Cost Accounting in Local Government

Local Government Revenues

If the purpose of government is to take some of my money and pool it with some of your money in order to do something that we all benefit from, then the revenue limitations that started with Proposition 13 have reduced what California governments have been able to do for the common good.

The voters started with limiting property taxes in 1978. Not because the property tax is “bad” but because a few large local governments got greedy and didn’t lower the tax rate when home values grew enormously. It would have been very simple to lower the rate in order to just have a modest revenue growth. Los Angeles County was the worst offender and led to the tax revolt by Howard Jarvis.

Next on the list were the fee-supported services. Voters were concerned that local governments would increase fees to make up for the property tax drop. With the help of a Jarvis side-kick, Paul Gann, the voters adopted Proposition 4 in 1979 to limit fees to the “cost reasonably borne” in providing the fee service. This was the impetus for establishing our firm as we specialized in helping calculate the “cost reasonably borne” for fee services.

But we still had assessment districts. After Propositions 13 & 4 passed, new districts sprouted up for practically everything including police and fire protection. The voters could see where this was going and passed Proposition 218 in 1996. Assessment adoptions and increases had to be approved by a two-thirds vote as it is a “special tax.” This has led local governments to carefully consider the distinction between a “special tax” (two-thirds approval) and a “general tax” (majority approval). There is now a dance performed to convince voters that if the “general tax” (which cannot be earmarked) is approved it will really be used for a special purpose, just trust us.

If an assessment district was truly formed for the benefit of the property owners being assessed, then if the costs of the district increased and the beneficiaries didn’t want to pay, the local government should be indifferent to continuing it. There are a large number of California assessment districts that are continuing to exist but are not covering their full cost. The reader can draw their own conclusion about who benefits from those assessment districts.

One fee rebellion caused fees to change without using the initiative process. Dick McCarthy took on building plan check fees at the City of Palm Springs and created a movement that lowered building fees to developers throughout California.

Transferring monies from a local government utility to its general fund may have been restricted by Proposition 218; but, it wasn’t until 2010 with the passage of Proposition 26 that a number of cities recalculated the transfer amount and refunded monies to their utilities and, ultimately, the rate payers.

What’s left? Well, fines were explicitly excluded from the above propositions. However, as I pointed out in a blog article (10/22/2012: “What do I want to pay for?”) – a legitimate revenue source can be abused. The $35 traffic fine becomes $248 with add on charges that are actually taxes but got approved by a two-thirds vote of a one-party legislature. Actually, my example was cheap. According to the LA Times, the State has unpaid court fines of about $10 Billion and says “…Is it any surprise that many people aren’t paying when a typical ticket with a base fine of $100 is laden with so many add-ons that the final cost is nearly $500? And a ticket with a base fine of $500 will run you nearly $2,000. Don’t pay immediately, and a $300 penalty is added.” Naturally, this affects many individuals who are already living on the edge financially. Expect to see more changes in our “fine” future.

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