B.1.1.2 Proposition 13
In 1978, California voters approved Proposition 13, the People’s Initiative to Limit Property Taxation, amending the State Constitution to limit ad valorem property taxes (see Section 1.7.1 Proposition 13 (1978), Jarvis-Gann Initiative)153 in response to a decade of rapidly rising property tax bills.154 Before Proposition 13, a property tax payer paid different tax rates to the local agencies providing services, including several special districts, one or more school districts, a city, and the county. In addition, local governments could generally set the property tax rate—the percentage of AV that would be imposed annually as a tax—in accordance with the revenue needs of the local government.155, 156 Before 1978, real property was appraised cyclically, with no more than a 5-year interval between reassessments. Because property values were systematically reviewed and updated, AVs were usually kept at or near current market value levels, and the average property tax rate before Proposition 13 was approximately 3% of the property’s market value. This tax rate, combined with the rapid increase in real estate values in California, especially for single family residences, caused the tax bills of homeowners to rise at a rapid rate.
Proposition 13 accomplished property tax relief in two important ways. First, it limited the annual property tax rate to 1% of the full cash value of the property. Second, it defined the full cash value to be the value shown on the 1975–76 assessment roll—a 2-year rollback of property values—or the actual market value upon sale of the property. Once sold, property is reassessed at 1% of the sale price, and the 2% annual growth cap applies to each subsequent year after the sale.157 This has resulted in what some have called an acquisition value approach to taxation, which in a rising real estate market requires new buyers to pay dramatically higher taxes compared to those who have owned their property for longer periods.158
The passage of Proposition 13 marked a watershed moment in California local government finance. For school districts, the passage of Proposition 13 eliminated their ability to levy additional special property taxes to pay off their facility indebtedness.159 By capping the ad valorem tax rate on real property at 1%, the corresponding income from property taxes was also capped to such an extent that it virtually eliminated this source as a means for repayment. Further limiting school districts, Proposition 13 prohibited new ad valorem property taxes, but allowed special taxes with two-thirds voter approval. Special taxes, however, were not defined.160 As a result of Proposition 13 county property tax revenues dropped from $10.3 billion in 1977–78 to $5.04 billion in 1978–79, prompting a fiscal crisis for many local governments.161
Proposition 13 allowed local governments to levy voter-approved debt above the 1% rate to pay for indebtedness approved by voters before 1978.162 While most pre 1978 approved debt has been paid off, there are still two common pre 1978 obligations paid with voter approved debt: local government voter approved retirement benefits and payments to the State Water Project.163
The passage of Proposition 13 shifted the primary responsibility for financing new school construction and modernization from local school districts to the State. By prohibiting property tax overrides to fund local GO bonds, Proposition 13 eliminated the primary source of local revenue for new school construction and modernization. Proposition 13 was the first of several state level initiatives (see Section 1.7 Historical Overview of Voter-Approved Limitations on Local Government Revenues) directed at the fiscal affairs of state and local government that dramatically limited fiscal flexibility and have been the catalyst for many of the financing programs and techniques discussed in this section of the Guidebook.
Since the passage of Proposition 13, two amendments to the California Constitution have allowed school districts to again finance school facilities through the issuance of GO bonds. Proposition 46, approved in 1986, allows public agencies with taxing power (including school districts) to issue GO bonds to finance the acquisition or improvement of real property and to levy taxes above the Proposition 13 limit (1% of AV) to pay debt service on the bonds with two-thirds voter approval. Proposition 39, approved in 2000, allows school districts and community college districts to issue GO bonds to finance the construction, reconstruction, rehabilitation or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition of lease of real property for school facilities with 55% voter approval.