BILL ANALYSIS                                                                                                                                                                                                    

                                                                       AB 448

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          448 (Brown)

          As Introduced  February 23, 2015

          2/3 vote.  Urgency

          |Committee       |Votes |Ayes                 |Noes                 |
          |                |      |                     |                     |
          |                |      |                     |                     |
          |Local           |9-0   |Maienschein,         |                     |
          |Government      |      |Gonzalez, Alejo,     |                     |
          |                |      |Chiu, Cooley,        |                     |
          |                |      |Gordon, Holden,      |                     |
          |                |      |Linder, Waldron      |                     |
          |                |      |                     |                     |
          |Appropriations  |17-0  |Gomez, Bigelow,      |                     |
          |                |      |Bonta, Calderon,     |                     |
          |                |      |Chang, Daly, Eggman, |                     |
          |                |      |Gallagher,           |                     |
          |                |      |                     |                     |
          |                |      |                     |                     |
          |                |      |Eduardo Garcia,      |                     |
          |                |      |Gordon, Holden,      |                     |
          |                |      |Jones, Quirk,        |                     |
          |                |      |Rendon, Wagner,      |                     |
          |                |      |Weber, Wood          |                     |
          |                |      |                     |                     |
          |                |      |                     |                     |


                                                                       AB 448

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          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.

          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.  


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          FISCAL EFFECT:  According to the Assembly Appropriations Committee  
          on-going costs in the range of $5 million (General Fund (GF)) to  
          backfill property tax reductions to schools.  


          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 GF 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 GF 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 GF with property tax  
            revenues (dollar for dollar) that otherwise would have gone to  


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            schools through ERAF.  This replacement funding is known as the  
            "VLF adjustment amount".  The state GF 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  
            of 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  
            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  


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            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 VLF.  

            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  

          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  
            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  


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

            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  


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            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.  

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


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          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.  

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