Existing property tax law requires the county auditor, in each fiscal year, to allocate property tax revenue to local jurisdictions in accordance with specified formulas and procedures, and generally provides that each jurisdiction shall be allocated an amount equal to the total of the amount of revenue allocated to that jurisdiction in the prior fiscal year, subject to certain modifications, and that jurisdictions portion of the annual tax increment, as defined.

Existing property tax law also requires that, for purposes of determining property tax revenue allocations in each county for the 199293 and 199394 fiscal years, the amounts of property tax revenue deemed allocated in the prior fiscal year to the county, cities, and special districts be reduced in accordance with certain formulas. It requires that the revenues not allocated to the county, cities, and special districts as a result of these reductions be transferred to the Educational Revenue Augmentation Fund in that county for allocation to school districts, community college districts, and the county office of education.

Beginning with the 200405 fiscal year and for each fiscal year thereafter, existing law requires that each city, county, and city and county receive additional property tax revenues in the form of a vehicle license fee adjustment amount, as defined, from a Vehicle License Fee Property Tax Compensation Fund that exists in each county treasury. Existing law requires that these additional allocations be funded from ad valorem property tax revenues otherwise required to be allocated to educational entities.

This bill would modify these reduction and transfer provisions for a city incorporating after January 1, 2004, and on or before January 1, 2012, for the 201415 fiscal year and for each fiscal year thereafter, by providing for a vehicle license fee adjustment amount calculated on the basis of changes in assessed valuation.

By imposing additional duties upon local tax officials with respect to the allocation of ad valorem property tax revenues, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

This bill would incorporate additional changes to Section 97.70 of the Revenue and Taxation Code proposed by AB 448 that would become operative if this bill and AB 448 are both chaptered and this bill is chaptered last.

Existing property tax law requires the county auditor, in each fiscal year, to allocate property tax revenue to local jurisdictions in accordance with specified formulas and procedures, and generally provides that each jurisdiction shall be allocated an amount equal to the total of the amount of revenue allocated to that jurisdiction in the prior fiscal year, subject to certain modifications, and that jurisdictions portion of the annual tax increment, as defined.

Existing property tax law also requires that, for purposes of determining property tax revenue allocations in each county for the 199293 and 199394 fiscal years, the amounts of property tax revenue deemed allocated in the prior fiscal year to the county, cities, and special districts be reduced in accordance with certain formulas. It requires that the revenues not allocated to the county, cities, and special districts as a result of these reductions be transferred to the Educational Revenue Augmentation Fund in that county for allocation to school districts, community college districts, and the county office of education.

Beginning with the 200405 fiscal year and for each fiscal year thereafter, existing law requires that each city, county, and city and county receive additional property tax revenues in the form of a vehicle license fee adjustment amount, as defined, from a Vehicle License Fee Property Tax Compensation Fund that exists in each county treasury. Existing law requires that these additional allocations be funded from ad valorem property tax revenues otherwise required to be allocated to educational entities.

This bill would modify these reduction and transfer provisions for a city incorporating after January 1, 2004, and on or before January 1, 2012, for the 20142015 201415 fiscal year and for each fiscal year thereafter, by providing for a vehicle license fee adjustment amount calculated on the basis of changes in assessed valuation.

By imposing additional duties upon local tax officials with respect to the allocation of ad valorem property tax revenues, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Existing property tax law requires the county auditor, in each fiscal year, to allocate property tax revenue to local jurisdictions in accordance with specified formulas and procedures, and generally provides that each jurisdiction shall be allocated an amount equal to the total of the amount of revenue allocated to that jurisdiction in the prior fiscal year, subject to certain modifications, and that jurisdictions portion of the annual tax increment, as defined.

Existing property tax law also requires that, for purposes of determining property tax revenue allocations in each county for the 199293 and 199394 fiscal years, the amounts of property tax revenue deemed allocated in the prior fiscal year to the county, cities, and special districts be reduced in accordance with certain formulas. It requires that the revenues not allocated to the county, cities, and special districts as a result of these reductions be transferred to the Educational Revenue Augmentation Fund in that county for allocation to school districts, community college districts, and the county office of education.

Beginning with the 200405 fiscal year and for each fiscal year thereafter, existing law requires that each city, county, and city and county receive additional property tax revenues in the form of a vehicle license fee adjustment amount, as defined, from a Vehicle License Fee Property Tax Compensation Fund that exists in each county treasury. Existing law requires that these additional allocations be funded from ad valorem property tax revenues otherwise required to be allocated to educational entities.

This bill would modify these reduction and transfer provisions for a city incorporating after January 1, 2004, and on or before January 1, 2012, for the 20142015 fiscal year and for each fiscal year thereafter, by providing for a vehicle license fee adjustment amount calculated on the basis of changes in assessed valuation.

By imposing additional duties upon local tax officials with respect to the allocation of ad valorem property tax revenues, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

 VETO  

Bill No: SB 25

Author: Roth (D), et al.

Amended: 8/28/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 4/8/15

AYES: Hertzberg, Nguyen, Bates, Beall, Hernandez, Lara, Pavley

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen

SENATE FLOOR: 40-0, 6/1/15

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

SENATE FLOOR: 40-0, 9/2/15

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

ASSEMBLY FLOOR: 79-0, 9/1/15 - See last page for vote

SUBJECT: Local government finance: property tax revenue allocation: vehicle license fee adjustments

SOURCE: Author

DIGEST: This bill changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004.

ANALYSIS:

Existing law:

1. Imposes the vehicle license fee (VLF) in lieu of personal property tax on California motor vehicles, at a rate based on the taxable value of the vehicle.

2. Funds public safety realignment programs with VLF revenues that, before the passage of SB 89 (Committee on Budget and Fiscal Review, Chapter 35, Statutes of 2011), would have been allocated to four cities that incorporated after January 1, 2004.

This bill:

1. Establishes a vehicle license adjustment amount for a city incorporating after January 1, 2004, and on or before January 1, 2012, as follows:

1. A formula to calculate the base year VLF adjustment amount for fiscal year (FY) 2015-16 which uses the population of the incorporating city, times the sum of the most recent VLF adjustment amount for all cities in the county, divided by the sum of the population of all the cities in the county; and

2. A formula to calculate the VLF adjustment amount for the 2016-2017 FY, and each FY thereafter, that includes the percentage change from the immediately preceding FY to the current FY in gross taxable assessed valuation.

Background

In 1998, the Legislature began cutting the VLF rate from 2% to 0.65% of a vehicle's value. The State General Fund backfilled the lost VLF revenues to cities and counties. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the VLF backfill from the State General Fund with property tax revenues that otherwise would have gone to schools through the Educational Revenue Augmentation Fund (ERAF). This replacement funding is known as the “VLF adjustment amount.” The State General Fund backfills schools for their lost ERAF money.

The VLF-property tax swap did not reallocate extra property tax revenues to cities that were not in existence when the State was compensating cities for the difference between the 2% and 0.65% VLF rates. As a result, new cities received less VLF funding than they would have if they had incorporated before the VLF-property tax swap.

Advocates for cities asked the Legislature to reallocate a portion of existing cities’ remaining VLF funds to new cities to help make new city incorporations financially feasible. In response, the Legislature passed AB 1602 (Laird, Chapter 556, Statutes of 2006), which changed the allocation of VLF funds to restore the VLF revenues for city incorporations that were lost under the VLF-property tax “swap.” AB 1602’s formula allocated $50 per capita adjusted annually for growth.

Governor Brown’s 2011 Realignment Proposal shifted the responsibility for some state public safety programs to local governments. The Legislature passed SB 89, which re-calculated the Department of Motor Vehicle’s administration fund to $25 million and increased vehicle license registration by $12 per vehicle to offset DMV’s cut budget. SB 89 also eliminated VLF revenues allocated to cities and shifted those revenues to fund public safety realignment. Proposition 30 (2012) amended the Constitution to permanently dedicate a portion of the sales tax and VLF to local governments to pay for the programs realigned in 2011-12.

Four new cities incorporated after the Laird bill enacted new VLF funding allocations for new cities and before those allocations were repealed. The City of Wildomar incorporated on July 1, 2008. The City of Menifee incorporated on October 1, 2008. The City of Eastvale incorporated on October 1, 2010. Most recently, the City of Jurupa Valley officially incorporated on July 1, 2011, only two days after SB 89 repealed the VLF allocation formulas for new cities.

Advocates for cities argue that SB 89’s elimination of VLF allocations creates fiscal hardships for cities that incorporated with the expectation that they would receive VLF revenues under the formulas enacted by the 2006 Laird bill.

Comments

By abruptly eliminating VLF allocations for recently incorporated cities, SB 89 pulled the rug out from under four cities that chose to incorporate based, in part, on the expectation that they would receive VLF funding under the formulas enacted by the 2006 Laird bill. After SB 89’s enactment, each of the four cities had to make substantial cuts to vital public services that would have been funded by VLF allocations. In the City of Jurupa Valley, SB 89’s fiscal effect was particularly severe, resulting in a loss of 46% of the city’s first year General Fund revenues and a 26% loss of General Fund revenues in subsequent years. This bill helps to rebalance the four cities’ finances by restoring some VLF-related funding.

Related/Prior Legislation

SB 69 (Roth, 2014), which contained provisions that were nearly identical to this bill’s VLFAA formula for cities that incorporated after 2004, was vetoed by Governor Brown.

SB 56 (Roth, 2013) and AB 677 (Fox, 2013) both contained VLF adjustments amounts similar to the provisions in this bill for city incorporations, but included adjustments for annexations as well. SB 56 was held on the Senate Appropriations Committee’s Suspense File. AB 677 was referred to, but never heard by, the Assembly Local Government Committee.

SB 1566 (Negrete McLeod, 2012) and AB 1098 (Carter, 2012) also would have reallocated VLF revenues to newly incorporated cities and to cities that annexed inhabited territory. SB 1566 was held on the Senate Appropriations Committee’s Suspense File. AB 1098 was amended during the last two days of the 2011-12 legislative session to contain SB 1566’s provisions, but was subsequently vetoed by the Governor.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee this bill would result in an annual General Fund impact of about $16.7 million in 2015-16, which would grow each year thereafter by the property tax growth rate.

SUPPORT: (Verified 10/29/15)

California Association of Local Agency Formation Commissions

California Police Chiefs Association

California Professional Firefighters

California State Association of Counties

Cities of Fontana, Menifee, Jurupa Valley and Wildomar

Contra Costa Local Agency Formation Commission

League of California Cities

Orange County Local Agency Formation Commission

Riverside County Board of Supervisors

Riverside Sheriffs Association

San Diego Local Agency Formation Commission

San Mateo Local Agency Formation Commission

Southwest California Legislative Council

OPPOSITION: (Verified 10/29/15)

None received

GOVERNOR'S VETO MESSAGE:

I am returning Senate Bill 25 without my signature.

This bill allows four cities that incorporated after January 1, 2004 and before January 1, 2012 to receive additional property tax revenue through a redistribution of Vehicle License Fee revenue.

My signature of SB 107 provides approximately $24 million dollars in fiscal relief to these four cities. This bill results in additional long term costs to the general fund that the state's budget cannot afford.

ASSEMBLY FLOOR: 79-0, 9/1/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Gordon

Prepared by: Brian Weinberger / GOV. & F. / (916) 651-4119

11/4/15 14:01:19

**** END ****

 UNFINISHED BUSINESS  

Bill No: SB 25

Author: Roth (D), et al.

Amended: 8/28/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 4/8/15

AYES: Hertzberg, Nguyen, Bates, Beall, Hernandez, Lara, Pavley

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen

SENATE FLOOR: 40-0, 6/1/15

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

ASSEMBLY FLOOR: 79-0, 9/01/15 - See last page for vote

SUBJECT: Local government finance: property tax revenue allocation: vehicle license fee adjustments

SOURCE: Author

DIGEST: This bill changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004.

Assembly Amendments add double-jointing language to avoid chaptering out conflicts in the event that both this bill and AB 448 (Brown), which also amends Section 97.70 of the Revenue & Taxation Code, are enacted into law.

ANALYSIS:

Existing law:

1. Imposes the vehicle license fee (VLF) in lieu of personal property tax on California motor vehicles, at a rate based on the taxable value of the vehicle.

2. Funds public safety realignment programs with VLF revenues that, before the passage of SB 89 (Committee on Budget and Fiscal Review, Chapter 35, Statutes of 2011), would have been allocated to four cities that incorporated after January 1, 2004.

This bill:

1. Establishes a vehicle license adjustment amount for a city incorporating after January 1, 2004, and on or before January 1, 2012, as follows:

1. A formula to calculate the base year VLF adjustment amount for fiscal year (FY) 2015-16 which uses the population of the incorporating city, times the sum of the most recent VLF adjustment amount for all cities in the county, divided by the sum of the population of all the cities in the county; and

2. A formula to calculate the VLF adjustment amount for the 2016-2017 FY, and each FY thereafter, that includes the percentage change from the immediately preceding FY to the current FY in gross taxable assessed valuation.

Background

In 1998, the Legislature began cutting the VLF rate from 2% to 0.65% of a vehicle's value. The State General Fund backfilled the lost VLF revenues to cities and counties. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the VLF backfill from the State General Fund with property tax revenues that otherwise would have gone to schools through the Educational Revenue Augmentation Fund (ERAF). This replacement funding is known as the “VLF adjustment amount.” The State General Fund backfills schools for their lost ERAF money.

The VLF-property tax swap did not reallocate extra property tax revenues to cities that were not in existence when the State was compensating cities for the difference between the 2% and 0.65% VLF rates. As a result, new cities received less VLF funding than they would have if they had incorporated before the VLF-property tax swap.

Advocates for cities asked the Legislature to reallocate a portion of existing cities’ remaining VLF funds to new cities to help make new city incorporations financially feasible. In response, the Legislature passed AB 1602 (Laird, Chapter 556, Statutes of 2006), which changed the allocation of VLF funds to restore the VLF revenues for city incorporations that were lost under the VLF-property tax “swap.” AB 1602’s formula allocated $50 per capita adjusted annually for growth.

Governor Brown’s 2011 Realignment Proposal shifted the responsibility for some state public safety programs to local governments. The Legislature passed SB 89, which re-calculated the Department of Motor Vehicle’s administration fund to $25 million and increased vehicle license registration by $12 per vehicle to offset DMV’s cut budget. SB 89 also eliminated VLF revenues allocated to cities and shifted those revenues to fund public safety realignment. Proposition 30 (2012) amended the Constitution to permanently dedicate a portion of the sales tax and VLF to local governments to pay for the programs realigned in 2011-12.

Four new cities incorporated after the Laird bill enacted new VLF funding allocations for new cities and before those allocations were repealed. The City of Wildomar incorporated on July 1, 2008. The City of Menifee incorporated on October 1, 2008. The City of Eastvale incorporated on October 1, 2010. Most recently, the City of Jurupa Valley officially incorporated on July 1, 2011, only two days after SB 89 repealed the VLF allocation formulas for new cities.

Advocates for cities argue that SB 89’s elimination of VLF allocations creates fiscal hardships for cities that incorporated with the expectation that they would receive VLF revenues under the formulas enacted by the 2006 Laird bill.

Comments

By abruptly eliminating VLF allocations for recently incorporated cities, SB 89 pulled the rug out from under four cities that chose to incorporate based, in part, on the expectation that they would receive VLF funding under the formulas enacted by the 2006 Laird bill. After SB 89’s enactment, each of the four cities had to make substantial cuts to vital public services that would have been funded by VLF allocations. In the City of Jurupa Valley, SB 89’s fiscal effect was particularly severe, resulting in a loss of 46% of the city’s first year General Fund revenues and a 26% loss of General Fund revenues in subsequent years. This bill helps to rebalance the four cities’ finances by restoring some VLF-related funding.

Related/Prior Legislation

SB 69 (Roth, 2014), which contained provisions that were nearly identical to this bill’s VLFAA formula for cities that incorporated after 2004, was vetoed by Governor Brown.

SB 56 (Roth, 2013) and AB 677 (Fox, 2013) both contained VLF adjustments amounts similar to the provisions in this bill for city incorporations, but included adjustments for annexations as well. SB 56 was held on the Senate Appropriations Committee’s Suspense File. AB 677 was referred to, but never heard by, the Assembly Local Government Committee.

SB 1566 (Negrete McLeod, 2012) and AB 1098 (Carter, 2012) also would have reallocated VLF revenues to newly incorporated cities and to cities that annexed inhabited territory. SB 1566 was held on the Senate Appropriations Committee’s Suspense File. AB 1098 was amended during the last two days of the 2011-12 legislative session to contain SB 1566’s provisions, but was subsequently vetoed by the Governor.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee this bill would result in an annual General Fund impact of about $16.7 million in 2015-16, which would grow each year thereafter by the property tax growth rate.

SUPPORT: (Verified 9/1/15)

California Association of Local Agency Formation Commissions

California Police Chiefs Association

California Professional Firefighters

California State Association of Counties

Cities of Fontana, Menifee, Jurupa Valley and Wildomar

Contra Costa Local Agency Formation Commission

League of California Cities

Orange County Local Agency Formation Commission

Riverside County Board of Supervisors

Riverside Sheriffs Association

San Diego Local Agency Formation Commission

San Mateo Local Agency Formation Commission

Southwest California Legislative Council

OPPOSITION: (Verified 9/1/15)

None received

ASSEMBLY FLOOR: 79-0, 9/01/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Gordon

Prepared by: Brian Weinberger / GOV. & F. / (916) 651-4119

9/1/15 20:15:44

**** END ****

SENATE THIRD READING

STR Bill Id:SB 25

Author:(Roth)

As Amended Ver:August 28, 2015

Majority vote

SENATE VOTE: 40-0

SUMMARY: Provides a city incorporating after January 1, 2004, and on or before January 1, 2012, with property tax in lieu of vehicle license fees (VLF). Specifically, this bill:

1. Establishes a vehicle license adjustment amount for a city incorporating after January 1, 2004, and on or before January 1, 2012, as follows:

1. A formula to calculate the base year VLF adjustment amount for fiscal year (FY) 2015-16 which uses the population of the incorporating city, times the sum of the most recent VLF adjustment amount for all cities in the county, divided by the sum of the population of all the cities in the county; and,

2. A formula to calculate the VLF adjustment amount for FY 2016-17, and each FY thereafter, that includes the percentage change from the immediately preceding FY to the current FY in gross taxable assessed valuation (property tax revenues).

2. Contains chaptering out language to avoid conflicts with AB 448 (Brown) of the current legislative session.

3. Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current law governing state mandated local costs.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. On-going costs of approximately $17 million (General Fund) to backfill property tax reductions to schools as follows:

1. This bill will result in a one-time shift of approximately $16.7 million from the Riverside County Educational Revenue Augmentation Fund (ERAF) to the cities of Jurupa Valley, Eastvale, Menifee, and Wildomar, and permanently "re-base" the VLF adjustment amount going forward. The General Fund would generally backfill the reductions from ERAF to replace funding that would otherwise go to schools pursuant to Proposition 98 (1988) minimum funding guarantees. As such, the bill would result in an annual General Fund impact of about $16.7 million in 2015-16, which would grow each year thereafter by the property tax growth rate.

2. Unknown, likely minor state reimbursable costs to Riverside County to adjust property tax allocation formulas for the four recently-incorporated cities (General Fund). It is unlikely that the county would file a claim for reimbursement for these minor one-time costs.

COMMENTS:

1. VLF. VLF is a tax on the ownership of a registered vehicle in place of taxing vehicles as personal property. Prior to 1935, vehicles in California were subject to property tax, but the Legislature decided to create a state wide system of vehicle taxation. The taxable value of a vehicle is established by the purchase price of the vehicle, depreciated annually according to a statutory schedule. Prior to recent budget actions, the state collected and allocated the VLF revenues, minus administrative costs, to cities and counties. The VLF tax rate is currently 0.65% of the value of a vehicle, but historically (from 1948-2004) it was 2%. In 1998, the Legislature cut the VLF rate from 2% to 0.65 % of a vehicle's value. The state General Fund backfilled the lost revenues to cities and counties with revenues equivalent to the full 2% VLF tax rate.

2. VLF-Property Tax Swap (2004-05 Budget) and Subsequent Legislation. Prior to the 2004 budget agreement, the total VLF revenue, including the backfill from the state General Fund, was allocated in proportion to population. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the backfill from the state General Fund with property tax revenues (dollar for dollar) that otherwise would have gone to schools through ERAF. This replacement funding is known as the "VLF adjustment amount". The state General Fund then backfilled schools for the lost ERAF money. After the dollar for dollar swap in Fiscal Year 04-05, property tax in lieu of VLF payments (VLF adjustment amount) to cities and counties is allocated in proportion to each jurisdiction's annual change in gross assessed valuation (property tax revenues).

The 2004-05 budget agreement did not provide compensating property-tax-in-lieu-of-VLF for future new cities or for annexations to cities where there was pre-existing development. Prior to the 2004-05 budget agreement, a newly incorporated city received additional VLF revenues based on three times the number of registered voters in the city at the time of incorporation. For most cities, this increased allocation continued for the first seven years. Following the 2004-05 budget agreement, no cities received this VLF revenue bump upon incorporation. Cities that had not incorporated by FY 2004-05 receive no property tax in lieu of VLF, and therefore, do not have a VLF adjustment amount.

The temporary remedy to address the lack of property-tax-in-lieu-of-VLF for annexations and incorporations after the budget agreement on August 5, 2004, came in the form of AB 1602 (Laird), Chapter 556, Statutes of 2006. AB 1602 specified that a city that annexes, or an unincorporated area that incorporates after August 5, 2004, but prior to July 1, 2009, will receive special allocations from a portion of the remaining VLF revenues. The funding formula contained in AB 1602 incorporated an artificially inflated population factor during the first five years for start-up costs, which roughly replicated the broad fiscal incentive for city incorporations that existed before the VLF-property tax swap in 2004. Similarly, for annexations that had pre-existing residential development, AB 1602 increased the per capita VLF allocation, based on each person residing in an annexed area at the time of annexation in addition to the allocation of VLF revenues, to levels comparable to pre-2004 allocations. AB 1602 expired on July 1, 2009, and gave communities five years to complete annexations or incorporations that were initiated under the assumption that VLF funding would be available. SB 301 (Romero), Chapter 375, Statutes 2008, eliminated the deadline that communities had to incorporate and eliminated the sunset date for city annexations to receive additional VLF.

SB 89 (Budget and Fiscal Review Committee), Chapter 35, Statutes of 2011, redirected VLF revenues away from newly incorporated cities, annexations, and diverted funds to the Local Law Enforcement Account to help fund public safety realignment. SB 89 also allocated $25 million to the Department of Motor Vehicles (DMV) in FY 2011-12 for administrative costs and increased the basic vehicle registration fee from $31 to $43.

According to the Senate Appropriations Committee, SB 89 had the effect of eliminating over $15 million in the Motor Vehicle License Fee (MVLFA) revenues in 2011-12 from four newly incorporated cities (Menifee [October 1, 2008], Eastvale [October 1, 2010], Wildomar [July 1, 2008], and Jurupa Valley [July 1, 2011]), as well as over $4 million from cities that have annexed inhabited areas. By abruptly cutting the allocation of VLF funds to newly incorporated cities and for inhabited city annexations, the realignment shift in 2011 disproportionally endangered the fiscal viability of communities that rely on VLF revenues. For example, the City of Jurupa Valley, which incorporated within days of the passage of SB 89, anticipated VLF revenues representing 47% of its General Fund budget.

3. Bill Summary. This bill establishes a base year VLF adjustment amount for FY 2015-16 for cities that incorporated after January 1, 2004, and on or before January 1, 2012, to replicate funds that existed for new cities prior to 2004. In each subsequent FY, the VLF adjustment amount for these cities would be the jurisdiction's annual change in the assessed valuation which is the same formula used to calculate the VLF adjustment amount for other cities. This bill will only impact four cities: Jurupa Valley, Eastvale, Menifee, and Wildomar, which all incorporated during the timeframe contained in the bill. This bill does not provide a VLF adjustment amount for cities incorporating after January 1, 2012. This bill is author-sponsored.

4. Author's Statement. According to the author, "In 2011, one of the steps the Legislature took to close the state's massive budget gap was to pass Senate Bill 89 which eliminated Vehicle License Fee (VLF) revenue allocated to newly incorporated cities and annexed areas. As a result, four newly incorporated cities in Riverside County – Eastvale, Jurupa Valley, Menifee and Wildomar – lost critical funding.

"The situation for the City of Jurupa Valley is especially urgent, as VLF funding was eliminated only days before the city incorporated. The residents had voted for cityhood based on state VLF money being available for the new city. Jurupa Valley now faces disincorporation, potentially forcing Riverside County to provide essential services to residents which the County has not budgeted for."

5. Previous Legislative Attempts to Address the Impacts of SB 89. SB 1566 (Negrete McLeod) of 2012, and AB 1098 (Carter) of 2012, sought to remedy the loss of ongoing revenues to new cities and annexations after the 2004 VLF property tax swap, a fix that was achieved by AB 1602. SB 89 did not remove the formulas to calculate the VLF revenue to incorporated or annexed cities in statute. SB 1566 and AB 1098 would have restored the funding allocations in AB 1602. SB 1566 died on the Senate Appropriations Committee's suspense file. The Governor vetoed AB 1098, stating that its reallocation of VLF revenues "undermine the 2011 Realignment formulas that would jeopardize dollars for local public safety programs, provides cities new funding beyond what existed under previous law, and would create a hole in the General Fund to the tune of $18 million. Given the current fiscal uncertainties, this is not acceptable."

SB 56 (Roth) of 2013 was returned to the Secretary of Senate without further action, pursuant to Joint Rule 56. AB 677 (Fox) of 2013 was filed with the Chief Clerk without further action, pursuant to Joint Rule 56. SB 56 would have established VLF adjustment amounts for annexations, and also included a formula for cities that incorporated after 2004 to receive a VLF adjustment amount similar to the formulas established in this bill.

AB 1521 (Fox) of 2014, which was vetoed by the Governor, would have modified the amount of VLF allocated to counties and cities to include changes in the assessed valuation within annexed areas, and is nearly identical to AB 448, currently pending in the Senate.

SB 69 (Roth) of 2014, which was vetoed by the Governor, would have provided a city incorporating after January 1, 2004, and on or before January 1, 2012, with property tax in lieu of VLF, and is nearly identical to the provisions in this bill.

6. Policy Consideration. The Governor's veto message for SB 69 (Roth) of 2014, states, "While it is true that the state's economy has improved markedly, and significant progress has been made in aligning revenues and expenditures, I do not believe that it would be prudent to authorize legislation that would result in long term costs to the general fund that this bill would occasion."

7. Arguments in Support. Supporters argue that this bill reinstates a critical funding component to cities incorporated between January 1, 2004, and January 1, 2012, and ensures their continued viability.

8. Arguments in Opposition. None on file.

Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958 FN: 0001632

Date of Hearing: August 19, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

SBPCA Bill Id:SB 25

Author:(Roth) – As Introduced Ver:December 1, 2014

Urgency: No State Mandated Local Program: Yes Reimbursable: Yes

SUMMARY:

This bill establishes a motor vehicle license fee (VLF) adjustment amount for cities that incorporated after January 1, 2004, and on or before January 1, 2012.

FISCAL EFFECT:

1. On-going costs of approximately $17 million (GF) to backfill property tax reductions to schools as follows:

1. This bill will result in a one-time shift of approximately $16.7 million from the Riverside County Educational Revenue Augmentation Fund (ERAF) to the cities of Jurupa Valley, Eastvale, Menifee, and Wildomar, and permanently “re-base” the VLF adjustment amount going forward. The General Fund would generally backfill the reductions from ERAF to replace funding that would otherwise go to schools pursuant to Proposition 98 minimum funding guarantees. As such, the bill would result in an annual General Fund impact of about $16.7 million in 2015-16, which would grow each year thereafter by the property tax growth rate.

2. Unknown, likely minor state reimbursable costs to Riverside County to adjust property tax allocation formulas for the four recently-incorporated cities (GF). It is unlikely that the county would file a claim for reimbursement for these minor one-time costs.

COMMENTS:

1. Purpose. This is the sixth legislative attempt to address the disproportionate impact the 2011 budget trailer bill (SB 89) had on cities that incorporated after January 1, 2004, and on or before January 1, 2012. These incorporations were funded, in part, through an increased share of VLF revenue. In an effort to fund realignment, SB 89 shifted approximately $150 million of VLF revenue to the Local Law Enforcement Services Account. The author notes that by abruptly cutting the allocation of VLF funds to newly incorporated cities, the realignment shift in 2011 disproportionally endangered the fiscal viability of communities that rely on VLF revenues. For example, for the City of Jurupa Valley which incorporated within days of the passage of SB 89, the anticipated VLF revenues represented 47% of its General Fund budget.

This bill impacts only the four cities that incorporated during the timeframe in the bill, Jurupa Valley, Eastvale, Menifee, and Wildomar, all in Riverside County. The bill establishes a base year VLF adjustment amount for these cities for FY 2015-16 to replicate funds that existed for new cities prior to 2004.

2. Background. Current law imposes the VLF in lieu of personal property tax on California motor vehicles, at a rate based on the taxable value of the vehicle. The state collects and allocates the VLF revenues, minus administrative costs, to cities and counties. In 1998, the VLF rate was reduced and the state General Fund backfilled the lost revenues to cities and counties.
   
   

As part of the 2004 budget agreement, the Legislature enacted a “VLF-property tax swap,” which permanently reduced the VLF rate to 0.65 percent, repealed the direct offset payments from the General Fund, and instead replaced lost local revenues with property taxes that would otherwise have gone to schools through the ERAF in each county. The replacement funding was known as the “VLF adjustment amount.” The state General Fund generally backfills local school funding that is reduced through the ERAF shift.

Prior to 2004, the state had historically provided additional VLF revenue to newly incorporated cities. The budget agreement, however, did not provide compensating property-tax-in-lieu-of-VLF for future new cities or for annexations. A temporary remedy came with the passage of AB 1602 (Laird) Chapter 556, Statutes of 2006, which, until July 1, 2011, provided additional revenue from reallocating a portion of existing cities’ VLF funds to new cities and cities that annexed inhabited areas in order to make new incorporations and annexations financially feasible.

As part of the realignment proposal in the 2011-12 Budget, SB 89 (Budget and Fiscal Review Committee), Chapter 35, Statutes of 2011, among other provisions, shifted VLF revenues from cities to fund local law enforcement grants through the newly established Local Law Enforcement Services Account. SB 89 also eliminated the formulas established by AB 1602 (Laird) that provided enhanced VLF revenues to newly incorporated cities and cities that annex inhabited territory. This action eliminated over $15 million in VLF revenues in 2011-12 for four newly incorporated cities (Menifee, Eastvale, Wildomar, and Jurupa Valley), as well as over $4 million from cities that had annexed inhabited areas (Chico, San Ramon, Santa Clarita, Temecula, Fontana, San Jose, Porterville, Tulare and Visalia).

3. Related Legislation. AB 448 (Brown), pending on the Senate Appropriations Committee's Suspense File, contains a similar adjustment for cities that annexed inhabited areas.

4. Prior Legislation.

1. SB 69 (Roth) of 2014, nearly identical to this bill, would have provided a city incorporating after January 1, 2004, and on or before January 1, 2012, with property tax in lieu of VLF. SB 69 was vetoed by the Governor. In his veto message the Governor remarked, "…I do not believe that it would be prudent to authorize legislation that would result in long term costs to the general fund that this bill would occasion."

2. AB 1521 (Fox) of 2014, nearly identical to this year's AB 448, would have modified the amount of VLF allocated to counties and cities to include changes in the assessed valuation within annexed areas. AB 1521 was vetoed by the Governor. His veto message was similar to that of SB 69, citing long term costs to the general fund.

3. SB 56 (Roth) of 2013 and AB 677 (Fox) of 2013, both contained VLF adjustments amounts for both annexations and city incorporations, similar to the provisions of AB 1521 for annexations and SB 69 in 2014. SB 56 (Roth) was held on the Senate Appropriations Committee's Suspense File. AB 677 (Fox) was referred to, but never heard by, the Assembly Local Government Committee.

4. SB 1566 (Negrete McLeod, 2012) and AB 1098 (Carter, 2012) also would have reallocated VLF revenues to newly incorporated cities and to cities that annexed inhabited territory. SB 1566 was held on the Senate Appropriations Committee's Suspense File. AB 1098 was amended during the last two days of the 2011-12 legislative session to contain SB 1566's provisions and was vetoed by the Governor.

Analysis Prepared by: Jennifer Swenson / APPR. / (916) 319-2081

Date of Hearing: July 15, 2015

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Brian Maienschein, Chair

SBPCA Bill Id:SB 25

Author:(Roth) – As Introduced Ver:December 1, 2014

SENATE VOTE: 40-0

SUBJECT: Local government finance: property tax revenue allocation: vehicle license fee adjustments.

SUMMARY: Provides a city incorporating after January 1, 2004, and on or before January 1, 2012, with property tax in lieu of vehicle license fees (VLF). Specifically, this bill:

1. Establishes a vehicle license adjustment amount for a city incorporating after January 1, 2004, and on or before January 1, 2012, as follows:

1. A formula to calculate the base year VLF adjustment amount for fiscal year (FY) 2015-16 which uses the population of the incorporating city, times the sum of the most recent VLF adjustment amount for all cities in the county, divided by the sum of the population of all the cities in the county; and,

2. A formula to calculate the VLF adjustment amount for FY 2016-17, and each FY thereafter, that includes the percentage change from the immediately preceding FY to the current FY in gross taxable assessed valuation (property tax revenues).

2. Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current law governing state mandated local costs.

FISCAL EFFECT: According to the Senate Appropriations Committee, there is a one-time, permanent shift of approximately $16.7 million in property tax revenues in 2015-16 from the Riverside County [Educational Revenue Augmentation Fund] (ERAF) to four recently-incorporated cities. The General Fund would generally backfill the reductions from ERAF to replace funding that would otherwise go to schools pursuant to Proposition 98 minimum funding guarantees. The initial General Fund backfill payments would increase each year thereafter at the property tax growth rate. Unknown, likely minor state reimbursable costs to Riverside County officials to adjust property tax allocation formulas for the four recently-incorporated cities (General Fund). It is unlikely that counties would file a claim for reimbursement for these minor one-time costs.

COMMENTS:

1. VLF. VLF is a tax on the ownership of a registered vehicle in place of taxing vehicles as personal property. Prior to 1935, vehicles in California were subject to property tax, but the Legislature decided to create a state wide system of vehicle taxation. The taxable value of a vehicle is established by the purchase price of the vehicle, depreciated annually according to a statutory schedule. Prior to recent budget actions, the state collected and allocated the VLF revenues, minus administrative costs, to cities and counties. The VLF tax rate is currently 0.65% of the value of a vehicle, but historically (from 1948-2004) it was 2%. In 1998, the Legislature cut the VLF rate from 2% to 0.65 % of a vehicle's value. The state General Fund backfilled the lost revenues to cities and counties with revenues equivalent to the full 2% VLF tax rate.

2. VLF-Property Tax Swap (2004-05 Budget) and Subsequent Legislation. Prior to the 2004 budget agreement, the total VLF revenue, including the backfill from the state General Fund, was allocated in proportion to population. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the backfill from the state General Fund with property tax revenues (dollar for dollar) that otherwise would have gone to schools through ERAF. This replacement funding is known as the "VLF adjustment amount". The state General Fund then backfilled schools for the lost ERAF money. After the dollar for dollar swap in FY 04-05, property tax in lieu of VLF payments (VLF adjustment amount) to cities and counties is allocated in proportion to each jurisdiction's annual change in gross assessed valuation (property tax revenues).

The 2004-05 budget agreement did not provide compensating property-tax-in-lieu-of-VLF for future new cities or for annexations to cities where there was pre-existing development. Prior to the 2004-05 budget agreement, a newly incorporated city received additional VLF revenues based on three times the number of registered voters in the city at the time of incorporation. For most cities, this increased allocation continued for the first seven years. Following the 2004-05 budget agreement, no cities received this VLF revenue bump upon incorporation. Cities that had not incorporated by FY 2004-05 receive no property tax in lieu of VLF, and therefore, do not have a VLF adjustment amount.

The temporary remedy to address the lack of property-tax-in-lieu-of-VLF for annexations and incorporations after the budget agreement on August 5, 2004, came in the form of
AB 1602 (Laird), Chapter 556, Statutes of 2006. AB 1602 specified that a city that annexes, or an unincorporated area that incorporates after August 5, 2004, but prior to July 1, 2009, will receive special allocations from a portion of the remaining VLF revenues. The funding formula contained in AB 1602 incorporated an artificially inflated population factor during the first five years for start-up costs, which roughly replicated the broad fiscal incentive for city incorporations that existed before the VLF-property tax swap in 2004. Similarly, for annexations that had pre-existing residential development, AB 1602 increased the per capita VLF allocation, based on each person residing in an annexed area at the time of annexation in addition to the allocation of VLF revenues, to levels comparable to pre-2004 allocations. AB 1602 expired on July 1, 2009, and gave communities five years to complete annexations or incorporations that were initiated under the assumption that VLF funding would be available. SB 301 (Romero), Chapter 375, Statutes 2008, eliminated the deadline that communities had to incorporate and eliminated the sunset date for city annexations to receive additional VLF.

SB 89 (Budget and Fiscal Review Committee), Chapter 35, Statutes of 2011, redirected VLF revenues away from newly incorporated cities, annexations, and diverted funds to the Local Law Enforcement Account to help fund public safety realignment. SB 89 also allocated $25 million to the Department of Motor Vehicles (DMV) in FY 2011-12 for administrative costs and increased the basic vehicle registration fee from $31 to $43.

According to the Senate Appropriations Committee, SB 89 had the effect of eliminating over $15 million in the Motor Vehicle License Fee (MVLFA) revenues in 2011-12 from four newly incorporated cities (Menifee [October 1, 2008], Eastvale [October 1, 2010], Wildomar [July 1, 2008], and Jurupa Valley [July 1, 2011]), as well as over $4 million from cities that have annexed inhabited areas. By abruptly cutting the allocation of VLF funds to newly incorporated cities and for inhabited city annexations, the realignment shift in 2011 disproportionally endangered the fiscal viability of communities that rely on VLF revenues. For example, the City of Jurupa Valley, which incorporated within days of the passage of
SB 89, anticipated VLF revenues representing 47% of its General Fund budget.

3. Bill Summary. This bill establishes a base year VLF adjustment amount for FY 2015-16 for cities that incorporated after January 1, 2004, and on or before January 1, 2012, to replicate funds that existed for new cities prior to 2004. In each subsequent FY, the VLF adjustment amount for these cities would be the jurisdiction's annual change in the assessed valuation which is the same formula used to calculate the VLF adjustment amount for other cities. This bill will only impact four cities: Jurupa Valley, Eastvale, Menifee, and Wildomar, which all incorporated during the timeframe contained in the bill. This bill does not provide a VLF adjustment amount for cities incorporating after January 1, 2012. This bill is author-sponsored.

4. Author's Statement. According to the author, "In 2011, one of the steps the Legislature took to close the state’s massive budget gap was to pass Senate Bill 89 which eliminated Vehicle License Fee (VLF) revenue allocated to newly incorporated cities and annexed areas. As a result, four newly incorporated cities in Riverside County – Eastvale, Jurupa Valley, Menifee and Wildomar – lost critical funding.

"The situation for the City of Jurupa Valley is especially urgent, as VLF funding was eliminated only days before the city incorporated. The residents had voted for cityhood based on state VLF money being available for the new city. Jurupa Valley now faces disincorporation, potentially forcing Riverside County to provide essential services to residents which the County has not budgeted for.

"While ongoing funding is critical to stabilize new cities and annexations, VLF revenue is no longer available as a funding source for cities due to the passage of Proposition 30 (2012), which requires that VLF funds be used exclusively for criminal justice realignment. Cities play a vital role in fulfilling many of the state’s policy goals which include achieving smart growth objectives, promoting transportation and infrastructure investments, meeting affordable housing needs, and realizing greenhouse gas reduction goals.

"SB 25 utilizes a county’s ERAF. If the funds are fully used, the school share of ERAF will be used to make up the difference. This will be fully reimbursed by the state’s general fund so there is no impact on schools. SB 25 will provide funding for newly incorporated cities and cities which annexed inhabited areas that lost funding as a result of SB 89 (2011) and will not provide new money for cities."

5. Previous Legislative Attempts to Address the Impacts of SB 89. SB 1566 (Negrete McLeod) of 2012, and AB 1098 (Carter) of 2012, sought to remedy the loss of ongoing revenues to new cities and annexations after the 2004 VLF property tax swap, a fix that was achieved by AB 1602. SB 89 did not remove the formulas to calculate the VLF revenue to incorporated or annexed cities in statute. SB 1566 and AB 1098 would have restored the funding allocations in AB 1602. SB 1566 died on the Senate Appropriations Committee's suspense file. The Governor vetoed AB 1098, stating that its reallocation of VLF revenues “undermine the 2011 Realignment formulas that would jeopardize dollars for local public safety programs, provides cities new funding beyond what existed under previous law, and would create a hole in the General Fund to the tune of $18 million. Given the current fiscal uncertainties, this is not acceptable.”

SB 56 (Roth) of 2013 was returned to the Secretary of Senate without further action, pursuant to Joint Rule 56. AB 677 (Fox) of 2013 was filed with the Chief Clerk without further action, pursuant to Joint Rule 56. SB 56 would have established VLF adjustment amounts for annexations, and also included a formula for cities that incorporated after 2004 to receive a VLF adjustment amount similar to the formulas established in this bill.

AB 701 (Quirk-Silva), Chapter 393, Statutes of 2013, increased Orange County’s VLF adjustment amount to reflect the amount that the County would receive, if its VLF adjustment amount had not been offset, in 2004, to help the County finance its bankruptcy-related debt. AB 701 increased Orange County's VLF adjustment amount by $53 million in FY 2013-14 and required that the calculation for FY 2014-15, and each FY thereafter, is based on a prior FY amount that reflects the full amount of the one-time increase of $53 million. The amount is adjusted annually by the annual property tax growth rate in the County, which is the same for all other counties.

AB 1521 (Fox) of 2014, which was vetoed by the Governor, would have modified the amount of VLF allocated to counties and cities to include changes in the assessed valuation within annexed areas, and is nearly identical to AB 448 (Brown), currently pending in the Senate Appropriations Committee.

SB 69 (Roth) of 2014, which was vetoed by the Governor, would have provided a city incorporating after January 1, 2004, and on or before January 1, 2012, with property tax in lieu of VLF, and is nearly identical to the provisions in this bill.

6. Conflicting Legislation. Provisions of this bill conflict with AB 448 (Brown) and may need amendments to address the conflict, should the bills continue to move through the legislative process.

7. Policy Consideration. The Governor's veto message for SB 69 (Roth) of 2014, states, "While it is true that the state's economy has improved markedly, and significant progress has been made in aligning revenues and expenditures, I do not believe that it would be prudent to authorize legislation that would result in long term costs to the general fund that this bill would occasion."

8. Arguments in Support. Supporters argue that this bill reinstates a critical funding component to cities incorporated between January 1, 2004, and January 1, 2012, and ensures their continued viability.

9. Arguments in Opposition. None on file.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Local Agency Formation Commissions

California Police Chiefs Association

California Professional Firefighters

California State Association of Counties

Cities of Fontana, Menifee, Jurupa Valley and Wildomar

Contra Costa Local Agency Formation Commission

League of California Cities

Orange County Local Agency Formation Commission

Riverside County Board of Supervisors

Riverside Sheriffs Association

San Diego Local Agency Formation Commission

San Mateo Local Agency Formation Commission

Southwest California Legislative Council

Opposition

None on file

Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958

 THIRD READING  

Bill No: SB 25

Author: Roth (D), et al.

Introduced: 12/1/14

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 4/8/15

AYES: Hertzberg, Nguyen, Bates, Beall, Hernandez, Lara, Pavley

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen

SUBJECT: Local government finance: property tax revenue allocation: vehicle license fee adjustments

SOURCE: Author

DIGEST: This bill changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004.

ANALYSIS:

Existing law:

1. Imposes the vehicle license fee (VLF) in lieu of personal property tax on California motor vehicles, at a rate based on the taxable value of the vehicle.

2. Funds public safety realignment programs with VLF revenues that, before the passage of SB 89 (Committee on Budget and Fiscal Review, Chapter 35, Statutes of 2011), would have been allocated to four cities that incorporated after January 1, 2004.

This bill:

1. Establishes a vehicle license adjustment amount for a city incorporating after January 1, 2004, and on or before January 1, 2012, as follows:

   1. A formula to calculate the base year VLF adjustment amount for fiscal year (FY) 2015-16 which uses the population of the incorporating city, times the sum of the most recent VLF adjustment amount for all cities in the county, divided by the sum of the population of all the cities in the county; and

   2. A formula to calculate the VLF adjustment amount for the 2016-2017 FY, and each FY thereafter, that includes the percentage change from the immediately preceding FY to the current FY in gross taxable assessed valuation.

Background

In 1998, the Legislature began cutting the VLF rate from 2% to 0.65% of a vehicle's value. The State General Fund backfilled the lost VLF revenues to cities and counties. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the VLF backfill from the State General Fund with property tax revenues that otherwise would have gone to schools through the Educational Revenue Augmentation Fund (ERAF). This replacement funding is known as the “VLF adjustment amount.” The State General Fund backfills schools for their lost ERAF money.

The VLF-property tax swap did not reallocate extra property tax revenues to cities that were not in existence when the State was compensating cities for the difference between the 2% and 0.65% VLF rates. As a result, new cities received less VLF funding than they would have if they had incorporated before the VLF-property tax swap.

Advocates for cities asked the Legislature to reallocate a portion of existing cities’ remaining VLF funds to new cities to help make new city incorporations financially feasible. In response, the Legislature passed AB 1602 (Laird, Chapter 556, Statutes of 2006), which changed the allocation of VLF funds to restore the VLF revenues for city incorporations that were lost under the VLF-property tax “swap.” AB 1602’s formula allocated $50 per capita adjusted annually for growth.

Governor Brown’s 2011 Realignment Proposal shifted the responsibility for some state public safety programs to local governments. The Legislature passed SB 89, which re-calculated the Department of Motor Vehicle’s administration fund to $25 million and increased vehicle license registration by $12 per vehicle to offset DMV’s cut budget. SB 89 also eliminated VLF revenues allocated to cities and shifted those revenues to fund public safety realignment. Proposition 30 (2012) amended the Constitution to permanently dedicate a portion of the sales tax and VLF to local governments to pay for the programs realigned in 2011-12.

Four new cities incorporated after the Laird bill enacted new VLF funding allocations for new cities and before those allocations were repealed. The City of Wildomar incorporated on July 1, 2008. The City of Menifee incorporated on October 1, 2008. The City of Eastvale incorporated on October 1, 2010. Most recently, the City of Jurupa Valley officially incorporated on July 1, 2011, only two days after SB 89 repealed the VLF allocation formulas for new cities.

Advocates for cities argue that SB 89’s elimination of VLF allocations creates fiscal hardships for cities that incorporated with the expectation that they would receive VLF revenues under the formulas enacted by the 2006 Laird bill.

Comments

By abruptly eliminating VLF allocations for recently incorporated cities, SB 89 pulled the rug out from under four cities that chose to incorporate based, in part, on the expectation that they would receive VLF funding under the formulas enacted by the 2006 Laird bill. After SB 89’s enactment, each of the four cities had to make substantial cuts to vital public services that would have been funded by VLF allocations. In the City of Jurupa Valley, SB 89’s fiscal effect was particularly severe, resulting in a loss of 46% of the city’s first year General Fund revenues and a 26% loss of General Fund revenues in subsequent years. This bill helps to rebalance the four cities’ finances by restoring some VLF-related funding.

Related/Prior Legislation

SB 69 (Roth, 2014), which contained provisions that were nearly identical to this bill’s VLFAA formula for cities that incorporated after 2004, was vetoed by Governor Brown.

SB 56 (Roth, 2013) and AB 677 (Fox, 2013) both contained VLF adjustments amounts similar to the provisions in this bill for city incorporations, but included adjustments for annexations as well. SB 56 was held on the Senate Appropriations Committee’s Suspense File. AB 677 was referred to, but never heard by, the Assembly Local Government Committee.

SB 1566 (Negrete McLeod, 2012) and AB 1098 (Carter, 2012) also would have reallocated VLF revenues to newly incorporated cities and to cities that annexed inhabited territory. SB 1566 was held on the Senate Appropriations Committee’s Suspense File. AB 1098 was amended during the last two days of the 2011-12 legislative session to contain SB 1566’s provisions, but was subsequently vetoed by the Governor.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee this bill would result in an annual General Fund impact of about $16.7 million in 2015-16, which would grow each year thereafter by the property tax growth rate.

SUPPORT: (Verified 5/29/15)

California Association of Local Agency Formation Commissions

California Police Chiefs Association

California Professional Firefighters

California State Association of Counties

City of Jurupa Valley

City of Menifee

City of Riverside

Contra Costa County Local Agency Formation Commission

County of Riverside

League of California Cities

Riverside Sheriff’s Association

San Diego County Local Agency Formation Commission

San Mateo County Local Agency Formation Commission

Southwest California Legislative Council

Urban Counties Caucus

OPPOSITION: (Verified 5/29/15)

None received

Prepared by: Brian Weinberger / GOV. & F. / (916) 651-4119

5/30/15 16:50:01

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 25 (Roth) - Local government finance: property tax revenue allocation: vehicle license fee adjustments

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 25 would revise the formulas for calculating annual “vehicle license fee (VLF) adjustment amounts” for cities that incorporated from January 1, 2004 through January 1, 2012. The bill would result in a one-time shift of property tax revenues from the Educational Revenue Augmentation Fund (ERAF) in Riverside County to four specified cities, which would be built into property tax allocation formulas in future years.

Fiscal Impact:

• One-time, permanent shift of approximately $16.7 million in property tax revenues in 2015-16 from the Riverside County ERAF to four recently-incorporated cities. The General Fund would generally backfill the reductions from ERAF to replace funding that would otherwise go to schools pursuant to Proposition 98 minimum funding guarantees. The initial General Fund backfill payments would increase each year thereafter at the property tax growth rate.
  
  

• Unknown, likely minor state reimbursable costs to Riverside County officials to adjust property tax allocation formulas for the four recently-incorporated cities (General Fund). It is unlikely that counties would file a claim for reimbursement for these minor one-time costs.

Background:

Existing state law imposes the VLF, which is in lieu of a personal property tax on California motor vehicles, at a rate based on the taxable value of the vehicle. The Department of Motor Vehicles collects the VLF annually from vehicle owners at the time of registration, and allocates the revenues to cities and counties after deducting administrative costs. The VLF rate is currently 0.65 percent of the value of a vehicle, but the historical rate beginning in 1948 was 2 percent. Beginning in 1998, the state reduced the VLF rate and offset the loss of local revenues with General Fund payments.

As part of the 2004 budget agreement, the Legislature enacted a “VLF-property tax swap,” which permanently reduced the VLF rate to 0.65 percent, repealed the direct offset payments from the General Fund, and instead replaced lost local revenues with property taxes that would otherwise have gone to schools through the ERAF in each county. The replacement funding was known as the “VLF adjustment amount.” The state General Fund generally backfills local school funding that is reduced through the ERAF shift.

Prior to 2004, the state had historically provided additional VLF revenue to newly incorporated cities. Following the passage of AB 1602 (Laird) Chap 556/2006 until July 1, 2011, this additional revenue came from reallocating a portion of existing cities’ VLF funds to new cities and cities that annexed inhabited areas in order to make new incorporations and annexations financially feasible.

As part of the realignment proposal in the 2011-12 Budget, SB 89 (Committee on Budget and Fiscal Review) Chap 35/2011 deemed DMV’s VLF collection costs as $25 million for 2011-12, increased the vehicle registration fee by $12, and shifted VLF revenues from cities to fund local law enforcement grants through the newly established Local Law Enforcement Services Account. SB 89 also eliminated the formulas established by AB 1602 (Laird) that provided enhanced VLF revenues to newly incorporated cities and cities that annex inhabited territory. Proposition 30, approved by the voters in 2012, amended the Constitution to permanently dedicate a portion of the sales tax and VLF to local governments to pay for the programs realigned as part of the 2011-12 Budget.

SB 89 had the effect of eliminating over $15 million in enhanced VLF revenues in 2011-12 from four newly incorporated cities (Menifee, Eastvale, Wildomar, and Jurupa Valley). These cities had based their decisions to incorporate, at least in part, on the expectation of receiving enhanced VLF revenues to remain fiscally viable.

Proposed Law:

SB 25 would modify the formulas for allocating annual “VLF adjustment amounts” for any city that incorporated after January 1, 2004, and on or before January 1, 2012. Specifically, this bill would require the VLF adjustment amount to be calculated according to the following formulas:

• For the 2015-16 fiscal year, the county auditor would calculate the base VLF adjustment amount by multiplying each city’s population by the per capita amount of countywide VLF adjustment amount for all cities in the county.

• For the 2016-17 fiscal year, and each year thereafter, county auditors would calculate the VLF adjustment amount for these cities by adjusting the prior year’s amount by a growth factor to reflect year-to-year changes in assessed property values within each jurisdiction.

Related Legislation:

There have been numerous bills in recent years to address the loss of VLF revenues in newly incorporated cities and cities that have annexed inhabited areas, following the passage of SB 89 in 2011. SB 1566 (Negrete McLeod), which was held on this Committee’s Suspense File in 2012, would have reallocated VLF revenues to recently-incorporated cities and those that annexed inhabited territory. The contents of SB 1566 were amended into AB 1098 (Carter) on the Assembly Floor in the last two days of the 2011-12 legislative session, but that bill was vetoed by the Governor. In 2013, both SB 56 (Roth) and AB 677 (Fox) contained provisions revising VLF adjustment amounts for both newly-incorporated cities and those that had annexed inhabited territory. SB 56 was approved by the Governance and Finance Committee, but never heard in this Committee. AB 677 was never heard in a committee.

Most recently, AB 1521 (Fox), which was vetoed by the Governor last year, would have provided an enhanced VLF adjustment amount from county ERAF revenues to cities that annexed inhabited territory. Finally, SB 69 (Roth), which was also vetoed by the Governor in 2014 but never heard in this Committee, is nearly identical SB 25, and would have provided recently-incorporated cities with enhanced VLF adjustment amounts from county ERAF revenues. The veto message for SB 69 states the following:

While it is true that the state's economy has improved markedly, and significant progress has been made in aligning revenues and expenditures, I do not believe that it would be prudent to authorize legislation that would result in long term costs to the general fund that this bill would occasion.

Staff Comments:

SB 25 would make changes to property tax allocations to benefit cities that have incorporated since 2004 at the expense of the General Fund. This would result in a one-time adjustment by shifting approximately $16.7 million from the Riverside County ERAF to the cities of Jurupa Valley, Eastvale, Menifee, and Wildomar, and permanently “re-base” the VLF adjustment amount going forward. Any reductions to ERAF allocations are typically backfilled by the state General Fund pursuant to Proposition 98 minimum funding guarantees. As such, the bill would result in an annual General Fund impact of about $16.7 million in 2015-16, which would grow each year thereafter by the property tax growth rate.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert Hertzberg, Chair

2015 - 2016 Regular

VEHICLE LICENSE FEE ADJUSTMENT AMOUNTS FOR CITY INCORPORATIONS

Changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004.

Background and Existing Law

In lieu of a property tax on motor vehicles, the state collects an annual Vehicle License Fee (VLF) and allocates the revenues, minus administrative costs, to cities and counties. In 1998, the Legislature began cutting the VLF rate from 2% to 0.65% of a vehicle's value. The State General Fund backfilled the lost VLF revenues to cities and counties. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the VLF backfill from the State General Fund with property tax revenues that otherwise would have gone to schools through the Educational Revenue Augmentation Fund (ERAF). This replacement funding is known as the “VLF adjustment amount.” The State General Fund backfills schools for their lost ERAF money.

The VLF-property tax swap did not reallocate extra property tax revenues to cities that were not in existence when the State was compensating cities for the difference between the 2% and 0.65% VLF rates. As a result, new cities received less VLF funding than they would have if they had incorporated before the VLF-property tax swap.

Advocates for cities asked the Legislature to reallocate a portion of existing cities’ remaining VLF funds to new cities to help make new city incorporations financially feasible. In response, the Legislature passed AB 1602 (Laird, 2006), which changed the allocation of VLF funds to restore the VLF revenues for city incorporations that were lost under the VLF-property tax “swap.” AB 1602’s formula allocated $50 per capita adjusted annually for growth.

Governor Brown’s 2011 Realignment Proposal shifted the responsibility for some state public safety programs to local governments. The Legislature passed Senate Bill 89 (Committee on Budget and Fiscal Review, 2011), which re-calculated the Department of Motor Vehicle’s administration fund to $25 million and increased vehicle license registration by $12 per vehicle to offset DMV’s cut budget. SB 89 also eliminated VLF revenues allocated to cities and shifted those revenues to fund public safety realignment. Proposition 30 (2012) amended the Constitution to permanently dedicate a portion of the sales tax and VLF to local governments to pay for the programs realigned in 2011-12.

Four new cities incorporated after the Laird bill enacted new VLF funding allocations for new cities and before those allocations were repealed. The City of Wildomar incorporated on July 1, 2008. The City of Menifee incorporated on October 1, 2008. The City of Eastvale incorporated on October 1, 2010. Most recently, the City of Jurupa Valley officially incorporated on July 1, 2011, only two days after SB 89 repealed the VLF allocation formulas for new cities.

Advocates for cities argue that SB 89’s elimination of VLF allocations creates fiscal hardships for cities that incorporated with the expectation that they would receive VLF revenues under the formulas enacted by the 2006 Laird bill.

Proposed Law

Beginning in the 2015-16 fiscal year, Senate Bill 25 requires that the Vehicle License Fee Adjustment Amount (VLFAA) for any city that incorporated after January 1, 2004, and on or before January 1, 2012 must be calculated according to the following formula:

• For the 2015-16 fiscal year, the city’s base VLFAA is calculated by multiplying the city’s population by the per capita amount of countywide VLFAA funding received by cities in the county.

• For each fiscal year thereafter, the prior year’s VLFAA is adjusted to reflect the year-to-year change in assessed property values within the city.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. By abruptly eliminating VLF allocations for recently incorporated cities, SB 89 pulled the rug out from under four cities that chose to incorporate based, in part, on the expectation that they would receive VLF funding under the formulas enacted by the 2006 Laird bill. After SB 89’s enactment, each of the four cities had to make substantial cuts to vital public services that would have been funded by VLF allocations. In the City of Jurupa Valley, SB 89’s fiscal effect was particularly severe, resulting in a loss of 46% of the city’s first year General Fund revenues and a 26% loss of General Fund revenues in subsequent years. SB 25 helps to rebalance the four cities’ finances by restoring some VLF-related funding.

2. A deal’s a deal. SB 25 is only the most recent of a series of bills that have reopened provisions of law that were settled as a part of the complex and intense negotiations that produced Proposition 1A (2004), which limited the Legislature’s power to shift local revenues. While city officials understandably found SB 89’s reallocations of VLF revenues to be an unexpected and unwelcome change from the allocations established by AB 1602 (Laird, 2006), SB 89 effectively returned VLF funding for city incorporations to the amounts that were provided for in the original 2004 VLF-property tax swap deal. It is unclear why the issue should continue to be revisited if the problems relating to VLF funding for city incorporations were not sufficiently serious to prevent an agreement in 2004.

3. Zero-sum game. Allocating property tax revenues is a zero-sum game; every reallocation creates winners and losers. SB 25 makes a winner out of four cities

that annexed after 2004 and before 2012. The higher VLF adjustment amounts they receive under SB 25’s formula will reduce the amounts of property tax revenues they contribute to ERAF. In some years, the fiscal loser will be the State General Fund, which must backfill the property tax revenues that schools won't get from ERAF. The annual loss to the State General Fund will grow in the future as property tax revenues grow.

4. Related legislation. SB 25’s VLFAA formula for city incorporations is nearly identical to language in SB 56 (Roth, 2013), which the Senate Governance & Finance Committee approved on a 7-0 vote. SB 56 died in the Senate Appropriations Committee. Last year, SB 69 (Roth, 2014) contained provisions that replicated SB 56’s VLFAA formula for cities that incorporate after 2004. But SB 69, which Governor Brown vetoed, was not heard in the Governance & Finance Committee. SB 1566 (Negrete McLeod, 2012) would have reallocated VLF revenues formerly dedicated to DMV and FTB administrative costs to recently incorporated cities and to cities that annexed inhabited territory. The Senate Governance & Finance Committee approved SB 1566 on a 9-0 vote. The bill later died in the Senate Appropriation Committee. During the last two days of the 2011-2012 legislative session, AB 1098 (Carter) was amended on the Assembly Floor to contain SB 1566’s provisions. The Governor vetoed AB 1098, stating that it “would undermine the 2011 Realignment formulas in a manner that would jeopardize dollars for local public safety programs, provides cities new funding beyond what existed under previous law, and would create a hole in the General Fund to the tune of $18 million.”

Support and Opposition

(4/2/15)

Support: California Association of Local Agency Formation Commissions; California Professional Firefighters; California State Association of Counties; Cities of Jurupa Valley and Riverside; Riverside Sheriff’s Association; San Diego Local Agency Formation Commission; Southwest California Legislative Council; Urban Counties Caucus.

Opposition: Unknown.

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