BILL ANALYSIS �
AB 701
Page 1
Date of Hearing: September 11, 2013
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
K.H. "Katcho" Achadjian, Chair
AB 701 (Quirk-Silva) - As Amended: September 4, 2013
SUBJECT : General Subject: Local government finance: property
tax revenue allocation: vehicle license fee adjustments: County
of Orange.
SUMMARY : Increases the vehicle license fee (VLF) adjustment
amount for Orange County by $53 million and repeals a statute
that requires a $50 million increase in the annual amount of ad
valorem property tax allocated to Orange County.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Increase, for the 2013-14 fiscal year (FY), the VLF adjustment
amount for Orange County by $53 million, and increase for the
FY 2014-15 and each fiscal year thereafter, the VLF adjustment
amount for Orange County based on a prior fiscal year amount
that reflects the full amount of this one-time increase of $53
million.
2)Repeal a statute that requires an increase of $50 million in
the amount of ad valorem property tax revenue that would
otherwise be allocated annually to Orange County.
3)State that the Legislature directs the Department of Finance
and the Chancellor of the California Community Colleges to
work with Orange County, the Orange County Auditor-Controller,
and the intervenors in obtaining 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.
4)Make findings and declarations that an appropriate resolution
would be for the County of Orange to repay the amount owed
pursuant to the Department of Finance v. Grimes as follows:
a) $5 million in FY 2014-15;
b) $15 million in FY 2015-16;
c) $25 million in FY 2016-17;
AB 701
Page 2
d) $50 million in FY 2017-18; and,
e) $55 million in FY 2018-19.
5)Make findings and declarations that a special law is necessary
because of the unique fiscal pressures being encountered by
Orange County due to the decrease in the County's allocation
of VLF revenues as a result of Chapter 35 of the Statutes of
2011.
6)Provide that if the Commission on State Mandates determines
that this bill contains costs mandated by the state,
reimbursement to local agencies and school districts for those
costs shall be made pursuant to current law governing state
mandated local costs.
EXISTING LAW :
1)Establishes VLF, which is imposed on all registered vehicles
in California based on vehicle value or price at the time of
purchase and annually thereafter.
2)Requires, beginning with FY 2004-05, county auditors to reduce
the total amount of ad valorem property tax revenue that is
otherwise required to be allocated to a county's Educational
Revenue Augmentation Fund (ERAF) by the countywide VLF
adjustment amount.
AS PASSED BY THE ASSEMBLY , this bill authorized the California
Infrastructure and Economic Development Bank to serve as the
primary state agency for applying to any federal infrastructure
bank or financing authority. Further, this bill expanded the
membership of the board of directors from five to seven members
and specifies that legislative members will be nonvoting
members.
FISCAL EFFECT : According to the Senate Appropriations
Committee, 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.
COMMENTS :
1)The VLF is a tax on the ownership of a registered vehicle in
place of taxing vehicles as personal property. Prior to 1935
AB 701
Page 3
vehicles in California were subject to property tax, but the
Legislature decided to create a state-wide system of vehicle
taxation. The taxable value of a vehicle is established by the
purchase price of the vehicle, depreciated annually according
to a statutory schedule. Prior to recent budget actions, the
state collected and allocated the VLF revenues, minus
administrative costs, to cities and counties. The VLF tax
rate is currently 0.65% of the value of a vehicle, but
historically (from 1948-2004) it was 2%. In 1998, the
Legislature cut the VLF rate from 2% to 0.65 % of a vehicle's
value. The state General Fund backfilled the lost revenues to
cities and counties with revenues equivalent to the full 2%
VLF tax rate.
2)As part of the 2004-05 Budget agreement, the Legislature
enacted the "VLF-property tax swap," which replaced the
backfill from the state General Fund with property tax
revenues, this replacement funding is known as the "VLF
adjustment amount." The property tax revenues would have
otherwise gone to schools through ERAF. The state General
Fund then backfilled schools for the lost ERAF money.
The 2004-05 budget agreement also included an exemption for
Orange County from the VLF-property tax swap because a portion
of the County's VLF allocation was pledged to bonded debt
related to the County's bankruptcy proceeding that took place
in 1996. The Legislature allocated $54 million to Orange
County annually (plus growth) to first repay the bankruptcy
debt and then as general fund revenue. The State Controller
intercepted approximately $54 million to directly repay the
bankruptcy debt until 2005 when Orange County refinanced its
bankruptcy debts and no longer needed the VLF revenue to
pledge to bond holders. In calculating the County's
VLF-Property Tax Swap in 2004, the County's property tax in
lieu of VLF was reduced by $54 million, which was the amount
intercepted by the State to support the County's bankruptcy
debt payment. In other words, Orange County received a lower
VLF adjustment amount to offset the amount of VLF revenues
that the County retained.
3)As part of the FY 2011-12 Budget agreement, SB 89 (Budget and
Fiscal Review Committee), Chapter 35, Statutes of 2011, the
Legislature redirected an estimated $453 million from the base
0.65% VLF rate to the Local Law Enforcement Account to help
fund public safety realignment. By doing this SB 89
AB 701
Page 4
eliminated the annual share of VLF revenues that Orange County
received following the 2004-05 budget agreement, which was
approximately $48 million in FY 2011-12.
4)Orange County sponsored legislation to try and remedy the loss
of VLF revenues with AB 43 of the First Extraordinary Session,
which would have increased, for FY 2011-12, the VLF adjustment
amount for the County by $48 million and would have required
this increase to be included in the calculation of the VLF
adjustment amount for the County for each year thereafter, so
long as certain conditions were met.
At the same time, the Orange County Board of Supervisors also
directed the County's Auditor-Controller to recalculate the
County's VLF adjustment amount for FY 2011-12, 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 $73 million in
both the 2011-12 and 2012-13 fiscal years. The General Fund
backfilled schools for the reduced ERAF funding. The
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 of 2013,
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.
5)Supporters of the bill argue that this bill sets the path for
resolving litigation in this matter by including intent
language directing a settlement that includes a repayment plan
from FY 2014-15 to FY 2018-19. This bill also states that the
Legislature directs the parties of the case to agree to not
seek appellate review.
This bill increases 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.
Under this bill, in FY 2013-14 Orange County's VLF adjustment
amount would increase by $53 million. This bill also requires
that the calculation of Orange County's VLF adjustment amount
AB 701
Page 5
for the FY 2014-15, and each fiscal year thereafter, is based
on a prior FY amount that reflects the full amount of the
one-time increase of $53 million. The amount would be
adjusted annually by the annual property tax growth rate in
the County.
This bill also repeals the statute enacted by SB 8 X3, Chapter
4, Statutes of 2009, Third Extraordinary Session, as part of
the FY 2009-10 Budget agreement which increased the property
tax revenue allocation to Orange County by $35 million
annually in FY 2009-10 and FY 2010-11, and by $50 million
annually in each FY thereafter.
6)Support arguments: Supporters argue that this bill places
Orange County in the funding formula for the VLF adjustment
amount in a manner comparable to California's other 57
counties and provides certainty and growth to Orange County's
local property tax revenues and fiscal stability in future
years.
Opposition arguments: Opposition could argue that this bill
will result in a loss to the general fund and provides a
remedy only to Orange County, but does not include a fix for
newly incorporated cities and cities that annexed inhabited
areas that were also adversely impacted by the redirected VLF
funds in SB 89 (Budget Committee) Chapter 35, Statutes of
2011.
REGISTERED SUPPORT / OPPOSITION :
Support
California State Association of Counties
Orange County Board of Supervisors
Opposition
None on file
Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916)
319-3958
AB 701
Page 6