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
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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
FN: 0007149