Legal Alerts

The state budget deal approved by the California Legislature will have significant impacts on property tax revenues of local governments, including special districts, cities and counties. The budget bills are awaiting the signature of the governor, but he is expected to sign them.

The state has elected to borrow its way out of its $26 billion deficit by, among other things, tapping into $1.9 billion of local government property tax revenues under the “severe state fiscal hardship” provisions of Proposition 1A.   

Prop. 1A was passed by the voters in 2004 with the intent of protecting the property tax revenues of local governments. Under Prop. 1A, the state is only allowed to borrow local government property taxes on the condition that they be paid back within three years and with interest. Prop. 1A also provides that the state cannot engage in such borrowing for more than two fiscal years during any 10-year period, and cannot borrow a second time unless it has fully repaid the prior loan.

Under the legislation adopted to implement Prop 1A, each county auditor for the 2009-2010 fiscal year is expected to reduce by 8 percent the ad valorem property tax revenue that was distributed to each city, county and special district for the 2008-09 fiscal year. The county auditors are then required to transfer such revenues to certain educational funds. 

The legislation includes two repayment options. The first option involves the establishment of a joint powers authority (“JPA”), which will issue bonds and use the proceeds to provide agencies with funds to replace the borrowed property taxes. The state will pay for bond issuance as well as pay an interest rate of up to 8 percent, depending on the level of participation.

The second option is aimed at local governments that prefer to be repaid by the state directly at an interest rate determined by the California Department of Finance, subject to a 6 percent cap. This is anticipated to be the preferred option for local agencies with adequate resources that do not need to obtain bond proceeds through the JPA and/or have a better credit rating than the state. This may also be a better option because any repayment option involving a JPA could be more expensive for local agencies due to the impaired credit rating of the state.

There are a number of other provisions and complex requirements that will come into play in regard to the state’s obligations to repay the borrowed property taxes.