A Republican lawmaker who tried earlier this year to end the standoff between counties and prospective cities by creating a state subsidy for incorporations has abandoned that plan and instead will try next year for an outright repeal of a 1992 state law that has effectively kept new cities off the map. Following a legislative hearing in October on his plan to require state government to reimburse new cities for the costs of traffic enforcement and wildlands fire protection now borne by state agencies, Assemblyman Bruce Thompson of Fallbrook said it is clear that idea isn't going to fly. ‘"We're going back to my original bill to do away with revenue-neutrality," Thompson said in an interview. "If it gets down the road and the counties back off a little bit, then maybe the state can kick in some revenues." At the hearing, he received a pledge of support from Senate Majority Leader Richard Polanco, D-Los Angeles. At issue is a six-year-old state law intended to help ease the pain to counties created by the so-called ERAF tax shift, which required counties to transfer a portion of their property taxes to school districts. The revenue-neutrality law protects the remaining county property-tax revenues by mandating that if new cities are carved out within their boundaries, counties must be left financially whole. To accomplish that, new cities are assessed an annual mitigation fee that must be paid their host county for 25 years. The fee, calculated by the county Local Agency Formation Commission, is to cover the costs of general county services that would continue to be provided to residents of the new city — services such as prosecution of crimes, medical care for the poor, public health inspections, foster care and the like. This zero-sum formula has had the effect of slowing city-creation to a near standstill. In the period between the passage of Proposition 13 in 1978 and the adoption of the revenue-neutrality law in 1992, an average of six new cities were created each year — a significant increase from the ‘60s and ‘70s, when the threat of property tax increases slowed the rate of incorporation. Since 1992 only two new cities have been formed — Shasta Lake in Shasta County and Citrus Heights in Sacramento County. The latter was the only the true test of the revenue-neutrality law, and its application has been bitter and litigious — with the legal battle finally ending in August when the county agreed to accept annual mitigation payments of $2.2 million rather than the $5.6 million originally set by the Sacramento County LAFCO (CP&DR, September 1998). The issue has created another point of contention in the strained relationship between cities and counties, and also reopened old arguments about the role, structure, and authority of LAFCOs. Most of these issues were aired at the October 14 interim hearing, which was ordered this summer by the Senate Local Government Committee when it declined to act on Thompson's AB 2147. The bill incorporated a consensus plan drafted in April by representatives of the California State Association of Counties and League of California Cities. AB 2147 included language that would have changed the way LAFCOs calculate the revenues and service costs of new cities and also allowed for a reevaluation of mitigation payments owed to counties if a LAFCO's original fiscal estimates didn't pan out. Its most innovative provision would have required the state to transfer to new cities revenues equal to the amount of savings it would realize from no longer having to provide traffic enforcement, and in some cases fire protection, to the newly incorporated areas. The argument for including the state in the revenue-neutrality formula was most aggressively advanced by Truckee City Manager Stephen Wright, who noted that his city's incorporation relieved the California Highway Patrol of traffic-control responsibility for 140 miles of streets. In addition, the city now contracts — at $100,000 a year — with the California Department of Forestry and Fire Protection for fire-suppression services on land the CDF previously serviced at no cost to local taxpayers. "It is a windfall to the state of California," argued Wright. Despite support from local governments, the idea of using state funds to solve the local revenue-neutrality problem ran into trouble at the hearing, in part because of the political might of the state public safety agencies. Rising to the defense of the CHP, which objected to the plan, Polanco declared simply: "It's not fair." Thompson didn't rule out the idea of providing some sort of direct state financial incentives to promote incorporations. But he made clear his view that counties are using the revenue-neutrality law to protect their political turf. ‘The county arguments don't stack up anymore," he said. "They did when counties were in the red, but that's no longer the case. Right now, counties are holding incorporation proponents hostage up and down the state....It's about money, but it's also about power." Of the 22 city-incorporation movements in the state that are in limbo because of the revenue-neutrality roadblock, three are in Thompson's north San Diego County Assembly district — including his home community of Fallbrook. If the revenue-neutrality law were repealed, Thompson said, "I don't know if there would be a rush toward new incorporations, but there definitely is a pent-up demand. The problem right now is that communities can't make a decision at all." Even before passage of the revenue-neutrality law, city incorporations have been contentious ever since the passage of Proposition 13, which took away the ability of new cities to levy their own property taxes to cover the costs of providing municipal services. ‘Every incorporation since 1990 has resulted in litigation," said LAFCO consultant Walter Kieser, testifying before the interim hearing. "We absolutely have to address this." The hearing assembled incorporation proponents from Fallbrook, Elk Grove in Sacramento County and Rancho Santa Margarita in Orange County, as well as officials from affected counties. The cityhood proponents were united in their plea that the revenue-neutrality law be repealed. Dan Briggs, a cityhood proponent in Elk Grove, called the law "a major obstacle to our incorporation efforts....It's hard to explain to voters that they will have to pay a fee to the county and to convince them it's not extortion." Pat Leary of CSAC said the counties organization will adamantly oppose efforts to repeal revenue-neutrality, saying, "The very fiscal future of counties is at stake." Sacramento County Administrative Officer Robert Thomas testified that the effect of repealing the law would be to leave the county responsible for serving pockets of poverty in unincorporated areas. He urged lawmakers to seek a comprehensive fix of local-government financing in order to "eliminate boundary-line decisions based on cherry-picking of high-revenue areas." The issue of cityhood for newly developing areas — or for longstanding communities located in unincorporated areas — has long been a contentious one because it encompasses so many other power and money issues associated with local government. Incorporations were rampant during the postwar era, when California's suburbs were growing rapidly, but they slowed considerably after the creation of county Local Agency Formation Commissions in 1963. LAFCOs have veto power over incorporations and must find both that they are fiscally viable and logical in terms of geography and government organization. Because California's LAFCO law permits decentralized decisionmaking — there is a LAFCO in every county but there is no state appeals board — each county has developed its own "model" of cityhood. Ventura and Santa Clara counties, for example, have long pursued a policy of channeling virtually all urban growth into cities. In Sacramento County, on the other hand, two-thirds of the population lives in unincorporated territory. Citrus Heights was only the fifth city incorporated in a county of 1 million people, and the first new city created in half a century. This "model" of unincorporated communities has placed the county government in the role of "municipal government" for most of the county's suburbs, thus exacerbating the strife between suburban cityhood proponents and the county government. In Orange County, by contrast, the county government has sought to work with cityhood proponents under the revenue-neutrality law to find a "middle ground" that will allow the cities to incorporate. The affluent, fast-growing areas of south Orange County have been a breeding ground of cityhood activity, and the county's weakened financial condition following the 1994 bankruptcy forced county officials to accommodate cityhood efforts. Contacts: April Manatt, consultant, Senate Local Government Committee, (916) 445-9748. Assemblyman Bruce Thompson, (909) 699-1113.