BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 817 (Roth) - Local government finance:  property tax revenue  
          allocations:  vehicle license fee adjustments
          |                                                                 |
          |                                                                 |
          |                                                                 |
          |                                |                                |
          |Version: February 22, 2016      |Policy Vote: GOV. & F. 7 - 0    |
          |                                |                                |
          |                                |                                |
          |Urgency: No                     |Mandate: Yes                    |
          |                                |                                |
          |                                |                                |
          |Hearing Date: April 11, 2016    |Consultant: Mark McKenzie       |
          |                                |                                |

          This bill meets the criteria for referral to the Suspense File.

          Summary: SB 817 would revise the formulas for calculating annual  
          "vehicle license fee (VLF) adjustment amounts" for cities that  
          incorporated from January 1, 2004 through January 1, 2012.  The  
          bill would result in a one-time shift of property tax revenues  
          from the Educational Revenue Augmentation Fund (ERAF) in  
          Riverside County to four specified cities, which would be built  
          into property tax allocation formulas in future years.

           One-time, permanent shift of approximately $18 million in  
            property tax revenues in 2016-17 from the Riverside County  


          SB 817 (Roth)                                          Page 1 of  
            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.

          Background:  Existing state law imposes the VLF, which is in lieu of a  
          personal property tax on California motor vehicles, at a rate  
          based on the taxable value of the vehicle.  The Department of  
          Motor Vehicles collects the VLF annually from vehicle owners at  
          the time of registration, and allocates the revenues to cities  
          and counties after deducting administrative costs.  The VLF rate  
          is currently 0.65 percent of the value of a vehicle, but the  
          historical rate beginning in 1948 was 2 percent.  Beginning in  
          1998, the state reduced the VLF rate and offset the loss of  
          local revenues with General Fund payments.  

          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  
          Prior to 2004, the state had historically provided additional  
          VLF revenue to newly incorporated cities.  Following the passage  
          of AB 1602 (Laird) Chap 556/2006 until July 1, 2011, this  
          additional revenue came 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  
          (Committee on Budget and Fiscal Review) Chap 35/2011 deemed  


          SB 817 (Roth)                                          Page 2 of  
          DMV's VLF collection costs as $25 million for 2011-12, increased  
          the vehicle registration fee by $12, and 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.  Proposition 30, approved  
          by the voters in 2012, amended the Constitution to permanently  
          dedicate a portion of the sales tax and VLF to local governments  
          to pay for the programs realigned as part of the 2011-12 Budget.

          SB 89 had the effect of eliminating over $15 million in annual  
          enhanced VLF revenues beginning in 2011-12 from four newly  
          incorporated cities (Menifee, Eastvale, Wildomar, and Jurupa  
          Valley).  These cities had based their decisions to incorporate,  
          at least in part, on the expectation of receiving enhanced VLF  
          revenues to remain fiscally viable.

          Proposed Law:  
            SB 817 would modify the formulas for allocating annual "VLF  
          adjustment amounts" for any city that incorporated after January  
          1, 2004, and on or before January 1, 2012.  Specifically, this  
          bill would require the VLF adjustment amount to be calculated  
          according to the following formulas:
                 For the 2016-17 fiscal year, the county auditor would  
               calculate the base VLF adjustment amount by multiplying  
               each city's population by the per capita amount of  
               countywide VLF adjustment amount for all cities in the  
                 For the 2017-18 fiscal year, and each year thereafter,  
               county auditors would calculate the VLF adjustment amount  
               for these cities by adjusting the prior year's amount by a  
               growth factor to reflect year-to-year changes in assessed  
               property values within each jurisdiction.

          Legislation:  SB 25 (Roth), which was vetoed by the Governor  
          last year, was effectively identical to this bill.  The veto  
          message states the following:
               This bill allows four cities that incorporated after  


          SB 817 (Roth)                                          Page 3 of  
               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 fund that the state's budget  
               cannot afford.

          SB 69 (Roth), which was also vetoed by the Governor in 2014 but  
          never heard in this Committee, is nearly identical to this bill  
          and SB 25, and would have provided recently-incorporated cities  
          with enhanced VLF adjustment amounts from county ERAF revenues.   
          The veto message for SB 69 states the following:

               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. 

          There have been numerous other bills in recent years to address  
          the loss of VLF revenues in newly incorporated cities and cities  
          that have annexed inhabited areas, following the passage of SB  
          89 in 2011.  SB 1566 (Negrete McLeod), which was held on this  
          Committee's Suspense File in 2012, would have reallocated VLF  
          revenues to recently-incorporated cities and those that annexed  
          inhabited territory.  The contents of SB 1566 were amended into  
          AB 1098 (Carter) on the Assembly Floor in the last two days of  
          the 2011-12 legislative session, but that bill was vetoed by the  
          Governor.  In 2013, both SB 56 (Roth) and AB 677 (Fox) contained  
          provisions revising VLF adjustment amounts for both  
          newly-incorporated cities and those that had annexed inhabited  
          territory.  SB 56 was approved by the Governance and Finance  
          Committee, but never heard in this Committee.  AB 677 was never  
          heard in a committee.  More recently, AB 1521 (Fox), which was  
          vetoed by the Governor in 2014, would have provided an enhanced  
          VLF adjustment amount from county ERAF revenues to cities that  
          annexed inhabited territory.  


          SB 817 (Roth)                                          Page 4 of  

          Comments:  SB 817 would make changes to property tax allocations  
          to benefit cities that have incorporated since 2004 at the  
          expense of the General Fund.  This would result in a one-time  
          adjustment by shifting approximately $18 million from the  
          Riverside County ERAF to the cities of Jurupa Valley, Eastvale,  
          Menifee, and Wildomar, and permanently "re-base" the VLF  
          adjustment amount going forward.  Any reductions to ERAF  
          allocations are typically backfilled by the state General Fund  
          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 2016-17, which would grow each year thereafter  
          by the property tax growth rate. 
          As noted in the Governor's veto message of SB 25 last year, SB  
          107 (Committee on Budget and Fiscal Review), Chap 325/2015,  
          provided $23.75 million in one-time fiscal relief to recently  
          incorporated cities impacted by the loss of VLF revenues  
          following the passage of SB 89 in 2011.  This General Fund  
          appropriation was used to pay debts incurred by Wildomar (over  
          $1 million), Menifee (over $1 million), and Jurupa Valley (over  
          $21 million) for services rendered through contracts with  
          Riverside County.  The City of Eastvale did not receive any  
          fiscal relief from SB 107, and has filed a lawsuit challenging  
          the allocation of fiscal relief to only three of the four  
          recently-incorporated cities.  The outcome of litigation is  
          pending at this time.

                                      -- END --