BILL ANALYSIS Ó SB 89 Page 1 SENATE THIRD READING SB 89 (Budget and Fiscal Review Committee) As Amended June 28, 2011 Majority vote. Budget Bill Appropriation Takes Effect Immediately SENATE VOTE :Vote not relevant SUMMARY: Makes various changes with respect to the motor vehicle license fee revenue allocation and cost-sharing of Department of Motor Vehicles' administrative expenses. Provisions of the bill are necessary to implement the 2011-12 Budget Act. Specifically, this bill: 1)Clarifies the allocation of revenues derived from the vehicle license fee (VLF) collected on vehicles through June 30, 2011, and the period beginning after this date, by affirming that revenues derived from the VLF for initial or renewal registrations due on or after May 19, 2009 and before July 1, 2011 are attributable to the 2010-11 fiscal year. Provides a technical adjustment to recalculate the amount of the VLF allocated in 2010-11 to the existing Local Revenue Fund. 2)Adjusts the cost-sharing methodology used by the Department of Motor Vehicles (DMV) for purposes of allocating various administrative expenses. Specifically: a) Sets the cost share of the VLF for DMV administrative expenses at $25 million in 2011-12, with future amounts for administrative costs determined annually by the Legislature; b) Provides intent language specifying that the Department of Finance (DOF) and DMV are to develop a cost allocation model for the purposes of allocating costs of the DMV's various activities and submit this model to the Legislature for consideration; and, c) Increases the amount of the vehicle registration fee (VRF) by $12, from $31 to $43, beginning July 1, 2011, reflecting adjusted cost-sharing and specifying that amounts raised are used for costs incurred in registration and regulation activities. 3)Directs that specified VLF revenues collected after July 1, 2011 be distributed to the Local Law Enforcement Services Account in the Local Revenue Fund 2011 (established by Government Code Section 30025) for allocation to cities, counties and cities and counties SB 89 Page 2 for local public safety. 4)Adds an appropriation allowing this bill to take effect immediately upon enactment. FISCAL EFFECT : The measure will result in additional resources for realignment purposes of $453 million, comprising $300 million from adjusting the cost allocation methodology with respect to DMV administrative costs and $153 million from directing certain VLF revenues to the Local Revenue Fund 2011. COMMENTS : 1)DMV collects fees annually from the owners of motor vehicles that support the operation of the DMV and the California Highway Patrol, among other departments. As part of the VRF collection, the DMV also collects the VLF, which is an in-lieu local property tax based on the value of the vehicle. The VLF rate was set at 2.0% of a vehicle's value for a 50-year period ending in 1998. The VLF rate was reduced over time to a new base rate of 0.65%, and the state has essentially "backfilled" the associated revenue loss to local governments through a shift in property taxes. As part of the 2009-10 Budget, the VLF increased by 0.50%, from 0.65% to 1.15% (except for certain commercial vehicles). The increase extended from May 19, 2009 to June 30, 2011. Revenues from 0.35% of the increase went to the General Fund with revenues from the remaining 0.15% of the increase directed to the newly created Local Safety and Protection Account. The Governor's January Budget proposed to maintain the current 1.15% VLF rate for an additional five-year period to support his state-local realignment proposal. This budget proposal was adopted by the Budget Conference Committee, but was not approved by the full Legislature. As part of the spring process, SB 94 (Budget and Fiscal Review Committee), Chapter 21, Statutes of 2011 was adopted to provide DMV additional administrative flexibility as the budget was deliberated and the VLF rate was established. Among other provisions, SB 94 relaxed the DMV requirement to bill vehicle owners at least 60-days in advance of the payment and registration due date. This provided a delay, which together with other administrative flexibilities, allowed DMV to avoid potentially erroneous billing, multiple billing, or other confusion. However, because of these delays, there is now a need to add clarity regarding the appropriate SB 89 Page 3 distribution of revenues received on or after July 1, 2011. Thus, the bill clarifies that the fees billed prior to July 1, 2011 are attributable to that period and directed to those designated purposes. 2)Support for DMV administrative costs are funded from different fees and taxes collected on vehicles, including the VLF and VRF. Currently, DMV administrative costs are over-attributed to the VLF because its share is based on the higher VLF rate that was formerly in effect. Under the proposal, administrative costs paid by the VLF would be reduced, and the administrative costs paid from other fees would be increased, as indicated above. By setting the administrative costs for DMV of collecting the VLF at $25 million, the costs of collection as a share of total VLF collected would be roughly 1%. This is proportionally similar to the cost of collection for the Franchise Tax Board for the personal income tax and the corporate tax, and similar to the cost of collection for the Board of Equalization for the sales tax. If DOF finds in the future, through a cost sharing model developed with DMV, that the amount provided from the VLF is not sufficient to cover the DMV's costs of collecting the VLF, it would notify the Legislature and propose the necessary budget adjustments. By reducing the share of administrative costs paid out of the VLF, this bill would result in an additional $300 million in VLF revenue to allocate to cities and counties. The bill directs this $300 million into the Local Revenue Fund 2011 to be used for public safety. As a result, the amount of VLF directed to local governments would increase by $300 million to support public safety realignment. 3)Under current law, the 0.65% VLF is allocated to: i) Local Revenue Fund; ii) Orange County for the payment of indebtedness (the bonds for which these revenues were pledged have been pre-refunded); and, iii) cities, counties and cities and counties. This bill will instead allocate specified revenues (excluding revenues allocated to the Local Revenue Fund and to certain other purposes) to the Local Law Enforcement Services Account within the Local Revenue Fund 2011. Analysis Prepared by : Mark Ibele / BUDGET / (916) 319-2099 FN: 0001407 SB 89 Page 4