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 SB 56 -- 6/11/13 -- Page 2 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.