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 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 201718 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 the statutory provisions noted above.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 37 (Roth) - Local government finance: property tax revenue allocations: vehicle license fee adjustments

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

Bill Summary:

SB 37 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 $18.9 million in property tax revenues in 2017-18 from the Riverside County ERAF to four recently-incorporated cities. The state 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 annual enhanced VLF revenues beginning 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 37 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 2017-18 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 2018-19 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:

SB 817 (Roth), which was vetoed by the Governor last year, was effectively identical to this bill. The veto message states the following:

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. Last year, in recognition of the fiscal challenges these four cities confront, I signed SB 107 which provided them approximately $24 million dollars. While I commend Senator Roth's tireless commitment to assist the cities, this bill requires the state to make additional and long term General Fund spending commitments. As such, this proposal must be considered in light of other budget priorities during upcoming budget deliberations.

SB 25 (Roth), which was vetoed by the Governor in 2015, was effectively identical to this bill and SB 817. The veto message for SB 25 states the following:

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.

SB 69 (Roth), which was also vetoed by the Governor in 2014 but never heard in this Committee, is nearly identical to this bill and 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.

There have been numerous other bills 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. More recently, AB 1521 (Fox), which was vetoed by the Governor in 2014, would have provided an enhanced VLF adjustment amount from county ERAF revenues to cities that annexed inhabited territory.

Staff Comments:

SB 37 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 $18.9 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 $18.9 million in 2017-18, which would grow each year thereafter by the property tax growth rate.

As noted in the Governor’s veto message of SB 25 in 2015, SB 107 (Committee on Budget and Fiscal Review), Chap 325/2015, provided $23.75 million in one-time fiscal relief for recently incorporated cities impacted by the loss of VLF revenues following the passage of SB 89 in 2011. This General Fund appropriation was used to pay debts incurred by Wildomar (over $1 million), Menifee (over $1 million), and Jurupa Valley (over $21 million) for services rendered through contracts with Riverside County. The City of Eastvale did not receive any fiscal relief from SB 107, and subsequently filed a lawsuit against Riverside County challenging the allocation of funds to only three of the four recently-incorporated cities. The court ruled in favor of Riverside County.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Local government finance: property tax revenue allocations: vehicle license fee adjustments

Changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004 but before 2012.

Background

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 cut the VLF rate from 2% to 0.65% of a vehicle's value and backfilled the lost VLF revenues to cities and counties from the state’s General Fund. Traditionally, VLF had been allocated on a per-capita basis, meaning new cities that incorporated, or existing cities that annexed inhabited areas, would receive larger shares of the VLF.

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 (dollar-for-dollar) 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’s General Fund backfilled schools for their lost ERAF money to meet the funding guarantees under Proposition 98 (1988).

Prior to the VLF-property tax swap in 2004, a newly incorporated city received additional VLF revenues based on a calculation of 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. The swap did not provide extra property tax revenues to cities yet to be incorporated. Therefore, cities incorporated after 2004 received less VLF funding than they would have if they had incorporated prior to the swap. 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 2004 swap. AB 1602’s formula allocated $50 per capita adjusted annually for growth.

Senate Bill 89 (Committee on Budget and Fiscal Review, 2011), which implemented portions of the Governor’s public safety realignment proposal, negated the provisions of AB 1602 and shifted the responsibility for some state public safety programs to local governments. SB 89 redirected VLF revenues away from newly incorporated cities and diverted these 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.

SB 89 subtracted $15 million in the Motor Vehicle License Fee (MVLFA) revenues in 2011-12 from four newly incorporated cities. By reducing the allocation of VLF funds to newly incorporated cities, the realignment shift endangered the fiscal viability of communities that rely on VLF revenues. For example, the City of Jurupa Valley, which incorporated within days the passage of SB 89, anticipated VLF revenues representing 47% of its General Fund budget.

Four new cities incorporated after AB 1602 was 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.
• 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.

As a part of the State Budget approved in 2015, the Legislature passed SB 107 (Senate Budget and Fiscal Review Committee, 2015), which provided nearly $24 million in fiscal relief to the four recently incorporated cities that lost funding under SB 89’s reallocation of VLF revenues. The fiscal relief authorized by SB 107 has been used to forgive more than $1 million in debts owed by the cities of Wildomar and Menifee and more than $21 million in debts owed by the City of Jurupa Valley for services the County of Riverside provided to those cities after they incorporated. The City of Eastvale, which received no fiscal relief from SB 107, filed a lawsuit against Riverside County challenging the allocation of fiscal relief to only three of the four recently incorporated cities. The court ruled in favor of Riverside County. The one-time fiscal relief provided by SB 107 does not address the ongoing fiscal shortfall created by the annual loss of VLF revenues that the newest cities counted on at the time they decided to incorporate.

The author argues that, “There is no reason why only four cities should be singled out to receive an inequitable share of state revenue. Ongoing funding is critical to stabilize these new cities and restore a fair statewide funding mechanism.”

Proposed Law

Beginning in the 2017-18 fiscal year, Senate Bill 37 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 2017-18 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. SB 37 helps to rebalance the four cities’ finances by restoring some VLF-related funding.

2. A deal’s a deal. SB 37 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 2004-2005 budget negotiations. 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 did not 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 37 makes a winner out of four cities that annexed after 2004 and before 2012. The higher VLF adjustment amounts they receive under SB 37’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 in accordance with property tax revenues.

4. Veto. SB 37 is effectively identical to SB 817 (Roth, 2016), which the Senate Governance & Finance Committee approved on a 7-0 vote. Governor Brown vetoed SB 817, stating:

“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.

Last year, in recognition of the fiscal challenges these four cities confront, I signed SB 107 which provided them approximately $24 million dollars. While I commend Senator Roth’s tireless commitment to assist the cities, this bill requires the state to make additional and long-term General Fund spending commitments. As such, this proposal must be considered in light of other budget priorities during upcoming budget deliberations.”

5. Related legislation. SB 37’s VLFAA formula for city incorporations is nearly identical to language in SB 817 (Roth, 2016), SB 25 (Roth, 2015), and SB 56 (Roth, 2013), all of which the Senate Governance & Finance Committee approved on a 7-0 vote. Both SB 817 and SB 25 were vetoed by Governor Brown, and SB 56 died in the Senate Appropriations Committee. SB 69 (Roth, 2014) contained provisions that replicated SB 56’s VLFAA formula for cities that incorporate after 2004, but the measure, 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 Appropriations Committee. AB 1098 (Carter, 2012), which was amended on the Assembly Floor to contain SB 1566’s provisions, was vetoed by Governor Brown.

Support and Opposition

Support: California Association of Local Agency Formation Commissions; California State Association of Counties; City of Eastvale; City of Jurupa Valley; City of Wildomar; County of Riverside; League of California Cities; Riverside Sheriffs’ Association; Urban Counties of California..

Opposition: Unknown.