What a difference a year makes. 

In 2019, San Francisco’s skyrocketing property-tax haul and stagnant school enrollment led to a surplus of funds; the mayor and supervisors and organized labor quarreled about where a $185 million so-called “windfall” should go before allocating it to teachers, affordable housing, the homeless, and other benevolent destinations. 

In 2020, the state is broke and will be attempting to wrest away these funds — both retroactively, reclaiming money that has long since been spent, and moving forward. 

The city estimates that if the California Department of Finance gets its way, San Francisco will be out $180 million for funds going back to 2018 and then be tagged an additional $60 million every year moving forward. 

The state’s maneuver — which would come to fruition with the pending passage of the innocuous-sounding Education Omnibus Trailer Bill — would also yank scores of millions of dollars from Santa Clara, San Mateo, Marin, and Napa Counties, along with San Francisco. 

This, of course, comes in the midst of the worst financial crisis in a lifetime. 

5 County Letter to Speaker and Pro Tem Opposing Excess ERAF Legislation 6.10.20 by Joe Eskenazi on Scribd

City Controller Ben Rosenfield this week confirmed that this Sacramento proposal “is the single most significant financial implication in the state budget for San Francisco.” 

The mayor’s office confirmed that Mayor London Breed has been in contact with Gov. Gavin Newsom over this. But the state Department of Finance is slated to release the language in its omnibus trailer bill on Friday — and its final content is not yet known. 

San Francisco Supervisors Matt Haney and Hillary Ronen this week introduced a resolution opposing the state’s proposed move,. The resolution was unanimously adopted. 

“We have not yet begun to feel what a $1.7 billion budget hole begins to feel like in real life,” Ronen said, regarding the perilous fiscal situation San Francisco finds itself in, thanks to the pandemic. 

And that was before the state’s planned move. 

“When we do begin to feel that, and people realize the state clawed back $180 million and $60 million every year moving forward, it is going to be dramatic. That translates into cuts to our schools, cuts to pothole-filling, cuts to affordable housing, cuts to homeless services, and layoffs.” 

The money the state is hoping to reallocate to itself (even retroactively) are “Educational Revenue Augmentation Funds,” administered locally and directed toward school and community college districts.

While San Francisco’s situation was in 2019 often referred to as a “windfall,” that term was always a misnomer. Even prudent, cautious fiscal analysts figured that this money would come to the city every year for the near foreseeable future — “barring state action.” 

That action appears to have come, but not in a manner anyone could have entirely predicted. 

San Francisco teachers and their allies advocated for a healthy chunk of San Francisco’s “windfall” funding. But this is no windfall — and many competing priorities are also vying for this ongoing funding. Photo by Jennifer Cortez, January 2019.

The state controller has long been the responsible body for determining each of the 58 counties’ Educational Revenue Augmentation Fund (ERAF) allocations. San Francisco — and the handful of other counties — last year exceeded its state-determined allocation and had funds returned. 

The Department of Finance now aims to take over this duty from the state controller. It aims to use different calculations, going back retroactively to 2018, to determine how much ERAF each county owes. It was the state controller that previously determined when “surplus” ERAF funds could be returned to the counties, as occurred in San Francisco last year. 

But the Department of Finance will be using different calculations, which are less generous to the counties (even retroactively). And, to boot, the Department of Finance would punish counties failing to pay up with civil penalties of 10 percent per year, in addition to 1.5 percent monthly — an annual aggregate interest of 28 percent. 

This has induced loud howls from the affected counties. 

“As far as I can tell, our County has administered the law properly. Their application of the funding allocation methodology has been audited multiple times by the State Controller’s Office and received a ‘clean’ audit each time,” wrote Santa Clara County assessor Larry Stone in a June 10 letter to Assemblyman Phil Ting (D-San Francisco), the chair of the budget committee. 

“The imposition of penalties, including retroactive penalties going back to fiscal year 2018/19, is completely offensive and unwanted and should be rejected. It is particularly egregious in light of the fact that [the Department of Finance’s] guidance is based on new interpretations of laws that have existed since at least 2012. It also creates a dangerous precedent that should be deeply concerning to all jurisdictions across the state.” 

Stone notes that this move would not create any additional funding for schools and refers to it, bluntly, as a “money grab.” 

But, in an Orwellian turn of phrase, the Educational Revenue Augmentation Fund never resulted in augmentation of educational revenue, going back to its initiation in 1992. 

In that year, during lean times, the state of California devised a method to fund its schools even less while, in effect, taking money away from its cities and counties.

Since the state is not permitted to simply yank away county property taxes, it essentially created a shell game to accomplish the same end. It established this “Augmentation Fund” in every county, requiring counties to pay into it and disseminate the money to school districts. Subsequently, state funding of schools was reduced by an equivalent amount. 

In 2019, Ken Kapphahn, a fiscal and policy analyst for the state Legislative Analyst’s Office, told Mission Local that there were significant legal hurdles in place preventing the state from unilaterally wresting away surplus ERAF money from San Francisco and other counties. 

Proposition 1A of 2004, he noted, severely curtailed the state’s ability to redirect the allocations of local property taxes. So, for major changes of the sort now being proposed, Kapphahn surmised, we “might need to go back to a vote of the people.”

Clearly, that is not happening right now. 

“We believe that if we challenge this in court, we will prevail,” said David Campos, a former Mission District supervisor who is now Santa Clara’s deputy county executive. “But that’s not the point.” 

As his San Francisco successor, Ronen, notes, “Litigation will take years. We’re trying to head this off at the pass.”

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