California pulls a fast one

According to a letter issued by City Controller Ben Rosenfeld on Tuesday, the state will be “borrowing” an estimated $91 million from property taxes collected by The City in the 2009-10 fiscal year. (Here's the pdf: Download Budget Letter.)

The California Constitution allows the state to force counties to part with a percentage of local property taxes, but requires that the state repay them the amount of the “borrowed” funds plus interest in three years. (Art. 13, Sec. 25.5.)

Such confiscation reminds me of Halloween when I was little. My siblings and I would come home with our trick-or-treating booty and my dad would promptly take some of the candy for “inspection.” We’d sit by helplessly as he protected us from the possibility of razor blades in the candy, always particularly “suspicious” of the Fun Sized Snickers bars. (He was never fond of grape-flavored food, so a grenade wrapped in Mike and Ike Jolly Joes would have gone undetected.)

Imagine if my dad had said to each of us: I promise that next year I will replace the candy that I took (I’m dad, so I can); in the meantime, you and your siblings can pool those promises together and sell the debt to someone else in exchange for replenished little plastic pumpkins today.

That’s basically what localities are able to do under a law passed July 28.

Instead of waiting until June 30, 2013, for redress, the new law (ABX4 15) allows each county to sell the rights to state repayment to a Joint Powers Authority (in this case, the authority would be sponsored by the League of California Cities and the California State Association of Counties) who will issue bonds on the debt and give us back the borrowed amount. The state will pay for interest on the bonds up to about 8 percent.

Ideally, this could all be arranged in just a few months, allowing for the seamless continuation of local services that depend on funding that’s about to be hijacked. Cities and counties did something similar in 2005 when the state took a portion of local vehicle license fees.

According to the League of California Cities, however, this time things are a little different. For starters, the state’s credit rating is hovering around junk-bond status and insurance is not available for these new bonds.

On the other hand, the new law puts repayment of the “loans” at a very high priority — behind only education and general obligation bonds — so investors wishing to bet on the reimbursement won’t be completely laughed out of the boardroom.

The devil is in the details, of course, and those have to be worked out in the coming weeks. Hopefully this new law will mean that, of the $146 million The City is estimated to lose due to the state’s budget crisis, $91 million will be coming right back to us (there may also be a way to finance about $19 million in redevelopment fund losses).

Using a financing trick to give the state a treat isn’t ideal. But it may be the best we can do, so long as the state can take funds from counties like candy from a baby.

Comments

[israel]

Brilliant, so happy to read this.

[Anna]

Melissa, you are a very smart writer - I'm always impressed.