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Abstract
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.