BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1521 HEARING: 6/25/14
AUTHOR: Fox FISCAL: Yes
VERSION: 6/17/14 TAX LEVY: No
CONSULTANT: Weinberger
VEHICLE LICENSE FEE ADJUSTMENT AMOUNTS
FOR CITY ANNEXATIONS (URGENCY)
Changes the formulas for calculating annual vehicle license
fee adjustment amounts to account for territory annexed to
cities since 2004.
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.
When the Legislature cut the VLF rate, the amount of VLF
revenue available to a city as the result of annexing an
inhabited area also was reduced. The VLF-property tax swap
did not compensate cities for this reduction. Cities only
receive additional property tax revenues in lieu of lost
VLF based on the future growth of assessed valuation in the
annexed area.
In response, advocates for cities asked the Legislature to
reallocate a portion of existing cities' remaining VLF
funds to cities that annex inhabited areas to help make
AB 1521 -- 6/17/14 -- Page 2
city annexations financially feasible. In response, the
Legislature passed AB 1602 (Laird, 2006), which changed the
allocation of Vehicle License Fee (VLF) funds to replace
the VLF revenues for annexations that were lost under the
VLF-property tax swap.
Governor Brown's 2011 Realignment Proposal shifted several
state programs and commensurate revenues to local
governments. The Legislature passed Senate Bill 89
(Committee on Budget and Fiscal Review, 2011), which
recalculated the Department of Motor Vehicle's
administration fund to $25 million and increased vehicle
license registration by $12 per vehicle to offset DMV's
loss of general Fund dollars. SB 89 also eliminated the
$153 million in VLF revenues allocated to cities and
shifted those revenues to fund public safety realignment.
Proposition 30 (2012) amended the Constitution to
permanently dedicate a portion of the sales tax and VLF to
local governments to pay for the programs realigned in
2011-12.
Advocates for cities argue that SB 89's elimination of VLF
allocations creates fiscal hardships for cities that
annexed inhabited areas with the expectation that they
would receive revenues under the formulas enacted by the
2006 Laird bill and makes future annexations of inhabited
areas financially infeasible.
Proposed Law
In the 2014-15 fiscal year, Assembly Bill 1521 requires
county auditors to calculate vehicle license fee adjustment
amounts (VLFAA) for cities, counties, and cities and
counties using a specified formula that reflects the
percentage change from the 2004-05 fiscal year to the
2014-15 fiscal year in assessed property values within the
city, county, or city and county.
For the 2015-16 fiscal year, and for each fiscal year
thereafter, AB 1521 requires county auditors to calculate
the VLFAA for a city, county, or city and county by
adjusting the prior year's VLFAA amount to reflect the
year-to-year change in assessed property values within the
jurisdiction of the city, county, or city and county.
AB 1521 -- 6/17/14 -- Page 3
The bill makes non-substantive conforming changes to state
law relating to the calculation of Orange County's vehicle
license fee adjustment amount.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . By abruptly reducing the
allocation of VLF funds for inhabited city annexations, SB
89 pulled the rug out from under cities that had annexed,
or were planning to annex, inhabited areas. AB 1521 helps
to rebalance those cities' finances balance by restoring
some funding related to annexations. In recent years,
Legislators have enacted statutes that promote the
annexation of incorporated "island" communities to realize
the land use planning, infrastructure, and service delivery
improvements that can result. AB 1521 advances this
important statewide policy goal, benefitting communities
throughout California.
2. A deal's a deal . AB 1521 is only the most recent of a
series of bills that have reopened provisions of law that
were settled as a part of the complex and intense
negotiations that produced Proposition 1A (2004), which
limited the Legislature's power to shift local revenues.
While city officials understandably found SB 89's
reallocations of VLF revenues to be an unexpected and
unwelcome change from the allocations established by AB
1602 (Laird, 2006), SB 89 effectively returned VLF funding
for city annexations to the amounts that were provided for
in the original 2004 VLF-property tax swap deal. If the
problems relating to VLF funding for city annexations were
not sufficiently serious to prevent an agreement in 2004,
it is unclear why the issue should continue to be
revisited.
3. Zero-sum game . Allocating property tax revenues is a
zero-sum game; every reallocation creates winners and
losers. AB 1521 makes a winner out of cities that annexed
inhabited territory after 2004, and those that will annex
inhabited territory in the future. The higher VLF
AB 1521 -- 6/17/14 -- Page 4
adjustment amounts they receive under AB 1521's formula
will reduce the amounts of property tax revenues they
contribute to ERAF. In some years, the fiscal loser will
be the State General Fund, which must backfill the property
tax revenues that schools won't get from ERAF. The annual
loss to the State General Fund will grow in the future as
property tax revenues grow and as cities annex additional
territory.
4. Related legislation . AB 1521's VLFAA formula for city
annexations is nearly identical to language in SB 56 (Roth,
2013), which the Senate Governance & Finance Committee
approved on a 7-0 vote. SB 56 died in the Senate
Appropriations Committee. This year, SB 69 (Roth, 2014)
contains provisions that replicate SB 56's VLFAA formula
for cities that are incorporated after 2004. SB 1566
(Negrete McLeod) would have reallocated VLF revenues
formerly dedicated to DMV and FTB administrative costs to
recently incorporated cities and to cities that annexed
inhabited territory. The Senate Governance & Finance
Committee approved SB 1566 on a 9-0 vote. The bill later
died in the Senate Appropriation Committee. During the
last two days of the 2011-2012 legislative session, AB 1098
(Carter) was amended on the Assembly Floor to contain SB
1566's provisions. The Governor vetoed AB 1098, stating
that it "would undermine the 2011 Realignment formulas in a
manner that would jeopardize dollars for local public
safety programs, provides cities new funding beyond what
existed under previous law, and would create a hole in the
General Fund to the tune of $18 million."
5. Urgency . Regular statutes take effect on January 1
following their enactment; bills passed in 2014 take effect
on January 1, 2015. The California Constitution allows
bills with urgency clauses to take effect immediately if
they're needed for the public peace, health, and safety. AB
1521 contains an urgency clause declaring that it is
necessary for its provisions to go into effect immediately
to preserve the public peace, health, and safety cities
that annexed inhabited areas that lost revenue as a result
of the passage of SB 89 in 2011.
Assembly Actions
Assembly Local Government Committee: 9-0
AB 1521 -- 6/17/14 -- Page 5
Assembly Appropriations Committee:16-0
Assembly Floor: 75-0
Support and Opposition (6/19/14)
Support : Association of California Cities - Orange County;
California Association of Local Agency Formation
Commissions; California Contract Cities Association; Cities
of Eastvale, Fontana, Indian Wells, Jurupa Valley, Lake
Elsinore, La Mirada, La Quinta, Menifee, Murrieta, Norco,
Palm Desert, Santa Clarita, Temecula, Visalia, and
Wildomar; League of California Cities; Orange County;
Orange County Local Agency Formation Commission; Placer
County Local Agency Formation Commission; Riverside Local
Agency Formation Commission; San Bernardino County Local
Agency Formation Commission; San Diego County Local Agency
Formation Commission; Santa Clarita Valley Chamber of
Commerce; Southwest California Legislative Council;
Western Riverside Council of Governments.
Opposition : Unknown.