BILL ANALYSIS                                                                                                                                                                                                    

                                                                      SB 25

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          Date of Hearing:  July 15, 2015


                              Brian Maienschein, Chair

          25 (Roth) - As Introduced December 1, 2014

          SENATE VOTE:  40-0

          SUBJECT:  Local government finance: property tax revenue  
          allocation: vehicle license fee adjustments.

          SUMMARY:  Provides a city incorporating 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) 2015-16 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,  


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             b)   A formula to calculate the VLF adjustment amount for FY  
               2016-17, and each FY thereafter, that includes the  
               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:  According to the Senate Appropriations  
          Committee, there is a one-time, permanent shift of approximately  
          $16.7 million in property tax revenues in 2015-16 from the  
          Riverside County [Educational Revenue Augmentation Fund] (ERAF)  
          to four recently-incorporated cities.  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 General Fund backfill  
          payments would increase each year thereafter at the property tax  
          growth rate.  Unknown, likely minor state reimbursable costs to  
          Riverside County officials to adjust property tax allocation  
          formulas for the four recently-incorporated cities (General  
          Fund).  It is unlikely that counties would file a claim for  
          reimbursement for these minor one-time costs.  


          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  


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            Legislature decided to create a state wide 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  
            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  


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            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  

            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  


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            registration fee from $31 to $43.  

            According to the Senate Appropriations Committee, SB 89 had  
            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 2015-16 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 for these cities  
            would be the jurisdiction's annual change in the assessed  
            valuation 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 Senate Bill 89 which eliminated Vehicle  


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            License Fee (VLF) revenue allocated to newly incorporated  
            cities and annexed areas.  As a result, four newly  
            incorporated cities in Riverside County - Eastvale, Jurupa  
            Valley, Menifee and Wildomar - lost critical funding. 

            "The situation for the City of Jurupa Valley is especially  
            urgent, as VLF funding was eliminated only days before the  
            city incorporated.  The residents had voted for cityhood based  
            on state VLF money being available for the new city.  Jurupa  
            Valley now faces disincorporation, potentially forcing  
            Riverside County to provide essential services to residents  
            which the County has not budgeted for.

            "While ongoing funding is critical to stabilize new cities and  
            annexations, VLF revenue is no longer available as a funding  
            source for cities due to the passage of Proposition 30 (2012),  
            which requires that VLF funds be used exclusively for criminal  
            justice realignment.  Cities play a vital role in fulfilling  
            many of the state's policy goals which include achieving smart  
            growth objectives, promoting transportation and infrastructure  
            investments, meeting affordable housing needs, and realizing  
            greenhouse gas reduction goals.  

            "SB 25 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.  SB 25 will  
            provide funding for newly incorporated cities and cities which  
            annexed inhabited areas that lost funding as a result of SB 89  
            (2011) and will not provide new money for cities."  

          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  


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            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 died on  
            the Senate Appropriations Committee's suspense file.  The  
            Governor vetoed AB 1098, stating that its reallocation of VLF  
            revenues "undermine the 2011 Realignment formulas that would  
            jeopardize dollars for local public safety programs, provides  
            cities new funding beyond what existed under previous law, and  
            would create a hole in the General Fund to the tune of $18  
            million. Given the current fiscal uncertainties, this is not  

            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.  

            AB 701 (Quirk-Silva), Chapter 393, Statutes of 2013, increased  
            Orange County's VLF adjustment amount to reflect the amount  
            that the County would receive, if its VLF adjustment amount  
            had not been offset, in 2004, to help the County finance its  
            bankruptcy-related debt.  AB 701 increased Orange County's VLF  
            adjustment amount by $53 million in FY 2013-14 and required  
            that the calculation for FY 2014-15, and each FY thereafter,  
            is based on a prior FY amount that reflects the full amount of  
            the one-time increase of $53 million.  The amount is adjusted  
            annually by the annual property tax growth rate in the County,  
            which is the same for all other counties.  

            AB 1521 (Fox) of 2014, which was vetoed by the Governor, would  
            have modified the amount of VLF allocated to counties and  


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            cities to include changes in the assessed valuation within  
            annexed areas, and is nearly identical to AB 448 (Brown),  
            currently pending in the Senate Appropriations Committee.  

            SB 69 (Roth) of 2014, which was 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 is nearly identical to the provisions in this bill.  

          6)Conflicting Legislation.  Provisions of this bill conflict  
            with AB 448 (Brown) and may need amendments to address the  
            conflict, should the bills continue to move through the  
            legislative process.  

          7)Policy Consideration.  The Governor's veto message for SB 69  
            (Roth) of 2014, states, "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."  

          8)Arguments in Support.  Supporters argue that this bill  
            reinstates a critical funding component to cities incorporated  
            between January 1, 2004, and January 1, 2012, and ensures  
            their continued viability.  

          9)Arguments in Opposition.  None on file. 



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          California Association of Local Agency Formation Commissions

          California Police Chiefs Association

          California Professional Firefighters

          California State Association of Counties

          Cities of Fontana, Menifee, Jurupa Valley and Wildomar

          Contra Costa Local Agency Formation Commission

          League of California Cities

          Orange County Local Agency Formation Commission

          Riverside County Board of Supervisors


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          Riverside Sheriffs Association

          San Diego Local Agency Formation Commission

          San Mateo Local Agency Formation Commission

          Southwest California Legislative Council


          None on file

          Analysis Prepared by:Misa Lennox / L. GOV. / (916)