Some might consider it a prenuptial agreement. To others it’s alimony. Either way, Goleta’s revenue-neutrality agreement with Santa Barbara County is complex, and it’s the focus of a simmering custody battle between the two governments.
Goleta currently gives the county half of its sales and property taxes and 40 percent of its bed taxes. That’s the first part of the agreement, which was executed as a condition of the city’s incorporation in 2002.
Beginning in 2012, however, the city will keep 100 percent of the bed tax and 20 percent of the sales tax it was sharing with the county. But that formula will leave half of Goleta’s property taxes and 30 percent of its sales tax going to the county, in perpetuity.
Sound complicated? It is.
It wasn’t always this way. Before 1992, there were about four incorporations each year in California, due at least in part to the state’s growing population. But when Citrus Heights made its move to incorporate in the late 1980s, Sacramento County objected, because of the revenue it would lose as a result. Property taxes, sales taxes, bed taxes and other revenue in the incorporated area would go to the new city instead.
The early ‘90s were also financially sketchy for California counties as the state had taken to dipping into county coffers to make up for its budget deficits.
Those circumstances led to the creation of revenue neutrality, a 1992 policy by which incorporating cities must strike a deal with their county to mitigate the loss of revenue as a result of the incorporation, if the city generated more revenue than the county would save in transferring the cost of services to the new city. Since the creation of revenue neutrality, the rate of incorporation has dropped sharply, due in part to what could sometimes be onerous terms on the fledgling cities. Nevertheless, the revenue-neutrality agreement is required and must be signed by both principal parties for an incorporation to take place.
Not all revenue-neutrality agreements are the same. The 1992 legislation, now part of the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000, was unclear about the specifics of revenue neutrality, and untested by case law. As a result, revenue-neutrality agreements executed by the few cities that incorporated after 1992 tend to have varying terms.
That’s the situation Santa Barbara County and the prospective city of Goleta were facing in 2001.
County finances were tight that year.
“The revenue loss (from Goleta incorporation) was one of our big concerns,” then-2nd District Supervisor Susan Rose said of the circumstances at the time Goleta was looking to go its separate way.
Meanwhile, after several unsuccessful attempts to incorporate, a new city of Goleta appeared to be on the horizon. The latest effort was led by the slow-growth group GoletaNow!, several members of which wound up on Goleta’s first city council.
“We couldn’t become a city until we had a revenue-neutrality agreement,” said Cynthia Brock, a GoletaNow! member who was on the team negotiating with the county, alongside Jack Hawxhurst and Jonny Wallis. All three were elected to the first council; Wallis is not seeking re-election this time.
Both the county and the chief petitioners were working in good faith, Brock said.
The result of those negotiations was an agreement that would start out by handing over roughly $5.5 million to the county, and repay a $1.5 million startup loan from the county.
The $5.5 million was not a flat fee, however. The Goleta RNA is based largely on percentages: if Goleta is prosperous, the county gets more money. If Goleta collects less money, the county gets less.
It was an attempt to cushion the city during times of economic hardship, said Margaret Connell, a former councilwoman who is making another run for office in Tuesday’s election. Other cities that have paid based on flat fees have found themselves floundering when city revenue took a dip, she said.
Goleta, it turns out, did well in its formative years and was able to increase its annual budget to roughly $23 million. Correspondingly, the city’s obligations to the county have risen to $7.44 million as of 2007.
That notion does not sit well with council candidate Don Gilman. The businessman voted yes on the 2001 Measure H incorporation initiative, and also for the revenue-neutrality agreement that was part of it.
“Unfortunately, the voters were led into believing it was payment for services,” he said. He thought the money would be going to municipal services, only to find out the RNA was a payment on top of services the city was already paying for, he said.
An extra $8.2 million — projected for 2008 — could go toward funding items on Goleta’s wish list, Gilman said, such as a parks and recreation department or a fire station. Gilman also pointed out that Goleta pays the most out of its revenue, in stark contrast to Riverside County’s newest cities, Menifee Valley and Wildomar, which actually get paid by the county.
“We’re paying for nothing, and some of that is in perpetuity,” said Gilman, noting terms that have the city sharing certain taxes indefinitely with the county. By Gilman’s analysis, 34 percent of Goleta’s funds go to revenue neutrality, a staggering amount compared to the average 6.5 percent from other newly incorporated cities.
Tied to his concern is a projected three-year downturn in Goleta’s economy. The city will also lose the vehicle license tax it gets from the state for its early years of incorporation, taking a chunk out of its funds.
But while Gilman’s main platform has been the need to renegotiate the revenue-neutrality agreement, its proponents assert that the RNA is not as big an issue as it is being made out to be.
For one thing, say Brock and Wallis, the first city council was prudent enough to save for just this rainy day, putting aside funds to compensate for the future loss of the vehicle license fees.
What’s more, by 2012, some of the RNA’s terms decrease, which is estimated to put the city back in a surplus after one year.
And, they say, it’s important to understand the context of the revenue-neutrality agreements the cities make with their counties.
“In some instances it could be cheaper for the county to pay the city than to provide services to that area,” Connell said.
Regardless of how big an impact the RNA has or doesn’t have over the next few years, it looks as if some kind of change could be coming. Goleta’s council candidates, with the possible exception of Ed Easton, have been vocal about revisiting the issue.
Can Goleta’s revenue-neutrality agreement be changed? It’s been done before. Citrus Heights renegotiated its RNA, which required that more than $5 million be paid to the county indefinitely, down to a lower payment capped at 25 years. Rancho Cordova challenged its RNA with Sacramento County two years after its incorporation in 2004.
How Goleta will try to renegotiate will be an important choice. Earlier this year the city contemplated an alternative local sales tax that could have sunk Measure A, the countywide half-cent transportation sales tax meant to continue the current Measure D, which expires in 2010.
“I feel strongly that the only reason the county ever agreed to sit down with us is because they were informed that there was a possibility that we would have our own sales tax,” City Councilwoman Jean Blois said of that meeting. The city has since dropped the issue and the county has also forgiven the city’s startup loan.
Another factor is Santa Barbara County’s ongoing budget problems. An amendment to the revenue-neutrality policy just after Goleta’s incorporation, giving a little more specificity to RNAs might also come into play.
Also, both candidates for the 3rd Supervisorial District seat, Doreen Farr and Steve Pappas, have been sympathetic to renegotiating the RNA, adding to the chances that neither Goleta nor the county will resort to the legal actions other cities and counties have gone through to change the terms.
Noozhawk staff writer Sonia Fernandez can be reached at firstname.lastname@example.org.