BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1096
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           (Without Reference to File)
           
          SENATE THIRD READING
          SB 1096 (Budget and Fiscal Review Committee)
          As Amended July 27, 2004
          2/3 vote.  Urgency

           SENATE VOTE  :  Vote not relevant
            
           SUMMARY  :  Accomplishes $1.3 billion of annual General Fund (GF)  
          savings in fiscal year (FY) 2004-05 and FY 2005-06 by reducing  
          payments to, or shifting funds from, local governments and  
          implements the statutory provisions of the local government  
          portion of the 2004-05 Budget, including changes to Vehicle  
          License Fee (VLF) Law.  Specifically,  this bill  :

          1)Makes the following changes to existing law regarding the VLF:

             a)   Eliminates the current VLF "offset" mechanism and  
               permanently sets the VLF rate at 0.65% as of January 1,  
               2005.  Under current law, the basic VLF rate is 2%, but an  
               offset is applied that reduces the effective rate to  
               taxpayers to 0.65%;

             b)   Eliminates VLF "backfill" payments along with the  
               "trigger" provision in current law that reduces taxpayer  
               offsets in the event that the GF has insufficient funds to  
               make backfill payments to cities and counties for their  
               revenue loss due to the VLF offsets.  VLF backfill payments  
               would be replaced by property tax revenues as discussed  
               below;

             c)   Repeals the VLF "poison pills" and makes permanent the  
               current vehicle depreciation schedule administratively  
               adopted by the Department of Motor Vehicles (DMV);

             d)   Revises the allocation of VLF revenues (at the 0.65%  
               rate) as follows:

               i)     74.9% to the Local Revenue Fund (LRF), which funds a  
                 portion of Realignment. Under current law the LRF  
                 receives 24.33% of both VLF revenue and GF backfill  
                 payments-equivalent to 24.33% of the full 2% VLF rate.   
                 The new LRF allocation of 74.9% of the 0.65% VLF rate  
                 will provide an equivalent amount of funding (about $1.5  








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                 billion in 2004-05); and,

               ii)    25.1%  (about $500 million in 2004-05) to the Motor  
                 Vehicle License Fee (MVLF) Account in the Transportation  
                 Tax Fund to fund vehicle registration administration and  
                 enforcement ($277 million in 2004-05) with the remainder  
                 allocated to cities on a per-capita basis ($215 million  
                 in 2004-05). Continues existing dedications of the MVLF  
                 revenue and intercept mechanisms that provide security  
                 for Orange County's bankruptcy debt.

             e)   Authorizes cities and counties to securitize their "VLF  
               receivables," defined as each entity's share of the  
               approximately $1.3 billion VLF "gap" loan.  The gap amount  
               is the amount of backfill not paid to local governments in  
               2003-04, but which the state has statutorily promised to  
               pay to local governments by August of 2006.

          2)Replaces VLF backfill payments to cities and counties  ($4.1  
            billion in 2004-05) with property tax revenues as follows:

             a)   Creates a new VLF Property Tax Compensation Fund in each  
               county to replace VLF backfill payments.  The fund will  
               receive property tax revenues diverted from each county's  
               Educational Revenue Augmentation Fund (ERAF), which helps  
               fund K-14 education.  If the amount needed for replacement  
               of backfill exceeds the amount of ERAF in a county, then  
               property tax revenue will be diverted from the basic AB 8  
               allocations to K-14 education (excluding basic aid  
               districts).  Under Proposition 98 and existing law  
               governing school apportionments, the state GF will replace  
               the property tax revenues diverted from K-14 education;

             b)   Establishes initial allocations for 2004-05 to each city  
               and each county of replacement property tax revenues.  This  
               initial amount would be the estimated full MVLF Account  
               allocation that each entity would have received under  
               current law (as of January 1, 2004) in 2004-05 from both  
               VLF revenues and GF backfill payments less (in the case of  
               cities) the amount of actual MVLF Account revenues  
               allocated to them in 2004-05 (from remainder after  
               realignment and administrative costs are funded).  County  
               auditors would make payments to each city and each county  
               twice annually-by January 31 and by May 31.  The State  
               Controller would provide these estimates to county auditors  








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               by September 1, 2004;

             c)   Provides for allocations in 2005-06 to be calculated  
               based on the total actual amount of MVLF Account revenue  
               plus backfill payments that each city and each county would  
               have received in 2004-05 less actual MVLF allocations in  
               2004-05 adjusted by the increase in gross taxable assessed  
               value within each city or each county.  These amounts would  
               be communicated to the auditors by the State Controller by  
               September 1, 2005.  There also would be a "settleup"  
               adjustment to reconcile with the actual VLF replacement  
               revenue required for each entity in 2004-05;

             d)   Provides for allocations in subsequent years to be the  
               property tax replacement revenue for each city and each  
               county in the prior year adjusted by the increase in gross  
               taxable assessed value within each city or each county;  
               and,

             e)   Includes provisions to adjust allocations to recently  
               incorporated cities after their initial 7-year population  
               estimate ends.

          3)Provides for a total of $700 million of annual reductions in  
            VLF property tax replacement revenues  to cities and counties   
            in 2004-05 and in 2005-06, as follows:

             a)   $350 million to counties.  The reduction to each county  
               will be in proportion to their current share of MVLF  
               Account revenue allocated to all counties; and,

             b)   $350 million to cities.  The reduction to each city will  
               be in proportion to its share (compared with the statewide  
               total for all cities) of sales tax, property tax, and VLF  
               revenues in 2002-03, with each revenue source weighted  
               equally.  However, individual city reductions must be at  
               least a minimum of 2% and may not exceed 4% of general  
               revenues as reported to the State Controller for 2001-02.   
               The measure authorizes the City of Long Beach to borrow  
               interest earnings on its tidelands subsidence reserve to  
               cover the reductions.

          4)Provides for a total of $350 million of annual property tax  
            shifts from special districts to ERAF in 2004-05 and 2005-06,  
            as follows:








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             a)   Property tax allocations to enterprise special districts  
               (excluding amounts pledged to debt service) would be  
               reduced by 40%.  However, no reduction could exceed 10% of  
               a district's total revenues.  Reductions to transit  
               districts would be limited to 3% of their property tax  
               revenue.  Public utility districts and sewage and  
               sanitation districts serving the Lake Tahoe Basin and  
               subject to special requirements of the Porter-Cologne Water  
               Act would be treated as nonenterprise districts (see  
               below);

             b)   Property tax allocations to nonenterprise special  
               districts (excluding amounts pledged to debt service) would  
               be reduced by 10%; 

             c)   No reductions would apply to districts providing fire  
               protection or police functions or to property tax revenues  
               used for those purposes by districts with broader  
               functions. Reductions also would not apply to hospital or  
               health care districts, library districts, mosquito  
               abatement districts, vector control districts, and  
               veteran's memorial districts; and,

             d)   Any shortfall in the $350 million property tax shift  
               would be made up by increasing the property tax shifts from  
               enterprise special districts (excluding transit districts)  
               on a proportionate basis, subject to the cap of 10% of  
               total revenues for any district.

          5)Provides for a total of $250 million of annual payments from  
            redevelopment agencies to ERAF in 2004-05 and 2005-06, as  
            follows:

             a)   The amount of the payment for each agency would be in  
               proportion to its share of statewide tax increment revenue  
               (gross tax increment revenue and tax increment revenue net  
               of pass-throughs to other entities would be weighted  
               equally in this calculation). Agencies could borrow from  
               their current annual contributions to their  
               low-and-moderate income housing funds (but not from any  
               fund balance) to make these payments or from their "parent"  
               city or county.  In the event that a redevelopment agency  
               failed to make a required payment, the county auditor would  
               be required to deduct the amount from property tax  








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               allocations to the parent city or county; and,

             b)   Authorizes extensions of statutory redevelopment time  
               limits by one year for each year of the ERAF payments if  
               the existing time limit has no more than10 years remaining  
               or if the existing time limit is between 10 years and 20  
               years provided that the agency is in compliance with  
               housing requirements.

          6)Makes various technical corrections to the "Triple-Flip"  
            provisions that govern the temporary replacement of a  
            quarter-cent of the local Bradley-Burns sales and use tax with  
            special property tax allocations from ERAF to cities and  
            counties.  The major changes are to base the initial annual  
            property tax allocations on recent actual sales tax revenues  
            for each jurisdiction, rather than taxable sales, which take  
            longer to compile and are therefore more out of date, and  
            revisions to the "windup" process when the quarter-cent local  
            tax is restored to ensure that the correct amount of  
            replacement revenue has been provided.

          7)Contains legislative findings and declarations that this  
            entire measure is a comprehensive revision to local government  
            finances that would be an "interim measure" in its entirety  
            under Proposition 65 on the November 2, 2004 general election  
            ballot.  Therefore, if Proposition 65 is approved by the  
            voters and takes effect, all provisions of this measure would  
            be repealed.

          8)Requires the state to pay deferred obligations for  
            state-mandated local programs over a period of no more than  
            five years beginning in 2006-07.  This payment requirement  
            applies to the amounts that the state determines to be owed to  
            cities, counties, and special districts for mandated-cost  
            claims prior to July 1, 2005.

          9)Forgives county property tax allocation errors identified by  
            the State Controller in audits conducted prior to June 30,  
            2001. 

          10)Clarifies that a special reduction in ERAF allocations to  
            eligible counties in 1993-94 carries forward into subsequent  
            years.

          11)Includes an urgency clause.








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           FISCAL EFFECT  :  The primary fiscal effect of this measure is to  
          achieve state GF savings of $1.3 billion annually in 2004-05 and  
          in 2005-06. These savings result from the temporary reduction in  
          VLF replacement property tax revenues to cities and counties  
          ($700 million annually), which reduces the amount of property  
          tax shifted from K-14 education, and from the temporary ERAF  
          shifts from special districts and redevelopment agencies ($600  
          million annually), which increases property tax revenues for  
          K-14 education.  The additional property tax revenue to K-14  
          education will reduce the state's funding obligation under  
          Proposition 98.

          Deferred mandate claims by cities, counties, and special  
          districts are expected to total $1 billion or more by the end of  
          2004-05.  Therefore, the commitment to pay claims over five  
          years could cost approximately $200 million annually starting in  
          2006-07 and ending in 2010-11, if all claims are determined to  
          be valid and if payments are made in equal installments.   
          However, this requirement affects only the timing and not the  
          amount of state costs because the California Constitution  
          currently requires the state to reimburse mandated costs.

          Property tax allocation errors identified in State Controller's  
          audits that would be forgiven by this bill total roughly $9  
          million.  These errors represent under-allocations to ERAF that,  
          if corrected, would reduce state K-14 education costs by an  
          equivalent amount.

           COMMENTS  :  The VLF replacement revenues provided by this measure  
          would be included in property tax revenues that would be  
          protected by the proposed legislative constitutional amendment  
          on local government finance.  The allocations provided in this  
          bill of VLF tax revenues to Realignment and local governments  
          also would be consistent with the VLF allocations in the  
          proposed legislative constitutional amendment.

          Proposition 65, the local government initiative on the November  
          General Election Ballot, suspends any statute enacted since  
          November 2003 that would require voter approval under its  
          provisions (these are termed "interim measures" by Proposition  
          65).  Interim measures under Proposition 65 include any  
          reduction in property tax revenues to individual local  
          governments and any reduction or elimination of VLF backfill  
          payments.  The finding in this bill states the Legislature's  








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          intent that this entire measure should be suspended as an  
          interim measure if Proposition 65 passes and becomes effective.   
          The purpose of this statement is to emphasize that the bill  
          operates as a whole, so that, for example, VLF replacement  
          property tax revenues should not be provided to local  
          governments if the VLF backfill also remains in place under  
          Proposition 65.

          AB 1457 (Budget Committee), Chapter 37, Statutes of 2004,  
          temporarily suspended a VLF "poison pill" provision that would  
          have prevented the Controller from continuing to allocate VLF  
          revenues and backfill payments to counties for Realignment.  The  
          temporary suspension ended on July 15th.  The poison pill  
          provision was activated after the California Supreme Court  
          declined in December 2003 to review a decision that state law  
          transferring the Medically Indigent Adult (MIA) program to  
          counties constituted a reimbursable state-mandated local program  
          ($3.4 million was at stake in that decision).  The MIA poison  
          pill also eliminated the specific statutory basis for the VLF  
          depreciation schedule, although DMV has adopted the same  
          depreciation schedule through regulation.


           Analysis Prepared by  :  Dan Rabovsky/ BUDGET / (916) 319-2099


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