BILL ANALYSIS                                                                                                                                                                                                    



                                                                AB 1457
                                                                Page  1

         (Without Reference to File)
         
        CONCURRENCE IN SENATE AMENDMENTS
        AB 1457 (Budget Committee)
        As Amended May 3, 2004
        2/3 vote.  Urgency
         
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        |ASSEMBLY:  |     |(April 24,      |SENATE: |32-1 |(May 3, 2004)  |
        |           |     |2004)           |        |     |               |
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             (vote not relevant)                
         
         Original Committee Reference:    U. & C.

        SUMMARY  :  Suspends a "Poison Pill" provision through July 15, 2004,  
        to authorize continued allocations of vehicle license fee (VLF)  
        revenue and General Fund (GF) "backfill" transfers to the Local  
        Revenue Fund (LRF), which finances local (primarily county) health  
        and mental health programs under the 1991 State-Local Realignment.   
        Revises, temporarily, the allocation of backfill transfers between  
        the LRF and the Motor Vehicle License Fee Account (MVLF Account) in  
        the State Transportation Fund in order to hold Realignment funding  
        harmless for the 2003-04 VLF backfill funding "gap."

         The Senate amendments  delete the Assembly version of this bill, and  
        instead:

        1)Suspend the Medically Indigent Adult (MIA) Poison Pill provision  
          through July 15, 2004.  The Poison Pill suspension enables the  
          State Controller to continue to allocate VLF revenues and transfer  
          GF backfill payments to the LRF through the end of fiscal year  
          2003-04 (which extends to July 15 for Realignment).

        2)Directs the State Controller (Controller) to revise transfers of  
          VLF and GF backfill as necessary to fully fund allocations to the  
          LRF for 2003-04 as follows:

           a)   Increase GF backfill transfers to the LRF and reduce  
             transfers to the MVLF Account to allocate the entire gap  
             shortfall to the MVLF Account and hold the LRF harmless for the  
             2003-04 funding gap; and,

           b)   End the special 2003-04 allocation of 28.07% VLF revenue to  
             the LRF as of February 29, 2004, and, instead, adjust VLF  








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             revenue allocations between the LRF and the MVLF Account so that  
             each fund receives its regular statutory share of VLF revenues  
             for 2003-04 (24.33% to the LRF and 75.67% to the MVLF Account).

         EXISTING LAW  :
         
         1)Imposes the VLF on vehicle owners.  The VLF is a tax levied on  
          vehicle value or price at the time of purchase and annually  
          thereafter.

        2)Dedicates, constitutionally, VLF revenue (net of administration  
          costs and refunds) to cities and counties. 

        3)Requires, generally, that the LRF receive 24.33% of VLF and  
          backfill revenues, but increases the LRF share to 28.07% for  
          2003-04.

        4)Specifies a base VLF rate of 2% of vehicle value, but also requires  
          an offset (reduction) of 67.5% of that amount (for an effective tax  
          rate of 0.65%).

        5)Requires, generally, the state to make GF backfill payments to the  
          MVLF Account and the LRF to replace the revenue loss from the VLF  
          offset.

        6)Includes a Poison Pill provision that eliminates the slower vehicle  
          depreciation schedule that was imposed to increase VLF revenues to  
          fund Realignment and the authority to transfer VLF and backfill  
          amounts to the LRF.  This Poison Pill is activated upon a final  
          court decision that counties' obligation to provide medical  
          services to medically indigent adults (MIAs) is a reimbursable  
          state mandate.

        7)Defines the VLF backfill funding gap to be the amount of VLF  
          offsets that were not transferred from the GF to the MVLF Account  
          and to the LRF for registrations and renewals due prior to October  
          1, 2003.

        8)Requires the Controller to make a GF transfer to restore VLF gap  
          funding to local governments on August 15, 2006.

         AS PASSED BY THE ASSEMBLY  , this bill appropriated telephone bill  
        surcharge revenues to the California Public Utilities Commission  
        (PUC) for payments to small independent telephone corporations  
        serving rural and small metropolitan areas.








                                                                AB 1457
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         FISCAL EFFECT  :  Authorizes transfers totaling approximately $700  
        million of VLF and GF backfill amounts to the LRF in 2003-04 to meet  
        normal Realignment statutory funding commitments.  Of this amount,  
        about $400 million is for the VLF gap period prior to October 1 and  
        about $200 million is for the period from March 1 (when the MIA  
        Poison Pill was activated) through the end of 2003-04.   

         COMMENTS  : 

        1)Realignment and VLF.  The Governor's Budget proposes to repeal the  
          VLF MIA Poison Pill.  This proposal is consistent with the Budget's  
          assumption of full funding of State-Local Realignment in 2004-05.   
          The 1991 Realignment of various state health and social services  
          programs and funding responsibilities to counties was funded by a  
          combination of sales tax and VLF revenues.  The sales tax funding  
          was from a dedicated half-cent increase in the state sales tax.   
          The VLF revenues were provided through slowing the depreciation  
          schedule that determines the value of vehicles on which the VLF is  
          assessed.  The VLF depreciation change now produces annual revenue  
          of $1.5 billion for Realignment (out of a total of about $5.8  
          billion).  As a result of the reduction in the VLF rate, actual VLF  
          revenues now account for about $500 million of VLF Realignment  
          funding.  GF backfill provides the remaining $1 billion. 

        2)The Poison Pill.  At the time that Realignment was established,  
          counties were asserting that the shift of the MIA program to them  
          (from the Medi-Cal Program) in 1982 constituted a state-mandated  
          local program for which they were entitled to reimbursement.  The  
          potential state exposure, should those claims prove successful, was  
          thought to be large.  Realignment, along with other actions, was  
          intended, in part, to help support county funding for health and  
          mental health programs.  As a protective measure, the Legislature  
          included a provision in the Realignment legislation that repeals  
          the VLF depreciation schedule and the authority to allocate VLF  
          (now including backfill) revenues to Realignment (via the LRF) in  
          the event that the courts determined that the 1982 MIA shift was a  
          reimbursable mandate.

           a)   Poison Pill Activated.  As it turned out, only one county,  
             San Diego, successfully asserted an MIA mandate claim, and that  
             only for one year and $3.4 million.  However, San Diego County's  
             claim has triggered the Poison Pill provision (the state's final  
             appeal to the California Supreme Court was refused in December  
             2003).  The Department of Motor Vehicles has issued emergency  








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             regulations temporarily extending the Realignment depreciation  
             schedule.  However, there is no longer statutory authority for  
             the Controller to allocate VLF revenue or backfill to  
             Realignment.  Instead, all VLF revenue and backfill will be  
             transferred to the MVLF Account and allocated to cities and  
             counties primarily on a per-capita basis.

           b)   Suicide Pact.  The MIA Poison Pill will make the state just  
             as sick as the counties.  In the absence of VLF Realignment  
             funding, counties will have unfunded mandates for the programs  
             that Realignment requires them to carry out.  They will then  
             claim reimbursement from the state GF for their unfunded  
             mandates.  Some counties may refuse, or simply be unable, to  
             carry out all of their Realignment programs without this  
             funding.  A final determination of an unfunded mandate for  
             Realignment itself will activate another poison pill provision  
             that repeals the sales tax for Realignment.  Eventually, after  
             considerable disruption, the state would have to restore  
             Realignment funding or take back the programs and costs that it  
             transferred to counties in 1991.

        3)The VLF Gap and Realignment.  The 2003-04 Budget eliminated the VLF  
          backfill for 2003-04.  At the time the Budget was enacted, the VLF  
          "trigger" had been pulled and it was anticipated that the VLF rate  
          would be restored to the full 2% starting October 1, 2003.  From  
          July 1 to October 1, however, local governments would only receive  
          VLF revenue at the reduced tax rate without any GF backfill.  This  
          backfill gap resulted in a GF budget savings (and a loss to local  
          governments to be repaid in 2006).  Budget legislation increased  
          the percentage allocation of VLF revenues to the LRF in 2003-04 in  
          order to make up for the gap loss to the LRF and hold Realignment  
          harmless.

        4)VLF Reduction Leaves LRF with a Gap Problem.  Governor  
          Schwarzenegger acted to eliminate the VLF trigger rate increase and  
          to restore GF backfill payments (for registrations due after  
          October 1).  As a result, actual VLF revenues (excluding backfill)  
          are only about a third of the amount contemplated in the 2003-04  
          Budget, and the increased percentage allocation to the LRF is  
          inadequate to make up for the gap loss to the LRF.

        5)Only A Temporary Fix.  This addresses the immediate situation in  
          2003-04.  However, additional legislation will be necessary to  
          provide Realignment funding from the VLF and backfill in 2004-05,  
          as proposed by the Governor's Budget. 








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        6)Suspension of Article XI Poison Pill Unnecessary.  This bill also  
          suspends an additional Realignment Poison Pill provision that is  
          triggered if the courts decide that the Constitutional dedication  
          of VLF revenues to local governments precludes the state from  
          requiring local governments to use a portion of VLF revenues for  
          Realignment.  This Poison Pill has not been activated and continues  
          to serve its intended purpose.


         Analysis Prepared by  :    Dan Rabovsky / BUDGET / (916) 319-2099FN:  
        0005104