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Budget Trailer Bill SB 130 Contains Long-Sought Fix for Struggling Newly-Incorporated Cities

April 25, 2017
California’s four most recently incorporated cities are on the cusp of receiving a long-needed permanent fix to their revenues with SB 130.
Approved by the Senate Budget and Fiscal Review Committee on Monday, April 24, the measure was also the subject of an Assembly Budget Committee informational hearing that day. The bill is expected to pass on the Senate and Assembly floors this week, followed by Gov. Jerry Brown’s signature. 

The League testified in support of SB 130 in both committees. This measure, which mirrors the contents of League-supported SB 37 (Roth), restores funding stability to four recently incorporated cities — Eastvale, Wildomar, Menifee and Jurupa Valley. These cities, all in Riverside County, have experienced severe financial hardship since 2011 when the state swept all remaining shares of city vehicle license fee (VLF) revenues.
While all city budgets were affected by the loss of city shares of VLF, these four cities were particularly hit hard in that they were much more reliant on the VLF than all of the state’s other 478 cities due to prior legislative tinkering with local revenue sources.
Some history explains why.  
Prior to 1998, cities had three main sources of general revenue: property tax; sales tax; and VLF revenue. (VLF originated as a local property tax levied on vehicles until 1933 when the state standardized collection.) Then in 1998, during a 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. The League opposed that proposal because the promises to backfill created uncertainty for local revenues; however it was ultimately approved. This leads to more recent history.
As state budget difficulties returned in the early 2000s legislators began to question the backfill to local agencies and also balked at the notion of allowing the triggers to be pulled that would restore VLF collection at its previous level of 2 percent. An agreement was reached in 2004 and solidified in Proposition 1A — a revenue protection measure sponsored by the League — that allowed all cities and counties in existence on that date to swap the amounts owed to them as VLF backfill dollar-for-dollar for increased shares of local property tax. During the negotiations, the League had also advocated for the “swap” to address future incorporations and annexations, but the fix did not make it into the final package.
All cities in existence in 2004 were kept whole by the swap but the agreement did not resolve how 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 were also a smart-growth incentive: more people in your city meant more revenue.
The League worked with then Assembly Member John Laird (D-Santa Cruz) in 2006 to fashion a solution in AB 1602 by providing permanent increased shares of a small pool of remaining VLF to newly incorporated cities and cities that annexed inhabited areas.
In 2011, however, during another state budget crisis, the Legislature passed SB 89 — a quickly adopted bill with no public hearings — that swept all of these remaining VLF funds as part of a budget solution. Despite the bill being in print for only a matter of hours, the League still managed to issue an oppose letter and lobbied against it on the Senate floor. The League also filed a lawsuit challenging SB 89, which proved unsuccessful.
For the last six years, the League has drafted, sponsored and supported various measures to address the harmful impacts of SB 89 on the four recently incorporated cities as well as cities that lost funding over annexations. Regrettably, the Governor vetoed the measures that reached his desk.
SB 130 Becomes Vehicle to Restore Funding to Four Cities
A breakthrough finally occurred this legislative session with SB 130. The Governor in recent negotiations agreed to sign SB 130 when it reaches his desk. The measure provides the four cities 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 in the swap 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. 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. 
SB 130, is a long-overdue fix for the four recently incorporated cities that were unjustly and severely harmed by the passage of SB 89 in 2011; still outstanding, however, are the longer-term policy issues associated with future incorporations and annexations which the League will continue to work on. 
The League thanks Sen. Richard Roth (D-Riverside) and Assembly Member Sabrina Cervantes (D-Corona) for their lobbying efforts with the Governor to ensure that the fiscal harm caused to the four cities will finally be addressed, and also appreciates the work of the representatives of the firm of Joe A. Gonsalves & Son who advocated on behalf of the affected cities.   

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