Officials have budget worries in San Mateo County

But the payback process is not straightforward. Instead of simply giving cities and counties back the amount of fee revenue collected in their respective jurisdictions, the state uses a reimbursement formula based on jurisdictions’ nonbasic aid school districts, or those that don’t generate enough property taxes to meet their state-mandated minimum school funding needs.

That works out for most counties, which mostly have nonbasic aid schools. And even though San Mateo County has only a few nonbasic aid schools — meaning most of the districts are fully funded via the area’s property taxes — the money from the property-tax-in-lieu-of-VLF is still critical for cities’ general funds, which help pay for numerous projects and services, ranging from housing to police services and infrastructure needs.

Likely triggered by its severe projected deficit — about $28 billion according to Newsom’s revised budget — the state plans to withhold what it owes to San Mateo County, and it’s one of only three counties being denied such funds. That’s because, with only a few nonbasic aid districts in the county, the state has less of a legally binding obligation to pay it back. While the other two counties, Alpine and Mono, are in a similar predicament, their overall VLF shortfalls are much lower, County Executive Officer Mike Callagy said.

“This is the first year [the Department of Finance] is just saying, ‘We don’t owe you,’” Callagy said. “They’re trying to rely on a loophole, even though they’ve always recognized it.”

The county, including all cities within its borders, is owed about $70 million from last fiscal year, and the projected amount owed for this year is $114 million. Rich Lee, South San Francisco assistant city manager, said the in-lieu fee amount the city is owed comprises almost 9% of its total general fund budget.

And if the state continues claiming it no longer owes the county and its cities such payments — combined with the fact that more school districts are likely to become basic aid — the situation could become increasingly dire.

“By the time you project out for the next 10 years, it’s just going to get orders of magnitude worse. By the time we get to year 10, it’s $300 million plus dollars [countywide],” Lee said of the potential deficit.

Many have been raising concern at council meetings over the last couple months, pressuring elected officials to start thinking of ways to recoup the revenue in other ways. During a February Belmont City Council meeting, city staff noted the VLF payments comprise about 15% of its general fund operations, and even discussed accelerating its recent foray into commercial cannabis operations to help stem the bleeding.

Callagy said its county-specific $41 million VLF shortfall would impact a range of much-needed services and could even lead to large-scale structural deficits.

“It’s going to impact our shelter operations, housing subsidies, school-based health clinics, gun violence prevention programs, our climate change initiatives,” he said. “These are all programs that we are not mandated to have but that we’ve done using our general funds.”

Newsom’s initial budget was released in January without appropriating money for the reimbursements, and the most recent proposed budget still excluded the line item, confirming city officials’ worries.

“We really hoped it would be in [the revised May budget] and that the Department of Finance would come to their senses and do the right thing, and apparently it’s fallen on deaf ears,” Callagy said. “This is the most significant crisis in the way of funding that we have faced in decades.”

But with so few affected counties, creating a sense of urgency has proved difficult.

“It is very politically challenging because there is just Assemblymember Diane Papan and perhaps a few others that are trying to support us,” Lee said. “It’s very difficult.”