Funding

Many special districts have faced tough financial times over the last quarter century. Before Proposition 13, special districts received $945 million from property taxes (1977-78). In 1978-79, their property tax revenues dropped to $532 million, a loss of almost 50%.

Responding to this financial hardship, the Legislature created the Special District Augmentation Fund (SDAF) to provide a supplemental income for special districts. The state government sent state money to the SDAF in each county based on a formula in state law. The county supervisors, in turn, allocated the SDAF money to the special districts within their counties. The State took over a greater percentage of funding for schools from local governments to help local governments get through the Proposition 13 transition. This practice lasted from 1978 to 1992.

Faced with huge state budget deficits in 1992-93 and 1993-94, state officials shifted almost $4 billion annually in property taxes from local governments (cities, counties, special districts, and redevelopment agencies) to an Educational Revenue Augmentation Fund (ERAF) in each county. The property tax revenue in the ERAF supports schools. ERAF helps the state government fulfill its constitutional duty to fund schools. When the Legislature abolished SDAF in 1993-94, the state transferred $244 million in special district property tax revenues to schools. Because non-enterprise special districts rely almost entirely on property tax revenues, many were fiscally devastated as a result of the ERAF funding shifts. (See the box above.) Enterprise special districts were better able to make up for the lost revenue because they have fees that generate revenue and they rely less on property taxes.

Although state legislators have granted some partial relief to special districts, ERAF’s fiscal consequences remain especially harsh for non-enterprise districts. In 2000, Governor Gray Davis vetoed a bill that would have capped ERAF shifts. In 2001, bills that would have helped fire districts, library districts, and recreation and park districts failed to pass. The ERAF issue remains unsolved.

ERAF and the Fulton-El Camino Recreation and Park District

One special district that has been particularly devastated by the ERAF shift is the Fulton-El Camino Recreation and Park District in Sacramento County. This District lost more than $2.9 million in property tax revenue to ERAF between 1992-93 and 2001-02. As a non-enterprise district, it cannot recover these losses with service charges.

This revenue loss has caused the District to demolish the Howe Pool, and it may have to fill another swimming pool. The District lacks money to repair aging facilities and attract quality employees. The lack of funds threatens the public safety at its recreation facilities.

Special districts’ financial reserves have become controversial. In 2000, a report by the Little Hoover Commission revealed that special districts reported more than $19.4 billion in reserves to the State Controller in 1996-97. Enterprise special districts, which charge fees, hold most of the reserves.

This large dollar figure raised a red flag for policy-makers and the public. Why were the districts setting aside so much money? And how were they planning to spend it?

In response, special district leaders argued that there are legitimate reasons for these reserves. Nearly all of the money in reserves was allocated into specific funds for given purposes. Large reserves are needed to accumulate the capital to pay for large public works projects. Reserves also provide a safety cushion in lean years, stabilizing consumers’ rates.

It became clear to taxpayers and legislators that special districts should improve the way they report their fiscal activities. Specifically, they need to explain the purpose of the reserves. Out of this controversy came a new law that now requires the largest special districts to report their reserves and fiscal information more descriptively to the State Controller’s Office, which will post the information on its web site.

Much Ado About Nothing?

The Metropolitan Water District of Southern California (Met) entered the public spotlight when the Little Hoover Commission report revealed that it held $4 billion in reserves.

But, according to Met, that figure actually reflected all of Met’s earnings (not just cash reserves). This figure included the district’s capital assets like the Colorado River Aqueduct and expensive water filtration plants. The cash reserves were actually just under $1 billion. As a large special district that serves the highly populated Southern California region, Met claims its reserves are a hedge against volatile water markets. Fluctuating weather patterns cause shortfalls that would create price spikes for customers in the absence of a Water Rate Stabilization fund, which uses reserve money.

Starting in January 2001, cities, counties, and special districts each pay one-third of the costs of the Local Agency Formation Commission (LAFCO), where they have representation on the Commission. For decades, the county governments had always paid 100% of LAFCOs’ costs. Many consider this new formula to be a more equitable way of paying for LAFCOs.

Special districts’ one-third share of the LAFCO costs is divided among the districts in that county. A given district’s contribution is proportionate to the district’s revenue. For this reason, some special districts must pay what they say are disproportionate amounts. For example, the Sacramento Municipal Utility District, an enterprise district that serves a large number of customers, pays for nearly 85% of the special districts’ share of the Sacramento LAFCO budget. Similarly, hospital districts in Sonoma County pay more than other special districts.