BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1566 HEARING: 4/18/12
AUTHOR: Negrete McLeod FISCAL: Yes
VERSION: 4/10/12 TAX LEVY: No
CONSULTANT: Lui
VLF ALLOCATIONS TO CITIES
Reallocates vehicle license fees to recently incorporated
cities and cities that annexed inhabited territory.
Background and Existing Law
In lieu of a property tax on motor vehicles, the state
collects an annual Vehicle License Fee (VLF) and allocates
the revenues, minus administrative costs, to cities and
counties. 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 backfill from the State General Fund with
property tax revenues that otherwise would have gone to
schools through the Educational Revenue Augmentation Fund
(ERAF). In turn, the State General Fund backfills schools
for their lost ERAF money.
Previously, for the first seven years after incorporation,
new cities received VLF funds under a formula that
calculated their population as three times the number of
the city's registered voters. That formula deliberately
overstated a new city's population, resulting in a higher
share of VLF funds. This so-called "VLF bump" gave a new
city more money during its start-up period. The
VLF-property tax swap eliminated the VLF bump for newly
incorporated cities and cities that annex inhabited areas.
Advocates for cities asked the Legislature to reallocate a
portion of existing cities' remaining VLF funds to new
cities and to cities that annex inhabited areas to help
make new city incorporations and city annexations
financially feasible. In response, the Legislature passed
AB 1602 (Laird, 2006), which changed the allocation of
Vehicle License Fee (VLF) funds to cities in three ways:
SB 1566 -- 4/10/12 -- Page 2
� For cities that incorporated between August 5, 2004
and July 1, 2009, AB 1602 allocated an additional $50
per capita that is adjusted over time to reflect
changes in total VLF revenues relative to changes in
the total population of all cities.
� For cities that incorporated between August 5, 2004
and July 1, 2009, those cities' shares of VLF funds
and revenues from specified state fuel taxes are
allocated according to a formula that increases a new
city's actual population by 50% in its first year
after incorporation, 40% in the second year, 30% in
the third year, 20% in the fourth year, and 10% in
the fifth year. After five years, cities receive VLF
funding and fuel tax revenues in proportion to their
actual populations.
� For cities that incorporated before August 5, 2004,
which annex new areas , AB 1602 allocated an
additional $50 per capita for the population in those
newly annexed areas at the time of annexation. This
per capita amount is adjusted over time to reflect
changes in total VLF revenues relative to changes in
the total population of all cities.
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. Similarly,
a city that annexed an inhabited area received less VLF
revenue than it would have before the VLF-property tax
swap. Because the amount of the per capita VLF allocations
went down when the Legislature cut the VLF rate, the amount
of additional VLF revenue coming to a city as the result
annexing an inhabited area was also sharply reduced. The
VLF-property tax swap did not compensate cities for this
reduction. Cities only receive additional property tax
revenues in lieu of lost VLF based on the future growth of
assessed valuation in the annexed area.
Last year, Governor Brown's Realignment Proposal shifted
several state programs and commensurate revenues to local
governments. The Legislature passed Senate Bill 89
(Committee on Budget and Fiscal Review, 2011), which
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recalculated 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 the $153 million in VLF
revenues allocated to cities and shifted those revenues to
fund public safety realignment.
Advocates for cities argue that SB 89's elimination of VLF
allocations jeopardizes the financial viability of recently
incorporated cities and cities that annexed inhabited
areas. The lack of VLF revenues makes new city
incorporations and city annexations of populated territory
financially infeasible. Local officials want the
Legislature to reallocate a portion of cities' remaining
VLF funds to new cities and to cities that annex inhabited
areas.
Proposed Law
I. VLF Revenues. Senate Bill 1566 changes the allocation
of Vehicle License Fee funds to cities in three ways. On
and after July 2012, SB 1566 requires the State Controller
to allocate the balance of all motor vehicle license fees
and other monies in the Motor Vehicle License Fee Account,
in the following manner:
For a city that incorporated from an unincorporated
territory after August 5, 2004:
o An additional $50 per capita that is
adjusted over time to reflect changes in total
VLF revenues relative to changes in the total
population of all cities, and
o Its share of VLF funds and revenues from
specified state fuel taxes that are allocated
according to a formula that increases a new
city's actual population by 50% in its first year
after incorporation, 40% in the second year, 30%
in the third year, 20% in the fourth year, and
10% in the fifth year. After five years, cities
receive VLF funding and fuel tax revenues in
proportion to their actual populations.
For a city that incorporated before August 5, 2004,
which annexed new areas:
o An additional $50 per capita for the
population in those newly annexed areas at the
time of annexation. This per capita amount is
SB 1566 -- 4/10/12 -- Page 4
adjusted over time to reflect changes in total
VLF revenues relative to changes in the total
population of all cities, and
o Its share of VLF funds and revenues from
specified state fuel taxes that are allocated
according to a formula that increases a new
city's actual population by 50% in its first year
after incorporation, 40% in the second year, 30%
in the third year, 20% in the fourth year, and
10% in the fifth year. After five years, cities
receive VLF funding and fuel tax revenues in
proportion to their actual populations.
SB 1566 requires the Controller to allocate the balance of
all motor vehicle license fees and other monies in the
Motor Vehicle License Fee Account on and after July 1, 2011
and before July 1, 2012, to the Local Law Enforcement
Services Account in the Local Revenue Fund 2011 for
allocation to cities, counties, and cities and counties.
II. Department of Motor Vehicles. SB 1566 repeals the
DMV's $25 million administrative budget for VLF
registration fee collection and allows the Legislature to
annually determine and appropriate an amount for the DMV
and the Franchise Tax Board to collect vehicle registration
fees and other fees. SB 1566 prohibits the amount from
being appropriated from the Motor Vehicle License Fee
Account in the Transportation Tax Fund.
III. Findings and declarations. SB 1566 makes several
findings and declarations to support its purpose.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . By abruptly cutting the
allocation of VLF funds to newly incorporated cities and
for inhabited city annexations, last year's realignment
shift pulled the rug out from under communities that rely
on VLF revenues. For the City of Jurupa Valley, SB 89 was
signed into law two days before its official incorporation,
and the assumed VLF revenues constituted 46% of Jurupa
Valley's General Fund. As a result of decreased revenues,
SB 1566 -- 4/10/12 -- Page 5
Eastvale reduced police personnel to one deputy and one
community service officer for its 53,670 residents. SB
1566 restores a portion of lost vehicle license fee
revenues to four newly incorporated cities -- Menifee,
Eastvale, Wildomar, and Jurupa Valley -- and cities that
recently annexed inhabited territories, like Fontana and
Santa Clarita. When SB 89 shifted VLF funds to support
local public safety realignment, it diverted $153 million
from local governments. $14 million would have been
allocated to the four nearly incorporated cities in
Riverside County and $4 million to cities that recently
annexed inhabited areas. Specifically, Wildomar lost $2
million, Eastvale lost $3 million, Menifee lost $3.8
million, and Jurupa Valley lost $6.5 million. Coupled with
redevelopment agencies' elimination, receiving zero VLF
revenues obliterates local coffers -- leaving recently
incorporated cities few fiscal options. SB 1566 restores
necessary, and promised, funding to keep newly-incorporated
cities and cities that annexed inhabited areas from facing
severe fiscal challenge. Communities throughout California
stand to benefit from the new annexations and
incorporations that will be facilitated by SB 1566's
restoration of the VLF funding.
2. Indefinite . SB 1566 mirrors the Laird bill and
provides newly incorporated cities and cities that annex
inhabited areas a five-year time period of increased VLF
revenues due to artificially-inflated city population.
When SB 89 eliminated the cities' VLF revenues, it did not
amend the related Revenue and Taxation code section that
outlined how a city's population would be calculated. SB
1566 cross-references this population inflation formula,
where a city's actual population is inflated by 50% in its
first year after incorporation, 40% in the second year, 30%
in the third year, 20% in the fourth year, and 10% in the
fifth year. For the sixth year and thereafter, cities
receive VLF funding in proportion to their actual
populations. In cross-referencing the Revenue and Taxation
code section, SB 1566 provides cities both the five-year
startup amount and an indefinite ongoing amount of a per
capita allocation, as determined by the VLF formula prior
to realignment, for year six and after. An indefinite and
continual allowance may mean fewer funds are available for
public safety realignment and could interfere with DMV's
administrative budget. The Committee may wish to consider
an amendment that sunsets the VLF bump after its five-year
SB 1566 -- 4/10/12 -- Page 6
start-up period.
3. Tough love . Governor Brown said, "California's long
term stability depends on our willingness to continue to
pay down debt and live within our means." Four cities were
all born at the height of the global economic crisis --
Wildomar (2008), Menifee (2008), Eastvale (2010), and
Jurupa Valley (2011), knowing the economic risk associated
with new cityhood. Throughout the state, local governments
face distressed economies and are forced to consider
funding alternatives, like raising taxes. What makes these
four newly incorporated cities any different than the other
482 cities that desperately need funding for public
services? The Committee may wish to weigh the value of
prioritizing recently incorporated cities financial
interest over others.
4. Just cities . SB 1566 has no fiscal effect on counties'
VLF revenues and no net fiscal effect on the state, because
state officials recover their administrative costs.
However, some counties are concerned that because SB 1566
alters VLF allocations in the first year of realignment,
counties' funding source may be jeopardized. The fiscal
effect of additional VLF allocations falls exclusively on
other cities, meaning additional VLF revenues to new cities
or annexed areas decreases all other cities' per capita
allocations. While SB 1566 has no fiscal impact on the
Local Law Enforcement Services Account (public safety
realignment), it tinkers with DMV's $25 million
administrative budget. SB 1566 reallocates $18 to newly
incorporated cities and cities that annexed inhabited
areas, leaving the DMV $7 million. The bill assumes DMV's
administrative costs are offset by the increased revenues
from the $12 vehicle license registration fee. If the DMV
does have additional revenues, the Committee may wish to
consider that the Administration has alternative funding
priorities for those funds.
5. Expiration dating . SB 1566 is not first time cities
have sought VLF allocation protections. In 2008, SB 301
(Romero) extended the deadline for when communities need to
incorporate, or cities to annex inhabited territories, to
receive the Laird bill's five-year VLF bump. SB 301 was
set to sunset on July 2014. The Legislature could have
expected pressure to extend the deadline to prevent cities
from once again confronting sharply reduced VLF funding
SB 1566 -- 4/10/12 -- Page 7
when incorporating or annexing inhabited areas. While the
cities' VLF funds were unexpectedly eliminated last year,
the Committee may wish to consider that these funds were
already about to expire.
6. Annexation incentive . Since the passage of the Laird
bill, existing cities have benefited from the additional
VLF funding provided for city annexations of inhabited
areas. However, the complete removal of VLF funds makes
annexations of inhabited areas fiscally unviable. SB 1566
would restore the state's previous commitments to providing
cities with incentives to annex inhabited areas. Through
other statutes encouraging the annexation of unincorporated
islands and setting a lower vote threshold for city
annexations than incorporations, the Legislature has
demonstrated a preference for city annexations. SB 1566 has
no sunset date on the VLF funding formula, which
establishes a permanent financial incentive for city
annexations of inhabited areas.
7. Double-referred . Because the bill pertains to vehicle
license fees and the DMV, Senate Bill 1566 is also referred
to the Senate Committee on Transportation and Housing.
Support and Opposition (4/12/12)
Support : California Professional Firefighters; California
Association of Local Agency Formation Commissions; Cities
of Madera, San Ramon, Vista, and Visalia and the Town of
Los Altos Hills; Riverside County Sheriff; Riverside
Sheriff's Association; Southwest California Legislative
Council; Southwest Riverside County Association of
Realtors.
Opposition : California State Association of Counties.