BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING


          SB  
          817 (Roth)


          As Amended  August 18, 2016


          Majority vote


          SENATE VOTE:  38-0


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          |Committee       |Votes|Ayes                   |Noes                 |
          |                |     |                       |                     |
          |                |     |                       |                     |
          |                |     |                       |                     |
          |----------------+-----+-----------------------+---------------------|
          |Local           |8-0  |Eggman, Waldron,       |                     |
          |Government      |     |Alejo, Bonilla, Chiu,  |                     |
          |                |     |Cooley,                |                     |
          |                |     |                       |                     |
          |                |     |                       |                     |
          |                |     |Beth Gaines, Linder    |                     |
          |                |     |                       |                     |
          |----------------+-----+-----------------------+---------------------|
          |Appropriations  |20-0 |Gonzalez, Bigelow,     |                     |
          |                |     |Bloom, Bonilla, Bonta, |                     |
          |                |     |Calderon, Chang, Daly, |                     |
          |                |     |Eggman, Gallagher,     |                     |
          |                |     |Eduardo Garcia,        |                     |
          |                |     |Holden, Jones,         |                     |
          |                |     |Obernolte, Quirk,      |                     |
          |                |     |Santiago, Wagner,      |                     |
          |                |     |Weber, Wood, McCarty   |                     |








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          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,  


             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 Assembly Appropriations  
          Committee, 








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


          COMMENTS:  


          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  
            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 GF backfilled the lost revenues to cities  
            and counties with revenues equivalent to the full 2% VLF tax  
            rate.  









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          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 GF, 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 GF 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 GF then  
            backfilled schools for the lost ERAF money.  After the  
            dollar-for-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  
            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  
            of AB 1602 (Laird), Chapter 556, Statutes of 2006.  


            SB 89 (Budget and Fiscal Review Committee), Chapter 35,  
            Statutes of 2011, redirected VLF revenues away from newly  








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            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  
            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 GF 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  
            author-sponsored.  










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          4)Author's Statement.  According to the author, "In 2011, one of  
            the steps the Legislature took to close the state's massive  
            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 GF  
            so there is no impact on schools." 


          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  








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            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.  


            SB 69 (Roth) of 2014 and SB 25 (Roth) of 2015, 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) of 2016, 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  
            bill.


          6)Budget Appropriation.  Last year, the State Budget contained a  








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            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 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 cities.  


          7)Policy Consideration.  The Legislature 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 GF.  


          8)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.  


          9)Arguments in Opposition.  None on file. 




          Analysis Prepared by:                                             
                          Misa Lennox / L. GOV. / (916) 319-3958  FN:  








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