BILL ANALYSIS Ó
AB 2277
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Date of Hearing: April 6, 2016
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Susan Talamantes Eggman, Chair
AB 2277
(Melendez) - As Introduced February 18, 2016
SUBJECT: Local government finance: property tax revenue
allocation: vehicle license fee adjustments.
SUMMARY: Provides a city that incorporated after January 1,
2004, and on or before
January 1, 2012, with property tax in lieu of vehicle license
fees (VLF). Specifically, this bill:
1)Establishes a vehicle license adjustment amount for a city
incorporating after January 1, 2004, and on or before January
1, 2012, as follows:
a) A formula to calculate the base year VLF adjustment
amount for fiscal year (FY) 2016-17 which uses the
population of the incorporating city, times the sum of the
most recent VLF adjustment amount for all cities in the
county, divided by the sum of the population of all the
cities in the county; and,
b) A formula to calculate the VLF adjustment amount for FY
2017-18, and each FY thereafter, that includes the
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percentage change from the immediately preceding FY to the
current FY in gross taxable assessed valuation (property
tax revenues).
2)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.
FISCAL EFFECT: This bill is keyed fiscal.
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 General Fund 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
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VLF revenue, including the backfill from the state General
Fund, 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 General Fund with property tax revenues (dollar for
dollar) that otherwise would have gone to schools through
ERAF. This replacement funding is known as the "VLF
adjustment amount". The state General Fund 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. Prior to the 2004-05 budget agreement, a newly
incorporated city received additional VLF revenues based on
three times the number of registered voters in the city at the
time of incorporation. For most cities, this increased
allocation continued for the first seven years. Following the
2004-05 budget agreement, no cities received this VLF revenue
bump upon incorporation. Cities that had not incorporated by
FY 2004-05 receive no property tax in lieu of VLF, and
therefore, do not have a VLF adjustment amount.
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
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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
assumption that VLF funding would be available. 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 (DMV) 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
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the effect of eliminating over $15 million in the Motor
Vehicle License Fee (MVLFA) revenues in 2011-12 from four
newly incorporated cities (Menifee [October 1, 2008], Eastvale
[October 1, 2010], Wildomar [July 1, 2008], and Jurupa Valley
[July 1, 2011]), 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. For example, the City
of Jurupa Valley, which incorporated within days of the
passage of
SB 89, anticipated VLF revenues representing 47% of its
General Fund budget.
3)Bill Summary. This bill establishes a base year VLF
adjustment amount for FY 2016-17 for cities that incorporated
after January 1, 2004, and on or before January 1, 2012, to
replicate funds that existed for new cities prior to 2004. In
each subsequent FY, the VLF adjustment amount would be the
city's annual change in assessed property values, which is the
same formula used to calculate the VLF adjustment amount for
other cities. This bill will only impact four cities: Jurupa
Valley, Eastvale, Menifee, and Wildomar, which all
incorporated during the timeframe contained in the bill. This
bill does not provide a VLF adjustment amount for cities
incorporating after January 1, 2012. This bill is
author-sponsored.
4)Author's Statement. According to the author, "In 2011, one
of the steps the Legislature took to close the state's massive
budget gap was to pass SB 89 which eliminated VLF revenue
allocated to newly incorporated cities and annexed areas. As
a result, four newly incorporated cities in Riverside County -
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Eastvale, Jurupa Valley, Menifee and Wildomar - lost critical
funding. These cities are now facing the possibility of
disincorporation, potentially forcing Riverside County to
provide essential services to residents which the County has
not budgeted for. AB 2277 will: (1) Provide funding for newly
incorporated cities that lost funding as a result of SB 89
(2011); (2) Does not provide new money for cities. This bill
restores funds that existed for new cities prior to 2004. AB
2277 utilizes a county's ERAF. If the funds are fully used,
the school share of ERAF will be used to make up the
difference. This will be fully reimbursed by the state's
general fund so there is no impact on schools."
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 was held
on the Senate Appropriations Committee's suspense file, and AB
1098 was vetoed by the Governor.
SB 56 (Roth) of 2013 was returned to the Secretary of Senate
without further action, pursuant to Joint Rule 56. AB 677
(Fox) of 2013 was filed with the Chief Clerk without further
action, pursuant to Joint Rule 56. SB 56 would have
established VLF adjustment amounts for annexations, and also
included a formula for cities that incorporated after 2004 to
receive a VLF adjustment amount similar to the formulas
established in this bill.
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AB 1521 (Fox) of 2014, vetoed by the Governor, and AB 448
(Brown) of 2015, held on the Senate Appropriations Committee's
suspense file, would have modified the amount of VLF allocated
to counties and cities to include changes in the assessed
valuation within annexed areas.
SB 69 (Roth) of 2014 and SB 25 (Roth) of 2015, which were
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, and are nearly
identical to the provisions in this bill.
SB 817 (Roth), currently pending in the Senate Appropriations
Committee, changes the formulas for calculating the VLF
adjustment amounts for the four cities identical to the
provisions contained in this bill.
6)Budget Appropriation. Last year, the State Budget contained a
one-time appropriation to address the general fund shortfalls
of the four newly incorporated cities in Riverside County;
however, the appropriation does not address ongoing funding
needs.
SB 107 (Committee on Budget and Fiscal Review), Chapter 325,
Statutes of 2015, appropriated nearly $24 million from the
General Fund to the Department of Forestry and Fire Protection
in order to forgive monies owed by the newly incorporated
cities for services rendered by the County of Riverside. The
fiscal relief authorized by SB 107 has been used to forgive
more than $1 million in debt owed by the City of Menifee, $1
million in debt owed by the City of Wildomar, and $21 million
in debt owed by the City of Jurupa Valley for services that
Riverside County provided to those cities following their
incorporation. The City of Eastvale received no money
following the passage of SB 107 and unsuccessfully sought to
challenge the County's decision in the courts to allocate the
fiscal relief to the other three newly formed cities.
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7)Policy Consideration. The Committee may wish to ask the
author about the status of conversations with the Governor in
light of the budget appropriation contained in SB 107 and past
veto messages for nearly identical bills that have expressed
concerns with long-term costs to the General Fund.
8)Arguments in Support. Supporters argue that this bill
reinstates a critical funding component to cities that
incorporated between January 1, 2004, and January 1, 2012, and
ensures their continued viability.
9)Arguments in Opposition. None on file.
REGISTERED SUPPORT / OPPOSITION:
Support
California Association of Local Agency Formation Commissions
California State Association of Counties
Cities of Eastvale, Jurupa Valley, Menifee, Wildomar
Riverside County
Riverside Local Agency Formation Commission
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Southwest California Legislative Council
Opposition
None on file
Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958