Report 99142 Summary - April 2000

The State-County Property Tax Administration Program:

The State and the Counties Continue to Benefit, but the Department of Finance Needs to Improve Its Oversight

RESULTS IN BRIEF

In 1995, the Legislature created the State-County Property Tax Administration Program (program), which allows county assessors to contract with the Department of Finance (department) to receive performance-based loans. The legislation responded to the financial straits of county assessors, who were facing substantial work backlogs created by major budget reductions. County assessors use the state loans to finance various local property tax administration activities, such as processing backlogs of assessment appeals, searching for unassessed property, or enhancing computer systems. The department considers the loans repaid if the assessors complete the additional workloads their loan agreements specify. The Legislature is deliberating whether it should continue the program, which is scheduled to end in fiscal year 2000-01.

Continuing the program makes good business sense. Although department oversight has been weak, the program continues to generate a significant amount of new property tax revenues that benefit the State and the counties. For the most current completed loan year, the 47 counties participating in the program reported that $50.9 million in state-funded loans generated more than $590 million in new property tax revenues. Although this average rate of return of almost $12 for every dollar loaned was overstated, the program still provides a positive return to the State, counties, cities, special districts, and redevelopment agencies. Also, the program is financially successful in times of recession as well as prosperity because counties have the discretion to use loan money for whatever property tax work produces the most revenue at a given time. In addition, assessors are still reporting backlogs, which suggests a continued reliance on loans from the State. All but 1 of the 47 participating counties reported backlogs of property tax work at the end of the most current completed loan year. Finally, the program provides a much-needed infusion of funds that strengthens the local property tax administration system.

Although we believe the program should continue, we found that the department makes loans to counties based on insufficient and unverified information and does not have enough data to evaluate the program's success. In addition, the department has allowed counties to carry over unused funds without requiring them to explain how and when they plan to use the funds. As a result, the department could be making loans that are larger than necessary. Further, the department has less assurance that program funds ultimately will be spent on property tax administration. The information gap has resulted primarily because the department has not required adequate county reporting.

Finally, the Legislature recently required the Legislative Analyst's Office to develop alternatives for restructuring the property tax allocation system. If the Legislature makes significant changes to the property tax allocation system, the need for the program should be re-evaluated.

RECOMMENDATIONS

To ensure additional growth in property tax revenues that benefit local governments and the State, the Legislature should continue the State-County Property Tax Administration Program.

If the Legislature continues the program, the department should improve its oversight by requiring that counties do the following:

  • Use a standard process for reporting additional workloads, revenues, and expenditures related to loan funds, and for showing that the county has contributed an appropriate amount of its own resources for property tax administration.

  • Specify in the loan agreements how the counties will calculate additional workloads, revenues, and expenditures related to loan funds and how they will demonstrate that an appropriate level of county resources was used for property tax administration.
To ensure that the counties use loan funds only for property tax administration and that reported revenues are attributable to loan funds actually spent, the department should require counties to do the following:
  • Explain how they plan to use any loan funds remaining from the previous years, along with any funds they request for the current year.

  • Report the actual amount of loan funds they spent during the loan period.

  • Calculate additional revenues generated by the loan funds actually used.
Finally, to ensure that the department is receiving accurate information from the counties, the department should require each county auditor to validate county reports on the following:
  • Additional workloads, revenues, and expenditures resulting from loan funds, as well as the county's method of calculating the additional revenues.

  • The amount of county revenue spent on property tax administration.

  • The amount of unused loan funds from prior years and how the county used those funds.
AGENCY COMMENTS

The department generally concurred with our recommendations. It acknowledged that if the program is continued, it should improve its oversight of the program and require a more standardized reporting format by the counties. The department also indicated that if the program sunsets at the end of fiscal year 2000-01, as provided in current law, it will consider implementing the recommendations to the extent feasible throughout the remainder of the current program.


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