BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 1191 (Huber) - Local government finance.
Amended: January 23, 2012 Policy Vote: G&F 8-0
Urgency: Yes Mandate: Yes
Hearing Date: June 25, 2012
Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1191 would enact a process for reimbursing
local entities in a county in which all school districts are
"basic aid" for lost sales tax and vehicle license fee revenues
diverted under specified statutes. This process would currently
only apply to local entities in Amador County, but may apply to
others in the future.
Fiscal Impact:
General Fund loss of $1.524 million in 2012-13 for
allocation to Amador County and the cities located therein,
related to losses incurred in the 2010-11 fiscal year. This
amount was appropriated in budget actions recently approved
by the Legislature, but not yet signed by the Governor.
Unknown future General Fund losses of at least $1.5 million
for each fiscal year in which Amador County qualifies for
compensation. Preliminary information suggests that Amador
County has continued to have all basic aid school districts
since 2010-11 and the circumstances will likely continue for
the foreseeable future. If additional counties become 100%
basic aid in future fiscal years, the General Fund losses
could escalate dramatically to the low millions annually if
a smaller county qualifies, or to the tens of millions
annually if a larger county goes 100% basic aid (see staff
comments).
Background: Proposition 57 (2004), the California Economic
Recovery Bond Act, allowed the state to purchase $15 billion in
general obligation bonds to reduce the state budget deficit. To
secure these Economic Recovery Bonds (ERBs), accompanying
legislation significantly changed the distribution of sales and
use taxes and other local revenues through what is commonly
known as the "Triple Flip" (AB X5 9, Oropeza, Chap 2/2003, 5th
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Extraordinary Session; SB 1096, Budget Committee, Chap
211/2004). The Triple-Flip reduced the local sales and use tax
rate by 0.25% and dedicated that portion of the sales and use
tax revenues to paying off the deficit financing bonds. To
compensate local governments, the Triple-Flip transferred
property tax revenues from a county's Educational Revenue
Augmentation Fund (ERAF) into a Sales and Use Tax Compensation
Funds (SUTCF). Because transferring funds out of ERAF results
in lower property tax revenues to schools, the state General
Fund backfills the funds transferred out of ERAF to maintain
minimum funding guarantees to schools pursuant to Proposition
98. The Triple Flip will remain in effect until the ERBs are
paid off, which is anticipated to occur by the 2016-17 fiscal
year.
Existing state law imposes an annual vehicle license fee (VLF)
at the time of vehicle registration, 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 taxable value of
a vehicle is established by the purchase price, depreciated
annually according to a statutory schedule. The VLF tax 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 from the General Fund. As part of the 2004
budget agreement, the Legislature repealed the offset system,
reduced the VLF rate to 0.65 percent, and replaced lost local
revenues with ERAF property taxes that would otherwise have gone
to schools (known as the "VLF-Property Tax Swap), which are
deposited into each county's Vehicle License Fee Property Tax
Compensation Fund (VLFPTCF). The state General Fund backfills
schools for any lost property tax revenues. Unlike the
Triple-Flip, the VLF Swap is a permanent mechanism.
If the amount of funds available in a county's ERAF is
insufficient to cover the amount of sales tax and VLF revenue
diverted from the county by the Triple Flip and the VLF Swap,
state law allows a county to divert the remaining shortfall from
property taxes allocated directly to K-12 school and community
college districts, as long as they aren't "basic aid" districts.
The state General Fund backfills the districts' lost revenues.
Basic aid school districts are districts that receive 100% of
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their funding from local property taxes to meet Proposition 98
minimum funding guarantees, and don't require additional funding
from the state General Fund. Because of the fluctuations in
local property tax revenues and enrollment, school districts can
be basic aid one year and non-basic aid the next. The State
Department of Education certifies which school districts are on
basic aid. Provisions in both the Triple Flip and the VLF Swap
hold basic aid districts harmless, meaning that there would be
no redistribution from school property tax funds from basic aid
districts to other local agencies for their losses.
If all of the school districts in a county are basic aid
districts, there is no statutory mechanism for fully reimbursing
local governments for losses related to the Triple-Flip and VLF
Swap. During the 2010-11 fiscal year, all of the school
districts in Amador County were basic aid districts. The
Legislature recently took action to appropriate $1.524 million
in funding for Amador County to compensate for revenues that the
county lost to the Triple-Flip and VLF Swap and was unable to
recover from schools' property taxes in 2010-11. AB 1464
(Blumenfield), 2012-13 Budget Bill, is currently awaiting action
by the Governor, who has until June 27, 2012 to sign or veto the
measure.
Proposed Law: This bill creates a process for cities and
counties to seek reimbursement for lost revenues due to
legislation in 2004 that enacted the Triple Flip and VLF Swap,
both of which are methods of reallocating tax payments.
Specifically, this bill would:
Require the county auditor, for the 2012-13 fiscal year
and each subsequent fiscal year, to calculate the
difference between the countywide adjustment amount for
that fiscal year and the in lieu local sales and use tax
revenues actually received by the county and each city in
that county.
Require the county auditor to submit a claim to the
State Controller (SCO) if there is not enough property tax
otherwise required to be allocated under the provisions of
the Triple Flip to fully offset the sales and use tax
revenues lost within the county.
Require the SCO, upon appropriation by the Legislature,
to deposit the amount of the claim into the Sales and Use
Tax Compensation Fund (SUTCF), and require the county
auditor to allocate the funds to the county and to each
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city in that county based upon the calculated amounts.
Require the county auditor, for the 2012-13 fiscal year
and each subsequent fiscal year, to calculate the amount of
property tax revenues that the county was unable to
allocate into the Vehicle License Fee Property Tax
Compensation Fund (VLFPTCF) to reach the full countywide
VLF adjustment amount, pursuant to the VLF Swap.
Require the county auditor to submit a claim to the SCO
if insufficient property tax revenues are available to
fully offset the amount of VLF revenues lost within a
county as a result of the VLF Swap.
Require the SCO, upon appropriation by the Legislature,
to deposit the amount of the claim into VLFPTCF and
allocate that amount among the cities and county in
accordance with specified provisions.
Related Legislation: AB 1464 (Blumenfield), the 2012-13 Budget
Act which was recently approved by the Legislature and is
currently pending Governor action, contains an appropriation of
$1.524 million for reimbursement to Amador County and the cities
in that county related to shortfalls incurred in 2010-11 due to
the Triple-Flip and VLF Swap.
Staff Comments: A combination of demographic factors and
economic conditions made all school districts in Amador County
meet the criteria as basic aid districts in 2010-11. This has
created unintended consequences for Amador County and its cities
because there is no legal mechanism that allows for
reimbursement of lost local sales tax and VLF revenues as a
result of the Triple-Flip and VLF Swap. The consequences are
particularly devastating in smaller and more rural local
governments where the amounts in question represent a
significant proportion of local budgets. AB 1191 would enact a
mechanism to address these unforeseen circumstances.
The provisions of AB 1191 would currently only apply to Amador
County, which has only one countywide school district, but the
Governor's proposed budget included a state subvention for Mono
County as well. It was later discovered that Mono County did
not meet the 100% basic aid criteria, and approximately $2.9
million originally included in the proposed budget for Mono
County was removed prior to the passage of AB 1464 by the
Legislature. In addition to Amador and Mono Counties, the
Legislative Analyst's Office (LAO) analysis of the Governor's
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proposed budget notes that "based on the number of basic aid
K-14 districts within their borders, the counties most likely to
experience funding shortfalls in the future appear to be: Inyo,
Marin, Plumas, San Mateo, and Sonoma." The determination of
whether a district is basic aid depends upon local property tax
revenues, district enrollment, and the level of state general
education funding. As a result, basic aid districts tend to be
located in either affluent areas with a high property tax base,
or smaller and more rural districts that have experienced
declining enrollment. The LAO also notes that the dissolution
of redevelopment will likely increase the number of basic aid
districts because K-14 districts will receive additional
property tax revenues that were previously allocated to
redevelopment agencies. Staff notes that the General Fund
impact of this bill would escalate into the low millions
annually if another smaller county, such as Mono, were to go
100% basic aid, but could rise dramatically into the tens of
millions annually if a larger county, such as San Mateo or
Marin, were to go 100% basic aid. AB 1191 treats all counties
equitably, but the Committee may wish to consider whether
larger, more affluent counties should qualify for a state
General Fund subvention using the same criteria that applies to
smaller and poorer counties that rely more heavily on the relief
provided by this bill.
The Senate Budget Subcommitee 4 hearing on this issue raised a
number of other key considerations for the Legislature to
consider. Most notably, the Subcommittee hearing agenda for
this item noted the following issues:
The funding shifts did include uncertainty and risk, as
the relative growth of various revenue streams over many
years was unknown. On a statewide basis, data suggests
most counties - perhaps as many as 56 of 58 counties - have
received a net benefit from the shifts.
The enacting legislation did not include provisions for
the State to backfill locals with new subventions if the
baseline funding mechanism proved to be insufficient to
maintain city and county funds. At the time of the
legislation, stakeholders were likely aware of the risk of
variable levels of growth for different revenue streams,
but may not have anticipated this outcome of all schools
within the county becoming "basic aid." Since this outcome
may not have been foreseen by the State or local
governments at the time of bill enactment, does the State
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have a responsibility to backfill for this revenue loss?
The Budget Subcommittee action to approve funding for Amador
County also included the adoption of supplemental report
language that requires the Department of Finance (DOF) and the
LAO to independently submit reports to the Legislature by
January 1, 2013 that: (1) addresses the conditions under which
local governments may be compensated in cases where there are
insufficient ERAF funds to fully offset the fiscal effect of the
Triple-Flip and the VLF Swap, and (2) outline one or more
alternative mechanisms for such compensation. The Committee may
wish to consider whether it is premature to enact a bill to
address the identified problem before considering DOF and LAO
recommendations on the topic.
Staff notes that the ERBs are likely to be paid off by the
2016-17 fiscal year, at which time the Triple-Flip mechanism,
and the need for subvention related to the resulting local
revenue losses, would terminate. For Amador County, the total
shortfall amount related to the Triple Flip is a relatively
small portion (less than 25%) of the total amount of
reimbursement for which the county would qualify. The General
Fund revenue impact related to subventions provided to Amador
County is expected to increase slightly each year. Assuming
Amador County still qualifies for a subvention by the time the
Triple-Flip expires, which is highly likely, there would be a
slight drop in the subvention amount for which Amador qualifies
at that time.
Although the inclusion of state subventions for local
governments related to the unintended consequences of the
Triple-Flip and VLF Swap were proposed by the Governor and
adopted by the Legislature, the Administration indicated in the
budget process that the inclusion of the funding did not
represent a commitment with regards to funding future budget
shortfalls for local governments. The Committee may wish to
consider whether it is preferable to enact a legislative
solution to the identified problem, or leave the issue subject
to the annual budget process, where it can be examined in the
context of the larger state fiscal environment. While the bill
only provides funding for claims submitted to the SCO upon
appropriation by the Legislature, it would be more difficult to
analyze each county separately, based upon individual
circumstances, and there would be pressure to provide full
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funding of any county claims that were presented.
Recent budget actions provide a subvention for Amador County
related to shortfalls experienced in the 2010-11 fiscal year.
AB 1191 only applies to fiscal years beginning in 2012-13. It
is unclear whether the intent of the author is to also provide
for funding for Amador County related to losses incurred in
2011-12, but the current bill language does not appear to
provide for reimbursement related to those losses.
Proposed Author Amendments: The author intends to provide
amendments to add "local request disclaimer" language to provide
more certainty that Amador County will not file a claim for
reimbursement of any costs associated with the bill. Staff
notes that another option to address the potential reimbursable
mandate would be to make the decision to calculate shortfalls
and submit claims to the SCO a discretionary action for county
auditors.