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League Sponsors Bill to Restore Funding to Cities Harmed by SB 89

Legislation Will Also Ensure Funding Formula for Cities that Annex Inhabited Territories Going Forward

March 2, 2018
Last year the Legislature restored funding to California’s four most recently incorporated cities through the passage of SB 130 and this year the Legislature has the opportunity to restore funding to cities that had annexed territories since 2006.
Assembly Member Eloise Reyes (D-Grand Terrace) has introduced AB 2268 to restore funding to approximately 140 cities that had annexed inhabited territory in reliance on previous financial incentives, and then suffered fiscal harm when those funds were swept away through the budget process with SB 89 in 2011. Going forward, the measure would provide similar incentives to support future annexations of inhabited territory to improve services to affected residents consistent with state Local Agency Formation Commission (LAFCO) policies.
Sponsored by the League, AB 2268 would restore and stabilize funding with benefits to local services and compact growth.
The funding formula used in AB 2268 is identical to the formula approved by the Legislature to restore funding to four recently incorporated cities that were also harmed by SB 89 in last year’s SB 130. The state fiscal impact of SB 130 is estimated to be up to $19 million annually; the fiscal costs of addressing the losses cities suffered on annexations in AB 2268 would be comparatively less at approximately $5 million.
The funding swept from cities in SB 89 was from a special allocation of city shares of vehicle license fee (VLF) revenue derived from allocations made by AB 1602 (Laird) of 2006. The Legislature enacted AB 1602 to address some unresolved issues with the 2004 VLF-property tax swap. The swap allowed all cities and counties in existence in 2004 to swap dollar-for-dollar the amounts owed by the state to them as VLF backfill, following the state’s decision to reduce the amount of VLF paid by consumers. However, the 2004 swap did not address the future annexations and incorporations.
The Legislature in 2017 resolved the financial harm caused by SB 89 to four recently incorporated cities via the passage of SB 130 (Budget). SB 130 contains a statutory formula (based on the 2004 VLF-property tax swap) that provides these 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 to other cities. In short, these cities will be treated equally with all other cities under the swap. Although SB 130 did not resolve issues associated with future annexations, it provides the legislative template to also address this issue. 
Western City magazine this month features an article entitled ”How SB 89 Harmed City Annexations — and Why Fixing It Makes Sense,” by Dan Carrigg, which has more indepth backfound information on this issue.
Next Steps
The League urges all cities to review AB 2268 and support this measure because of its benefits not only to the cities that annexed post-2006, but because it restores fiscal incentives for future annexations.
The measure has not yet been set for its first committee hearing but it will likely be heard by the Assembly Local Government Committee. The League has prepared a sample letter cities can use to voice support. The sample letter, along with the League’s support letter, can be found at www.cacities.org/billsearch by plugging AB 2268 into the search function.

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