BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 701 (Quirk-Silva) - Local government finance: Orange County
vehicle license fee adjustments.
Amended: September 4, 2013 Policy Vote: G&F 7-0
Urgency: No Mandate: Yes
Hearing Date: September 11, 2013
Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 701 would repeal an annual allocation of $50
million in property tax revenues to Orange County, and increase
that county's allocation of property tax revenues by $53 million
in 2013-14 through a specified vehicle license fee adjustment
amount. Allocations to Orange County in the 2014-15 fiscal year
and each year thereafter would be subject to an annual growth
factor.
Fiscal Impact: This bill would result in a net General Fund loss
of $3 million in 2013-14. The impact would grow annually each
year by the growth in property tax revenues in Orange County.
Annual General Fund savings of $50 million. The bill would
repeal an annual $50 million augmentation of property tax to
Orange County from the Educational Revenue Augmentation Fund
(ERAF) as of January 1, 2014, which would relieve the annual
General Fund backfill for schools by an equivalent amount.
General Fund loss of $53 million in 2013-14, increasing
annually thereafter to reflect the property tax growth rate
in Orange County. The bill would enact a new allocation of
property tax revenues to Orange County of $53 million in
2013-14. For the 2014-15 fiscal year and each year
thereafter, this amount would be adjusted to reflect the
annual growth in property tax revenues in the county.
Potential delay in payments to K-12 schools in Orange
County, which would affect the timing of General Fund relief
related to backfills of property tax revenues apportioned to
schools. (see staff comments)
AB 701 (Quirk-Silva)
Page 1
Background: Existing state law imposes the VLF, which is in lieu
of a personal property tax on California motor vehicles, at a
rate based on the taxable value of the vehicle. The historical
VLF tax rate since 1948 was 2 percent of the value of a vehicle,
but beginning in 1998, the state reduced the VLF rate to 0.65
percent and offset the loss of local revenues from the General
Fund. During the Davis Administration, the VLF rate was
temporarily restored to the historical rate of 2 percent due to
budget deficits. As part of the 2004-05 budget agreement,
however, the Legislature enacted the "VLF-property tax swap"
through SB 1096 (Senate Budget and Fiscal Review Committee),
Chap 211/2004, which repealed the offset system, permanently
reduced the VLF rate to 0.65 percent, and replaced lost local
revenues with property taxes that would otherwise have gone to
schools through the Educational Revenue Augmentation Fund (ERAF)
in each county. The replacement property tax funding is defined
as a "VLF adjustment amount" in existing law.
SB 1096, in conjunction with a second trailer bill, AB 2115
(Assembly Budget Committee), Chap 610/2004, also provided an
exception to the VLF-property tax swap for Orange County.
Specifically, to facilitate the sale of bonds and other
indebtedness related to its 1994 bankruptcy, 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. The amount retained by Orange County
for these purposes was approximately $54 million when the
statute was enacted, but had fallen to approximately $48 million
by 2011-12 due to decreases in VLF revenue growth. Orange
County received a lower VLF adjustment amount to offset the
amount of VLF revenues that the county retained.
In addition, SB X3 8 (Ducheny), Chap 4/2009, was enacted as part
of the 2009-10 budget agreement. This measure increased
property tax allocations to Orange County by $35 million in
2009-10 and 2010-11, and by $50 million annually thereafter,
which is defined in existing law as a "county equity amount."
The additional funds for Orange County are diverted from
property tax revenues currently allocated to local K-12 school
districts, excluding basic-aid districts, and the County Office
of Education. Under existing law governing K-12 revenue limit
apportionments, the property tax loss to schools is offset by
increased state General Fund apportionments, so that the net
cost of the additional funding for Orange County is borne by the
AB 701 (Quirk-Silva)
Page 2
General Fund.
Furthermore, SB 89 (Senate Budget and Fiscal Review Committee),
Chap 35/2011, was enacted as part of the 2011-12 budget plan
related to a major realignment of state program responsibilities
and revenues. SB 89 redirected local VLF revenues to pay for
local law enforcement grant programs, and eliminated the annual
VLF payments that Orange County would have received under SB
1096 to offset bankruptcy-related debts. This was deemed to be
allowable since Orange County had refinanced its bankruptcy debt
in 2005 in a manner that no longer pledged the VLF revenues as
security.
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 $150
million in 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. The County was ordered to pay approximately $150
million to the K-14 schools.
Proposed Law: AB 701 would increase the "vehicle license fee
adjustment amount" for Orange County by $53 million in the
2013-14 fiscal year. The amount would be adjusted annually
thereafter by the annual property tax growth rate in the county.
The bill would delete a provision in existing law that
allocates $50 million in additional property taxes annually to
Orange County from the ERAF.
AB 701 also directs the Department of Finance and the Chancellor
of the California Community Colleges to work with Orange County
officials and the intervenors to obtain a final and complete
resolution to Department of Finance v. Grimes in which all
AB 701 (Quirk-Silva)
Page 3
parties agree not to seek appellate review. The bill contains
findings and declarations that an appropriate resolution would
be for Orange County to repay the amounts owed pursuant to the
following schedule:
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.
Staff Comments: This bill is intended to resolve ongoing
disputes between the state and Orange County over property tax
allocations. As a result, it is understood that the County
would repay amounts owed as a result of the illegal
recalculation of the VLF adjustment amount, and property tax
laws would be changed to eliminate a flat $50 million annual
allocation in exchange for an additional allocation of $53
million in 2013-14 through a special VLF adjustment amount that
applies only to Orange County, which would grow annually
thereafter to reflect the growth in countywide assessed property
values. The net impact of these changes would be a General Fund
revenue loss of $3 million in 2013-14, which would grow annually
thereafter, as specified.
Staff notes that the court has ordered Orange County to repay
the approximately $150 million over the course of three years,
beginning in 2013-14. If the five-year schedule noted in the
bill's findings and declarations noted above is followed, rather
than the three-year schedule ordered by the court, AB 701 would
delay and spread out General Fund relief, as well as relief owed
to the Community Colleges in the County. Under the court
judgment, all funds would be repaid by 2015-16, but in the
schedule noted in the bill, over 85 percent of the funds would
not be repaid until after that fiscal year.
AB 701 (Quirk-Silva)
Page 4