BILL ANALYSIS SB 1096 Page 1 (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 SB 1096 Page 2 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 SB 1096 Page 3 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: SB 1096 Page 4 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 SB 1096 Page 5 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. SB 1096 Page 6 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 SB 1096 Page 7 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 FN: 0007149