BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1566 (Negrete McLeod) - Vehicle license fee allocations:
newly incorporated cities.
Amended: April 10, 2012 Policy Vote: G&F 9-0, T&H 7-1
Urgency: No Mandate: No
Hearing Date: May 24, 2012 Consultant: Mark McKenzie
SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
Bill Summary: SB 1566 would prohibit the Department of Motor
Vehicles (DMV) and Franchise Tax Board (FTB) from receiving its
vehicle license fee (VLF) collection costs from the proceeds of
VLF revenues. This bill would instead reallocate VLF revenues
formerly dedicated to DMV and FTB administrative costs to
recently incorporated cities and to cities that annexed
inhabited territory.
Fiscal Impact:
Shift of approximately $18 million in DMV administrative
costs from the Motor Vehicle License Fee (MVLF) Account (VLF
revenues) to the Motor Vehicle Account.
Allocations of approximately $14 million to recently
incorporated cities and approximately $4 million to cities
that have annexed inhabited territory (MVLF Account).
Background: Existing state law imposes the VLF, 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. DMV
collects the VLF annually from vehicle owners at the time of
registration. 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repealed the offset system, reduced the VLF rate to 0.65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 property taxes
that would otherwise have gone to schools (known as the
VLF-property tax swap). The state has also historically
SB1566 (Negrete McLeod)
Page 1
provided additional VLF revenue to newly incorporated cities.
Following the passage of AB 1602 (Laird) Chap 556/2006 until
July 1, 2011, this additional revenue came 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.
As part of the realignment proposal in the 2011-12 Budget, SB 89
(Committee on Budget and Fiscal Review) Chap 35/2011 deemed
DMV's VLF collection costs as $25 million for 2011-12, increased
the vehicle registration fee by $12, and shifted $133 million in
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 a five-year VLF "bump" to newly
incorporated cities and cities that annex inhabited territory.
SB 89 had the effect of eliminating over $15 million in MVLF
revenues in 2011-12 from four newly incorporated cities
(Menifee, Eastvale, Wildomar, and Jurupa Valley), as well as
over $4 million from cities that have annexed inhabited areas.
Proposed Law: SB 1566 would prohibit the Legislature from
appropriating MVLF revenues to DMV and FTB for administering and
enforcing the VLF. On and after July 1, 2012, the bill would
also restore the VLF "bump" formulas established by AB 1602
(Laird), and require the State Controller to allocate remaining
MVLF revenues to the Local Law Enforcement Services Account.
Specifically, this bill would do the following:
First, for cities that incorporated after August 5, 2004, the
Controller would allocate:
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
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.
SB1566 (Negrete McLeod)
Page 2
Second, for cities that incorporated before August 5, 2004 and
annexed new areas, the Controller would allocate:
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 population changes in all
cities, and
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.
Third, the Controller would allocate remaining MVLF revenues to
the Local Law Enforcement Services Account for allocations to
cities and counties, as specified.
Staff Comments: By abruptly cutting the allocation of VLF funds
to newly incorporated cities and for inhabited city annexations,
last year's realignment shift disproportionally endangered the
fiscal viability of communities that rely on VLF revenues. For
example, the City of Jurupa, which incorporated within days of
the passage of SB 89, the anticipated VLF revenues represented
46 percent of its General Fund budget. Others were forced to
dramatically reduce public safety personnel and other services.
SB 1566 would restore the funding provided to these cities from
the MVLF revenues.
In order to avoid the impact on realignment, SB 1566 proposes to
eliminate MVLF funding previously available to DMV and FTB for
VLF collection purposes, which essentially shifts their
administrative costs to the Motor Vehicle Account and General
Fund, respectively. The Governor's proposed 2012-13 budget
includes appropriations of MVLF funds of $18.2 million for DMV
and $5.6 million for FTB. The VLF "bump" provisions in this
bill would provide approximately $14 million for the four newly
incorporated cities and about $4 million for cities that annexed
inhabited areas. The remaining funds would flow to the Local
Law Enforcement Services Account for realignment purposes.
Since the bill would reduce MVLF allocations to DMV and FTB by
about $23.6 million, and only $18 million would be used for the
SB1566 (Negrete McLeod)
Page 3
VLF "bump" provisions, there would be a revenue gain of about
$5.8 million for realignment purposes. Staff notes that beyond
the five year "bump" provisions, these cities would receive
ongoing VLF revenues of about $14 million, but other cities that
received a VLF allocation on a per capita basis prior to the
passage of SB 89 would not receive VLF revenues. However, the
incentive would remain for any cities that incorporate or annex
inhabited territory in the future.
SB 1566 prohibits the Legislature from appropriating funds from
the MVLF Account to the Franchise Tax Board for enforcement
actions related to the VLF. The Governor's proposed budget
includes a total of $8.63 million in appropriations for FTB, of
which $5.63 million is anticipated to come from the MVLF
Account. This bill would prohibit such an appropriation in the
future, which would shift the burden to the General Fund or
jeopardize FTB's enforcement program altogether. FTB collected
$146.7 million in delinquent VLF revenues in 2010-11 and $148
million in 2011-12. Staff assumes that future allocations for
DMV, which are proposed at $18.2 million in 2011-12, would come
from the Motor Vehicle Account.
Staff notes that the bill's proposal to shift MVLF funds from
DMV and FTB and use those funds to provide allocations to newly
incorporated cities and those who annexed inhabited territories
may prove to be ineffective, since legislation cannot bind a
future Legislature. A future legislative action could ignore
the prohibition in the bill and appropriate funds to DMV and FTB
from the MVLF, which would result in a reduction in revenues for
realignment purposes.
Proposed amendments would limit the bill's applicability only to
those cities that recently incorporated and those who were
receiving additional VLF revenues for annexing inhabited
territory prior to January 1, 2012. The amendments would also
delete a provision that prohibited FTB administrative costs to
be appropriated from the MVLF Account.