BILL ANALYSIS                                                                                                                                                                                                    

                                                                     SB 817  

                                                                    Page  1

          Date of Hearing:  June 29, 2016


                               Lorena Gonzalez, Chair

          SB 817  
          (Roth) - As Amended February 22, 2016

          |Policy       |Local Government               |Vote:|8 - 0        |
          |Committee:   |                               |     |             |
          |             |                               |     |             |
          |             |                               |     |             |

          Urgency:  No  State Mandated Local Program:  YesReimbursable:   


          This bill establishes a motor vehicle license fee (VLF)  
          adjustment amount for cities that incorporated after January 1,  
          2004, and on or before January 1, 2012.

          FISCAL EFFECT:

          1)On-going costs of approximately $18 million (GF) to backfill  
            property tax reductions. This bill will result in a one-time  
            shift of approximately $18 million from the Riverside County  


                                                                     SB 817  

                                                                    Page  2

            Educational Revenue Augmentation Fund (ERAF) to the cities of  
            Jurupa Valley, Eastvale, Menifee, and Wildomar, and  
            permanently "re-base" the VLF adjustment amount going forward.  
             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.  This  
            amount would increase each year thereafter by the property tax  
            growth rate.  

          2)Unknown, likely minor state reimbursable costs to Riverside  
            County to adjust property tax allocation formulas for the four  
            recently-incorporated cities (GF).  It is unlikely that the  
            county would file a claim for reimbursement for these minor  
            one-time costs.


          1)Purpose. This is the eighth legislative attempt to address the  
            disproportionate impact the 2011 budget trailer bill (SB 89)  
            had on cities that incorporated after January 1, 2004, and on  
            or before January 1, 2012. These incorporations were funded,  
            in part, through an increased share of VLF revenue. In an  
            effort to fund realignment, SB 89 shifted approximately $150  
            million of VLF revenue to the Local Law Enforcement Services  
            Account.  The author notes that by abruptly cutting the  
            allocation of VLF funds to newly incorporated cities, the  
            realignment shift in 2011 disproportionally endangered the  
            fiscal viability of communities that rely on VLF revenues.  

            This bill impacts only four cities, Jurupa Valley, Eastvale,  
            Menifee, and Wildomar, all in Riverside County.  The bill  
            establishes a base year VLF adjustment amount for these cities  
            for FY 2016-17 to replicate funds that existed for new cities  
            prior to 2004.  


                                                                     SB 817 

                                                                    Page  3

          2)Background. Current law imposes the VLF in lieu of personal  
            property tax on California motor vehicles, at a rate based on  
            the taxable value of the vehicle. The state collects and  
            allocates the VLF revenues, minus administrative costs, to  
            cities and counties. In 1998, the VLF rate was reduced and the  
            state GF backfilled the lost revenues to cities and counties.   

            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 GF generally  
            backfills local school funding that is reduced through the  
            ERAF shift.  

            Prior to 2004, the state had historically provided additional  
            VLF revenue to newly incorporated cities. The budget  
            agreement, however, did not provide compensating  
            property-tax-in-lieu-of-VLF for future new cities or for  
            annexations. A temporary remedy came with the passage of AB  
            1602 (Laird) Chapter 556, Statutes of 2006, which, until July  
            1, 2011, provided additional revenue 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.


                                                                     SB 817  

                                                                    Page  4

            As part of the realignment proposal in the 2011-12 Budget, SB  
            89 (Budget and Fiscal Review Committee), Chapter 35, Statutes  
            of 2011, among other provisions, 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.  This action  
            eliminated over $15 million in VLF revenues in 2011-12 for  
            four newly incorporated cities (Menifee, Eastvale, Wildomar,  
            and Jurupa Valley), as well as over $4 million from cities  
            that had annexed inhabited areas (Chico, San Ramon, Santa  
            Clarita, Temecula, Fontana, San Jose, Porterville, Tulare and  

          3)Budget Appropriation.  Last year, the State Budget contained a  
            one-time appropriation to address the GF 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 GF  
            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 provided to  
            those cities by Riverside County 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 cities.  

          4)Related Legislation. 


                                                                     SB 817  

                                                                    Page  5

             a)   AB 2277 (Melendez), nearly identical to this bill, was  
               held on this Committee's Suspense File earlier this year.

             b)   AB 448 (Brown), containing a similar adjustment for  
               cities that annexed inhabited areas, was held on the Senate  
               Appropriations Committee's Suspense File.


             a)   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  
                 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.

             b)   SB 69 (Roth), which was also vetoed by the Governor in  
               2014 was 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:


                                                                     SB 817  

                                                                    Page  6

                 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. 

             c)   Additional attempts include:

               i.     AB 1521 (Fox) of 2014, nearly identical to AB 448,  
                 would have modified the amount of VLF allocated to  
                 counties and cities to include changes in the assessed  
                 valuation within annexed areas.  AB 1521 was vetoed by  
                 the Governor. His veto message was similar to that of SB  
                 69, citing long term costs to the general fund.

               ii.    SB 56 (Roth) of 2013 and AB 677 (Fox) of 2013, both  
                 contained VLF adjustments amounts for both annexations  
                 and city incorporations, similar to the provisions of AB  
                 1521 for annexations and SB 69 in 2014. SB 56 (Roth) was  
                 held on the Senate Appropriations Committee's Suspense  
                 File. AB 677 (Fox) was referred to, but never heard by,  
                 the Assembly Local Government Committee.

               iii.   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 and was vetoed by the  


                                                                     SB 817  

                                                                    Page  7


          Analysis Prepared by:Jennifer Swenson / APPR. / (916)