BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 817 |Hearing |3/30/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Roth |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |2/22/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- Local government finance: property tax revenue allocations: vehicle license fee adjustments Changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004. Background In lieu of a property tax on motor vehicles, the state collects an annual Vehicle License Fee (VLF) and allocates the revenues, minus administrative costs, to cities and counties. In 1998, the Legislature began cutting the VLF rate from 2% to 0.65% of a vehicle's value. The State General Fund backfilled the lost VLF revenues to cities and counties. As part of the 2004-05 budget agreement, the Legislature enacted the "VLF-property tax swap," which replaced the VLF backfill from the State General Fund with property tax revenues that otherwise would have gone to schools through the Educational Revenue Augmentation Fund (ERAF). This replacement funding is known as the "VLF adjustment amount." The State General Fund backfills schools for their lost ERAF money. The VLF-property tax swap did not reallocate extra property tax revenues to cities that were not in existence when the State was compensating cities for the difference between the 2% and 0.65% VLF rates. As a result, new cities received less VLF funding than they would have if they had incorporated before the SB 817 (Roth) 2/22/16 Page 2 of ? VLF-property tax swap. Advocates for cities asked the Legislature to reallocate a portion of existing cities' remaining VLF funds to new cities to help make new city incorporations financially feasible. In response, the Legislature passed AB 1602 (Laird, 2006), which changed the allocation of VLF funds to restore the VLF revenues for city incorporations that were lost under the VLF-property tax "swap." AB 1602's formula allocated $50 per capita adjusted annually for growth. Governor Brown's 2011 Realignment Proposal shifted the responsibility for some state public safety programs to local governments. The Legislature passed Senate Bill 89 (Committee on Budget and Fiscal Review, 2011), which re-calculated the Department of Motor Vehicle's administration fund to $25 million and increased vehicle license registration by $12 per vehicle to offset DMV's cut budget. SB 89 also eliminated VLF revenues allocated to cities and shifted those revenues to fund public safety realignment. Proposition 30 (2012) amended the Constitution to permanently dedicate a portion of the sales tax and VLF to local governments to pay for the programs realigned in 2011-12. Four new cities incorporated after the Laird bill enacted new VLF funding allocations for new cities and before those allocations were repealed. The City of Wildomar incorporated on July 1, 2008. The City of Menifee incorporated on October 1, 2008. The City of Eastvale incorporated on October 1, 2010. Most recently, the City of Jurupa Valley officially incorporated on July 1, 2011, only two days after SB 89 repealed the VLF allocation formulas for new cities. Advocates for cities argue that SB 89's elimination of VLF allocations creates fiscal hardships for cities that incorporated with the expectation that they would receive VLF revenues under the formulas enacted by the 2006 Laird bill. Proposed Law Beginning in the 2016-17 fiscal year, Senate Bill 817 requires that the Vehicle License Fee Adjustment Amount (VLFAA) for any city that incorporated after January 1, 2004, and on or before SB 817 (Roth) 2/22/16 Page 3 of ? January 1, 2012 must be calculated according to the following formula: For the 2016-17 fiscal year, the city's base VLFAA is calculated by multiplying the city's population by the per capita amount of countywide VLFAA funding received by cities in the county. For each fiscal year thereafter, the prior year's VLFAA is adjusted to reflect the year-to-year change in assessed property values within the city. State Revenue Impact No estimate. Comments 1. Purpose of the bill . By abruptly eliminating VLF allocations for recently incorporated cities, SB 89 pulled the rug out from under four cities that chose to incorporate based, in part, on the expectation that they would receive VLF funding under the formulas enacted by the 2006 Laird bill. After SB 89's enactment, each of the four cities had to make substantial cuts to vital public services that would have been funded by VLF allocations. In the City of Jurupa Valley, SB 89's fiscal effect was particularly severe, resulting in a loss of 46% of the city's first year General Fund revenues and a 26% loss of General Fund revenues in subsequent years. SB 817 helps to rebalance the four cities' finances by restoring some VLF-related funding. 2. A deal's a deal . SB 817 is only the most recent of a series of bills that have reopened provisions of law that were settled as a part of the complex and intense negotiations that produced Proposition 1A (2004), which limited the Legislature's power to shift local revenues. While city officials understandably found SB 89's reallocations of VLF revenues to be an unexpected and unwelcome change from the allocations established by AB 1602 (Laird, 2006), SB 89 effectively returned VLF funding for city incorporations to the amounts that were provided for in the original 2004 VLF-property tax swap deal. It is unclear why the issue should continue to be revisited if the problems relating SB 817 (Roth) 2/22/16 Page 4 of ? to VLF funding for city incorporations were not sufficiently serious to prevent an agreement in 2004. 3. Zero-sum game . Allocating property tax revenues is a zero-sum game; every reallocation creates winners and losers. SB 817 makes a winner out of four cities that annexed after 2004 and before 2012. The higher VLF adjustment amounts they receive under SB 817's formula will reduce the amounts of property tax revenues they contribute to ERAF. In some years, the fiscal loser will be the State General Fund, which must backfill the property tax revenues that schools won't get from ERAF. The annual loss to the State General Fund will grow in the future as property tax revenues grow. 4. One-time fiscal relief . As a part of the State Budget approved last year, the Legislature passed SB 107 (Senate Budget and Fiscal Review Committee, 2015), which provided nearly $24 million in fiscal relief to the four recently incorporated cities that lost funding under SB 89's reallocation of VLF revenues. The fiscal relief authorized by SB 107 has been used to forgive more than $1 million in debts owed by the cities of Wildomar and Menifee and more than $21 million in debts owed by the City of Jurupa Valley for services the County of Riverside provided to those cities after they incorporated. The City of Eastvale, which received no fiscal relief from SB 107, has filed a lawsuit challenging the allocation of fiscal relief to only three of the four recently incorporated cities. Regardless of the outcome of that litigation, the one-time fiscal relief provided by SB 107 does not address the ongoing fiscal shortfall created by the annual loss of VLF revenues that the newest cities counted on at the time they decided to incorporate. 5. Veto . SB 817 is effectively identical to SB 25 (Roth, 2015), which the Senate Governance & Finance Committee approved on a 7-0 vote. Governor Brown vetoed SB 25, stating: "This bill allows four cities that incorporated after January 1, 2004 and before January 1, 2012 to receive additional property tax revenue through a redistribution of Vehicle License Fee revenue. My signature of SB 107 provides approximately $24 million dollars in fiscal relief to these four cities. This bill results in additional long term costs to the general SB 817 (Roth) 2/22/16 Page 5 of ? fund that the state's budget cannot afford." 6. Related legislation . SB 817's VLFAA formula for city incorporations is nearly identical to language in SB 56 (Roth, 2013), which the Senate Governance & Finance Committee approved on a 7-0 vote. SB 56 died in the Senate Appropriations Committee. SB 69 (Roth, 2014) contained provisions that replicated SB 56's VLFAA formula for cities that incorporate after 2004. But SB 69, which Governor Brown vetoed, was not heard in the Governance & Finance Committee. SB 1566 (Negrete McLeod, 2012) would have reallocated VLF revenues formerly dedicated to DMV and FTB administrative costs to recently incorporated cities and to cities that annexed inhabited territory. The Senate Governance & Finance Committee approved SB 1566 on a 9-0 vote. The bill later died in the Senate Appropriation Committee. AB 1098 (Carter, 2012), which was amended on the Assembly Floor to contain SB 1566's provisions, was vetoed by Governor Brown. Support and Opposition (3/24/16) Support : Alameda County LAFCO; California Association of Local Agency Formation Commissions; California Police Chiefs Association; California State Association of Counties; Cities of Eastvale, Jurupa Valley, Wildomar, and Riverside; Contra Costa County LAFCO; County of Riverside; League of California Cities; Riverside Sheriffs Association; Solano County LAFCO; Southwest California Legislative Council; Urban Counties of California; Yolo County LAFCO. Opposition : Unknown. -- END --