BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 448 (Brown) - Local government finance:  property tax revenue  
          allocations:  vehicle license fee adjustments.
          
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          |Version: February 23, 2015      |Policy Vote: GOV. & F. 7 - 0    |
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          |Urgency: Yes                    |Mandate: Yes                    |
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          |Hearing Date: June 29, 2015     |Consultant: Mark McKenzie       |
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          This bill meets the criteria for referral to the Suspense File. 







          Bill  
          Summary:  AB 448, an urgency measure, would revise the formulas for  
          allocating annual "vehicle license fee (VLF) adjustment amounts"  
          to account for city annexations of inhabited territory since  
          2004.  The bill would result in a one-time permanent shift of  
          property tax revenues to those cities from the school share,  
          which would be built into property tax allocation formulas going  
          forward.


          Fiscal  
          Impact:  
           One-time, permanent shift of approximately $5 million in  
            property tax revenues in 2015-16 from the Educational Revenue  







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            Augmentation Fund (ERAF) in certain counties to cities that  
            have annexed inhabited areas since 2004.  The General Fund  
            would generally backfill the reductions from ERAF to replace  
            funding that would otherwise go to schools pursuant to  
            Proposition 98 minimum funding guarantees.  The initial $5  
            million General Fund backfill payments would increase each  
            year thereafter at the property tax growth rate. 

           To the extent that revisions to the formulas for allocating  
            VLF adjustment amounts removes a disincentive for other cities  
            to annex inhabited territory, the General Fund impacts could  
            increase in the future.

           Unknown state reimbursable costs to county officials to adjust  
            property tax allocation formulas to account for city  
            annexations going back to 2004 (General Fund).  It is unlikely  
            that counties would file a claim for reimbursement for these  
            one-time costs.


          Background:  Existing state law imposes the VLF, which is in lieu of a  
          personal property tax on California motor vehicles, at a rate  
          based on the taxable value of the vehicle.  The Department of  
          Motor Vehicles (DMV) collects the VLF annually from vehicle  
          owners at the time of registration, and allocates the revenues  
          to cities and counties after deducting administrative costs.   
          The VLF rate is currently 0.65 percent of the value of a  
          vehicle, but the historical rate beginning in 1948 was 2  
          percent.  Beginning in 1998, the state reduced the VLF rate and  
          offset the loss of local revenues with General Fund payments.  

          As part of the 2004 budget agreement, the Legislature enacted a  
          "VLF-property tax swap," which permanently reduced the VLF rate  
          to 0.65 percent, repealed the direct offset payments from the  
          General Fund, and instead replaced lost local revenues with  
          property taxes that would otherwise have gone to schools through  
          the ERAF in each county.  The replacement funding was known as  
          the "VLF adjustment amount."  The state General Fund generally  
          backfills local school funding that is reduced through the ERAF  
          shift.  

          The state has also historically provided additional VLF revenue  
          to newly incorporated cities and cities that annex inhabited  
          territory, but when the Legislature cut the VLF rate, the amount  








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          of VLF revenue available to cities annexing an inhabited area  
          was also reduced.  Following the passage of AB 1602 (Laird),  
          Chap 556/2006, until July 1, 2011, this additional revenue came  
          from reallocating a portion of existing cities' VLF funds to new  
          cities and cities that annexed inhabited areas in order to make  
          new incorporations and annexations financially feasible.  

          As part of the realignment proposal in the 2011-12 Budget, SB 89  
          (Committee on Budget and Fiscal Review) Chap 35/2011 deemed  
          DMV's VLF collection costs as $25 million for 2011-12, increased  
          the vehicle registration fee by $12, and shifted VLF revenues  
          from cities to fund local law enforcement grants through the  
          newly established Local Law Enforcement Services Account.  SB 89  
          also eliminated the formulas established by AB 1602 (Laird) that  
          provided enhanced VLF revenues to newly incorporated cities and  
          cities that annex inhabited territory.  Proposition 30, approved  
          by the voters in 2012, amended the Constitution to permanently  
          dedicate a portion of the sales tax and VLF to local governments  
          to pay for the programs realigned as part of the 2011-12 Budget.


          SB 89 had the effect of eliminating over $4 million in enhanced  
          VLF revenues in 2011-12 from cities that annexed inhabited  
          areas.  These cities had based their decisions to annex an  
          inhabited area, at least in part, on the expectation of  
          receiving enhanced VLF revenues.


          Proposed Law:  
            AB 448 would modify the formulas for allocating annual  
          "vehicle license fee (VLF) adjustment amounts" to account for  
          city annexations of inhabited territory since 2004.   
          Specifically, this bill would make the following adjustments:

                 For the 2015-16 fiscal year, county auditors would  
               calculate the VLF adjustment amount for cities and counties  
               using a specified formula that accounts for the percentage  
               change in assessed property values within each jurisdiction  
               from the 2004-05 fiscal year through the 2015-16 fiscal  
               year.
                 For the 2016-17 fiscal year, and each year thereafter,  
               county auditors would calculate the VLF adjustment amount  
               for cities and counties by adjusting the prior year's  
               amount by a growth factor to reflect year-to-year changes  








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               in assessed property values within each jurisdiction.

          The bill also makes non-substantive conforming changes to state  
          law relating to the calculation of Orange County's VLF  
          adjustment amount.


          Related  
          Legislation:  Numerous bills in recent years have been  
          introduced to address the loss of VLF revenues in newly  
          incorporated cities and cities that have annexed inhabited  
          areas, following the passage of SB 89 in 2011.  SB 1566 (Negrete  
          McLeod), which was held on this Committee's Suspense File in  
          2012, would have reallocated VLF revenues to  
          recently-incorporated cities and those that annexed inhabited  
          territory.  The contents of SB 1566 were amended into AB 1098  
          (Carter) on the Assembly Floor in the last two days of the  
          2011-12 legislative session, but that bill was vetoed by the  
          Governor.  In 2013, both SB 56 (Roth) and AB 677 (Fox) contained  
          provisions revising VLF adjustment amounts for both  
          newly-incorporated cities and those that had annexed inhabited  
          territory.  SB 56 was approved by the Governance and Finance  
          Committee, but never heard in this Committee.  AB 677 was never  
          heard in a committee.
          SB 69 (Roth), which was vetoed by the Governor last year but  
          never heard in this Committee, would have provided  
          recently-incorporated cities with enhanced VLF adjustment  
          amounts from county ERAF revenues.  AB 1521 (Fox), which was  
          also vetoed by the Governor last year, is nearly identical to AB  
          448 and would have provided an enhanced VLF adjustment amount  
          from county ERAF revenues to cities that annexed inhabited  
          territory.  The veto message for AB 1521 states the following:


               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. 


          Most recently, SB 25 (Roth), which is currently pending in the  
          Assembly Local Government Committee, would provide  








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          recently-incorporated cities with enhanced VLF adjustment  
          amounts from county ERAF revenues.  




          Staff  
          Comments:  AB 448 would make changes to property tax allocations  
          to benefit cities that annexed inhabited territory since 2004 at  
          the expense of the General Fund.  This would result in a  
          one-time adjustment by shifting approximately $5 million  
          statewide from certain county ERAF accounts to those cities, and  
          permanently "re-base" the VLF adjustment amount going forward.   
          Any reductions to ERAF allocations are typically backfilled by  
          the state General Fund pursuant to Proposition 98 minimum  
          funding guarantees.  As such, the bill would result in an annual  
          General Fund impact of $5 million, which would grow each year by  
          the property tax growth rate.  The General Fund impact would  
          increase to the extent the bill removes disincentives for cities  
          to annex inhabited territory in the future.


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