BILL ANALYSIS                                                                                                                                                                                                    

                                                                      SB 25  

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          Date of Hearing:  August 19, 2015


                                 Jimmy Gomez, Chair

          SB 25  
          (Roth) - As Introduced December 1, 2014

          |Policy       |Local Government               |Vote:|9 - 0        |
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          Urgency:  No  State Mandated Local Program:  YesReimbursable:   


          This bill establishes a motor vehicle license fee (VLF)  
          adjustment amount for cities that incorporated after January 1,  
          2004, and on or before January 1, 2012.


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          FISCAL EFFECT:

          1)On-going costs of approximately $17 million (GF) to backfill  
            property tax reductions to schools as follows:
             a)   This bill will result in a one-time shift of  
               approximately $16.7 million from the Riverside County  
               Educational Revenue Augmentation Fund (ERAF) to the cities  
               of Jurupa Valley, Eastvale, Menifee, and Wildomar, and  
               permanently "re-base" the VLF adjustment amount going  
               forward.  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.  As such, the bill would result in an  
               annual General Fund impact of about $16.7 million in  
               2015-16, which would grow each year thereafter by the  
               property tax growth rate.  

          1)Unknown, likely minor state reimbursable costs to Riverside  
            County to adjust property tax allocation formulas for the four  
            recently-incorporated cities (GF).  It is unlikely that the  
            county would file a claim for reimbursement for these minor  
            one-time costs.


          1)Purpose. This is the sixth legislative attempt to address the  
            disproportionate impact the 2011 budget trailer bill (SB 89)  
            had on cities that incorporated after January 1, 2004, and on  
            or before January 1, 2012. These incorporations were funded,  
            in part, through an increased share of VLF revenue. In an  
            effort to fund realignment, SB 89 shifted approximately $150  
            million of VLF revenue to the Local Law Enforcement Services  
            Account.  The author notes that by abruptly cutting the  
            allocation of VLF funds to newly incorporated cities, the  


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            realignment shift in 2011 disproportionally endangered the  
            fiscal viability of communities that rely on VLF revenues.   
            For example, for the City of Jurupa Valley which incorporated  
            within days of the passage of SB 89, the anticipated VLF  
            revenues represented 47% of its General Fund budget.

            This bill impacts only the four cities that incorporated  
            during the timeframe in the bill, Jurupa Valley, Eastvale,  
            Menifee, and Wildomar, all in Riverside County.  The bill  
            establishes a base year VLF adjustment amount for these cities  
            for FY 2015-16 to replicate funds that existed for new cities  
            prior to 2004.  

          2)Background. Current law imposes the VLF in lieu of personal  
            property tax on California motor vehicles, at a rate based on  
            the taxable value of the vehicle. The state collects and  
            allocates the VLF revenues, minus administrative costs, to  
            cities and counties. In 1998, the VLF rate was reduced and the  
            state General Fund backfilled the lost revenues to cities and  

            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.  


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            Prior to 2004, the state had historically provided additional  
            VLF revenue to newly incorporated cities. The budget  
            agreement, however, did not provide compensating  
            property-tax-in-lieu-of-VLF for future new cities or for  
            annexations. A temporary remedy came with the passage of AB  
            1602 (Laird) Chapter 556, Statutes of 2006, which, until July  
            1, 2011, provided additional revenue 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 (Budget and Fiscal Review Committee), Chapter 35, Statutes  
            of 2011, among other provisions, 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.  This action  
            eliminated over $15 million in VLF revenues in 2011-12 for  
            four newly incorporated cities (Menifee, Eastvale, Wildomar,  
            and Jurupa Valley), as well as over $4 million from cities  
            that had annexed inhabited areas (Chico, San Ramon, Santa  
            Clarita, Temecula, Fontana, San Jose, Porterville, Tulare and  

          3)Related Legislation. AB 448 (Brown), pending on the Senate  
            Appropriations Committee's Suspense File, contains a similar  
            adjustment for cities that annexed inhabited areas. 


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          4)Prior Legislation.

             a)   SB 69 (Roth) of 2014, nearly identical to this bill,  
               would have provided a city incorporating after January 1,  
               2004, and on or before January 1, 2012, with property tax  
               in lieu of VLF.  SB 69 was vetoed by the Governor.  In his  
               veto message the Governor remarked, "?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."

             b)   AB 1521 (Fox) of 2014, nearly identical to this year's  
               AB 448, would have modified the amount of VLF allocated to  
               counties and cities to include changes in the assessed  
               valuation within annexed areas.  AB 1521 was vetoed by the  
               Governor. His veto message was similar to that of SB 69,  
               citing long term costs to the general fund.

             c)   SB 56 (Roth) of 2013 and AB 677 (Fox) of 2013, both  
               contained VLF adjustments amounts for both annexations and  
               city incorporations, similar to the provisions of AB 1521  
               for annexations and SB 69 in 2014. SB 56 (Roth) was held on  
               the Senate Appropriations Committee's Suspense File. AB 677  
               (Fox) was referred to, but never heard by, the Assembly  
               Local Government Committee.

             d)   SB 1566 (Negrete McLeod, 2012) and AB 1098 (Carter,  
               2012) also would have reallocated VLF revenues to newly  
               incorporated cities and to cities that annexed inhabited  
               territory.  SB 1566 was held on the Senate Appropriations  
               Committee's Suspense File. AB 1098 was amended during the  
               last two days of the 2011-12 legislative session to contain  


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               SB 1566's provisions and was vetoed by the Governor.

          Analysis Prepared by:Jennifer Swenson / APPR. / (916)