Governor is missing a chance to enact big reform

By Daniel Weintraub, Sacramento Bee Thursday, July 15, 2004

Gov. Arnold Schwarzenegger was back on the road again Wednesday, posing with law enforcement officials and demanding that legislators pass his plan to protect local governments from the depredations of the state. That is, protect local governments once he finishes taking $2.6 billion from their coffers over the next two years.

Given his own designs on city and county revenues, Schwarzenegger's hands are hardly clean on this issue. So perhaps he should ease the inflammatory rhetoric and get back to doing what he promised when he was elected: solving some of California's seemingly intractable problems.

Past governors have acknowledged the dysfunction but shied away from attacking the problem because so many interest groups have a stake in the outcome that blowing through them all would be political heavy lifting at its worst.

But that is exactly why we elected an outsider with no previous ties to any of those groups. Schwarzenegger held himself out as the man who could change the culture in Sacramento and bring common-sense solutions to the fore. That's why his take on local government finance is so disappointing.

Schwarzenegger was more honest back in January, when he merely proposed shifting $1.3 billion in annual property tax revenue from cities, counties and special districts to the schools. That move would relieve the state of an identical obligation to public education and help the governor balance his budget.

That was before local government officials gathered signatures to place on the November ballot Proposition 65, which would not only prevent Schwarzenegger's proposed shift but also prohibit any future transfers and lock all the current tax formulas into the state constitution. Seeking to neutralize the local government lobby and protect his fund shift, Schwarzenegger assigned a pair of negotiators to open talks with city and county leaders aimed at finding a compromise.

The result: The locals agreed to give up $1.3 billion a year for two years, and Schwarzenegger agreed to support their drive for long-term protection. After the two-year shift that the governor wanted, the local agencies would get their money again. And then the whole system would be locked down, subject to change only if approved by the voters.

When the governor embraced this deal, however, he abandoned any chance of bringing all the warring parties together, or getting past them, in the cause of long-term reform.

The big, overriding issue that needs attention is the gap between where tax money is raised and where it is spent. The whole system needs to be realigned so that, as much as possible, those functions are connected. When one agency is responsible for raising money and another for spending it, all kinds of problems result, chief among them a glaring lack of accountability.

In addition, funding formulas created as long ago as 1979, in the aftermath of property-tax cutting Proposition 13, need another look. The Legislature back then locked in the distribution of local tax money that was in place at the time, without regard to whether it made sense over the long haul. It didn't, but we've been stuck with it ever since, and now Schwarzenegger's proposal would place it into the constitution.

Finally, the relative mix of property tax and sales tax revenue at the local level is a persistent problem. Cities and counties over time have become too reliant on sales tax, forcing them to swoon over potential retail development while giving the cold shoulder to housing. This trend muddles market forces and helps create an imbalance between jobs and housing, driving up the price of homes and worsening transportation gridlock.

"The tremendous emphasis in local government planning decisions and zoning and subsidy policies toward commercial development has led to an overbuilding of malls, auto dealerships, movie theaters and hotels, and punished housing," says Chris Norby, a libertarian-leaning Republican who is an Orange County supervisor and former city councilman. "We punish the housing developer, overtax and over-fee the people who want to build homes, and we subsidize malls and big-box stores."

Under pressure from the Legislature, Schwarzenegger tweaked his plan. But the only real change has been in provisions to allow the state, in a limited fashion, to borrow local funds in the future.

It would be far better to drop that escape hatch, which wouldn't help state budget writers much anyway, and focus instead on the larger issue of local finance.

Instead of making a mistake that will haunt California for years to come, the governor should return to his original proposal, shift local money to the state for one year only, and let the cities and counties make their case to the voters in November.

If the public likes their solution, state officials will have to live with it. But if Proposition 65 loses, Schwarzenegger can begin the next day to put together the kind of real reform worthy of his power and prestige, a reform that would cement his legacy on an important and difficult issue.

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Last modified: July 15, 2004

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