BILL ANALYSIS                                                                                                                                                                                                    

                         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                                            |
          |:         |                                                      |


          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  


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          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  


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          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.


           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  


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          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  


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          state to reimburse local agencies if the Commission on State  
          Mandates determines that the bill imposes a reimbursable  

          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  

           Opposition  :  Unknown.