BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 56 HEARING: 6/19/13
AUTHOR: Roth FISCAL: Yes
VERSION: 6/11/13 TAX LEVY: No
CONSULTANT: Lui
VLF ALLOCATIONS TO CITIES (URGENCY)
Establishes vehicle license fee adjustment amounts for
newly incorporated cities and city annexations.
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," which
replaced the VLF backfill from the State General Fund 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.
The VLF-property tax swap did not reallocate extra property
tax revenues to cities that were not in existence when the
State was compensating cities for the difference between
the 2% and 0.65% VLF rates. As a result, new cities
received less VLF funding than they would have if they had
incorporated before the VLF-property tax swap. Similarly,
a city that annexed an inhabited area received less VLF
revenue than it would have before the VLF-property tax
swap. Because the amount of the per capita VLF allocations
went down when the Legislature cut the VLF rate, the amount
of additional VLF revenue coming to a city as the result
annexing an inhabited area was also sharply 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
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assessed valuation in the annexed area.
Advocates for cities asked the Legislature to reallocate a
portion of existing cities' remaining VLF funds to new
cities and to cities that annex inhabited areas to help
make new city incorporations and city annexations
financially feasible. In response, the Legislature passed
AB 1602 (Laird, 2006), which changed the allocation of
Vehicle License Fee (VLF) funds to restore the VLF revenues
for city incorporations and annexations that were lost
under the VLF-property tax "swap." AB 1602's formula
allocated $50 per capita adjusted annually for growth.
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 cut
budget. SB 89 also eliminated 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 and temporarily increases the sales
tax .25% (4 years) and state personal income taxes (7
years) by creating three additional tax brackets for higher
income earners.
Any incorporation must be "revenue neutral" (SB 1559,
Maddy, 1992). A local agency formation commission must
find that the amount of revenues the new city takes from
the county after incorporating would be equal to the amount
of savings a county would attain from no longer providing
services transferred to the new city. Advocates for cities
argue that SB 89's elimination of VLF allocations
jeopardizes the financial viability of newly incorporated
cities and cities that annexed inhabited areas, making it
less likely that cities with incorporate or annex new
territory.
Proposed Law
Starting in 2013-14, Senate Bill 56 requires county
SB 56 -- 6/11/13 -- Page 3
auditors, to calculate cities' vehicle license fee
adjustment amounts (VLFAA) using the following methodology:
For the 2013-14 fiscal year, the VLFAA is
calculated to reflect the percentage change from
2004-05 fiscal year to the 2013-14 fiscal year in
assessed property values within the city.
For the 2014-15 fiscal year, and for each fiscal
year thereafter, the prior year's VLF amount is
adjusted to reflect the year-to-year change in
assessed property values within the city.
The VLFAA for any city that incorporates after January 2004
is calculated according to the following formula:
For the 2013-14 fiscal year, or the first year of
the city's incorporation, whichever is later, the
city's base VLFAA is calculated by multiplying the
city's population by the per capita amount of
countywide VLFAA funding received by cities in the
county.
For each fiscal year thereafter, the prior year's
VLF amount is adjusted to reflect the year-to-year
change in assessed property values within the city.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . SB 56 establishes ongoing
funding for incorporations and inhabited annexations that
were not accounted for in the VLF-swap of 2004. The new
VLFAA is not just a targeted relief to communities,
specifically the four recently incorporated cities of
Wildomar, Menifee, Eastvale, and Jurupa Valley -- that were
disadvantaged by a sudden change in VLF funding rules.
Rather, the funding formulas would roughly replicate the
broad fiscal incentive for city incorporations that existed
before the VLF-property tax swap. While ongoing funding is
critical to stabilize new cities and annexations, VLF
revenue is no longer available as a funding source.
Through other statutes encouraging the annexation of
unincorporated islands, the Legislature has demonstrated a
preference for city annexations. SB 56 has no sunset date
SB 56 -- 6/11/13 -- Page 4
on the VLF funding formula, which establishes a permanent
financial incentive for city annexations of inhabited
areas. According to the author, "Cities play a vital role
in fulfilling many of the state's policy goals, like smart
growth objectives, transportation and infrastructure
investments, affordable housing needs, and greenhouse gas
reduction goals. Without a new funding source, it is
unlikely there can be any new incorporations or
annexations. This will have a huge impact on the state's
ability to achieve many of its policy objectives."
2. A state subsidy . Allocating property tax revenues is a
zero-sum game; every reallocation creates winners and
losers. SB 56's allocations of VLFAA property tax revenues
make winners out of newly incorporated cities and other
cities that have annexed territory since 2004. The fiscal
loser will be the State General Fund, which must backfill
property tax revenues shifted away from schools by the new
VLFAA's formulas. The Committee may wish to consider
whether the state should be subsidizing a city's growth at
the expense of the state General Fund.
3. The known unknowns . Two anticipated policies may
complicate SB 56's VLFAA. First, Governor Brown's 2013-14
Budget proposes a collection of K-12 education funding
formulas, known collectively as the "Local Control Funding
Formula (LCFF)," which would replace several existing
revenue limit and categorical funding formulas with new
formulas for school districts, charter schools, and county
offices of education. Because the proposed Budget will
change the education funding formulas, school districts'
revenue limits will also change, potentially freeing more
property tax revenues for use by other taxing entities.
However, because revenue limits aren't determined until
2014, it is unclear how VLFAA will interact with LCFF.
Second, according to a Legislative Analyst Office's 2012
report, "Current projections anticipate that Proposition 57
deficit recovery bond will be repaid by 2016-17, and the
triple flip will be ended. At that time, the $1.7 billion
in ERAF monies, which would otherwise have been used to
fund the triple flip, will be available for other uses,
like the VLF swap and offsetting state K-14 expenditures."
Laws governing property tax allocation are complex.
Legislators should be aware of possible unintended
consequences from the adjustments made by SB 56.
SB 56 -- 6/11/13 -- Page 5
4. Urgency clause . Regular statutes take effect on the
January 1 following their enactment; bills passed in 2013
take effect on January 1, 2014. The California
Constitution allows bills with urgency clauses to take
effect immediately if they're needed for the public peace,
health, and safety. SB 56 contains an urgency clause to
provide immediate financial relief to the recently
incorporated cities of Jurupa Valley, Eastvale, Menifee,
and Wildomar and cities that annexed territory since 2004.
5. Previous legislation . Last year, this committee heard
SB 1566 (Negrete McLeod), which would have reallocated VLF
revenues formerly dedicated to DMV and FTB administrative
costs to recently incorporated cities and to cities that
annexed inhabited territory. SB 1566 passed out on a 9-0
vote. It later died in the Senate Appropriation
Committee's suspense file. 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 its reallocation of
VLF revenues "undermine the 2011 Realignment formulas 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. Given the current fiscal
uncertainties, this is not acceptable."
Support and Opposition (6/13/13)
Support : California Association of Local Agency Formation
Commissions; California Police Chiefs Association;
California Professional Firefighters; California State
Association of Counties; Cities of Corona, Eastvale,
Fontana, Jurupa Valley, Menifee, Rancho Cordova, San Jose,
and Wildomar; Corona Regional Medical Center; County of
Riverside; Cremation Society of Southern California;
Eastvale Chamber of Commerce; Greater Corona Valley Chamber
of Commerce; Jurupa Community Services District; League of
California Cities; League of California Cities - Riverside
County Division; Orange County Local Agency Formation
Commission; Riverside County Fire Department; Riverside
County Sheriff Stan Sniff; Riverside Local Agency Formation
Commission; Riverside Sheriff's Association; Southwest
Riverside County Association of Realtors; Thomas Miller
Mortuary; Urban Counties Caucus; 64 Eastvale Residents.
SB 56 -- 6/11/13 -- Page 6
Opposition : Unknown.