BILL ANALYSIS                                                                                                                                                                                                    

                                                                     AB 448

                                                                    Page  1

          Date of Hearing:  April 15, 2015


                              Brian Maienschein, Chair

          AB 448  
          (Brown) - As Introduced February 23, 2015

          SUBJECT:  Local government finance:  property tax revenue  
          allocations:  vehicle license fee adjustments.

          SUMMARY:  Modifies the formulas for calculating annual vehicle  
          license fee adjustment amounts to include the assessed property  
          valuation within inhabited territory annexed to cities.   
          Specifically, this bill:   

          1)Modifies the amount of property tax in lieu of vehicle license  
            fees (VLF adjustment amount) allocated to counties and cities  
            to include changes in the assessed property valuation within  
            annexed areas since 2004.  

          2)Provides that the VLF adjustment amount formula in existing  
            law, which excludes the assessed property valuation in an area  
            upon annexation, for the fiscal year (FY) 2006-07 and  
            thereafter, applies until FY 2014-15.  

          3)Establishes a formula to calculate the VLF adjustment amount  
            for FY 2015-16, that includes the percentage change from FY  
            2004-05 to FY 2015-16, in the assessed property valuation  
            within the jurisdiction, which includes the assessed property  
            valuation of annexed territory.


                                                                     AB 448

                                                                    Page  2

          4)Establishes a formula to calculate the VLF adjustment amount  
            for FY 2016-17 and each FY thereafter that includes the  
            percentage change from the immediately preceding FY to the  
            current FY in assessed property valuation.  

          5)Provides 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.  

          6)Contains an urgency clause.  

          FISCAL EFFECT:  This bill is keyed fiscal.  


          1)VLF.  VLF is a tax on the ownership of a registered vehicle in  
            place of taxing vehicles as personal property.  Prior to 1935,  
            vehicles in California were subject to property tax, but the  
            Legislature decided to create a statewide 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)VLF-Property Tax Swap (2004-05 Budget) and Subsequent  
            Legislation.  Prior to the 2004 budget agreement, the total  
            VLF revenue, including the backfill from the state General  


                                                                     AB 448

                                                                    Page  3

            Fund was allocated in proportion to population.  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 (dollar for  
            dollar) that otherwise would have gone to schools through  
            ERAF.  This replacement funding is known as the "VLF  
            adjustment amount".  The state General Fund then backfilled  
            schools for the lost ERAF money.  After the dollar for dollar  
            swap in FY 04-05, property tax in lieu of VLF payments (VLF  
            adjustment amount) to cities and counties is allocated in  
            proportion to each jurisdiction's annual change in gross  
            assessed valuation (property tax revenues).  

            The 2004-05 budget agreement did not provide compensating  
            property-tax-in-lieu-of-VLF for future new cities or for  
            annexations to cities where there was pre-existing  
            development.  During the first year of annexed inhabited area  
            into a city, that city does not receive the growth in the  
            assessed value in order to calculate the growth in the city's  
            property tax in lieu of VLF.  Therefore, the loss was greater  
            for cities that annexed inhabited areas because the way growth  
            in the VLF adjustment amount is calculated is based on  
            property tax revenue.  

            The temporary remedy to address the lack of  
            property-tax-in-lieu-of-VLF for annexations and incorporations  
            after the budget agreement on August 5, 2004, came in the form  

            AB 1602 (Laird), Chapter 556, Statutes of 2006.  AB 1602  
            specified that a city that annexes, or an unincorporated area  
            that incorporates after August 5, 2004, but prior to July 1,  
            2009, will receive special allocations from a portion of the  
            remaining VLF revenues.  The funding formula contained in AB  
            1602 incorporated an artificially inflated population factor  
            during the first five years for start-up costs which roughly  


                                                                     AB 448

                                                                    Page  4

            replicated the broad fiscal incentive for city incorporations  
            that existed before the VLF-property tax swap in 2004.   
            Similarly, for annexations that had pre-existing residential  
            development, AB 1602 increased the per capita VLF allocation,  
            based on each person residing in an annexed area at the time  
            of annexation in addition to the allocation of VLF revenues,  
            to levels comparable to pre-2004 allocations.  AB 1602 expired  
            on July 1, 2009, and gave communities five years to complete  
            annexations or incorporations that were initiated under the  
            assumption that VLF funding would be available.  In 2008, SB  
            301 (Romero), Chapter 375, Statutes 2008, eliminated the  
            deadline that communities had to incorporate and eliminated  
            the sunset date for city annexations to receive additional  
            SB 89 (Budget and Fiscal Review Committee), Chapter 35,  
            Statutes of 2011, redirected VLF revenues away from newly  
            incorporated cities, annexations, and diverted funds to the  
            Local Law Enforcement Account to help fund public safety  
            realignment.  SB 89 also allocated 

            $25 million to the Department of Motor Vehicles in FY 2011-12  
            for administrative costs and increased the basic vehicle  
            registration fee from $31 to $43.  
            According to the Senate Appropriations Committee, SB 89 had  
            the effect of eliminating over $15 million in the Motor  
            Vehicle License Fee (MVLFA) revenues in 2011-12 from four  
            newly incorporated cities (Menifee, Eastvale, Wildomar, and  
            Jurupa Valley), as well as over $4 million from cities that  
            have annexed inhabited areas.  By abruptly cutting the  
            allocation of VLF funds to newly incorporated cities and for  
            inhabited city annexations, the realignment shift in 2011  
            disproportionally endangered the fiscal viability of  
            communities that rely on VLF revenues.  

          3)Bill Summary.  Under this bill, the current formula that  
            excludes the assessed property value within an annexed area  
            would only apply from FY 2006-07 to FY 2014-15.  This bill  


                                                                     AB 448

                                                                    Page  5

            changes the way that the growth in the VLF adjustment amount  
            (property tax in lieu of VLF) is calculated starting in FY  
            2015-16 to include the growth of assessed property values,  
            including in an annexed area, from FY 2004-05 to FY 2015-16.   
            The changes this bill would make to the VLF adjustment amount  
            would benefit cities that have annexed inhabited territory  
            since 2004 because it would include the assessed property  
            values in those territories in the formula used to allocate  
            property tax to that city.  Beginning in FY 2016-17, the VLF  
            adjustment amount would be calculated by adjusting the prior  
            year's amount by a growth factor to reflect the jurisdiction's  
            annual change in the assessed property values.  

            This bill is sponsored by the City of Fontana.  

          4)Author's Statement.  According to the author, "The City of  
            Fontana has lost $800,000 dollars as a result of SB 89.   
            Fontana annexed unincorporated areas in San Bernardino County  
            after 2004 and as a result does not have the funds to provide  
            public safety services to the area.  This bill will restore  
            funding to cities that were negatively affected by SB 89 and  
            help them sustainably plan for the future."    

          5)Previous Legislative Attempts to Address the Impacts of SB 89.  
             SB 1566 (Negrete McLeod) of 2012, and AB 1098 (Carter) of  
            2012, sought to remedy the loss of ongoing revenues to new  
            cities and annexations after the 2004 VLF property tax swap, a  
            fix that was achieved by AB 1602.  SB 89 did not remove the  
            formulas to calculate the VLF revenue to incorporated or  
            annexed cities in statute.  SB 1566 and AB 1098 would have  
            restored the funding allocations in AB 1602.  SB 1566 died on  
            the Senate Appropriations Committee's suspense file.  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  


                                                                     AB 448

                                                                    Page  6

            would create a hole in the General Fund to the tune of $18  
            million. Given the current fiscal uncertainties, this is not  

            SB 56 (Roth) of 2013 died in the Senate, pursuant to Joint  
            Rule 56.  AB 677 (Fox) of 2013 died in the Assembly, pursuant  
            to Joint Rule 56.  SB 56 and AB 677 would have established VLF  
            adjustment amounts similar to the provisions in this bill for  
            annexations, but also included a formula for cities that  
            incorporated after 2004.  

            AB 701 (Quirk-Silva), Chapter 393, Statutes of 2013, increased  
            Orange County's VLF adjustment amount to reflect the amount  
            that Orange County would receive if its VLF adjustment amount  
            had not been offset in 2004, to help Orange County finance its  
            bankruptcy-related debt.  AB 701 increased Orange County's VLF  
            adjustment amount by 

            $53 million in FY 2013-14 and required that the calculation  
            for FY 2014-15, and each FY thereafter, is based on a prior FY  
            amount that reflects the full amount of the one-time increase  
            of $53 million.  The amount is adjusted annually by the annual  
            property tax growth rate in Orange County, which is the same  
            for all other counties.  
            SB 69 (Roth) of 2014, which was vetoed by the Governor, would  
            have provided a city incorporating after January 1, 2004, and  
            on or before January 1, 2012, with property tax in lieu of  
            VLF.  SB 25 (Roth), currently pending in the Senate  
            Appropriations Committee, is substantially similar to SB 69.  

            AB 1521 (Fox) of 2014, which was vetoed by the Governor, would  
            have modified the amount of VLF allocated to counties and  
            cities to include changes in the assessed valuation within  
            annexed areas, and is nearly identical to the provisions in  
            this bill.  


                                                                     AB 448

                                                                    Page  7

          6)Policy Consideration.  The veto message for AB 1521 (Fox) of  
            2014, states, "While it is true that the state's economy has  
            improved markedly, and significant progress has been made in  
            aligning revenues and expenditures, I do not believe that it  
            would be prudent to authorize legislation that would result in  
            long term costs to the general fund that this bill would  

            The Committee may wish to ask the author what circumstances,  
            if any, have changed.  

          7)Arguments in Support.  Supporters argue that this bill would  
            restore funding stability to cities that annex inhabited  
            territory, and reestablish a foundation that support  
            sustainable and compact growth policies.  

          8)Arguments in Opposition.  None on file.  

          9)Urgency Clause.  This bill contains an urgency clause and  
            requires a two-thirds vote of each house.  



          City of Fontana [SPONSOR]

          California Association of Local Agency Formation Commissions


                                                                     AB 448

                                                                    Page  8

          Cities of Jurupa Valley and Wildomar

          Contra Costa Local Agency Formation Commission

          San Mateo Local Agency Formation Commission


          None on file

          Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958