Last fiscal year, Goleta tax revenues amounting to $8.1 million were retained by the county rather than the City of Goleta itself. This resulted from a “revenue neutrality agreement” negotiated with Santa Barbara County prior to Goleta’s incorporation.
So what is revenue neutrality?
Twenty-five years ago, if a new city incorporated, all taxes generated within the city went into its treasury. But in 1993, the State was in fiscal crisis – an all too frequent condition – and it solved its problem by hijacking local revenues, primarily from counties, to finance programs such as education. To soften the blow to county revenues that would occur when a new area became a city, a law was passed that required any income generated by a new city over and above the cost of city services that the county would no longer have to provide had to be shared with the county so that the incorporation was “revenue neutral” and did not financially harm the county.
Prior to Goleta incorporation, the county was taking in about $5.5 million in revenue from the area within the proposed city boundaries over and above the amount it was spending there on services such as road maintenance, parks, public safety, and planning. These additional funds were used for countywide services – the courts, public health, and other social programs. In order to get approval to move forward with Goleta incorporation, the proponents, GoletaNow!, had to negotiate a revenue neutrality agreement with the county. By the terms of this agreement, the county was to receive 50 percent of property taxes, 50 percent of sales tax and 40 percent of hotel bed taxes. Ten years after incorporation, in 2012, all bed taxes and 20 percent of the sales tax would revert to the city, but the county would continue to receive 50 percent of property tax and 30 percent of the sales tax in perpetuity. This agreement was part and parcel of the Goleta Cityhood proposal, which was approved by the voters in 2001.
With escalating property values in recent years, the amount of revenue retained by the county has increased each year, way beyond any increase in the cost of providing services. In the 2008-2009 fiscal year, this sum is expected to reach $8.2 million, or 34 percent of revenues generated by the city. No other newly incorporated city in the state has such a high percent of revenues going back to its county. Additionally, all other new cities have a point at which revenue sharing comes to an end, the termination period varying from seven years in Orange County to 30 or more in Sacramento County.
It is true that circumstances are not the same for all cities. Goleta has a couple of rich revenue producers: Bacara Resort and Spa and the Camino Real Marketplace with its big box stores. Other new cities may not have had this kind of disparity between the amount of revenues generated and the cost of basic services. This would be reflected in a lower percentage revenue share going to their counties. Nonetheless, far from being held harmless, Santa Barbara County is clearly benefiting from Goleta’s financial health.
In 2003, after Goleta’s incorporation, the state issued guidelines for revenue neutrality agreements and stated that these agreements should provide for “a process of adjustment after incorporation in order to account for unforeseen economic or legislative events significantly affecting the flow of local revenue.” Since 2001, state finances have been in turmoil, and, in addition, the escalating housing market has resulted in a bonus to the county with its 50 percent share of the city’s property tax revenues.
It is now fair to ask whether the county should benefit financially from new development in Goleta when most of the impacts and cost of services fall on the city. There are many beneficial programs the city would like to fund – recreation programs for young people and seniors, enhanced public safety and even its own city hall. The county, of course, can also make good use of these funds for services it provides directly to Goleta residents and others. It is a question of finding the right balance.
The Goleta City Council has opened a dialogue with the county on negotiating changes in the current agreement, beginning with a meeting at the end of March between two City Council members and two County Supervisors. The Council has also discussed the possibility of a ballot initiative or even litigation, though council members have expressed some reluctance to take that route.
Six years have passed since Goleta’s incorporation. It is time to take a new look and see if what was fair in 2001 needs to be amended to address conditions in 2008.