State proposal would drain $145M from Santa Clara County’s general fund

Santa Clara County officials said that a proposed amendment in a state bill would strip the county’s general fund of about $145 million annually, draining its budget for homeless services, supportive housing and child care among many programs if the proposal passes.

“It’s the county’s core services that are most in jeopardy so we must and will find ways to pay for them,” Supervisor Susan Ellenberg said. “The big question really will be what we do not fund in order to preserve these critical services.”

The state Department of Finance proposed an amendment to an education bill which would impose civil penalties on counties if their calculations for the Educational Revenue Augmentation Fund failed to comply with the law. The amendment would also apply retroactively to 2019.

The fund is comprised of local property tax revenues for schools districts. The districts would still receive the same amount of funding whether or not lawmakers pass the amendment, according to the county’s Finance Agency.

The question lies in whether the county or the state would be responsible for paying nearly $190 million every year — according to an estimate by the Department of Finance provided to the county’s Finance Agency — for schools under the Department of Finance’s new guidelines.

Deputy director of the state Department of Finance H.D. Palmer said Santa Clara County is among five counties that have been improperly reporting the number of students enrolled in schools.

“As a result, Santa Clara and other counties decided to take additional property tax that should have gone to schools and committed it to other purposes,” Palmer said. “We are correcting that and making sure that these five counties now pay their fair share.”

But officials in the county denounced the department’s findings. The state Controller’s Office had already audited the county without reporting any issues with its Educational Revenue Augmentation Fund, according to Alan Minato, the director of Santa Clara County’s Finance Agency. He said it is “mind boggling” that a different agency is taking issue with the county’s methods.

“The assertion by the Department of Finance that there has been some misappropriation is just absolute fantasy … they’re just basically making up facts in order to justify taking over the responsibility of the (state) controller,” County Executive Jeff Smith said.

Ellenberg said oversight of the county’s property taxes should remain with the state Controller’s Office as mandated by the government code.

“We’re not asking to be free from oversight. We’re simply asking that the current mandated structure remain in place with the allowance of counties to directly make decisions that are best for our own communities …” Ellenberg said. “Shifting oversight to the Department of Finance, which is an office led by an appointee of the governor, would appear to provide a less neutral form of oversight and a potential conflict of interest.”

In the late 80’s, California enacted Proposition 98 which requires a minimum percentage of the state budget to be spent on education. To reduce some of its state general fund spending on schools, the state Legislature later established the Educational Revenue Augmentation Fund in every county, shifting some of its responsibilities to local government.

The county deposits property tax revenues to its fund, supporting schools and community college districts. After meeting the mandated requirement to fund schools and paying the county’s special education programs, the county returns remaining funds to cities, special districts and the general fund, where it spends the excess money for an array of programs and services.

“We invested in cold weather shelters, fighting domestic violence (and) human trafficking, homelessness prevention, rapid rehousing for people so they didn’t become homeless, permanent supportive housing … It’s local revenue that we’re using to help the neediest people in our communities,” Supervisor Cindy Chavez said, who will hold a news conference Monday opposing the proposed amendment.

Loss in general fund dollars would spell even bigger trouble for nonprofit organizations in the county, according to Kyra Kazantzis, chief executive officer of the advocacy group Silicon Valley Council of Nonprofits.

Nonprofits are already struggling during the coronavirus pandemic as fundraising events have been canceled, Kazantzis said, and while philanthropic organizations have stepped up, it’s not enough to fill the gap.

“We’re looking at another huge hit from another source of funding which is county general fund dollars,” Kazantzis said. “Not only is it going to reduce those critical safety net services, but it actually could cause a number of very important nonprofit services, programs and entities to completely collapse.”

Meanwhile, Palmer disputed criticisms that the Department of Finance is attempting to fill the state’s budget shortfall from the pandemic.

“This was an accounting issue that was brought to the attention of Santa Clara and other counties earlier this year in January, prior to the onset of the COVID-19 recession and the subsequent budget shortfall,” Palmer said.

But Minato said the department’s new guidelines and proposed amendment came out of left field. And Smith added that the state should be shouldering its obligation to Proposition 98.

“Instead of the state taking responsibility, they’re trying to push it onto counties, which would mean that the counties would be subsidizing the state general fund …” Smith said. “They’re playing a three-card monte.”

Contact Nicholas Chan at [email protected] or follow @nicholaschanhk on Twitter.