The latest financial stunt in California seems a no-brainer for local governments, but it still doesn’t make much sense to those involved.

 

“If we can get the money today, why can’t the state?” Supervisor Frank Mecham asked at the Oct. 27 SLO County Board of Supervisors meeting.

 

Mecham was asking a question few seem able to answer. At its heart is the state’s borrowing of local property tax funds, allowed under Proposition 1A, which passed in 2004. It prevented state officials from borrowing local revenues and set guidelines for repayment, which wasn’t previously required.

 

This year, state officials pulled the trigger and decided to borrow 8 percent of local property tax revenues to patch their own budget. The decision sent ripples through SLO County and city governments, many of which are also facing budget problems and depend heavily on property tax revenues.

 

But there’s a solution, at least at the local level: The state can borrow the tax revenues, but is required to pay back local governments, with interest, within three years. Most counties and cities in the state are now leveraging their promised repayment to sell bonds and recoup the lost revenue. In effect, the state will borrow local revenues, but the bond sales will wash away the financial pain to local governments.

 

“This way we’re out of it completely,” said Andrea McGarvey of the county Auditor’s Office. “All we’ve done is sell an asset.”

 

But back to Mecham’s question: Why doesn’t the state simply sell its own bonds and leave the local revenues alone? McGarvey said the state has accrued too much debt already.

 

“Nobody knows the answer to that question other than the fact that they have borrowed so much,” McGarvey said. “Their cash flow is so difficult right now that this gives them a bit of breathing room.”

 

The budget crisis has also caused the state’s bond rating to drop to just above junk, begging another question: Will the bonds local governments are now depending on find buyers?

 

James Hamill is program manager for California Communities, which is handling the bond sales. He said because of the low-risk nature of the bonds, there should be enough buyer interest to ensure local governments are protected.

 

The bonds will be sold in mid-November, and so far every county in the state but Stanislaus is participating. Every city in SLO County is signed on, too, with the exception of Pismo Beach, which has yet to make a final decision on whether to participate.

 

Without the revenue provided by the bond sales, governments within the county stand to lose a combined $16.2 million from the state’s property tax borrowing. The county alone will lose about $11 million from the general fund, library, and road funds. In total, state officials will borrow $1.6 to $1.7 billion, Hamill said.