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Legislation Proposes New City Incorporation, Annexation Fix

March 28, 2014
A previous legislative effort seeking restoration of funding to newly incorporated cities and cities that annexed inhabited territory after 2004 has been revived this year in a two-bill package — SB 69 (Roth) and AB 1521 (Fox).
The package is based on SB 56 (Roth) that, in addition to restoring funding stability to recently incorporated cities and cities that annexed inhabited territory, established a foundation to support state growth policies by adjusting previous Vehicle License Fee (VLF)-Property Tax Swap calculations. The League is hopeful that this year’s two-bill approach will serve as a successful mechanism not only to struggling recently incorporated cities, such as Jurupa Valley, but to cities that will annex inhabited areas in the future.

For more than 50 years the majority portion of VLF revenues went to cities to provide for local resident services. Newly incorporated cities and inhabited areas annexed by cities were included in these allocations and received a share of VLF revenues based on population growth. However, after the 2004 VLF-property tax swap agreement, the amount of VLF revenues cities received was significantly cut after the VLF rate was reduced from 2 percent to 0.65 percent. To make up for lost revenues, city budgets were backfilled by additional dollar-for-dollar property tax revenues.
The Problem
While the 2004 VLF-property tax swap stabilized existing city and county funding by permanently dedicating shares of additional property taxes in exchange lost VLF revenues, it also created two major future policy problems that have the effect of undercutting city compact growth patterns: 
  1. The VLF swap failed to adjust for future state growth, so when cities annexed inhabited areas or incorporated, there were no additional property tax shares to offset the VLF revenues those communities would have received in prior years; thus, the incentives to annex inhabited areas were gone.
  2. Prior to legislative tinkering with the VLF, cities had three diverse revenues sources: sales tax, property tax and the VLF. After the VLF swap, cities continued to receive only sales and property taxes, with a very small amount of VLF. As a result, the prior VLF incentive that rewarded annexations of more people into a city was eliminated. AB 1602 (Chapter 556, Statutes of 2006) solved this issue by using some remaining VLF funds; however, the Legislature’s approval of SB 89 (Chapter 35, Statutes of 2011), which occurred in a matter of hours with no public hearings, swept this away. 
The Solution
AB 1521 (Fox): Local Government Finance: Annexations
AB 1521 (Fox) resolves the annexation aspect of this problem in a permanent way through a statutory formula. The bill provides cities that annexed inhabited areas after 2004 with additional property tax dollars in lieu of the amount of VLF revenue they would have received prior to the VLF-property tax swap. These amounts will be adjusted in the future according to the same rules applied to other cities.
Besides addressing the fiscal harm that occurred to cities in the wake of SB 89, this solution provides long-term policy benefits in the following areas:
  • Supports Local Agency Formation Commission’s (LAFCO) policies. LAFCO is charged with steering future city development away from sensitive habitats and prime farmland. Future annexations to a city’s urban boundary must be approved by LAFCO. In contrast, county development patterns are typically less dense and not regulated by LAFCO. 
  • State policies for achieving sustainability, greenhouse gas reduction, smart growth, infill and transit-oriented development and preserving farmland and open space have staked much on the role and success of cities. State compact growth policy objectives will suffer over the long term if cities lose incentives supporting annexations of inhabited areas. 
SB 69 (Roth): Local Government Finance: Annexations and Incorporations
In many ways, SB 69 is very similar to AB 1521 in seeking to address the fiscal harm experienced by affected cities. However, unlike AB 1521, SB 69 contains additional provisions allowing affected incorporated cities to participate in the funding solution provided to all cities and counties at the time of the 2004 VLF-property tax swap. Specifically, this bill:
  • Addresses the problems experienced by recently incorporated cities.
  • Assists those cities that annexed inhabited areas post-2004.
  • Establishes these funding sources to support future incorporation or annexation in furtherance of state common sense growth policies. 
Desired Actions and Next Steps
Currently, both bills are yet to be scheduled for legislative hearings. It is anticipated, however, that the bills will be set very soon as the Legislature prepares for FY 2014-15 budget negotiations. The League strongly encourages city officials to support both bills because they:
  • Address an injustice that was done to recently incorporated cities and cities that annexed inhabited territory since 2004.
  • Restore an improved financial footing that would support future incorporations and inhabited annexations in our growing state.
To take action on these measures, please tailor the sample support letter for both AB 1521 and SB 69 and submit to the CC listed recipients. You may fax your letter to the attention of Meg Desmond at (916) 658-8240 or submit via email. The League will continue to closely monitor the progress of both measures and inform members about any significant or urgent developments. 

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