California State Auditor Report Number : 2015-106

The University of California and the California State University
Several Campuses Recently Acquired Property, but Those Acquisitions Have Not Significantly Reduced Property Tax Revenue for Local Governments

Introduction

Background

The University of California (UC) and the California State University (CSU) are the two public university systems in California. UC was created by an 1868 statute as a public, state-supported, higher education institution, whereas the CSU system was established among individual existing colleges in 1982. UC has 10 campuses, and the CSU has 23 campuses throughout the State. The University of California Office of the President (UCOP) and the CSU Office of the Chancellor (Chancellor’s Office) oversee and support their respective systems.

The California State Constitution exempts state-owned property and property used exclusively for state colleges and universities, which include the UC and CSU campuses, from property taxation.² Although individual campuses initiate property acquisitions, properties acquired by CSU campuses are owned by the CSU Board of Trustees, and properties acquired by UC campuses are owned by the UC Regents. However, for readability, throughout the report we refer to property acquisitions as properties having been acquired by an individual campus. When a CSU or a UC campus acquires taxable property or leases a property exclusively for educational purposes, generally that property no longer produces property tax revenue unless the campus subsequently leases or sells that property to a party whose property is not exempt from taxation. As a result of these tax exemptions, when universities expand their campuses by acquiring properties that formerly were taxable, the corresponding local governments may experience a decrease in revenue from property taxes.

Local governments, such as cities and counties, generally provide fire and emergency medical services to the campuses we reviewed. Funding for local fire departments comes primarily from the local governments’ general funds. The local governments’ general fund revenue can come from several sources, such as property taxes, sales taxes, hotel taxes, and the collection of fines related to parking and moving violations. For example, the city of San Diego’s fiscal year 2015–16 budget identified nearly $1.3 billion in general fund revenue, with approximately $470 million coming from property taxes. Because the properties that the UC and CSU campuses own are tax‑exempt, those properties generally do not contribute directly to the property tax revenue streams that fund their local governments’ fire and emergency services. Because property tax revenue is an important source of income for cities and counties, large reductions in the amount of property taxes each year could reduce the funds available for allocation to fire departments for fire and emergency medical services.

Counties Assess Property Taxes and Allocate Them to Local Governments

Real property in California is generally subject to property taxation, although state law exempts some types of property, such as property owned by the State or property used exclusively for religious worship. State law requires each county to impose a property tax rate of 1 percent. Property is taxed on its taxable value, which is determined according to provisions of Proposition 13, which voters approved in 1978, and subsequent state law. For example, if in a given fiscal year the tax rate is 1 percent and the value of a piece of property acquired in that fiscal year is $100, the property tax on that property would generally be $1 for that fiscal year. Except for certain property that the State Board of Equalization assesses, each county’s assessor is responsible for establishing the taxable value of all property subject to property tax in that county, and that value can vary over time and is subject to limits established in state law. The county assessor calculates property value by increasing the initial assessed value at the time of purchase by 2 percent or the annual inflation rate, whichever is less. The taxable value is the lesser of this amount or the market value of the property. For example, if the market value of the property described above increased to $105 the next fiscal year, and if the inflation rate were 2.5 percent, state law would limit the taxable value increase to only 2 percent, resulting in a taxable value of $102.

Although state law requires each county to impose a 1 percent property tax rate, state law generally prohibits other local entities from imposing additional property taxes except in specified circumstances. One exception authorizes a county or other local entity in a county to impose an additional property tax so that the entity can make annual payments for certain voter‑approved debt. For example, in Los Angeles County, properties are subject to taxation by a number of taxing agencies, such as cities, school districts, and special districts. As a result, the property tax rate can be a little more than the 1 percent specified in state law. For instance, the property tax rate for some tax rate areas in Los Angeles County was 1.12 percent for fiscal year 2014–15.

Each county collects all property taxes imposed in its jurisdiction and apportions the revenue collected to the different local entities within the county. State law generally requires that each local entity be apportioned property tax revenue equal to what it received in the prior fiscal year plus its proportional share of any change in this revenue. For example, a city receives only a portion of all the property taxes collected on properties within its boundaries because the county, school districts, and any relevant special districts also each receive a portion of that property tax revenue.

Because the property taxes that a county collects on properties located within a city are apportioned to multiple local entities, growth or reduction in these property taxes helps or hurts multiple local governments and districts but in varying dollar amounts. Figure 1 shows the proportion of property taxes each type of local government received in fiscal year 2014–15 as a result of this county-by-county process.

Figure 1
Proportion of Statewide Property Taxes That Each Type of Local Government Received

Local Governments Provide Emergency Fire and Medical Services to the Campuses We Reviewed

Although the UC and CSU campuses do not pay property taxes, they generally receive certain services from their local governments. Specifically, each of the UC and CSU campuses we reviewed receives fire and emergency medical services from either the city or the county where they are located. For example, according to the associate vice president of real estate, planning and development at CSU San Diego, the city of San Diego provides fire and emergency services to the campus. On the other hand, UC Santa Barbara, which is located in an unincorporated area, receives fire and emergency medical services from Santa Barbara County. The text box on page 6 names the local government that provides fire and emergency medical services to the campuses we reviewed.

Scope and Methodology

The Joint Legislative Audit Committee (audit committee) directed the California State Auditor to perform an audit of selected UC and CSU campuses to identify property tax revenue losses to local governments because of expansions by the CSU and UC campuses. The audit committee also asked us to identify any related increases in funding for local fire departments that provide safety services to campuses and their surrounding communities to offset such tax revenue losses. Table 1 lists the audit’s objectives and the methods we used to address them.

Table 1
Audit Objectives and the Methods Used to Address Them

	Audit Objective	Method
1.	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed the relevant laws, regulations, and other background materials applicable to property taxes and the provision of fire and emergency medical services to California State University (CSU) and University of California (UC) campuses.
2.	Determine the CSU and UC policies, procedures, and practices for engaging with the local community or other regional association of governments before approving any property acquisition, construction, or expansion project for campus use.	Interviewed key staff at the CSU Office of the Chancellor (Chancellor’s Office), the UC Office of the President (UCOP), and the seven selected campuses recommended by the audit requestors—CSU Stanislaus, CSU Dominguez Hills, CSU San Diego, CSU San José, UC Berkeley, UC Merced, and UC Santa Barbara—to identify the policies and procedures related to engaging local governments. Requested and reviewed the applicable policies and procedures at the Chancellor’s Office, UCOP, and the seven selected campuses. At each of the four selected CSU campuses and the three selected UC campuses, reviewed the latest campus development plans and related documentation to determine the extent to which campuses engaged local governments that provide fire and emergency medical services to the campuses and addressed the governments’ concerns regarding the plans’ potential impact on providing these services. Using campus accounting records, identified all acquisition and construction projects completed between January 1, 2010, and June 30, 2015, and performed the following at each campus: Judgmentally selected two acquisitions, if applicable, and two to five construction projects, depending on the total number of construction projects completed. Reviewed available project documentation for the selected acquisitions and construction projects to determine whether campuses engaged local governments and addressed any project-specific concerns related to the provision of fire and emergency medical services.
3.	For the past five fiscal years, determine the budgetary allocations made by the CSU and UC systems to a selection of four CSU and three UC campuses for the provision of fire protection and emergency medical services to the campuses and their surrounding communities.	Interviewed key staff at the Chancellor’s Office and UCOP to determine whether the CSU and UC systems make budgetary allocations to campuses for the provision of fire protection and emergency medical services. For the purposes of this audit, we defined fire protection as responding to fire incidents. Interviewed key staff at the seven selected campuses to determine whether the campuses budget for the provision of fire protection and emergency medical services.
4.	To the extent possible, identify all properties that have been acquired or constructed by a selection of four CSU and three UC campuses since January 1, 2010. Using this information, determine the following:	Because the four selected CSU campuses had very few, if any, acquisitions, we reviewed acquisitions at one additional campus—CSU Chico—that the Chancellor’s Office identified as having multiple property acquisitions since January 1, 2010. For these five CSU campuses and the three UC campuses, we performed the following: As we performed at the other seven campuses under Objective 2, used accounting records at the CSU Chico campus to identify all property acquisitions and capital construction projects between January 1, 2010, and June 30, 2015.
	a. The current assessed value of all the property.	Interviewed campus officials who told us that they do not obtain assessments of market value for buildings after construction projects. Staff at county assessors told us they do not appraise or otherwise measure the market value of property the campuses own. We present the assessed value of property acquired between January 1, 2010, and June 30, 2015 in Table 3. The only value available for campus-owned properties for new constructions is the construction costs that the campuses capitalized for accounting purposes. We present this information in Appendix A for all construction projects the eight campuses completed and capitalized between January 1, 2010, and June 30, 2015.
	b. In cases where the CSU or UC campus has acquired property that was previously private, the estimated loss of property tax revenue associated with the property.	For each previously taxable property acquired between January 1, 2010, through June 30, 2015, we obtained the following property tax information from the relevant county assessor’s, tax collector’s, or auditor controller’s office: The assessed value at the time of acquisition. Property tax rate information. Information regarding how the tax revenue in each property’s tax area is allocated to local governments and districts. Using the information obtained, we calculated the estimated property tax loss to the local government where the acquiring campus is located using both the assessed value of the property and the property’s acquisition price. Compared the estimated property tax revenue loss since the time of acquisition to the total property revenue for the relevant local government over the same period. To estimate the property tax impacts of exemptions granted to campuses that leased otherwise taxable property, we did the following: Obtained from the relevant county assessor’s office the number and value of all such lease exemptions granted to each campus we reviewed. Using information obtained from the relevant county tax collector’s or auditor-controller’s offices, calculated the estimated total countywide property tax impact of each campus’s lease exemptions in fiscal year 2014–15. To estimate the property tax impacts of campus-owned properties that are leased to private third parties and are therefore taxable we obtained the following property tax information from the relevant county assessor’s, tax collector’s, or auditor controller’s office: The number and location of all such properties at each campus we reviewed. Property tax rate information for each property. Information regarding how tax revenue in each property’s tax area is allocated. Using the information obtained, calculated the estimated property taxes those properties generated in fiscal year 2014–15 for the local governments where the campuses we reviewed are located.
5.	Determine whether any CSU or UC campus has an existing contract, agreement, or any other in lieu payment arrangement with its neighboring fire agency to offset the revenue loss to that agency due to campus property acquisitions, construction, or expansions.	Requested that UCOP and the Chancellor’s Office identify campuses with relevant agreements for fire and emergency medical services. Contacted each campus to confirm whether or not it had agreements with the local governments to obtain fire and emergency medical services, and the reasons for the agreements. Obtained copies of the agreements. Reviewed the agreements to identify the reasons for and the financial terms of the agreements.
6.	For a selection of four CSU and three UC campuses, determine whether the local government that hosts the campus or its property has placed a local tax measure on the ballot since January 1, 2010, to pay for public safety services.	For each of the seven originally selected campuses, performed the following: Determined whether between January 1, 2010, and June 30, 2015, any local tax measures to fund public safety services in part or in whole were on the ballots of the local government of the jurisdiction where the campus is located. Interviewed officials at each local government about tax measures to determine the reasons for the proposed measures, and whether those reasons included financial or service demand impacts from the campus.
7.	Review and assess any other issues that are significant to the audit. For the seven originally selected campuses, performed the following:	Interviewed officials at the local governments of the jurisdictions where the campuses are located to obtain their perspectives on the campuses’ fiscal impacts to the local governments related to providing fire and emergency medical services. When officials expressed concerns about a campus’s financial impact, we requested and reviewed documentation provided to support the financial impact related to their concerns. For local governments that expressed concerns, we also requested and reviewed information related to the number of fire and emergency medical service incidents since January 1, 2010. We interviewed campus staff to obtain perspectives on the increases in demands for services. Requested from each of the seven campuses and obtained, when available, the most recent economic impact studies conducted or commissioned by the campuses. To the extent possible, identified the types of economic benefits the studies estimated for the areas surrounding each campus as well as the reasonableness of the studies’ methods.

Sources: California State Auditor’s analysis of Joint Legislative Audit Committee audit request number 2015-106 and information and documentation identified in the table column titled Method.

Methods to Address Data Reliability

In performing this audit, we obtained electronic data files extracted from the information systems listed in Table 2. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer-processed information that we use to support our findings, conclusions, or recommendations. Table 2 describes the analyses we conducted using data from these information systems, our methodology for testing them, and the conclusions we reached as to the reliability of the data. Although these determinations may affect the precision of the numbers we present, we found sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Table 2
Methods Used to Assess Data Reliability

Information System	Purpose	Method and Result	Conclusion
Four California State University (CSU) Campuses—CSU Dominguez Hills, CSU Stanislaus, CSU Chico, and CSU San José PeopleSoft CSU campuses’ accounting data for fiscal years 2009–10 through 2014–15	To identify the universe of all construction and property acquisition projects completed between January 1, 2010, and June 30, 2015. To make a selection of construction and acquisition projects to determine the extent to which campuses engaged with local governments before undertaking the projects.	This purpose did not require data reliability assessment. Instead, we gained assurance the population was complete. To test the completeness of the construction and acquisition data, we traced the total amounts capitalized to the audited financial statements.	Complete for the purpose of this audit.
California State University, San Diego (San Diego State) Oracle San Diego State’s accounting data for fiscal years 2009–10 through 2014–15
University of California, Berkeley (UC Berkeley) PeopleSoft UC Berkeley’s accounting data for fiscal years 2009–10 through 2014–15
University of California, Merced (UC Merced) University of California, Los Angeles (UCLA) Financial System UC Merced’s accounting data for fiscal years 2009–10 through 2014–15 as maintained by UCLA's financial system
University of California, Santa Barbara (UC Santa Barbara) UC Santa Barbara Mainframe Com‑Plete Services UC Santa Barbara’s accounting data for fiscal years 2009–10 through 2014–15
County Assessors, Collectors, and Auditor‑Controllers Property tax assessment, billing, and allocation systems Property tax assessments and collections for fiscal years 2009–10 through 2014–15	To calculate the estimated property tax loss to local governments for properties acquired and leased by the campuses we reviewed. To calculate the estimated tax revenue to local governments for properties that the campuses we reviewed owned and leased to private parties.	We did not perform accuracy and completeness testing on these data because testing the number and variety of data systems used in this audit would be cost-prohibitive.	Undetermined reliability for the purposes of this audit. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings and conclusions.
UC Berkeley Tri-Tech Records Management System Fire and emergency medical incidents involving the local fire department for fiscal years 2009–10 through 2014–15	To identify any trend in the number of fire and emergency medical incidents at UC Berkeley involving the local fire department.	We did not perform accuracy and completeness testing on these data because testing the number and variety of data systems used in this audit would be cost-prohibitive.	Undetermined reliability for the purposes of this audit. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings and conclusions.
County of Merced Fire Department Computer Aided Dispatch System Fire and emergency medical incidents involving the local fire department for fiscal years 2009–10 through 2014–15	To identify any trend in the number of fire and emergency medical incidents at UC Merced involving the local fire department.	We did not perform accuracy and completeness testing on these data because testing the number and variety of data systems used in this audit would be cost-prohibitive.	Undetermined reliability for the purposes of this audit. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings and conclusions.

Sources: California State Auditor's analysis of data obtained from selected California State University and University of California campuses, and the offices of county assessors, county collectors, and county auditor-controllers.

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Footnotes

² According to UC’s tax manager, when UC purchases property for investment purposes, generally through a limited liability corporation, it is not exempt from property taxation in California. Go back to text