Four New California Cities Might Dissolve

Editor’s Note: Correction Below

MARCH 13, 2012

By WAYNE LUSVARDI

Newspapers across the United States have told of the financial plight of three cities in northern California facing possible bankruptcy: Stockton, Hercules and Lincoln.

However, many may not be aware that four newly formed cities in Southern California may be facing disincorporation due to the California Legislature denying them property taxes in lieu of Vehicle License Fees that all other cities in the state receive.  These four cities are: Jurupa Valley, Eastvale, Wildomar, and Menifee.

They have a combined population of about 257,500 people, which would be similar in size to the city of Stockton.  Stockton is the largest city in California facing bankruptcy.

No city officials in any of the four Southern California cities are willing to say whether the actions of the Democratic-controlled Legislature create an appearance of partisan policy in denying taxes to only new cities in the Republican Inland Empire of Southern California.  Steve Harding, city manager for Jurupa Valley, said these four cities need bipartisan support to correct the legislature’s oversight about how this policy adversely affects newly incorporated cities.  According to CityData.com, three of these four cities voted a split ticket in the 2008 U.S. presidential election.

Cities With No Pension Spike or Debt Going Insolvent

Newer incorporated California cities such as Eastvale, Jurupa, Menifee and Wildomar have no substantial debt or pension obligations, as do older cities suffering from budgetary insolvency.  That is because the newer cities were incorporated from 2008 to 2010.  So bankruptcy is not an option because there is nothing financially to restructure.  Folding these cities back into Riverside County may be the only viable option.  But that would take a vote of the residents of each city.

Jurupa Valley, Eastvale, Wildomar and Menifee experienced a population boom from 2003 to 2008 due to the Housing Bubble. These four cities have lost from 17 to 46 percent of their operating budget when Vehicle License Fees were diverted to fund prison realignment in 2011.  The loss of these fees was not backfilled with property taxes, as happens in all other cities in California.

Typical salary and benefit costs for most city budgets are in the 70 to 80 percent range of the total budget. Thus, Jurupa Valley — which lost 46 percent of its budget — and Eastvale — which lost 38 percent — are the most susceptible of the four cities to becoming financially insolvent.  Insolvency is when expenditures exceed revenues.

Percent of Vehicle License Fees of City Budgets

	Northern California				Southern California
City	Stockton	Hercules	Lincoln		Jurupa Valley	Eastvale	Wildomar	Menifee
VLF   Percent	11%	9%	1%		46%	38%	22%	16%
Budget   Deficit	$20 to $38 mil.	$1 million	$2 million		$6.8 mil.	$5 million	$1.8 million	$3.4 million
Percent   Home Value Decline	Down 65%	Down 62%	Down 50%		Down 51%	Down 45%	Down 53%	Down 49%
Pop-   ulation	290,000	26,000	43,248		94,235	53,668	77,519	32,176
Political   Party	Democrat	Democrat	Republican		50/50	50/50	50/50	Republican

In 2006, AB 1602 Made Incorporation Easier

State Assembly Bill 1602 passed on Sept. 29, 2006, made it easier for unincorporated areas to become cities.   Instead of a property tax on motor vehicles as many states have, California collects an annual Vehicle License Fee — called the VLF.  It allocates the revenues, minus administration costs, to cities and counties.

The unincorporated area of Wildomar incorporated on Feb. 5, 2008. In 2008, the unincorporated areas of Menifee, Sun City and Quail City merged and became incorporated as the city of Menifee. This spurred interest by the areas of Mira Loma, Pedley, Glen Avon, Sunnyslope and Rubidoux to merge and incorporate.  The new city of Eastvale incorporated on Oct. 1, 2010. On July 1, 2011, the census place of Mira Loma became incorporated with the city of Jurupa.  Another part of Mira Loma became part of the city of Eastvale.

Questions and Answers

Steve Harding, city manager of Jurupa Valley, was interviewed and provided some helpful answers on the financial crisis facing all four cities.

Q: What is the current status of VLF in Jurupa?

Harding: Currently, the city has lost all of its estimated $6.8 million in VLF for FY 2011/12 and is scheduled to receive only $180,000 in COPS [Community Oriented Policing Services] backfill funding. Additionally, this annual loss is ongoing into future years.

Q: Why was Jurupa disproportionately hit with the highest diversion of VLFs?

A: Jurupa Valley along with the three other cities that incorporated after 2004 (Eastvale, Wildomar and Menifee) do not receive property tax in Lieu of VLF that all other cities in the state receive. The four new cities were receiving this proportionate revenue in the form of VLF only on a population basis as per the 2006 AB 1602 legislation. Jurupa Valley, being the largest of the four cities, was thus hit with the largest proportionate loss. In fact, only the city of Los Angeles lost more than Jurupa Valley as a result of the SB 89 VLF diversion. But even Los Angeles, along with all the other cities in the state, retained their significant property tax in lieu of VLF apportionment.

Q:  Is Jurupa’s budget in a shortfall to be met with reserves or in a true deficit due to loss of VLF’s?

A: As a brand new city, we had anticipated ending FY 11/12 with an approximate $9.7 million surplus for reserve in the general fund, with future balanced budgets moving forward into future fiscal years. With the loss of the VLF this year, we are now projecting an approximate $2.9 million surplus for reserve. However, as this loss at present time is ongoing, and as the city transitions into its second year, there will be a significant budget shortfall that will exhaust this reserve and lead to insolvency prior to the end of FY 12/13 without very significant and draconian cuts to services.

Q: Has the county loaned Jurupa funds and how long would they continue to do so?

A: Riverside County did loan the city $1.7 million for cash flow purposes since our VLF apportionment scheduled to be received in August 2011 did not come forward. Now that the city has begun receiving sales tax and other revenues, we have repaid that loan. However, it is noted that the only reason the county was able to do that was under state law, they can make such a loan to a new city in its first fiscal year, but cannot do so after that fiscal year completes. Thus, we cannot receive any more loans from the county.

Q: Does the City have a Plan B in the event that VLFs are not restored in whole or in part?

A: The city is working on a Plan B. However, it is unlikely the city would survive very long. The city has no employees at this time and all functions are handled by consultants. The most significant expenditure is for law enforcement (contract with the county sheriff), which will comprise approximately 60 percent of the anticipated Fiscal Year 2012/2013 budget. The sheriff has advised the city on the maximum cut they could absorb in service levels and continue to service the city from an officer safety standpoint. This cut would not be sufficient to cover the gap. Additional cuts in other services are being reviewed but if all services are curtailed, and all other costs eliminated (which can’t legally be done), there will still be a significant budget gap.

Q: Would the worse case scenario for the city be bankruptcy or disincorporation, or could the city absorb a loss of nearly 50 percent of its General Fund?

A:  The city [of Jurupa Valley] cannot absorb this loss. Worst-case scenario would be disincorporation, which would have to go before the voters. Bankruptcy is not really an option because we are so small in consultant staffing, and we have no debt or pension liabilities, etc., there is really nothing to re-organize. Again, law enforcement is the largest expenditure and they cannot be cut sufficiently to make up the gap do to their officer safety requirements.

Q:  What effect, if any, did the past swap of property taxes for VLFs have on Jurupa?

A:  When the 2004 “swap” took place, cities not yet in existence (and future annexations to existing cities) were left out of the funding “swap” formula. In 2006, AB 1602 was signed into law correcting the problem. However, instead of being placed in the “property tax in Lieu of VLF scenario,” as all other cities, the legislation devised a formula to allocate that proportional amount directly out of the VLF account. Thus, all cities and all annexations to existing cities that occurred after 2004 (essentially 2006) are now treated differently than all other cities in the state.

Q:  What efforts, if any, are under way in the Legislature to restore those funds?

A:  The city of Jurupa Valley has had several discussions with various legislators and the governor’s legislative and finance staff, including direct talks with Ana Matosantos, state finance director, on this issue. Also, SB 1566 has been introduced as a bi-partisan bill that will restore the VLF funding to the post-2004 new cities and annexations, beginning in FY 12/13. The authors of the bill are Sens. Gloria Negrete Mcleod and Bill Emmerson, with Sen. Kevin De Leon as a co-author. [Negrete Mcleod and De Leon are Democrats; Emmerson is a Republican.] Additionally, there is bipartisan co-sponsorship in the Assembly. The bill is currently in the Senate Rules Committee awaiting committee assignments. It is unclear at this time if the governor will support this bill.

Q: What is the story that Jurupa needs to get out on this issue?

A: Primarily that this is a matter of being treated fairly and equally with all the other cities in the state. Jurupa Valley understands and is willing to absorb the proportionate loss of the other cities in the state of their VLF funding, which in our case is approximately only $300,000 annually. However, we should not lose the proportionate AB 1602 funding that we have also lost since we do not receive the property tax in lieu of VLF, as all other cities retained. Additionally, this city is made up of a large segment of economically disadvantaged communities that have already enjoyed some significant service increase over what the county was providing, and that is now threatened. Additionally, the whole purpose of SB 89 was to re-direct revenue to law enforcement. However, in our case, and the other three cities mentioned previously, this is having a reverse affect. All four cities have either cut their law enforcement service down to dangerous levels, or are contemplating that for the next fiscal year. The bottom line is that we (and the other three cities and annexations) should not be treated any differently than the other 476 cities in the state.

Correction on March 29,2012: This article originally included Milpitas among the Northern California cities seeking bankruptcy. City manager Tom Wilson told us that the city “has no intention of filing for bankruptcy.” The city council did declare a fiscal emergency. But that was to deal with a $7 million budget problem because the state dissolved the city’s redevelopment agency. The city council soon will be “rescinding the fiscal emergency.” We regret the error.

— John Seiler, Managing Editor