Local Governments Unite in Funding Dispute With California

REDWOOD CITY, Calif. — All 20 cities in San Mateo County have joined a lawsuit accusing the State of California of withholding nearly $38 million in local funds, escalating a dispute that county leaders say threatens essential public services.

Background on the Funding Shortfall

The lawsuit, first filed by San Mateo County in August 2025, argues that the state failed to provide the full amount owed under a long-standing funding formula tied to the Vehicle License Fee Adjustment Amount, or VLFAA. Local governments were due $114.3 million this year but received only $76.5 million, leaving a gap of almost $38 million.

The county says the shortfall emerged after the state’s initial 2025 budget proposal omitted San Mateo County entirely from the funding distribution. County officials and state lawmakers secured a temporary, one-year restoration of two-thirds of the amount owed, but local leaders warn that the funding is likely to be excluded again next year.

“At a time when the County and our cities are working hard to sustain critical services while confronting ongoing fiscal challenges, it’s essential that the state maintain the local funding that nearly every other jurisdiction in California continues to receive,” said Supervisor Lisa Gauthier.

Cities Rally Behind the Lawsuit

The county’s 20 cities have unanimously joined the case, citing the impact of the funding loss on public safety, health programs, and affordable housing efforts. Mono County and Alpine County, which face similar issues, have also joined.

“When we are faced with a significant challenge or crisis in San Mateo County, our elected leaders and public officials come together to find common sense solutions and fight on behalf of the residents we serve,” said Redwood City Mayor Elmer Martínez Saballos.

County Executive Officer Michael Callagy said the collaboration reflects the seriousness of the financial threat. “I’m extremely pleased with the collaboration of all cities and towns in our County as this unjust taking by the State impacts all County residents.” He added that residents must understand “the real impacts of this State taking, this year and beyond.”

Claims Against the State

According to the lawsuit, the state violated its own statute and a 2004 budget compromise known as the “VLF Swap.” Under that agreement, counties and cities gave up vehicle license fee revenues to help the state close a deficit. In return, the state guaranteed ongoing replacement funding through property-tax-based allocations.

San Mateo County argues it has been shorted for years because of technical issues in the formula, even as 55 other counties receive full payments without dispute.

Local leaders describe the funding gap as a direct threat to essential city operations. San Mateo Mayor Rob Newsom said his city alone faces a $2.2 million shortfall. “Absorbing that shortfall has impacted essential city services and core neighborhood programs,” he said.

East Palo Alto Mayor Martha Barragan said the missing funds weaken support for youth programs and neighborhood safety. Pacifica Mayor Sue Beckmeyer emphasized the importance of VLFAA revenue for public safety and emergency services.

Next Steps in the Case

The lawsuit names the State of California and Joe Stephenshaw, the governor’s finance director, as defendants. It seeks full payment of all funds owed now and in future years without recurring budget negotiations.

The case is pending in San Francisco County Superior Court. The state is expected to respond in January.