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TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY
DATE: DECEMBER 16, 2003
SUBJECT: LOSS OF VEHICLE LICENSE FEE REVENUE
Staff Coordinator: Gary Gyves, Senior Administrative Analyst
Receive and file the attached staff report describing the loss of Vehicle License Fee revenue for FY 2003-04 and possibly fiscal years thereafter.
BACKGROUND AND DISCUSSION
During a period of time when the State of California (State) experienced a robust economy, the State legislature reduced the Vehicle License Fee (VLF) tax rate gradually over three straight years beginning in 1999. The result was a reduction in the VLF tax rate from 2% to 0.65% of a vehicle’s market value. The same VLF legislation also guaranteed cities and counties that the State would "backfill" or pay the difference between the two rates, a maximum of 1.35%, thereby leaving cities and counties whole. The legislation also contained a "trigger" mechanism for the tax rate to be reinstated to 2% if the State could no longer afford to backfill the reduced rate.
On June 19, 2003, due to the State budget crisis, the VLF trigger was pulled restoring the VLF tax rate from 0.65% back to the pre-1999 rate of 2%. The newly restored 2% VLF tax rate was effective with registrations due October 1, 2003 and thereafter. The State’s FY 2003-04 budget deleted all funding for the VLF backfill due to the reinstatement of the 2% tax rate on June 19, 2003. Consequently, a funding "gap" was created from June 20, 2003 until registrations paid at the full rate were remitted in October. In accordance with the FY 2003-04 State budget, the backfill portion from June 20, 2003 through June 30, 2003 is considered a loan by the State anticipated to be paid back in 2006. The backfill portion from July 1, 2003 through September 30, 2003 was not funded.
On November 17, the Governor issued an executive order instructing the Department of Motor Vehicles to immediately accept the lower VLF rate of 0.65% and to provide refunds to car owners that paid the higher rate of 2%. In addition, the Governor’s administration decided that refunds would be paid from VLF revenues paid in subsequent months. Therefore, future VLF revenue collections will be held and used to provide refunds until all refunds are paid. According to information provided by the League of California Cities (League), VLF payments will be withheld for the entire month of January and partially for February to provide the required refunds.
As of the time this report was finalized, the Legislature has not acted to restore the backfill funding to cities and counties for lost revenues due to the November 17 rate decrease. However, three bills have been introduced to appropriate the backfill to local governments, SB 5x 1 (Brulte), AB 5x 1 (Cox) and AB 5x 2 (Lowenthal). Finance staff does not know what action, if any, will be taken on the aforementioned bills or similar bills in the immediate future. Additionally, the legislature and the Governor’s administration are currently negotiating placing a $10-15 Billion bond issuance on the March 2004 ballot that may include, or may not include, the inclusion of all, or a portion of, the VLF backfill in the FY 2003-04 State budget.
The League is discussing possible litigation if the Legislature does not appropriate the backfill funding to cities and counties. It is the League’s position that Proposition 47 of 1986 (Article XI, Section 15) requires that local governments are backfilled by the state general fund for any loss of revenue due to VLF reductions.
As discussed in the December 4, 2003 Friday report, Mayor Gardiner has submitted a letter to the Governor urging him to work with the legislature to fund the VLF backfill before they go home for the holiday break.
Finance staff offers the following information about the estimated impact of the aforementioned VLF actions, assuming that the legislature does not approve VLF backfill funding for cities and counties for FY 2003-04:
As described previously herein, the FY 2003-04 budget was based upon the assumption that VLF revenue would be reduced to about $815,000 during FY 2003-04. Based upon information provided by the League, it appears as though VLF revenue will be about $674,000 during FY 2003-04. VLF revenue received during FY 2002-03 was $2,725,256, therefore, it appears as though VLF revenue will be approximately $2 million less than what was received by the City during FY 2002-03.
In anticipation of the significant reduction of VLF revenue, the adopted FY 2003-04 budget and 2003 Five Year Financial Model (2003 Model) included the following reductions from Staff’s early versions of a proposed budget and 2003 Model:
Additionally, the staff report that accompanied the 2003 Model included the following reminders:
No dedicated revenue source currently exists to provide monies to perform storm drain and sewer infrastructure improvements, as well as any long-term debt that could be used to finance such improvements.
Director of Finance & Information Technology