BILL ANALYSIS                                                                                                                                                                                                    

                         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.


           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  

          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  


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          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  


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          January 1, 2012 must be calculated according to the following  
                 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.


           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  


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          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  


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               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.

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