November 1, 1995
Volume 36, No. 20
Commentary
It is even more ludicrous when the state and many cities and counties face major budget problems.
Overdue is action to end an archaic and unjustifiable system that forces state and local governments in California to pay bloated wages for the construction of a badly needed classroom, a library or a freeway overpass to relieve congestion.
The issue is prevailing wage, and the growing rage over the current system's inherently senseless drag on efforts to make government in California more efficient. It is a blatant example of how the public is left with an empty feeling when learning how tax dollars are spent.
Public works projects in California have high pricetags because of a system that requires the most frequently used wage rate - usually one set by a collective bargaining contract - even when it is significantly higher than the wages paid to most workers in the same region.
For example, three out of 10 painters make $18 an hour union-scale wages in a locality, while two make $14 and two others get $12, one gets $15 and two make $15.50. Those who paint the walls of a publicly owned facility would make $18 an hour, even though seven of 10 painters in their region earn less.
The California Taxpayers' Association is part of a coalition that has supported Goldsmith's three-year legislative battle. His AB 138 has stalled in the Assembly Labor and Employment Committee, an organized labor bastion for a quarter-century and a graveyard for prevailing wage reform bills over the years. The Republican assemblyman will seek another vote after the Legislature reconvenes in January. Under the current Assembly partisan makeup, labor's hold on the committee may have slipped away.
Among AB 138's provisions is a $100,000 threshold for projects subject to prevailing wage requirements, similar to a proposal by Vice President Al Gore in his reinventing government-for-efficiency effort at the federal level. It also would allow hard-pressed local governments to waive prevailing wage requirements under certain circumstances.
California needs reasonable wage requirements. It needs a process that will stretch our tax dollars so they will pay for the construction of more school classrooms, libraries, roads and other badly needed public works.
It defies logic to maintain the status quo. Reform proposed by the Wilson Administration and Assemblyman Goldsmith will help make California more competitive with the rest of the country.
And taxpayers might not feel so empty - and angry - when they see the results of these changes: More bang for the buck.
The effort, through regulations and legislation, would save taxpayers hundreds of millions of dollars, according to estimates from the Department of Industrial Relations (DIR).
The agenda is not to repeal prevailing wage requirements, but rather to hold to the federal standard and depart from a method that is used by only two other states (Minnesota and Wisconsin).
DIR Director Lloyd W. Aubry Jr. on October 12 announced these proposed regulations:
Meanwhile, legislation (AB 138) that stalled in the Assembly Labor and Employment Committee will be pursued in 1996, the second half of the two-year legislative session. This measure, by Assemblyman Jan Goldsmith, would save taxpayers between $200 million and $250 million a year, according to DIR estimates. The bill has these provisions:
As a result of that review, Aubry concluded that taxpayers have not been getting the best use of their money.
Aubry said the reforms "are not a wholesale attack on the prevailing wage law. What California actually is doing is working to bring its own prevailing wage requirements in line with the federal Davis-Bacon Act. These changes are in the interest of taxpayers and will not affect the quality of work. They will save tax dollars at a time when California's infrastructure needs are great while state and local governments face limited resources to meet these needs. These reasonable prevailing wage reforms will help us to make our tax dollars stretch further while still maintaining a prevailing wage in accordance with national standards."
Cal-Tax President Larry McCarthy said this reform proposal "would be a tremendous boost for programs to maintain and improve California's infrastructure of highways, bridges, schools and other public works. California ranks 48th or 49th among the 50 states in its commitment to build needed infrastructure, and these reforms would enable the state to stretch its tax dollars.
"Hundreds of millions of dollars a year are wasted in bloated pay scales. This is bad enough and should not be tolerated even when state and local governments run revenue surpluses. It is extremely poor judgment in these tough fiscal times," McCarthy said.
"California's archaic prevailing wage requirements put us at a competitive disadvantage with other states where taxpayers are getting more bang for their buck," he said.
Goldsmith, former mayor of Poway in San Diego County, said local government leaders are aware of how California's prevailing wage boosts the costs of public works projects. "The governor's action will improve our ability to build roads, schools, libraries, parks and virtually all public projects at a fair price," he said.
A 4-4 deadlock in the Assembly policy committee this year forced Goldsmith to make AB 138 a two-year bill.
Robert Balgenorth, president of the State Building and Construction Trades Council, said labor unions and Republican legislators had been negotiating a compromise. He said the governor was motivated to act unilaterally to regain credibility lost in his failed bid for the presidency.
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The Antioch City Council on October 17 unanimously rescinded a 1.9% utility user tax, which had been enacted without voter approval last July to raise $1.6 million a year for additional police officers. City Finance Director John Tasker said the council probably will seek voter approval in March on a parcel tax or a utility user tax to provide the revenue.
Meanwhile, in Walnut Creek, voters next March will decide whether the city's hotel-motel tax will be increased from 8.5% to 10% and raise $135,000 a year. A 4-1 council vote recognized that they could not proceed with plans to boost the tax by adopting an ordinance because of the high court's revival of the 1986 ballot initiative requiring a majority vote on general taxes. The decision also upheld the two-thirds vote requirement for special taxes.
In Los Gatos, the town manager, town attorney and assistant town manager decided to yank a 2% utility user tax ordinance before it could take effect. The 90-day wait for their ordinance to become operative was just about over when the officials acted. The discussion now is whether to put the question before voters next March, said Marian Cosgrove, clerk of the 27,446-population town in Santa Clara County.
Earlier, the Butte County Board of Supervisors decided to ask voters next March to validate a 5% utility tax that had been imposed in 1991 without voter approval.
In Antioch, Tasker said the city also has business license and transient occupancy taxes that were enacted without voter approval. He said in an October 19 interview that he did not expect the council to act on its own and rescind these other taxes. On these particular levies, he said the council has taken a "let-'em-sue" attitude.
Meanwhile, the state high court gave itself more time to consider a petition for rehearing the decision in Santa Clara County Local Transportation Authority v. Guardino. The decision otherwise was to become final on October 28.
Hundreds of taxes imposed without voter approval, most often utility user, business license and transient occupancy (hotel-motel) levies, are in jeopardy as a result of the court ruling.
Jonathan Coupal, legal director for the Howard Jarvis Taxpayers Association (HJTA), proponent of Proposition 62 (which was to plug holes punched by the courts in the Jarvis-Gann initiative, Proposition 13 of 1978), said he planned more litigation. He said he intends to file lawsuits in San Jose and Sacramento to clarify how the Santa Clara case impacts charter cities. The decision clearly applies to general law cities, such as Los Gatos, Antioch, and Walnut Creek. However, charter cities have more freedom to levy taxes.
The HJTA also took out ads in 21 newspapers publicizing the court victory and urging support for a November 1996 ballot initiative effort designed to make it more difficult to impose property-related fees and assessments.
"Despite my belief in their importance, law enforcement activities do not meet the standard for a benefit assessment," the governor said in his October 16 veto message on SB 1247, by Senator Mike Thompson. The governor concurred with Cal-Tax's opposition to the measure that it would be an improper use of benefit assessments if those being assessed cannot be shown to benefit above and beyond the benefit to other, non-assessed properties.
Law enforcement is a broad, community-wide benefit that makes it impossible to demonstrate the required special benefit to property owners, the governor noted. He added that benefit assessments typically provide physical improvements such as streets, sidewalks, lighting and parks on, near, or in the neighborhood of the assessed property.
"This distinction between a special benefit, which is appropriately financed by assessments, and a general or community-wide benefit, is the critical test that this bill, despite its excellent purpose, cannot meet," Wilson said.
The governor noted that he has supported expanded local revenue authority for voter-approved tax increases for law enforcement services and that he supports mandate relief for local governments so funds can be redirected to public safety services. He added that he called a special election in 1993 so voters could act on a half-cent sales tax for local public safety purposes.
Wilson added that he intends "to offer an alternative means of providing a needed increase in resources for police protection in the coming legislative session."
The governor also vetoed AB 1830, by Assemblywoman Kerry Mazzoni, a bill that would have allowed the Marin County Regional Park and Open Space District to levy assessments under the Landscaping and Lighting Act. The governor said he vetoed the bill because, unlike other bills he has signed to allow creation of open-space districts, this measure sought to further codify the district's ability to levy assessments without voter approval.
"Moreover," the governor wrote in his veto message, "this bill provides that if the voters approve the assessment district, then any subsequent assessments levied by the district are considered to have been levied with the voters' approval. It would be inappropriate to assume that the electorate has approved any future assessments by virtue of approving the establishment of a district."
The governor signed two bills that grant local governments more taxing power - if two-thirds of voters concur. One bill, SB 717 by Thompson, authorizes the Fort Bragg City Council to levy a 0.25 percent or 0.5 percent sales tax until the year 2002. The bill also allows the San Joaquin County Board of Supervisors to levy a tax rate of 0.125 percent for up to 10 years for library services.
The second bill, Senator Tim Leslie's SB 1105, authorizes the Truckee City Council to levy a sales tax of 0.5 percent to finance maintenance and construction of city streets and roads.
Connell reported on October 16 that the state will have $1.4 billion available in borrowable reserves at the end of this fiscal year next June 30. In 1994, when the state borrowed unprecedented amounts with a two-year payback plan, lending institutions required a budget "trigger" to protect their investments. This required the controller, based on data from the legislative analyst and other sources, to determine whether the state could make ends meet.
A declaration from the controller that the state has insufficient resources would not have dictated spending cuts, but it would have set in motion a process that could have resulted in them. The governor would have to propose a plan, acceptable to the Legislature, to close the budget gap by December 1 with spending cuts, new revenues, or both. Failing that, the governor's director of finance would execute across-the-board spending reductions in all programs except constitutionally protected school funding and debt service.
Connell reported that the state's general fund cash position had improved largely due to the U.S. Supreme Court's 1994 Barclays decision that favored the state and resulted in back taxes from multinational corporations doing business in California. The timing of this decision, "not good budget planning," had more to do with the state's current fiscal outlook, she told reporters.
Almost half the $2.68 billion revenue gain from July 1, 1994 through June 30, 1995 was from bank and corporation taxes, with B&C revenues rising sharply last spring as a result of the Barclays case. This enabled the state to begin the fiscal year July 1 in surprisingly good shape, the controller reported.
She noted that her estimate of a $1.4 billion cushion is about $500 million below the governor's budget projection. In either case, the trigger mechanism would not be needed, she added. The difference comes from predictions of fewer federal dollars for health and welfare programs and for the incarceration of felons who are illegal immigrants, as well as the controller's more conservative outlook for economic growth.
She said it is "difficult to foresee" more than "modest" economic growth. The controller, for example, sees 1.9% growth in employment, compared to the Department of Finance's 2.2% figure.
Connell said the Department of Finance projection of an 8.2% increase in personal income tax revenues is "most optimistic," particularly when the top tax bracket will fall from 11% to 9.3% in January.
Thus, the controller's estimates of tax revenues for the current fiscal year are at least $100 million below budget assumptions, the "October Trigger Report" concluded.
Governor Pete Wilson's Department of Finance was "very pleased" by the announcement, stressing that the governor had noted last summer, when the budget was approved, that there would be sufficient cash on hand and the trigger would not be needed, said H.D. Palmer, assistant finance director.
Palmer also noted that fiscal year-to-date revenues were $525 million above the budget forecast and are due to strength of the bank-and-corporation tax - $193 million above the September forecast and a three-month gain of $154 million.
The Republican governor, the Los Angeles Times reported on October 19, is preparing to launch a "high-profile campaign to dramatically shrink the size of state government." The San Francisco Chronicle reported that the administration's approach to contracting out could include such agencies as the Department of Motor Vehicles and the state park system.
The governor is expected to highlight efforts to provide services more efficiently by the private sector or another public agency when he delivers his annual State of the State address in January. He has asked cabinet secretaries and department directors to provide recommendations by March.
George Dunn, the governor's deputy chief of staff, wrote a memo for the governor to administration leaders which said: "Permitting more cost and quality competition among public and private sector bidders serves the governor's goal of an efficient and business-like government. These tasks ... are critical prerequisites of a rational process to reshape state government to emphasize functions in which the state has a core competence. This kind of strategic focus is critical in an era of very limited resources."
The project is being coordinated by Wilson's deputy cabinet secretary, Phil Romero, who told The Times that it is an unprecedented, bottom-up review of the state's functions. "If you are not very good in one of your lines of business ... and if there is no compelling, overarching reason to stay in the line of business, then why stay in the business?" he asked.
The Times quoted an unnamed Wilson aide as estimating that the governor could propose a shift of between one-quarter and one-half of the state's responsibilities. Meanwhile, a high-ranking Wilson official told the Sacramento Bee that the internal review has no specific target for the amount of services that should be privatized.
Cal-Tax President Larry McCarthy applauded the governor's plan.
"This may be the single most effective measure the governor could take to improve cost and performance of public service in California," McCarthy said. "Change is long overdue. Other states are moving quickly toward competitive service delivery with the cooperation of their legislatures.
"This does not mean that everything government does is bad and everything the private sector does is good," McCarthy continued. "The goal of competitive serv-ice delivery, with public and private sectors bidding for contracts, is to improve quality of services for Californians at reduced costs."
Cal-Tax's "Plan for Stabilizing California Public Finance" projected last March that the state could save as much as $1.6 billion from competitive service delivery. Privatization studies indicate savings ranging from 10% to 40% from contracting out. The California State Personnel Board found that 68 state contracts in 1989-90, involving $27 million, averaged 44% in savings to taxpayers.
California's budget includes about $16 billion in state operations costs. If competitive service delivery were to affect only 25% of state operations, and savings of 10% to 40% were achieved, ongoing state cost reductions would range from $400 million to $1.6 billion.
The governor may have to seek a constitutional amendment, requiring voter approval, to deal with a 1934 amendment to the Constitution that requires public employees perform government duties. The Legislature in 1982 passed a bill allowing some privatization exceptions, but state law remains strongly biased against contracting out by requiring that the private sector, for example, perform a task 30% cheaper than state employees.
Wilson may propose a ballot initiative if the Legislature, particularly the Democrat-controlled Senate, continues to block efforts to put a constitutional amendment on the November 1996 ballot that would ban prohibitions on privatization, according to The Times.
Romero, in The Times report, said at least half of the state's activities could be done at least 30% cheaper by the private sector. He said he expects there will be some layoffs from the state's 267,400-person work force, though a significant number might be hired by the private sector company that wins the right to do the work, or they might organize their own company and bid for the job.
Opposition was voiced by public employee union officials. "Just on its face value, it doesn't follow that government services are going to be better or cheaper by wholesale privatization," Chris Voight, a spokesman for three unions representing attorneys, scientists and engineers, told The Bee. Yolanda Solari, president of the California State Employees' Association, said, "Privatization is not a miracle cure. It was one of the causes of corruption that motivated CSEA to press the state to pass civil service reforms in the 1930s."
The lien date is when property is valued for tax purposes. State-assessed property has had a January 1 lien date since 1987.
Senate Bill 327 eliminates the need for special accounting and auditing steps that businesses and county assessors use to comply with the arbitrary date of March 1. They are preparing information that is time-consuming and has no other use, said Senator Tom Campbell, the bill's author.
"This is a win-win for everyone," said Campbell. "Moving the lien date helps taxpaying businesses, particularly small businesses. Moving the lien date also benefits taxpayers generally by reducing the costs of audits and improving revenue collections by county assessors."
Other tax-related bills recently signed by the governor include:
Assemblyman Steven Kuykendall said his bill "gives businesses the same protection as other taxpayers, and the EDD's role in enforcing payroll compliance will be dramatically improved."
Under one proposal, the district would assess single-family homes about $8 a year, with multifamily and commercial parcels assessed more than $30 annually. This would be done under the state's 1972 Landscaping and Lighting Act, which provides for property assessments without voter approval.
It would be the first use of this law by a community college district.
A 4-2 vote of trustees on October 25 was considered the first step by the district to seek a tax in the massive, 882-square-mile district to raise money for extra classrooms and refurbish the district's nine campuses that are used by 97,200 students. About 45 percent of all the properties in Los Angeles County are within the largest community college system in the United States.
Trustee Lindsay Conner opposed the vote to conduct the survey, as critics argued that bypassing voters to impose a tax on property would violate the spirit of Proposition 13, which was approved by voters in 1978 to limit property taxes and prevent their increase without voter approval.
However, Board President David Lopez-Lee, author of the proposal, said, "This is a defining moment. Take a gut stand. Do the right thing."
Under the plan, the district would use the revenue to market bonds that would pay for upgrades of campus facilities, mostly parking, landscaping and recreational projects that backers say would be eligible under the law.
The California Supreme Court ruled in 1992 (Knox v. Orland) that Landscaping and Lighting Act assessments are exempt from Proposition 13's constitutional provisions that require two-thirds voter approval for taxes raised for specific, or special, purposes. The Los Angeles district failed to gain two-thirds voter approval for a $200 million facilities bond measure in 1991.
According to a staff analysis, the wine industry buys about 40,000 oak barrels a year, at a cost of $600 each, for a total annual industry expense of $24 million. The useful life of the barrels to impart flavor to wine is about two years.
The exemption would recognize that these barrels are property used in manufacturing wine.
The teachers union's 660-member governing body reached the decision last month at a meeting in San Francisco. It was decided that there was not enough time to mount a successful petition campaign for the November 1996 general election ballot.
The initiative would raise about $3 billion a year for public schools and universities. According to a report in the Los Angeles Times, the measure would give parents and teachers power to decide how the additional revenue is spent. It also would require schools to report how they are spending their budgets. They also must report their students' academic progress.
This measure would be an alternative to a potential voucher initiative on the ballot in 1998. The CTA spent $12.4 million to defeat a voucher initiative in 1993 and proponents of that measure have said they will try again in 1998.
Frank Graham-Caso, a government teacher at San Diego's Mira Mesa High School, was quoted in The Times as saying the CTA lacked an alternative to the 1993 voucher initiative. "If there is a voucher (initiative in 1998), people will have some clear choices and ... will see the wisdom of what we are proposing."
The CTA is financing the campaign by collecting $19 each from its 240,000 members.
California moved up from its rock-bottom management ranking as judged by Financial World magazine, gaining a C- grade. The new ranking, 42nd, compares to 50th in 1993, the magazine reported in its September 26 issue.
The report noted that while external borrowing reached a $7 billion high in 1995, the state will have retired its accumulated deficit buy the end of the current fiscal year and reduced cash-flow borrowing from $3 billion to $2 billion. The state budget, while 34 days late last summer, "emerged as a realistic document that should keep the state out of trouble," the magazine reported.
The state also received a C- for managing for results and a C+ for infrastructure maintenance.
According to a summary by the legislative analyst and the director of the state Department of Finance, the initiative would reduce revenues by about $20 billion a year for counties, cities, schools, special districts and redevelopment agencies. It would increase state costs by about $10 billion annually to replace losses to public schools.
Elimination of property tax relief programs would save about $400 million annually, and state revenue gain of about $1.2 billion annually would result for higher personal income and business taxes due to the elimination of deductions for property taxes.
State and local administrative savings from the elimination of the property tax program probably amount to several hundred million dollars annually, according to the summary.
The one-sided discussion on October 24 at the state Capitol brought heavy criticism of the flat tax concept - one rate of income taxation - from the municipal bond and real estate industries.
There was no representative of those pushing flat tax measures at the federal or state levels. Economist Arthur Laffer, a leading proponent of a planned flat tax ballot initiative in California, was scheduled to be represented at the hearing, but was not. Also, Assemblyman Howard Kaloogian, author of ACA 29, the legislative version of the Laffer proposal, did not attend.
Committee Chair Juanita McDonald said former Congressman Jack Kemp, chair of a task force appointed by U.S. Senate Majority Leader Bob Dole and House Speaker Newt Gingrich to recommend changes in the federal tax system, had been invited but could not attend. She said she hoped Kemp would attend a special joint Senate-Assembly hearing that she will propose to legislative leaders. This hearing, to focus on the flat tax issue, would be held early in 1996.
Mark Harris, managing director of PaineWebber, testified that flat tax proposals would adversely affect municipal bond market tax incentives, particularly if the Legislature is allowed to set rates every year. This would cause uncertainty and "a lot of firms, mine included, would think about remaining in the municipal bond market in California," he said. The availability of bond funding for capital improvements in various communities would be affected, he added.
Representatives of the California Association of Realtors testified that the flat tax without a mortgage interest deduction would have a devastating effect. They said there would be an instant decline of more than 20% in residential property values.
Jon David Vasche, director of economics and fiscal forecasting for the Legislative Analyst's Office, opened the hearing with a discussion of the state's tax structure and the stability of revenue sources.
He noted that California's taxable sales as a percent of personal income have declined dramatically in recent decades, resulting in inequities with taxed commodities disadvantaged relative to untaxed services. If California taxed services that were taxed in at least 20 other states in 1995-96, such as repair labor, landscaping services, janitorial services, custom computer programs, and coin-operated amusement machines, the total state-local revenue impact would exceed $2 billion a year.
McDonald predicted that there would be legislation introduced next year to tax types of services. Assemblyman Jim Cunneen, a committee member, questioned why attorney fees were not on Vasche's list, and was told that the list was limited to services taxed in at least 20 states.
Cunneen, who said he wanted to keep an open mind on the flat tax, said California is a "high-tax state" when the property tax is separated out, and he stressed that local governments have replaced much of what they lost from property tax-cutting Proposition 13 by imposing various fees and assessments.
Vasche said there are a number of ways to measure tax burden. As a percentage of personal income, he said, California is somewhere in the middle of the pack of states. Using per capita taxes, California ranks in the top 10, he noted.
California's highly progressive personal income tax structure causes the top 10% of income earners to pay 60% of the tax, he said. Even without the 10% and 11% brackets, which expire January 1, "we have a highly progressive system," Vasche said.
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call (916) 441-0490.California Taxpayers' Association:
ANTHONY L. SMITH First Vice Chair
LARRY McCARTHY President
REBECCA K. TAYLOR Senior Vice President
CAROL ROSS EVANS Vice President
DAVID R. DOERR Chief Tax Consultant
STEPHEN J. KROES Director of Research
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RON ROACH Editor