BILL ANALYSIS Ó AB 448 Page 1 ASSEMBLY THIRD READING AB 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 Page 2 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. AB 448 Page 3 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. COMMENTS: 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 AB 448 Page 4 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 AB 448 Page 5 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 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 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 AB 448 Page 6 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 AB 448 Page 7 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 occasion". The Legislature may wish to ask the author what circumstances, if any, have changed. AB 448 Page 8 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: 0000563