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Senator Roth Continues Efforts to Secure Equitable Financing for Recently Incorporated Cities

SB 37 Passes Out of Senate Governance and Finance Committee, Moves to Appropriations

March 16, 2017
California cities appreciate Sen. Richard Roth (D-Riverside) for his undaunted efforts to right a wrong.
Despite having previous bills rejected by Gov. Jerry Brown, he is back again this year with SB 37, which restores funding stability to four recently incorporated cities — Eastvale, Wildomar, Menifee and Jurupa Valley. These cities have experienced severe financial hardship since 2011 when the state swept all remaining shares of city vehicle license fee (VLF) revenues. The League commends the Senator for his tenacity and leadership on this effort. The Senate Governance and Finance Committee on March 15 passed SB 37 7-0, sending it to the Senate Appropriations Committee. 

The four Riverside County cities were particularly hard hit due to prior legislative tinkering with local revenue sources, and were much more reliant on the VLF than all of California’s other 478 cities. Here’s why. Prior to 1998, cities had three sources of revenue: property tax, sales tax and VLF revenue. (VLF originated as a local property tax levied on vehicles until the state standardized collection in 2004.) Fast forward to 1998 — during this good-budget year for the state some legislators became enamored with the idea of “cutting the car tax” from 2 percent to 0.65 percent with promises to backfill local agencies for their losses with shares of property tax from schools. This leads to more recent history.
As state budget difficulties returned in the early 2000s legislators began to question the backfill to local agencies. The lawmakers also balked at the notion of allowing the triggers to be pulled to allow VLF to be collected at its previous level of 2 percent. An agreement was reached in 2004, allowing all cities and counties in existence on that date to swap dollar-for-dollar the amounts owed to them as VLF backfill for increased shares of local property tax for schools. Proposition 2004 solidified this agreement.
This fix, however, left a major policy issue unresolved: there was no factor in the “swap” to address future incorporations or annexations. VLF had been previously allocated to cities on a per-capita basis. That meant that as new cities incorporated or otherwise added population they received increased shares of this pool of funds. These allocations also were a smart-growth incentive: more people in your city meant more revenue.
In 2006, the League worked with then-Assembly Member John Laird (D-Santa Cruz) to fashion AB 1602, which addressed this problem by providing permanent increased shares of a small pool of remaining VLF to newly incorporated cities and cities that annexed inhabited areas. When the Legislature swept all of these funds in 2011 as part of a budget solution, cities that had recently incorporated or annexed territory in heavy reliance of these funds were severely harmed, much more so than cities able to take advantage of the swap because they existed prior to 2004.
SB 37 resolves this problem for the four cities with a statutory formula that provides cities that incorporated between 2004 and 2012 with shares of property tax to offset the amount of vehicle license fee revenue they would have received. In future years the amount will be adjusted according to the same rules applied to other cities. In short, these cities will be treated equally with all other cities.
Restoring needed funding and avoiding the potential disincorporation of these new cities also provides long-term policy benefits to the state. Many of these funds will go to restore funding to local police and enhance public safety. Land use incentives should be considered as well. The four affected cities are located in one of the fastest growing regions of California. City land use patterns are urban and dense and their future growth is regulated by local agency formation commission (LAFCO) policies. In contrast, unincorporated development patterns are typically less dense and not regulated by LAFCO. This is a problem that the state cannot continue to ignore when considering the interaction between city and county growth patterns and reducing carbon emission — where growth occurs actually matters.
SB 37 would restore and stabilize funding for the affected cities and their residents with policy benefits to both local public safety and compact growth. The League appreciates Sen. Roth’s unwavering commitment to this important matter.
The bill language, League’s support letter and a sample support letter cities can use are available at www.cacities.org/billsearch by plugging SB 37 into the search function.

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