On January 10, 2003, the Governor submitted the FY 2003/2004 State Budget to the Legislature, proposing significant cuts and funding shifts to reduce the budget deficit that would severely affect cities and counties. The Governor has proposed to eliminate, beginning in February 2003, the 67.5% Vehicle License Fee (VLF) backfill currently paid to local governments. If elimination of the VLF backfill is enacted into law, the Sunnyvale General Fund would lose approximately $2.5 million in FY 2002/2003 and approximately $5 million in FY 2003/2004. The revenue loss in FY 2003/2004 would represent approximately 5.4% of the City’s total General Fund Operating Budget.

Working in conjunction with the League of California Cities, local governments across the state are mobilizing quickly to oppose any attempts by the State to eliminate this critical source of revenue.

2003 Legislative Action Policies 7.1. Planning and Management – Fiscal Management. ii) State

#1. Protect the authority of charter cities to control local revenues. Oppose the reconfiguration of revenue distribution formulas to take revenues away from local government to fund state programs.

In 1986, VLF revenue was constitutionally dedicated by voter approval to fund City and County services. In 1998, during a period of strong economic growth, the Legislature approved a reduction in VLF payments to vehicle owners. This reduction is known as the VLF "offset." In subsequent years the offset was increased to 67.5% of the total VLF owed. At the same time this "tax holiday" was given to vehicle owners, the State made up the difference in revenue to local governments by back-filling the offset. The 1998 legislation, plus subsequent enactments, contain clear provisions indicating that when insufficient funds are available to be transferred from the State General Fund to fully fund the backfill to local governments, then the offset would be reduced, resulting in higher VLF payments for vehicle owners. This is known as the "VLF trigger."

After pledging to protect this constitutionally guaranteed local revenue, the Governor is now proposing to eliminate the backfill entirely, beginning in February 2003. State Assembly Speaker Herb Wesson announced that he will introduce legislation to allow for restoration of VLF funding for cities and counties, proposing to end the tax holiday for vehicle owners (by clarifying how the trigger works) and guaranteeing that the backfill to local governments will not be eliminated.