California’s four newest cities, teetering on the brink of financial ruin, won’t be bailed out by the state government that put them in harm’s way.

Governor Jerry Brown vetoed Assembly Bill 1098 this week after claiming that the state couldn’t afford to put back $18 million it took in June 2011 from the state motor vehicle license fund to pay for local public safety programs. The cash-strapped Legislature took a total of $153 million from the fund to support the programs. The legislation, introduced just hours before a final vote on the state budget, diverted money from the fund to state law enforcement grants previously funded by an expired state tax and, before that, the General Fund.

Four Inland Empire cities―Jurupa Valley, Eastvale, Menifee and Wildomar―relied on the car tax money to jumpstart their fledgling municipalities and pay for expenses, as allowed by law, during their first five years of existence. Jurupa Valley was counting on receiving $6.8 million in 2012, about 47% of their annual operating budget. Menifee was to get $3.8 million, Eastvale $3 million and Wildomar $2 million.

Two of the four Riverside County cities incorporated in 2008, one in 2010 and one last year. All four are considered at risk of de-incorporation and joining three other California cities that have recently declared bankruptcy. Earlier in the week, officials in the city of Atwater in Merced County pondered filing for bankruptcy while wrestling with a $26 million budget gap.

The Assembly passed AB 1098, the fee restoration bill, unanimously and the Senate approved it 57-7. Although Governor Brown’s veto message underscored the importance of redirecting the money to public safety programs, an analysis by the Assembly Committee on Appropriations cited concerns by the California Police Chiefs Association that the shift of funds “had the unintended consequence of severely undermining front line law enforcement in newly incorporated cities and those cities that had recently annexed inhabited land.”

The annual vehicle license fee, established in 1935, provides a large pot of money for the state and has been a political ping-pong ball for years. The assessment raised nearly $6 billion in 2011-12.

The money raised by the levy was originally allocated without restriction to cities and counties until Proposition 13 in 1978 gutted the state’s property tax revenues and sent the Legislature on a hunt for new revenue sources. After repeated raids on the motor vehicle fund, Proposition 47 in 1986 mandated that just about all the fees be allocated to cities and counties.

But the state held on to the authority to alter the tax rate and adjust allocations, and has repeatedly messed with both. Various arrangements allowed for money taken from the fund (i.e. cities and counties) to be backfilled with money from the state’s General Fund or property tax collections. The state also put various restrictions on how the money could be spent.

Governor Gray Davis oversaw a tripling of the car tax in 2003, and after he was recalled in a special election, his successor, Governor Arnold Schwarzenegger, led a repeal of the increase and punched a giant hole in the state budget.

–Ken Broder

To Learn More:

California's Newest City Withering on Fiscal Vine (by Phil Willon, Los Angeles Times)

Gov. Jerry Brown Vetoes Financial Help for Four Young Cities (by Patrick McGreevy, Los Angeles Times)

VETO: Governor Rejects Bill to Aid Inland Cities (by Jim Miller, The Press-Enterprise)

Atwater, California Mulls Fiscal Emergency, Bankruptcy (Reuters)

A Brief History of California’s Car Tax: The Vehicle License Fee (California City Finance) (pdf)