BILL ANALYSIS Ó 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. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: February 23, 2015 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: Yes |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: June 29, 2015 |Consultant: Mark McKenzie | | | | ----------------------------------------------------------------- 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 AB 448 (Brown) Page 1 of ? 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 AB 448 (Brown) Page 2 of ? 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 AB 448 (Brown) Page 3 of ? 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 AB 448 (Brown) Page 4 of ? 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. -- END --