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.