BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 817| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 817 Author: Roth (D) Amended: 2/22/16 Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 3/30/16 AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/27/16 AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen SUBJECT: Local government finance: property tax revenue allocations: vehicle license fee adjustments SOURCE: Author DIGEST: This bill changes the formulas for calculating annual vehicle license fee adjustment amounts for four cities that incorporated after 2004. ANALYSIS: Existing law: 1)Imposes the vehicle license fee (VLF) in lieu of personal property tax on California motor vehicles, at a rate based on the taxable value of the vehicle. SB 817 Page 2 2)Funds public safety realignment programs with VLF revenues that, before the passage of SB 89 (Senate Budget and Fiscal Review Committee, Chapter 35, Statutes of 2011), would have been allocated to four cities that incorporated after January 1, 2004. This bill establishes a vehicle license adjustment amount for a city incorporating after January 1, 2004, and on or before January 1, 2012, as follows: 1)A formula to calculate the base year VLF adjustment amount for fiscal year (FY) 2016-17 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 2)A formula to calculate the VLF adjustment amount for the 2017-2018 FY, and each FY thereafter, that includes the percentage change from the immediately preceding FY to the current FY in gross taxable assessed valuation. Background 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. SB 817 Page 3 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 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, Chapter 556, Statutes of 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 SB 89 (Senate Budget and Fiscal Review Committee, Chapter 35, Statutes of 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 State 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. SB 817 Page 4 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. Comments 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. This bill helps to rebalance the four cities' finances by restoring some VLF-related funding. Related/Prior Legislation SB 25 (Roth, 2015) and SB 69 (Roth, 2014), both of which contained provisions that were nearly identical to this bill's VLFAA formula for cities that incorporated after 2004, were vetoed by Governor Brown. SB 56 (Roth, 2013) and AB 677 (Fox, 2013) both contained VLF adjustments amounts similar to the provisions in this bill for city incorporations, but included adjustments for annexations as well. SB 56 was held on the Senate Appropriations Committee's Suspense File. AB 677 was referred to, but never heard by, the Assembly Local Government Committee. SB 817 Page 5 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 SB 1566's provisions, but was subsequently vetoed by the Governor. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: Yes According to the Senate Appropriations Committee: " One-time, permanent shift of approximately $18 million in property tax revenues in 2016-17 from the Riverside County 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. SUPPORT: (Verified5/27/16) Alameda County LAFCO California Association of Local Agency Formation Commissions SB 817 Page 6 California Police Chiefs Association California State Association of Counties City of Eastvale City of Jurupa Valley City of Menifee City of Riverside City of Wildomar Contra Costa County LAFCO County of Riverside League of California Cities Riverside LAFCO Riverside Sheriffs Association San Mateo County LAFCO Solano County LAFCO Southwest California Legislative Council Urban Counties of California Yolo County LAFCO OPPOSITION: (Verified5/27/16) None received Prepared by:Brian Weinberger / GOV. & F. / (916) 651-4119 5/28/16 16:45:52 **** END ****