History of the VLF budget problem

Before 1935, California vehicles were subject to property tax administered by local governments. But in 1935 the legislature authorized a vehicle licensing fee (“VLF”) equal to 1.75% of the vehicle’s value and they exempted vehicles from property tax. Since the earlier property tax on vehicles had gone to local governments, the state agreed to return most of the new VLF fees to local governments. The VLF formula has changed over time, but it has always been a source of funding used by local governments to fix the streets and support other local functions. One change was Proposition 47 in 1986 that guaranteed VLF funding to local governments.

In the late 1990s and early 2000s, several different modifications to the VLF were proposed. However, in 2004, the Legislature agreed to permanently reduce the VLF from 2% of vehicle value to 0.65%. The cities and counties understandably reacted negatively to such a large reduction in one of their important funding sources.

Thus began a series of shell games with names like “The Triple Flip” with which Sacramento managed to send the cities money. Sacramento still collects the (now smaller) VLF but supplements it with property tax money to give the cities the required amount. The most confusing part of the shell game is that the amount of property tax sent to cities and counties “in-lieu of VLF” is determined by the types of school districts in the county. Sacramento sends the cities and county the amount of property tax that would have gone to non-basic-aid, or non-community-funded, school districts and it then backfills that funding to the school districts from other sources.

That “shell game” works well enough in many California counties. However, in a few places like San Mateo County with a significant number of basic-aid school districts, the math doesn’t add up to enough to give the cities the money they are supposed to receive. In recent years, the state has said, “OK. We will send you other funds to cover that shortfall.” But this year, the state budget is underwater and the state has been reluctant to cover the shortfall.

In small cities like Belmont, this means the city should receive a total of roughly $4 million “in-lieu of VLF.” (This is based on the VLF amount the city received in 2004, escalated forward in time.) However, based on the non-basic-aid school districts in our area, the funding sources now add up to only about $3 million, leaving a $1 million gap or “shortfall.” The $3 million layer is not currently at risk, but the $1 million shortfall layer is.  

In state and federal budget terms, $1 million may not sound like a lot. But to a small city it covers the wages of quite a few employees in public works, parks and recreation, and all of the other services needed to keep the city running.

Every year when we work through the Belmont city budget I think, “Aha! I finally understand this convoluted line item.” But I often then find out there is some detail that I don’t fully understand. But the important part is that the county and the cities need that shortfall layer of funding to maintain our current levels of service to the public and our financial reserves.

For the moment, the situation is looking up. Our local representatives in Sacramento including state Sen. Josh Becker, D-Menlo Park, and Assemblymember Diane Papan, D-San Mateo, have teamed with many city and county officials to get the shortfall money put back into the latest iteration of the state budget. However, the governor’s office could still eliminate that line item before the state budget becomes final. If you have an interest in city and county budget matters, this would be a great time to ask the governor’s office to preserve the VLF shortfall layer of funding.

Tom McCune is a member of the Belmont City Council.