Arguments against Prop. 13 dubious, says local group

All sorts of questionable claims regarding Proposition 13 are hitting the street, as a proposed ballot measure aims to undermine the landmark tax relief law. Pat Waite, president of Citizens for Fiscal Responsibility, provides perspective.

Opportunity Now: There is a lot of media noise about Proposition 13 and whether or not it's working as it should. What's going on?

Pat Waite: A move is afoot to begin dismantling California’s landmark 1978 Proposition 13 property tax limitation bill. A proposed ballot measure, innocuously titled “Schools and Community First” would remove Prop 13 caps on assessed property value for commercial and industrial properties. Assessors would update the valuation of such properties annually, “reclaiming” (Editor's Note: that's the measure's proponents' language) an estimated $12 billion in taxes that the initiative’s supporters claim are being avoided by California businesses through Prop 13 “loopholes.” (Editor's note: ditto)

These proponents claim that Prop 13 was pitched to voters as necessary to keep “grandma in her house,” but it was actually a nefarious plot by businesses to beef up their bottom lines and deprive government coffers of revenue. In backers’ minds, making businesses pay their “fair” (Editor's note: ditto) share of property taxes justifies modifying Prop 13.

ON: So what do you make of those claims?

PW: The concept that businesses are not paying their fair share of property taxes is a fabrication. An analysis published by California’s nonpartisan Legislative Analyst’s Office, “Common Claims about Proposition 13,”  debunks the assertion that Prop 13 somehow provided a benefit unique to businesses with respect to property taxes. Homeowners, the report notes, paid about 34% of total property taxes in 1979-80, rising to 37% by 2015-16, an increase the LAO attributes to a “faster growth in the number of residential properties than the number of commercial and industrial properties.” The fact of the matter is that Prop 13 allows all property owners to avoid property taxes, that benefit is not unique to businesses. But businesses don’t vote, so initiative supporters paint them as bad actors cheating government and society whenever possible.

ON: Why do we need a $12 billion tax increase? Sacramento is flush with tax money with a $222 billion dollar budget that includes a $7 billion surplus as well as significant rainy-day funds. Why more, why now?

PW: It is important to understand the driving force behind the “Schools and Community First Initiative.” We need only recall the City of San Jose’s experience between 2008 and 2016 to suss out the answer…pension costs.

Allow me to refresh your memory (if you are from San Jose) or to educate you on the matter (if you are not). San Jose runs its own independent pension plans. In 2008 Mayor Chuck Reed sounded the alarm over an unfunded pension liability of $1 billion. The city responded by increasing its annual payments to the pension funds to close this gap; General Fund pension payments ballooned from around $75 million annually to over $400 million, with roughly 20% fewer employees. Combined with the recession-induced reduction in tax revenue, this created massive budget shortfalls that the City Council addressed by cutting services, deferring maintenance, and even taking the draconian step of laying off public safety employees. The City frantically sought additional tax dollars to fill the hole created by increased pension payments, asking voters several time for tax increases that ultimately totaled about $90 million annually.

ON: What did we learn from San Jose's experience?

PW: Not much. San Jose was the canary in the coal mine, but surrounding municipalities, and the state overall, paid little heed. They were relying on the sage management of California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to avoid similar fates. There was one small problem…the pension funds were “misrepresenting” their ability to fulfill the pension promises being made to the employees of participating municipalities. The actual cost of providing lifetime employee pensions was significantly higher than what was being collected. Today, both pension systems are grossly underfunded, CalPERS to the tune of almost $140 billion and CalSTRS $107 billion. The jig is up, and the time has come to pay the piper. Local governments are desperately searching for incremental tax dollars to avoid the same fate that San Jose suffered a decade ago, because they know how that story ends.

Take, for example, my local Evergreen Elementary School District (ESD). In addition to facing a demographically driven enrollment decline, the growing costs of pension, health care and other benefits is squeezing the district’s budget. Before the Great Recession ESD’s total benefit costs ran about 30% of salaries. Ten years later that number had risen to 50%, and is projected to continue rising, crossing 60% in 2021-22. The dollar cost of benefits will have risen by 110% while salaries will have grown by less than 7%. They have cut bussing and programs to stay afloat, and are now closing schools. Multiply that impact by 1037 (the number of California school districts according to the California Department of Education), add in the 540 city and county governments, not to mention the over 3,000 special districts and you begin to understand the growing desperation for gutting Proposition 13.

ON: Why can't the state reduce costs instead of  just perpetually seeking more tax revenue?

PW: In California, it is nigh onto impossible to reduce public employee pensions, even those pension benefits not yet earned. Today, the only way to address the unfunded pension liability is by either paying more money into the pension funds or by generating significantly higher investment returns on the assets currently in those funds. Yet we approach the end of an historically long bull market in equities. The inevitable downturn will significantly increase the unfunded pension liabilities. When that day comes, and it will, the $12 billion “reclaimed” by moving commercial and industrial properties off Prop 13 will prove woefully inadequate. What will prevent government from then reclaim taxes being avoided by homeowners by their “loopholes” to make sure that all property owners pay their “fair” share?

Read more from Citizens for Fiscal Responsibility.

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