BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 701 HEARING: 9/10/13
AUTHOR: Quirk-Silva FISCAL: Yes
VERSION: 9/4/13 TAX LEVY: No
CONSULTANT: Weinberger
ORANGE COUNTY'S VEHICLE LICENSE FEE ADJUSTMENT AMOUNT
Increases Orange County's annual vehicle license fee
adjustment amount by $53 million and repeals a $50 million
augmentation of the county's annual property tax
allocation.
Background and Existing Law
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 began cutting the VLF
rate from 2% to 0.65% of a vehicle's value. The State
General Fund backfilled the lost VLF revenues to cities and
counties.
As part of the 2004-05 budget agreement, the Legislature
enacted the "VLF-property tax swap" (SB 1096, Senate Budget
Committee, 2004), which replaced the State General Fund
backfill with property tax revenues 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 General
Fund backfills schools for their lost ERAF money.
To help Orange County sell bonds and other indebtedness
related to its 1994 bankruptcy, the 2004-05 budget
agreement provided the county with an exception to the
VLF-property tax swap (SB 1096, Senate Budget Committee,
2004). State law allowed Orange County to retain some VLF
revenues, which were dedicated first to repaying the
County's bankruptcy debt and then as general county revenue
(AB 2115, Assembly Budget Committee, 2004). Orange County
received a lower VLF adjustment amount to offset the amount
of VLF revenues that the county retained.
AB 701 -- 9/4/13 -- Page 2
In 2009, the Legislature increased Orange County's share of
property tax revenues by giving the County $35 million of
property tax revenues from the County's non-basic-aid
schools in the 2009-10 fiscal year and $50 million in each
fiscal year thereafter (SB 8xxx, Ducheny, 2009). The State
General Fund backfills the amount shifted from the schools.
In 2005, Orange County refinanced its bankruptcy-related
debts in a manner that no longer required the county to
pledge VLF revenues as security to bond holders. As part
of the 2011-12 budget plan, the Legislature enacted a major
shift - or "realignment" - of state program
responsibilities and revenues to local governments. As
part of this realignment, the budget redirected an
estimated $453 million from the base 0.65 percent VLF rate
to pay for local law enforcement grant programs (SB 89,
Senate Budget Committee, 2011). SB 89 eliminated the
annual share of VLF revenues that Orange County would have
received under SB 1096 (2004), which would have been
approximately $48 million in the 2011-12 fiscal year.
To mitigate the loss of VLF revenues, the Orange County
Board of Supervisors directed the county's
auditor-controller to recalculate the County's VLF
adjustment amount for the 2011-12 fiscal year, and each
following year, without reducing the VLF adjustment by the
amount necessary to offset the VLF revenues that the county
received before SB 89's enactment. The recalculated VLF
adjustment amount reduced the amount of property taxes that
Orange County shifted to ERAF by approximately $75 million
in both the 2011-12 and 2012-13 fiscal years. The State
General Fund backfilled schools for the reduced ERAF
funding. The California Department of Finance sued the
Orange County Auditor Controller, claiming that state law
does not allow the county to recalculate the county's VLF
adjustment amount in the manner specified by the Board of
Supervisors. In May, a Superior Court judge ruled in favor
of the Department of Finance in the case, Department of
Finance v. Grimes.
Orange County officials want the Legislature to increase
the county's VLF adjustment amount in future years to
reflect the amount that the county would receive if its VLF
adjustment amount hadn't been offset, in 2004, to help the
county finance its bankruptcy-related debt.
AB 701 -- 9/4/13 -- Page 3
Proposed Law
Assembly Bill 701 increases, by $53 million, Orange
County's vehicle license fee adjustment amount for the
2013-14 fiscal year. AB 701 requires that the calculation
of Orange County's vehicle license fee adjustment amount
for the 2014-15 fiscal year, and each fiscal year
thereafter, must be based on a prior fiscal year amount
that reflects the full amount of this one-time increase of
$53 million.
AB 701 deletes a statute that requires a $50 million
increase in the amount of ad valorem property tax revenue
that otherwise must to be allocated to Orange County each
year.
The bill directs the Department of Finance and the
Chancellor of the California Community Colleges to work
with Orange County officials to obtain a judgment that is a
final and complete resolution to Department of Finance v.
Grimes in which all parties agree not to seek appellate
review.
AB 701 contains legislative findings and declarations that
suggest the following schedule for Orange County's
repayment of amounts owed pursuant to Department of Finance
v. Grimes:
Five million dollars ($5,000,000) in fiscal year
2014-15.
Fifteen million dollars ($15,000,000) in fiscal
year 2015-16.
Twenty-five million dollars ($25,000,000) in fiscal
year 2016-17.
Fifty million dollars ($50,000,000) in fiscal year
2017-18.
Fifty-five million dollars ($55,000,000) in fiscal
year 2018-19.
State Revenue Impact
No estimate.
AB 701 -- 9/4/13 -- Page 4
Comments
1. Purpose of the bill . Changes made by the 2011 -2012
state budget eliminated nearly $50 million in annual VLF
funding for Orange County, creating extreme fiscal
challenges for the county's government. County officials
responded by recalculating the vehicle license fee
adjustment amount to increase the property tax revenues
retained by Orange County, but the California Department of
Finance prevailed in a lawsuit challenging that action. AB
701 seeks to alleviate some of Orange County's fiscal
burden while also resolving the dispute between Orange
County and the State. By recalculating Orange County's VLF
adjustment amount to eliminate the 2004 offset, the bill
brings Orange County's VLF adjustment amount into line with
other counties' VLF adjustment amounts. The bill also
creates more consistency within the state laws governing
property tax allocation by eliminating an anomalous statute
that augmented Orange County's annual property tax
allocation by $50 million. Finally, the bill suggests an
approach to resolving the legal dispute between DOF and
Orange County, including a plan for repayment of amounts
owed by Orange County.
2. Zero-sum game . Allocating property tax revenues is a
zero-sum game; every reallocation creates winners and
losers. AB 701 makes Orange County a winner by replacing
the county's annual $50 million property tax augmentation
with a recalculated VLF adjustment amount that gives the
county an additional $53 million plus an annual growth
factor. The fiscal loser will be the State General Fund,
which must backfill the property tax revenues that Orange
County schools won't get from ERAF. The annual loss to the
State General Fund will grow in the future as property tax
revenues grow.
3. Special legislation . The California Constitution
prohibits special legislation when a general law can apply
(Article IV, §16). AB 701 contains findings and
declarations explaining the need for legislation that
applies only to Orange County.
4. Gut and amend . As introduced and passed in the
Assembly, AB 701 added two non-voting legislative members
to the California Infrastructure Bank's board of directors.
The Senate Governance & Finance Committee passed that
AB 701 -- 9/4/13 -- Page 5
version of the bill by a 4-1 vote at its June 12, 2013
hearing. The September 4 amendments deleted the bill's
contents and inserted the language relating to Orange
County's vehicle license fee adjustment amount.
Assembly Actions
Not relevant to the September 4, 2013 version of the bill.
Support and Opposition (9/9/13)
Support : California State Association of Counties; Urban
Counties Caucus.
Opposition : Unknown.