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Alarm Greets Prop. 13 Tax Case

September 26, 2003

Los Angeles Times

Local and state leaders say they can't afford the estimated $10 billion they'd have to give back if an O.C. ruling against valuations is upheld.

By Jean O. Pasco and Evan Halper
Times Staff Writers

September 26, 2003

Municipal and school budgets throughout California would collapse if an Orange County property tax lawsuit prevails on appeal in December and expands statewide, warn government officials arming to fight the ruling.

The state Department of Finance pegged the cost of losing the case at $10 billion some $4.7 billion coming from counties and cities, and $5.3 billion from state government reimbursing schools for their lost revenue.

Some state officials are skeptical that the ruling will be upheld. But if it is, property owners would score a financial windfall unseen since 1978's passage of Proposition 13, the state's historic tax-rollback measure which is central to the ruling.

The 2001 ruling, by Orange County Superior Court Judge John M. Watson, declared unconstitutional a practice used by assessors statewide to increase property values greater than the 2%-a-year cap imposed by Proposition 13.

The case involved the home of Seal Beach attorney Robert Pool, whose assessment rose 4% in one year after staying flat the previous year.

State assessors argue that the long-standing practice of catching up on otherwise-lost tax revenue because of stagnant real estate values, called recapturing, is legal. In the 1990s, some properties lost value and the owners paid less in taxes.

For government budget crunchers, the prospect of such a legal setback couldn't come at a worse time. State officials this summer cobbled over most of a $38-billion budget gap through spending cuts, borrowing and one-time money shifts. The state faces an $8-billion shortfall next year if current trends continue.

That spending plan already fell out of balance after a Sacramento County Superior Court judge ruled this week that it was unconstitutional for the state to borrow $2 billion to cover its employee pension payment. A similar lawsuit was filed Wednesday over $11 billion in "deficit bonds" that are the linchpin of the budget.

The $5.3-billion loss to schools could compel lawmakers to raise taxes or make more spending cuts, officials said.

"That seems like a pretty big number in the face of a $70-billion budget," said David Hitchcock, an analyst with Standard & Poor's Ratings Services in New York.

The state is in no position to hand $5.3 billion to schools, argued John L. Burkey, attorney for the California Assn. of School Boards, in papers filed with the state appeals court challenging the ruling.

"Realistically, the whole house of cards of California school finance could crumble," he wrote.

Taxpayers and tax advocates, meanwhile, have hailed Watson's ruling, saying it corrects a practice they believe illegally raised tax bills.

One taxpayer, Katherine Thulin, 72, of West Hollywood, said she was floored to receive her property tax notification this year. It posted an increase of more than 20% on the value of the condominium she bought in 1992.

"My reaction was sort of like when I got my new auto registration," she said, referring to a tripling of registration fees approved by state officials to help balance the budget. "I'm so mad about it."

Eventually handing out refunds to taxpayers like Thulin is labeled an administrative nightmare by local officials who would have to identify and then find taxpayers going back years. State law allows taxpayers to appeal assessments going back four years; Watson's ruling said the refunds should stretch back to 1979.

Ventura County Auditor-Controller Christine Cohen said she has been holding off on assessment appeals filed by homeowners on the advice of county lawyers. Officials are waiting for the outcome of the Orange County suit.

Any funding reduction will hurt, she said, because the cash-strapped county already slashed $17 million from its $1.2-billion budget.

Orange County officials estimated that the county's hit from refunds and lower property assessments would total $416 million if the court ruling is upheld, not including the costs of mailing taxpayer notifications and processing appeals. Additional losses would come in future years from a corresponding decrease in tax rolls.

"It would be devastating," said David Janssen, chief administrative officer for Los Angeles County, of the county's exposure to refunds and lost tax revenue, estimated at $1.2 billion by officials with the state Board of Equalization.

Riverside and Sacramento counties would lose about $200 million each; the estimate for San Diego County is about $400 million.

"There are a lot of reasons to hope it's overturned," Riverside County Chief Executive Larry Parrish said. "With the economic situation we're facing and the state problem, there is no county in the state that wouldn't be severely hammered."

Despite the implications, many officials in Sacramento still haven't focused on the case, or they believe it will be overturned.

Hitchcock of Standard & Poor's, as well as other budget analysts, said the lawsuit is the least of the state's litigation worries. Standard & Poor's advised investors Wednesday that a legal ruling delaying or postponing the sale of the "deficit bonds" could mean the state wouldn't have enough money to pay off its debts at the end of the fiscal year in June.

"I think there are other areas in the budget that are probably far more vulnerable" than losing the Orange County tax case, said Steve Sheffrin, director of the Center for State and Local Taxation at UC Davis.

Orange County Treasurer-Tax Collector John M.W. Moorlach said he isn't worried about the impact because he doesn't believe it will get that far.

"I think Judge Watson was just wrong," Moorlach said, noting that the judge has had other rulings reversed. "If the appellate court doesn't overturn this, though, then you'll see everyone weighing in."

A hearing before the state 4th District Court of Appeal has been scheduled for Dec. 16. Both sides have vowed to ask the U.S. Supreme Court to consider the case no matter what the decision.

Times staff writers Sue Fox, Seema Mehta and Catherine Saillant contributed to this report.




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