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Bring Municipal Alimony Under Control

Until the 1980s newly-formed cities did not have to compensate counties for the privilege of becoming incorporated.  That was changed thanks to Sacramento County's aggressive, though eventually unsuccessful, strruggle to stop Citrus Heights from becoming a city. One facet of that struggle was the passage of a new law that carved into stone a notion of revenue neutrality whereby new cities had to transfer money to the county to make up for future revenue losses. That was just another unintended complication of Proposition 13 in 1978, which had rolled back property taxes to 1% and frozen them at their 1976 value. Future assessments were limited to 2% per year for the original owner and could only be adjusted to reflect market value if a property was sold. Prior to Prop 13, the array of municipal service providers (the county, school districts and special districts like fire districts and cemetary districts) adjusted their property tax assessments separately each year - something like a layer cake of taxes. Once the 1% assessment was mandated, the layer cake turned into a pie in that the various service providers had to divvy up a fixed-rate tax. The post-Prop-13 pie amounted to some 40% less revenue than the layer cake. And splitting the pie was further complicated by school district's successful achievement of legislation setting aside 1/2 of the state's general fund for schools.

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This book on the history of Citrus Heights' incorporation has substantial details about how Sacramento County resisted cityhood for Citrus Heights, with numerous discussions of how revenue neutrality was weaponized. It is available at

So it was understandable that Sacramento County fought back against what it perceived as further deterioration of its budget if Citrus Heights gained a seat at the pie-eating table. Revenue Neutrality, as it was called, went into effect as Senate Bill 1559 of 1992, effectively stating that anytime a community wants to incorporate, it must not only be financially feasible, but it must also have no negative impact on its county by doing so . Citrus Heights found itself in negotiations with Sacramento County that resulted in the city budget being burdened with millions of dollars of revenue transfers to the county annually for 25 years. Sacramento County, which no longer had to shoulder the costs of providing municipal service to Citrus Heights, did not lay off any of its mun icipal services staff. And it did likewise when Elk Grove and then Rancho Cordova followed Citrus Heights' lead and became cities. Sacramento County which no longer serves municipalities totalling 345,000 people, continues to get millions of dollars of revenue from those municipalities. Those county revenues have been the result of the cities' hard work at nurturing their retail economy and improving the value of residential property with enhancements to streets, sidewalks and parks, service delivery improvements (particularly for law enforcement) and neighborhood empowerment services. Imagine how much better those cities' municipal services could have been if the revenues generated in their communities had stayed in their community. But, no, the money has flowed to the county for whatever. And the new cities had to agree to it because the LAFCO process gives the county the upper hand in negotiating the price of the divorce.

Well, it's not 1992 anymore. Here we are over 3 decades later; many things have changed. Property tax revenues are skyrocketing as real estate turns over. Sales tax revenues are evolving as online shopping is replacing brick-and-mortar retail. The pace of new city formation has slowed to a crawl, with only fourteen cities formed in California since 1992 and the most recent one being established in July of 2011. Revenue neutrality seems to have been the primary driver of the slow-down. All of those 14 cities have had to pay their county big bucks every year just to be a city. It has become standard practice to keep that revenue transfer in place for 25-30 years. Residents of the new cities have had to devote their local tax dollars to propping up their county's coffers, yet their county has been absolved of the job of providing municipal services. There has been no real accountability for the funds; the new city dwellers have no way to know what that chunk of their municipal tax dollars have bought for them. How is that fair?

On the other hand, closing a business is not without costs. Maybe a county has ventured into an infrastructure improvement project or some other municipal service investment. Maybe that investment is still being paid off while the new city has incorporated. One can see how it would be a problem for the county to be stuck with the bill while the new city gets the revenues. Yet one could also realize that the beneficiaries of the investment, those dwelling in the new city, are the same people who used to live in the unincorporated area that predated the new city. So, maybe, a case can be made for some level of reimbursement from a new city to its county,  just not a payment scheme that drags on for years and years. Beyond that, after the 25-30 years have gone by - when the county will have to deal with a significant loss of revenue and face a future without a subsidy from the new city - there are no statutory assurances that the county will be prepared for a smooth transition. The Legislature didn't really think revenue neutrality al the way through back in 1992. It is high time to do so.

Revenue neutrality is a statutory requirement that resembles divorce alimony. In practice, the costs have been negotiated to persist for 25-30 years. The Legislature has never examined the wisdom of such arrangements that place severe limitations on the ability of a new city to meet its municipal responsibilities.  County budgets have benefitted from the negotiations, with new cities bearing the increased costs at the expense of the very same taxpayers who used to be under the county’s municipal jurisdiction. A standard methodology is needed to structure payments to a county as a new city untangles municipal services from the county and to ensure fairness for the new city’s taxpayers. Our coalition urges revision of the LAFCO process for revenue neutrality.

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