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tripleflippro

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									 MMC Policy Update
 Budget “triple flip” update

  M M C              CALIFORNIA
                                                                      August 1, 2003


                                                                      WWW.MUNISERVICES.COM




The following was prepared to assist clients with an understanding of how the proposed tax swap included
in the 2003-04 State Budget trailer bill AB 1766 will impact local sales tax revenues and future economic
development decisions. The League and other industry representatives will meet to begin discussing
refining the statutes related to the concerns local governments have already raised. MMC will be involved
in this effort. Budget staff has indicated its commitment to review local governments concerns particularly
those related to the entire process in August. The League prepared an analysis of bills that include
provisions that impact local governments. Refer to the League’s website at www.cacities.org for the
complete analysis. Clients with specific comments should contact Fran Mancia, Director of Government
Relations at 800-800-8181 (extension 5013) or fran.mancia@muniservices.com.

AB 7X and AB 1766 – Triple Flip Provisions

AB 7X, the California Fiscal Recovery Financing Act, establishes the mechanisms through which the state
will be able to fund the accumulated budget deficit. It details the parameters under which the bonds can be
sold and creates the California Fiscal Recovery Fund as the special fund dedicated to repaying the deficit
bonds, with all associated details.

How we understand AB 1766 to work

AB 1766 fully defines the ½ cent Bradley-Burns sales tax for property tax “triple flip” which becomes
effective in the 2004-05 fiscal year. In sum, the “triple flip” will work as follows:

1. On August 15 of each year that the “triple flip” is in effect, the Director of Finance (DOF) will provide
State Board of Equalization (BOE) revenue estimates to counties (and hopefully cities). These estimates
are to be based on the prior fiscal year and will project the loss for the current fiscal year as of August 15.

2. On September 1, the DOF notifies the county auditor of the portion of the "countywide adjustment
amount" to be allocated for each city and county.

3. In January and May (date not specific) the county auditor allocates, one-half in each period, of the
amount identified on September 1 to cities and counties.

4. At the end of the fiscal year (no date specified) for which an adjustment amount was determined, DOF
recalculates adjustment amounts based on actuals and notifies the county auditor of the recalculated
amount. The BOE will have this information available in September following the fiscal year ending.

5. In the fiscal year following the year in which a recalculation was made (no date specified) the county
auditor shall allocate the excess amount, or for overpaid amounts, transfer it back to ERAF. Funds will
become available for this by January after the fiscal year ends.

Timing issues and cash flow concerns

There is a heightened concern about the potential cash-flow problems that might occur locally because
Sales and Use Tax (SUT) revenues are allocated monthly and property tax revenues are allocated twice a
year. Generally, local jurisdictions get about one-twelfth of their SUT each month (ignoring month-to-
month seasonal variations). The property tax /ERAF backfill will be calculated for each jurisdiction on the
basis of their prior year actual SUT receipts. The result will be that property tax /ERAF equal to 6/12ths
of the prior year actual SUT will go out in January. Under current law, jurisdictions would have gotten
7/12ths of actual SUT up to that point. In May, the property tax/ERAF equal to the remaining 6/12ths
prior year actual SUT will be allocated.

Under current law, locals would have received 4/12ths more of their SUT by that point. At the end of
each fiscal year, there will be a jurisdiction-by-jurisdiction reconciliation (settle-up) of property tax/ERAF
received versus actual SUT received, and overages and underages will be eliminated. Month-to-month
seasonal differences in SUT receipts could either mitigate or aggravate the cash flow differentials between
the two revenue sources. The details of the aforementioned payment plan are likely to be refined.

The following table demonstrates the financial impact of the timing deferential for jurisdictions receiving
$120,000 in “backfill” in fiscal year 2004-05.


                                                            Backfill
                 SUT      SUT Discounted     Backfill
                                                           Discounted
               Payments     Payments        Payments
                                                           Payments
  07 - 2004    9,000.00     9,000.00                              -
  08 - 2004    9,000.00     8,955.00                              -
  09 - 2004    9,000.00     8,909.78                              -
  10 - 2004    9,000.00     8,864.32                              -
  11 - 2004    9,000.00     8,818.65                              -
  12 - 2004   12,000.00     11,696.98                             -
  01 - 2005    9,000.00     8,726.60       54,000.00       52,359.61
  02 - 2005    9,000.00     8,680.24                              -
  03 - 2005   12,000.00     11,511.52                             -
  04 - 2005    9,000.00     8,586.80                              -
  05 - 2005    9,000.00     8,539.74       54,000.00       51,238.43
  06 - 2005   12,000.00     11,323.25                             -
  07 - 2005                       -                               -
  08 - 2005                       -                               -
  09 - 2005    3,000.00      2783.04                              -
  10 - 2005                       -                               -
  11 - 2005                       -                               -
  12 - 2005                       -                               -
  01 - 2006                       -        12,000.00        10,872.85


Value as of
 7/1/04                   116,395.91                       114,470.90
Value loss based on a 90% estimate and a
                                            (1,925.01)
        6% cost of 7/1/04 funds
    Other issues

    In addition to making sure that local government concerns regarding the timing of payments are addressed
    attention will be given to the aspects of verification and documentation to ensure that local governments
    receive all revenues to which each jurisdiction is entitled. There was language included in AB 1766 to
    account for specific situations that have been questioned. First, language was included to ensure that the
    transfer of property tax is not construed to increase ad valorem property tax revenue allocation to a
    community redevelopment agency (see Section 1 subdivision (f)(2) for details). Second, there is specific
    language that is intended to “hold harmless” the existing tax sharing agreements (refer to Section 2 of AB
    1766).

SOURCES

MMC utilized the following sources in the preparation of this publication:

California Legislature (www.leginfo.ca.gov)
League of California Cities (www.cacities.org)
Senator Brulte’s office (www.senate.ca.gov.)

								
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