The problem with VLF, explained for the rest of us

In 2004, California had a budget crisis and the state asked counties and cities to give up their vehicle license fee revenue (the portion of your car registration that had historically funded local services) in exchange for a guaranteed replacement stream funneled through school district funding formulas. The swap was supposed to be permanent and equal with every county giving up the same thing and getting the same thing back through another mechanism. For 55 of California’s 58 counties this worked fine but for San Mateo, Alpine and Mono counties, the formula broke long ago. The state’s own Legislative Analyst’s Office flagged it in 2012 when the gap was under $1 million and easily correctable, and that same problem now costs estimated $163 million in FY25-26 and will likely continue to grow until a permanent solution is implemented.

The formula fails because of how San Mateo County’s school districts are funded. The replacement payments were designed to flow through a pool of state money supporting districts whose local property tax revenue falls short of the state’s minimum per-pupil standard (what you may hear described as the difference between state-funded and community or locally-funded schools). As Peninsula property values have climbed, districts have been exiting that pool one by one, from roughly 12 a decade ago to four today. With fewer districts in the pool, the mechanism generates less money and the county and its cities come up short. No one intercepted the funds, the formula simply stopped producing the allocation it was supposed to guarantee.

Sacramento’s response is to point to a separate channel through which San Mateo County generates roughly $409 million annually in property tax flows tied to the state’s education funding system. That funding is directed to schools and does not flow to cities or the county for local services, which operate under separate jurisdictions. State law, including Proposition 98, treats these as legally distinct obligations and explicitly prohibits using one to cover the other.

Our community’s reality is this: Funding that the state promises but fails to send still has to come from somewhere. It gets cut from services residents depend on, or it finds its way onto local ballots asking voters to cover what Sacramento was already obligated to provide. These are services like shelter for 3,000 people, rental assistance keeping more than 5,500 households from displacement, early literacy programs for 7,400 children and crisis mental health response. In Redwood City, the annual shortfall equals the entire public library budget. In Daly City, a fire engine and nine firefighters. In San Mateo, the gap is comparable to running the entire parks and rec system for a year. In South San Francisco, it’s the equivalent of a full paramedic response unit. In Pacifica, the same loss translates into road maintenance delays, storm preparedness cuts and fewer resources for coastal erosion response. 

The complexity here is that while San Mateo County’s property wealth is real, so is the 30% of its residents who qualify as low income or our aging residents and who receive many of the services on the chopping block. The cost of simply getting by has also outpaced what not long ago was considered a stable, middle-class income. In San Mateo County, a family of four earning $169,000 qualifies as low income, and that was before 87 octane gas cost $5.50 a gallon. The many services at risk are essential to a growing percentage of our population, and this growing shortfall will continue to surface in reduced services, deferred investments and repeated asks to local voters to make up the difference.

Every city in the county has joined the lawsuit against the state, and Assemblymember Diane Papan working with state Sens. Scott Wiener and Josh Becker secured $76.5 million in the 2025 state budget, a partial payment for one year. Gov. Newsom’s proposed budget for 2026-27 includes nothing. While the legislature has written one-time fixes into the budget before, what has not existed is the will to make it permanent, which would require a rewrite of the underlying statute so the county receives what it is owed through a guaranteed obligation rather than a line item that disappears when Sacramento faces a deficit. Without that, this county returns to the same fight every budget cycle, and closing the gap will eventually show up on your ballot.