Thursday, May 28, 2009

Budget Links Between the State and Local Governments

Day 5 of Conference Committee reviewed the governor’s budget proposals affecting transportation and local government. But the controversy really centered on the governor’s proposal to borrow nearly $2 billion from local governments through the suspension of Proposition 1A.

The voters passed Proposition 1A in 2004 to limit the state’s ability to borrow local government funds to help balance the state’s budget. The initiative ensures local property tax and sales tax revenues remain with local government unless the governor declares a fiscal necessity and two-thirds of the Legislature concur.

The governor’s budget proposal allows the state to divert up to 8 percent of property tax revenues of cities, counties and special districts to schools. Under the terms of 1A, repayment would have to be made within three years with interest. The governor’s proposal also proposes legislation to authorize a joint powers authority to facilitate local government borrowing against the state's repayment promise.

A representative from the California State Association of Counties testified today that counties are already struggling to manage state and federally‐required programs and services. Counties assert that the suspension of Proposition 1A would exacerbate this serious problem. When coupled with the governor’s proposal to eliminate or substantially reduce many health and human services programs administered by counties, the impact of the governor’s proposals on local communities could be substantial. According to a recent study, every state dollar spent on CalWORKS grants – for example – generates $7.35 in total economic impact. This report is available online at

Furthermore, according to the League of California Cities, 96 cities in California have declared a state of severe economic hardship and noted their opposition to the governor’s proposal. A listing of these cities is available at

Recognizing that the financial links between the state and local governments can be confusing, the non-partisan Legislative Analyst’s Office produced a chart summarizing the history of this complex relationship. It can be found at