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Special Districts: Relics of the Past or Resources for the Future?
By Richard R. Terzian

Millions of Californians support and receive services from hundreds of independent special districts. These autonomous local governments provide essential services such as water and sanitation, fire and flood protection, and parks and recreation.

These governments, originally tailored to community needs, are often unknown to the people they serve. Because of their sheer numbers, narrow focus and low public profiles, many districts operate beyond the awareness and scrutiny of their customers and policymakers. Their near anonymity diminishes their accountability, and ultimately their effectiveness.

In 1999, the state's Little Hoover Commission initiated a study of California's more than 2,200 independent special districts. The commission undertook the review in response to a few high-profile stories about special districts operating in secret or storing up large financial reserves for projects that the public did not support.

During its year-long review, the commission looked at several issues, including the visibility and accountability of districts, their financial resources and how much of the property tax pie they receive. The commission also looked at how districts change - and why they sometimes fail to change. Findings and recommendations were issued in the May 2000 report, Special Districts: Relics of the Past or Resources for the Future?

Toward Visibility and Accountability
The commission found that many special districts are clearly doing a good job - reliably and responsibly making California a safe, healthy and prosperous place to live. But others operate without much scrutiny. Some of them should probably be merged to more efficiently provide services. And some of them should probably go away.

Most special districts were formed when California looked different than it does today. These districts, however, often do not evolve to reflect the changes that have occurred in California. Many survive as separate government agencies even after urbanization has paved over the economic or geographic reasons for their independence.

Special districts are very diverse - in their size, their function, and their performance. The fundamental problem, however, is that public and community leaders have trouble judging that performance and knowing when changes should be made.

The typical mechanisms used to hold government accountable do not always work well for special districts: The electoral process is not rigorous; public meetings are sparsely attended, and financial statements are hard to understand.

The commission identified many steps that districts could take to involve the public and community leaders. Budget summaries could be produced in understandable terms, included in billing statements and publicly presented to county supervisors and city councils. The Internet makes information easily available to the public.

Strengthening LAFCOs
While special districts were tailor-made to the needs of their communities when they were formed, many are reluctant to change as the needs of their customers change.

For example, of the 74 health care districts in the state, 24 of them no longer operate hospitals. Some may still provide value to their communities. But with few exceptions, these districts are not being scrutinized to determine if a separate government is truly needed to provide that service.

Richard R. Terzian is chairman of the Little Hoover Commission, formally known as the Milton Marks Commission on California State Government Organization and Economy.
Bipartisan by statute, the commission is an independent oversight agency, comprised of five public members appointed by the governor, four public members appointed by the Legislature, two state senators and two state Assembly members. The commission is charged with reviewing the operations of state agencies and their instrumentalities and advising the governor and Legislature on ways to make them more effective and efficient. Special Districts: Relics of the Past or Resources for the Future? can be found on the Commission's website at www.lhc.ca.gov/lhc.html, or by calling (916) 445-2125.

That job belongs to Local Agency Formation Commissions. But the commission heard that LAFCOs are understaffed, under-funded and lack the independence to challenge the status quo.

One solution to this problem is for LAFCOs to have the resources and the independence to be the catalysts for change in their communities that the Legislature intended. The state also can play a role by providing LAFCOs and community leaders with the analytical tools and methodologies to judge the districts and know when change would be beneficial. As it stands now, each county must develop its own methodologies for assessing when to merge or eliminate districts.

Special District Reserves and Property Tax Allocations
The commission also looked at two financial aspects of enterprise special districts - their retained earnings or reserves, and their allocation of property tax revenue.

According to the state Controller's Office, enterprise districts had retained earnings of $19.4 billion in 1996-97 - nearly two and one-half times their combined gross annual revenue. The Controller's Office, the sole source of statewide financial data on special districts, initially indicated that districts' retained earnings do not include fixed assets. It has since become clear that some districts include some fixed assets, while other districts report only monetary reserves. As a result, the precise amount that special districts hold in reserves is unknown, but substantial.

Some of these districts can articulate a plan, agreed to by other community leaders, for using these resources to build or modernize infrastructure. Other districts operate in obscurity, and their communities are largely unaware of these resources or why they are being held.

The commission believes that each district should publicly and simply explain their reserves, including needs and plans. The commission believes that those assets should be fully integrated into regional and statewide infrastructure planning and financing.

The commission also found that many enterprise special districts - which have the ability to charge fees for services - receive property taxes.

In 1996-97, enterprise special districts received $421 million in property tax revenues. More than $103 million went to 15 enterprise districts that the state controller identified as holding the largest retained earnings. At the same time, non-enterprise districts - like park and recreation districts that rely almost solely on property tax revenue - have struggled to make ends meet.

The commission believes that the state should reconsider - based on a case-by-case review - whether these allocation formulas, implemented more than two decades ago, still make sense.

In its report, the commission did not judge individual special districts because the citizens they serve should judge them. Each of the commission's recommendations would improve the ability of customers, taxpayers, and community and state leaders to understand the role that individual special districts should play in making California a better place to live.