May 18, 2010

Taxation and Government Finance Committee

Land Use Committee
Legislative Committee

The following is for study only and has NOT been approved by the Taxation and Government Finance Committee, Legislative or Executive Committees or the Board of Directors.

Issue

Should a surcharge be imposed on all commercial and residential property insurance policies to fund emergency response preparedness?

Action

Optional.

Options

1. Support legislation that would impose a property insurance surcharge to fund emergency response preparedness.

2. Oppose legislation that would impose a property insurance surcharge to fund emergency response preparedness.

3. Other.

4. Do nothing.

Status/Summary

Governor Schwarzenegger has proposed an Emergency Response Initiative to fund emergency response preparedness via a 4.8 percent surcharge on all commercial and residential property insurance policies.  The revenues will be used to augment program expenditures in three state departments with emergency response responsibilities and to support a grant program for local agency emergency first responders.  Senator Christine Kehoe has introduced the governor’s proposal as SB 1258 believing that state and local governments lack the financial resources to adequately fund mutual aid responsibilities that serve all Californians.  However, according to the Legislative Analyst’s Office (LAO), the Governor’s proposal “does not tie the proposed surcharge to the direct beneficiaries of these services” and, as a result, the surcharge is a tax.  The LAO believes that the primary beneficiaries of the surcharge will be those property owners who reside in the State Responsibility Areas (SRAs) – wildland areas that are the sole responsibility of CalFire.  Consequently, the LAO recommends that a fee be assessed on the direct beneficiaries of the state’s fire protection services – in other words, the property owners in the SRAs. 

Discussion

In January, Governor Schwarzenegger announced an Emergency Response Initiative to fund emergency response preparedness through a 4.8 percent surcharge on all commercial and residential property insurance policies.  It is estimated that the average surcharge will be $48 per insurance policy.  The revenues will be used for General Fund savings, to augment program expenditures in three departments – the Department of Forestry and Fire Protection (CalFire), California Emergency Management Agency, and the Military Department – and to support a $150 million grant program for local agency emergency first responders.

Senator Christine Kehoe has introduced the governor’s initiative in legislative form as Senate Bill 1258 believing that state and local governments lack the financial resources to adequately fund mutual aid responsibilities.  She states, “California’s communities constantly face a potentially devastating range of fire emergencies and other natural threats or disasters, including flooding, extreme temperatures, mudslides, drought, and earthquakes….  The Emergency Response Initiative will ensure California is prepared by providing first responders with new equipment and technology, improving overall emergency preparedness and response, and proactively helping to save lives and property.  This proposal will benefit all Californians – north, south, coastal, inland, rural, or urban.”

SB 1258 is co-sponsored by the California Fire Chiefs Association, California Professional Firefighters, and the Fire Districts Association of California.  Matthew Bettenhausen, Secretary of the California Emergency Management agency states: “Mutual aid response is the state’s most vital and effective defense against natural and manmade disasters; however, the system can only work when local and state jurisdictions participate with timely resources and trained personnel.”

However, according to the Legislative Analyst’s Office (LAO), the Governor’s Emergency Response Initiative “does not tie the proposed surcharge to the direct beneficiaries of these services” and, as a result, the surcharge is a tax.” The surcharge is being sold as providing needed emergency response services to all Californians.  The LAO, on the other hand, clearly believes that the primary beneficiaries of the surcharge will be those property owners who reside in the State Responsibility Areas (SRAs) – wildland areas that are the sole responsibility of CalFire. The LAO writes that it is not “good policy to raise additional general tax revenues for specific uses that benefit a defined population.”  Consequently, the LAO recommends that the Legislature reject the Governor’s proposal.  The Howard Jarvis Taxpayers Association agrees with the LAO and is therefore opposed to SB 1258; it is the only organization in opposition to the measure.

The LAO, instead, recommends that a fee be assessed on the direct beneficiaries of the state’s fire protection services – in other words, the property owners residing in the SRAs.  According to the LAO, CalFire provides wildland fire services that protect structures that belong to those property owners as well as providing general benefits to the state as a whole.  As a result, the LAO believes that a fee should be levied that divides the cost of these fire protection services between the landowners in the SRA and the state’s General Fund.  “The fee on owners should (1) be generally proportional to the additional costs imposed on the state as a result of the presence of those structures and (2) take into consideration the level of risk faced by the fee payer and the benefit received by the fee payer from CalFire’s services.”