only gets “basic aid” from the state and the county takes additional funds from ERAF as “excess ERAF.” However, since so many school districts in the county are “basic aid” – meaning they do not receive funds from the state beyond the minimum required – there are not enough ERAF funds to cover the shortfall.
In previous years, the state would provide additional funds to San Mateo County but due to the state’s $21 billion deficit, those additional funds were cut from the budget. Last year, the state almost did the same but added the additional funds in a last minute adjustment to the budget.
The California Legislative Analyst’s Office warned legislators about this issue in 2012, when the shortfall was less than $1 million, but no permanent solution was implemented.
The stakes are significant: vehicle license fee revenue accounts for about 18% of San Mateo County’s operating funds. County officials say losing tens of millions will strain budgets across all 20 cities, reducing funding for emergency response, health care, housing and other basic services.
Supervisor Jackie Speier, said the issue is about more than money. “The state made a promise, and breaking it doesn’t just hurt local government budgets, it hurts our residents,” she said in a statement.
San Mateo County has long warned of this funding quirk but it may not be blameless. San Mateo County was one of five counties that was accused of abusing “excess ERAF” by the Legislative Analyst’s Office in 2020. 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 county’s lawsuit names the state of California, Department of Finance Director Joe Stephenshaw and State Controller Malia Cohen as defendants.
Looks like Gavin would rather waste $235M to fund his national ambitions with a redistricting special election than reimburse the county for what it is owed.
Sacramento is indifferent to San Mateo County local governments’ demand for their last $38 million? Perhaps it matches those local governments’ indifference to the $500 million they take from their own (that is to say, our own local) working class schoolchildren each year.
Do you really want to understand this? Really? Then start at the genesis of the $38 million issue. Look at page 14 of the County’s 2023-24 Property Tax Highlights report on the SMC Controller’s website.
The first column shows you that $1.82 billion of local property tax was assessed and allocated to education for that year. The fourth column shows you that $158.6 million more was being returned that had been silently diverted to redevelopment agencies in our districts. Altogether that makes $2 billion of property tax assigned for education assessed and raised in our county in 2023-2024.
Now, in the second column, you see $153.7 million taken out of the Daly City, Millbrae and San Carlos school districts — every penny of property tax raised and allocated for them. Plus a smidge more ($24 million) was taken from the countywide (“ERAF”) fund created in 1992 to augment the stable, reliable, local property tax directly allocated for use to top up the poorest districts in our county.
Then, in the third column, you see $337.7 million more taken out of that ERAF fund — designated as “Excess” — that is to say, existing property tax available to educate children in San Mateo County but diverted and redistributed to local governments instead.
To recap, $2 billion was raised in 2023-24 for local education. $1.5 billion got there. The rest went to the county, cities, and fire/library/etc districts.
Now, instead of focusing on the $500 million that working and middle class kids in our county did not get, let’s focus on the $38 million that county officials are suing the State for.
On page 10, you will see that the $153.7 million taken above (aka “the second column” emptying the purses of five of our school districts) wasn’t enough. The state had authorized our local governments to take $268 million! So our local governments were left waiting for $114 million from this year’s state budget. (Perhaps this will give them a little empathy for those school districts, which are regularly made to wait for their money in what is known as “deferrals.” This school year they won’t get their last month’s payment until next year.)
In any case, it turns out that the state has only budgeted $76 million towards that $114 million obligation. (California budget detail line item 9210 7540.) Hence the lawsuit.
Do you wonder why state legislators are so indifferent to the plight of San Mateo County’s local governments? Eyeball the $337.7 million (“third column”). That only exists in a handful of “wealthy” counties. The Legislative Analyst’s Office “Excess ERAF” report of March 2020 (Figure 5) shows that San Mateo County local governments receive 127% of the statewide average property tax per resident, between their directly allocated property taxes and their (second column) VLF takings. Subtract the missing $38 million from the $337.7 million and state legislators still see $300 million of “Excess” educational property tax gravy redistributed amongst those cities, the county, and special districts. On top of that 27% premium already. Wowsa! Hard to tighten the state’s belt another $38 million when you see that.
Especially when there has been no outcry about what creates all that “Excess.” The state’s school funding formula is flat. There is no allowance for the much higher cost of living in San Mateo compared with the state average (MIT’s Glassmeier Index says 24% higher). Students in the county’s working and middle class schools get the same $, therefore 24% fewer resources, than their peers across the state. Which creates the “Excess” ERAF that our county government, cities and special districts silently slurp up.
Their excuse? It’s not a cynical theft, it’s a “Rebate.” After all, it was “taken” from them in 1992. Ignore Figure A-2 in the 2012 LAO report on property tax, they would say, which inconveniently shows that it was a return of the property tax they took from schools a year after Proposition 13 (aka the AB-8 Split).
This is a shell game that relies on beggaring schoolchildren in working class districts — areas that have no voice. And not a single local official, county official, or state official has tried to give them one.