The Effects Of Proposition 13 On Small City Revenues And Expenditures

Data from the 1969-1982 issues of the Annual Report: Financial Transactions Concerning Cities of California have been computerized to provide detailed records of revenues and expenditures of 57 "rural" incorporated cities in California with populations under 10,000. In addition to examining this data, we provide a comprehensive literature review and statement of California's property tax law, which was passed by the state's voters on June 6, 1978. Three aspects of Proposition 13 are examined: (1) The changing composition of revenues and expenditures, both before (1969-1978) and after (1978-1982), Proposition 13. (2) The degree to which revenues and expenditures have changed as a result of Proposition 13 (in terms of real and nominal dollars per capita). (3) The current trends and prospects facing small cities in providing public services in light of Proposition 13. With regard to the composition of funds, we show a greater reliance on "own-source revenues" and a declining dependence on federal revenue sharing and state and federal grants. Local governments have been quick to augment ''current service charges" which now represent the largest source of revenues for small communities. Despite these efforts, equally hurtful to these communities (in addition to the loss in property tax funds) has been the concomitant decline in state and federal grants. In fact, state and federal grants have remained low while the revenue from property taxes has rebounded since 1978. Expenditure patterns have changed significantly since Proposition 13. In particular, investments in capital outlays have decreased relative to operating expenses. But the relative decline in capital outlays now matches the proportion which was spent in the early 1970's. Thus, the impact of Proposition 13 may have been to slow a trend towards growing expenditures for capital building and equipment. Expenditures on public safety and works have become relatively more important in small city expenditure patterns. With regard to changes in per capita revenues and expenditures, we relied upon an econometric model using dummy variables to sort out the effects of Proposition 13 over time. The results show moderate trouble ahead for local governments which appear to be spending more than they take in. Real per capita revenues declined sharply with Proposition 13 while real per capita expenditures hardly changed. Extrapolations from our model indicated that substantial deficits can be expected in the local government financial picture for numerous small cities. Although local governments have raised "current service changes", enough to compensate for the loss in property tax revenues (and although the tax revenues have increased in recent years as a share of total revenues), the expenditure pattern continues unabatted. Without remedial measures to cover public service expenses, community deficits will mount in coming years.