BILL ANALYSIS                                                                                                                                                                                                    

                                                                     SB 817

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          Date of Hearing:  June 15, 2016


                           Susan Talamantes Eggman, Chair

          817 (Roth) - As Amended February 22, 2016

          SENATE VOTE:  38-0

          SUBJECT:  Local government finance:  property tax revenue  
          allocations:  vehicle license fee adjustments.

          SUMMARY:  Provides a city incorporating after January 1, 2004,  
          and on or before January 1, 2012, with property tax in lieu of  
          vehicle license fees (VLF).  Specifically, this bill:   

          1)Establishes a vehicle license adjustment amount for a city  
            incorporating after January 1, 2004, and on or before January  
            1, 2012, as follows:

             a)   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,  


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             b)   A formula to calculate the VLF adjustment amount for FY  
               2017-18, and each FY thereafter, that includes the  
               percentage change from the immediately preceding FY to the  
               current FY in gross taxable assessed valuation (property  
               tax revenues).  

          2)Provides that, if the Commission on State Mandates determines  
            that this bill contains costs mandated by the state,  
            reimbursement to local agencies and school districts for those  
            costs shall be made, pursuant to current law governing state  
            mandated local costs.  

          FISCAL EFFECT:  According to the Senate Appropriations  
          Committee, there is a one-time, permanent shift of approximately  
          $18 million in property tax revenues in 2016-17 from the  
          Riverside County Educational Revenue Augmentation Fund (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.


          1)VLF.  VLF is a tax on the ownership of a registered vehicle in  
            place of taxing vehicles as personal property.  Prior to 1935,  
            vehicles in California were subject to property tax, but the  


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            Legislature decided to create a statewide system of vehicle  
            taxation.  The taxable value of a vehicle is established by  
            the purchase price of the vehicle, depreciated annually  
            according to a statutory schedule.  Prior to recent budget  
            actions, the state collected and allocated VLF revenues, minus  
            administrative costs, to cities and counties.  The VLF tax  
            rate is currently 0.65% of the value of a vehicle, but  
            historically (from 1948-2004), it was 2%.  In 1998, the  
            Legislature cut the VLF rate from 2% to 0.65 % of a vehicle's  
            value.  The state General Fund backfilled the lost revenues to  
            cities and counties with revenues equivalent to the full 2%  
            VLF tax rate.  

          2)VLF-Property Tax Swap (2004-05 Budget) and Subsequent  
            Legislation.  Prior to the 2004 budget agreement, the total  
            VLF revenue, including the backfill from the state General  
            Fund, was allocated in proportion to population. As part of  
            the 2004-05 budget agreement, the Legislature enacted the  
            "VLF-property tax swap," which replaced the backfill from the  
            state General Fund with property tax revenues  
            (dollar-for-dollar) that otherwise would have gone to schools  
            through ERAF.  This replacement funding is known as the "VLF  
            adjustment amount".  The state General Fund then backfilled  
            schools for the lost ERAF money.  After the dollar-or-dollar  
            swap in FY 2004-05, property tax in lieu of VLF payments (VLF  
            adjustment amount) to cities and counties is allocated in  
            proportion to each jurisdiction's annual change in gross  
            assessed valuation (property tax revenues).  

            The 2004-05 budget agreement did not provide compensating  
            property-tax-in-lieu-of-VLF for future new cities or for  
            annexations to cities where there was pre-existing  
            development.  Prior to the 2004-05 budget agreement, a newly  
            incorporated city received additional VLF revenues based on  
            three times the number of registered voters in the city at the  
            time of incorporation.  For most cities, this increased  
            allocation continued for the first seven years.  Following the  


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            2004-05 budget agreement, no cities received this VLF revenue  
            bump upon incorporation.  Cities that had not incorporated by  
            FY 2004-05 receive no property tax in lieu of VLF, and  
            therefore, do not have a VLF adjustment amount.  

            The temporary remedy to address the lack of  
            property-tax-in-lieu-of-VLF for annexations and incorporations  
            after the budget agreement on August 5, 2004, came in the form  

            AB 1602 (Laird), Chapter 556, Statutes of 2006.  AB 1602  
            specified that a city that annexes, or an unincorporated area  
            that incorporates after August 5, 2004, but prior to July 1,  
            2009, will receive special allocations from a portion of the  
            remaining VLF revenues.  The funding formula contained in AB  
            1602 incorporated an artificially inflated population factor  
            during the first five years for start-up costs, which roughly  
            replicated the broad fiscal incentive for city incorporations  
            that existed before the VLF-property tax swap in 2004.   
            Similarly, for annexations that had pre-existing residential  
            development, AB 1602 increased the per capita VLF allocation,  
            based on each person residing in an annexed area at the time  
            of annexation, in addition to the allocation of VLF revenues,  
            to levels comparable to pre-2004 allocations.  AB 1602 expired  
            on July 1, 2009, and gave communities five years to complete  
            annexations or incorporations that were initiated under the  
            assumption that VLF funding would be available.  SB 301  
            (Romero), Chapter 375, Statutes of 2008, eliminated the  
            deadline that communities had to incorporate and eliminated  
            the sunset date for city annexations to receive additional  
            SB 89 (Budget and Fiscal Review Committee), Chapter 35,  
            Statutes of 2011, redirected VLF revenues away from newly  
            incorporated cities, annexations, and diverted funds to the  
            Local Law Enforcement Account to help fund public safety  
            realignment. SB 89 also allocated $25 million to the  
            Department of Motor Vehicles (DMV) in FY 2011-12 for  


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            administrative costs and increased the basic vehicle  
            registration fee from $31 to $43.  

            According to the Senate Appropriations Committee, SB 89 had  
            the effect of eliminating over $15 million in the Motor  
            Vehicle License Fee (MVLFA) revenues in 2011-12 from four  
            newly incorporated cities (Menifee [October 1, 2008], Eastvale  
            [October 1, 2010], Wildomar [July 1, 2008], and Jurupa Valley  
            [July 1, 2011]), as well as over $4 million from cities that  
            have annexed inhabited areas.  By abruptly cutting the  
            allocation of VLF funds to newly incorporated cities and for  
            inhabited city annexations, the realignment shift in 2011  
            disproportionally endangered the fiscal viability of  
            communities that rely on VLF revenues.  For example, the City  
            of Jurupa Valley, which incorporated within days of the  
            passage of 

            SB 89, anticipated VLF revenues representing 47% of its  
            General Fund budget.  
          3)Bill Summary.  This bill establishes a base year VLF  
            adjustment amount for FY 2016-17 for cities that incorporated  
            after January 1, 2004, and on or before January 1, 2012, to  
            replicate funds that existed for new cities prior to 2004.  In  
            each subsequent FY, the VLF adjustment amount would be the  
            city's annual change in assessed property values, which is the  
            same formula used to calculate the VLF adjustment amount for  
            other cities.  This bill will only impact four cities: Jurupa  
            Valley, Eastvale, Menifee, and Wildomar, which all  
            incorporated during the timeframe contained in the bill.  This  
            bill does not provide a VLF adjustment amount for cities  
            incorporating after January 1, 2012.  This bill is  

          4)Author's Statement.  According to the author, " In 2011, one  
            of the steps the Legislature took to close the state's massive  


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            budget gap was to pass Senate Bill 89 which eliminated VLF  
            revenue allocated to newly incorporated cities. As a result,  
            four newly incorporated cities in Riverside County - Eastvale,  
            Jurupa Valley, Menifee and Wildomar - lost critical funding.  

            "The situation for the City of Jurupa Valley is especially  
            urgent, as VLF funding was eliminated only days before the  
            city incorporated. The residents had voted for cityhood based  
            on state VLF money being available for the new city.  Jurupa  
            Valley considered disincorporation, potentially forcing  
            Riverside County to provide essential services to residents  
            which the County has not budgeted for.

            "While ongoing funding is critical to stabilize new cities,  
            VLF revenue is no longer available as a funding source for  
            cities due to the passage of Proposition 30 (2012), which  
            requires that VLF funds be used exclusively for criminal  
            justice realignment.  Cities play a vital role in fulfilling  
            many of the state's policy goals which include achieving smart  
            growth objectives, promoting transportation and infrastructure  
            investments, meeting affordable housing needs, and realizing  
            greenhouse gas reduction goals.

            "SB 817 utilizes a county's ERAF. If the funds are fully used,  
            the school share of ERAF will be used to make up the  
            difference. This will be fully reimbursed by the state's  
            general fund so there is no impact on schools." 


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          5)Previous Legislative Attempts to Address the Impacts of SB 89.  
             SB 1566 (Negrete McLeod) of 2012 and AB 1098 (Carter) of 2012  
            sought to remedy the loss of ongoing revenues to new cities  
            and annexations after the 2004 VLF property tax swap, a fix  
            that was achieved by AB 1602.  SB 89 did not remove the  
            formulas to calculate the VLF revenue to incorporated or  
            annexed cities in statute.  SB 1566 and AB 1098 would have  
            restored the funding allocations in AB 1602.  SB 1566 was held  
            on the Senate Appropriations Committee's suspense file, and AB  
            1098 was vetoed by the Governor.  

            SB 56 (Roth) of 2013 was returned to the Secretary of Senate  
            without further action, pursuant to Joint Rule 56.  AB 677  
            (Fox) of 2013 was filed with the Chief Clerk without further  
            action, pursuant to Joint Rule 56.  SB 56 would have  
            established VLF adjustment amounts for annexations, and also  
            included a formula for cities that incorporated after 2004 to  
            receive a VLF adjustment amount similar to the formulas  
            established in this bill.  

            AB 1521 (Fox) of 2014, vetoed by the Governor, and AB 448  
            (Brown) of 2015, held on the Senate Appropriations Committee's  
            suspense file, would have modified the amount of VLF allocated  
            to counties and cities to include changes in the assessed  
            valuation within annexed areas.  


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            SB 69 (Roth) of 2014 and SB 25 (Roth) of 2015, which were  
            vetoed by the Governor, would have provided a city  
            incorporating after January 1, 2004, and on or before January  
            1, 2012, with property tax in lieu of VLF, and are nearly  
            identical to the provisions in this bill.  

            AB 2277 (Melendez), held on this year's Assembly  
            Appropriations Committee's suspense file, would have changed  
            the formulas for calculating the VLF adjustment amounts for  
            the four cities identical to the provisions contained in this  

          6)Conflicting Legislation.  Provisions of this bill conflict  
            with AB 448 (Brown), pending in the Senate, and may need  
            amendments to address the conflict, should the bills continue  
            to move through the legislative process.  

          7)Budget Appropriation.  Last year, the State Budget contained a  
            one-time appropriation to address the General Fund shortfalls  
            of the four newly incorporated cities in Riverside County;  
            however, the appropriation does not address ongoing funding  
            needs.  SB 107 (Committee on Budget and Fiscal Review),  
            Chapter 325, Statutes of 2015, appropriated nearly $24 million  
            from the General Fund to the Department of Forestry and Fire  
            Protection in order to forgive monies owed by the newly  
            incorporated cities for services rendered by the County of  
            Riverside.  The fiscal relief authorized by SB 107 has been  
            used to forgive more than $1 million in debt owed by the City  
            of Menifee, $1 million in debt owed by the City of Wildomar,  
            and $21 million in debt owed by the City of Jurupa Valley for  
            services that Riverside County provided to those cities  
            following their incorporation.  The City of Eastvale received  
            no money following the passage of SB 107 and unsuccessfully  
            sought to challenge the County's decision in the courts to  
            allocate the fiscal relief to the other three newly formed  


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          8)Policy Consideration.  The Committee may wish to ask the  
            author about the status of conversations with the Governor in  
            light of the budget appropriation contained in SB 107 and past  
            veto messages for nearly identical bills that have expressed  
            concerns with long-term costs to the General Fund.  

          9)Arguments in Support.  Supporters argue that this bill  
            reinstates a critical funding component to cities incorporated  
            between January 1, 2004, and January 1, 2012, and ensures  
            their continued viability.  

          10)Arguments in Opposition.  None on file. 




          Alameda Local Agency Formation Commission

          California Association of Local Agency Formation Commissions

          California Police Chiefs Association 


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          California State Association of Counties

          Cities of Eastvale, Jurupa Valley, Menifee, Murrieta, Riverside,  
          and Wildomar

          Contra Costa Local Agency Formation Commission

          League of California Citites

          Urban Counties of California 

          Riverside County

          Riverside County Division of the League of California Cities

          Riverside Local Agency Formation Commission 

          Riverside Sheriffs' Association

          San Mateo Local Agency Formation Commission

          Solano Local Agency Formation Commission

          Southwest California Legislative Council


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          Yolo Local Agency Formation Commission


          None on file

          Analysis Prepared by:Misa Lennox / L. GOV. / (916)