BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 448 |Hearing |6/17/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Brown |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |2/23/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- VEHICLE LICENSE FEE ADJUSTMENT AMOUNTS FOR CITY ANNEXATIONS (URGENCY) Changes the formulas for calculating annual vehicle license fee adjustment amounts to account for territory annexed to cities since 2004. 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" (SB 1096, Senate Budget Committee, Chapter 211, Statutes of 2004), which replaced the State General Fund backfill 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. When the Legislature cut the VLF rate, the amount of VLF revenue available to a city as the result of annexing an AB 448 (Brown) 2/23/15 Page 2 of ? inhabited area also was 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 assessed valuation in the annexed area. In response, advocates for cities asked the Legislature to reallocate a portion of existing cities' remaining VLF funds, to cities that annex inhabited areas to help make city annexations financially feasible. In response, the Legislature passed AB 1602 (Laird, Chapter 556, Statutes of 2006), which changed the allocation of Vehicle License Fee (VLF) funds to replace the VLF revenues for annexations that were lost under the VLF-property tax swap. 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 loss of general Fund dollars. SB 89 also eliminated the $153 million in 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. Advocates for cities argue that SB 89's elimination of VLF allocations creates fiscal hardships for cities that annexed inhabited areas, with the expectation that they would receive revenues under the formulas enacted by the 2006 Laird bill and makes future annexations of inhabited areas financially infeasible. They want the Legislature to change the formula that county auditors use to calculate VLF adjustment amounts, to provide additional allocations that account for inhabited areas annexed by cities after 2004. Proposed Law In the 2015-16 fiscal year, Assembly Bill 448 requires county auditors to calculate vehicle license fee adjustment amounts (VLFAA) for cities, counties, and cities and counties using a specified formula that reflects the percentage change from the AB 448 (Brown) 2/23/15 Page 3 of ? 2004-05 fiscal year to the 2015-16 fiscal year in assessed property values within the city, county, or city and county. For the 2016-17 fiscal year, and for each fiscal year thereafter, AB 448 requires county auditors to calculate the VLFAA for a city, county, or city and county by adjusting the prior year's VLFAA amount to reflect the year-to-year change in assessed property values within the jurisdiction of the city, county, or city and county. The bill makes non-substantive conforming changes to state law relating to the calculation of Orange County's vehicle license fee adjustment amount. State Revenue Impact No estimate. Comments 1. Purpose of the bill . By abruptly reducing the allocation of VLF funds for inhabited city annexations, SB 89 pulled the rug out from under cities that had annexed, or were planning to annex, inhabited areas. AB 448 helps to rebalance those cities' finances balance by restoring some funding related to annexations. In recent years, Legislators have enacted statutes that promote the annexation of incorporated "island" communities to realize the land use planning, infrastructure, and service delivery improvements that can result. AB 448 advances this important statewide policy goal, benefitting communities throughout California. 2. A deal's a deal . AB 448 is only the most recent of a series of bills that have reopened provisions of law that were settled as a part of the complex and intense negotiations that produced Proposition 1A (2004), which limited the Legislature's power to shift local revenues. While city officials understandably found SB 89's reallocations of VLF revenues to be an unexpected and unwelcome change from the allocations established by AB 1602 (Laird, 2006), SB 89 effectively returned VLF funding for city annexations to the amounts that were provided for in the original 2004 VLF-property tax swap deal. If the problems AB 448 (Brown) 2/23/15 Page 4 of ? relating to VLF funding for city annexations were not sufficiently serious to prevent an agreement in 2004, it is unclear why the issue should continue to be revisited. 3. Zero-sum game . Allocating property tax revenues is a zero-sum game; every reallocation creates winners and losers. AB 448 makes a winner out of cities that annexed inhabited territory after 2004, and those that will annex inhabited territory in the future. The higher VLF adjustment amounts they receive under AB 448's formula will reduce the amounts of property tax revenues they contribute to ERAF. In some years, the fiscal loser will be the State General Fund, which must backfill the property tax revenues that schools won't get from ERAF. The annual loss to the State General Fund will grow in the future as property tax revenues grow and as cities annex additional territory. 4. Related legislation . AB 448 is nearly identical to AB 1521(Fox, 2014), which the Committee approved last year on a 7-0 vote. Ultimately, Governor Brown vetoed AB 1521. His veto message expressed his belief that, despite an improving economy and progress in aligning state finances, it would not "be prudent to authorize legislation that would result in long term costs to the general fund that [AB 1521] would occasion." Earlier this year, the Senate Governance & Finance Committee voted 7-0 to approve SB 25 (Roth, 2015), which would change the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004. Because AB 448 and SB 25 amend the same code sections in different ways, if both bills are signed into law the changes made by the bill that is chaptered first will get wiped out by the changes made by the bill that is chaptered last. To prevent one bill from "chaptering-out" the other, the Committee may wish to consider adopting technical "double-jointing" amendments that allow both bill's provisions to become law regardless of the order in which they are chaptered. 4. Mandate . The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because AB 448 imposes additional duties on local tax officials who are responsible for allocating ad valorem property tax revenues Legislative Counsel says that it imposes a new state mandate. AB 448 requires the AB 448 (Brown) 2/23/15 Page 5 of ? state to reimburse local agencies if the Commission on State Mandates determines that the bill imposes a reimbursable mandate. 5. Urgency . Regular statutes take effect on January 1 following their enactment; bills passed in 2015 take effect on January 1, 2016. The California Constitution allows bills with urgency clauses to take effect immediately if they're needed for the public peace, health, and safety. AB 448 contains an urgency clause declaring that it is necessary for its provisions to go into effect immediately to provide timely fiscal relief to preserve the public peace, health, and safety in cities that annexed inhabited areas that lost revenue as a result of SB 89's enactment in 2011. Assembly Actions Assembly Local Government Committee: 9-0 Assembly Appropriations Committee: 17-0 Assembly Floor: 79-0 Support and Opposition (6/11/15) Support : California Association of Local Agency Formation Commissions; California Police Chiefs Association; Cities of Fontana, Indian Wells, Jurupa Valley, and Wildomar; Contra Costa Local Agency Formation Commission; Imperial County Local Agency Formation Commission; San Mateo Local Agency Formation Commission. Opposition : Unknown. -END-