MOORLACH UPDATE — R&T Code Sec. 97.70 — November 15, 2011

Trying to explain the $49.5 million Vehicle License Fee (VLF) theft by Sacramento to reporters yesterday was not an easy one.  Let’s see how I do in this brief narrative.

Jefferson County and the Pennsylvania capital city of Harrisburg recently filed for Chapter 9 bankruptcy protection.  The questions I’ve been receiving from reporters of late revolve around how Orange County resolved its fiscal crisis, especially in about 18 months (versus 2 or 3 years).  The OC utilized new debt to emerge from its 1994 Chapter 9 bankruptcy in 1995 and 1996.  As a source of security for the bondholders, California Government Code Section 25350.6 authorized the pledge of the County’s VLF revenues to pay the bondholders. 

In 2003, Arnold Schwarzenegger replaced recalled Governor Gray Davis.  Davis left a sizable deficit, and the new governor put Proposition 57 on the March 2004 ballot to issue (borrow) $15 billion in bonds to get the state current in its cash position.  There were also promises of cutting credit cards and blowing up boxes, which never materialized; but I digress.  In order to pay off the $15 billion, the state also needed to have a secure income stream to pay its bondholders.  It traded sales tax and VLF revenues going to counties and cities for property taxes drawn from the Educational Revenue Augmentation Fund (ERAF), which was called the “VLF swap” and “triple-flip.”  In 2004, when real estate was frothy, this seemed like a fair trade.  Consequently, property taxes flowed to the County through a Vehicle License Fee Adjustment Account (VLFAA) under California Revenue & Taxation (R&T) Code Section 97.70. 

To resolve the state’s fiscal concerns, cities and counties were now going to receive their share of VLF revenues in the form of property taxes going forward.  However, because the OC had pledged its VLF revenues to pay its bondholders for the bankruptcy recovery plan, the state Legislature enacted Assembly Bill (AB) 2115, allocating $54 million as VLF revenues for fiscal year 2004-2005.  So, instead of receiving $223 million in property taxes, the OC received $54 million in VLF and $169 million in property taxes. 

In 2005, the County refinanced (refunded) its bankruptcy-related debt and the new debt did not require the VLF revenue pledge as security for repayment to the bondholders.  All the same, the County continued to receive its property taxes in the same manner established by AB 2115.  (Why this was not legislatively corrected in a prompt and expeditious manner still has me quite baffled.)

With the state still not blowing up boxes and cutting credit cards, this year Sacramento enacted Senate Bill (SB) 89, which was written on a Monday evening and passed the next day.  SB 89 repealed R&T Code Section 11005(b)(1), under which the County received its VLF set-aside, effective July 1, 2011.  This was part of the state’s budget balancing efforts.  Consequently, the state took the County’s $48 to $54 million annual VLF revenues.  The Board recently made budget reductions of approximately $49.5 million, which represents some 7.5 percent of our General Fund.  The OC is the only county to suffer this fate. 

What to do?  First, California laws and policy favoring uniform treatment is strong.  A “no better, no worse” posture applies to all counties.  Second, the County’s Auditor-Controller is required to calculate property tax according to R&T Code Section 97.70. 

The County Treasurer-Tax Collector collects the property taxes, which fills the ERAF.  The Auditor apportions and disburses the property taxes to the various cities, special districts, and school districts in the County and does this with payments throughout the year from the ERAF.  Utilizing R&T Code Section 97.70, which should have been done for the last six years, the County should receive $73.5 million in total property taxes, instead of the $49.5 million the County had anticipated.  The additional $24 million going to the County would reduce the amount in ERAF going to the school districts by $24 million.  Since the state has to abide by Proposition 98, it has to backfill this decrease in revenues to the schools.  Proposition 98 was passed by the voters in 1988 and established the ERAF in order to mandate a minimum level of funding for educational spending.

Now, let me get to the crux of what is happening.  The state, because it did not cut its credit cards, stole $49.5 million from the County of Orange in order to address its lack of cash.  Low and behold, in reviewing the law, it was discovered that the actual amount the County should be receiving is much higher than expected.  The County should not be treated differently than the other 57 counties and this recalculation will allow the OC to receive its property taxes comparably to the other counties in California.

A dysfunctional California kicked a sleeping dog and got bit.  The taxpayers of the OC are due the entire $73.5 million.  We must keep our $49.5 million and we rightfully deserve the additional $24 million.  The schools must be backfilled by the State.  The State has to figure out how to come up with the $73.5 million.  Had the Legislature and the Governor simply left the OC alone, it would have been $24 million ahead.  Now we have to wait and see how Sacramento responds to our having informed them that we are following the law.  Let’s hope they agree and we can all move on.

The Voice of OC covers the drama below.

Orange County Supervisors Poised to Defy State Over $48-Million Tax Grab

Rather than lose $48 million in revenue — the result of a budget-time tax grab by Gov. Jerry Brown last summer — Orange County officials are poised to defy the state by keeping a total of $73 million in property taxes.

The expected move by county leaders, which they say must be done in order to avoid layoffs and other austere budget cuts, is an aggressive and rarely seen tactic in which a locality unilaterally shifts decisions about how to distribute taxes from Sacramento to the local level.

The Orange County Board of Supervisors voted last week in closed session to make the move. Supervisors’ Chairman Bill Campbell wrote a letter Nov. 10 instructing Orange County Auditor-Controller David Sundstrom to execute the plan and Sundstrom has indicated he will comply.

Because of the implications, Campbell said, he knows Orange County is in for a fight.

"This will not go down easily at the state level," said Campbell. "Yes, it creates a $73-million obligation to state."

Brown took away the $48 million in annual tax revenues from Orange County earlier this year to help close a $25-billion hole in the state budget.

Brown’s budget staff found a mistake by county officials, who inadvertently severed the revenue stream’s legislative authorization after they refinanced the 1994 bankruptcy debt in 2005.

Despite media warnings that the revenue stream was unprotected, no Orange County elected legislative official, professional staffer or lobbyist took action to reestablish the legislative authorization for the vehicle license fee.

The result was Orange County’s share of vehicle license fees remained vulnerable. Ultimately, those funds were captured by Brown’s budget staff and taken away from Orange County.

Brown’s budget staff argues that when Orange County leaders refinanced the 1994 bankruptcy debt, they revoked the arrangement that gave the county a larger than usual slice of vehicle license fees.

But county officials counter that when Sacramento altered the ratio between property taxes and the vehicle fees in 2004 (called the VLF Swap), Orange County was penalized. The leftover slice of license fees  was seen in part as a way to even the percentage of local taxes lost locally.

Local legislators, labor leaders, supervisors and lobbyists tried to rally support behind legislation introduced in the summer to reverse the tax grab, but the effort was too little, too late.

The legislation advocated by Assemblyman Jose Solorio — which reversed the tax raid — passed the Assembly, but the state Senate adjourned before taking up the bill. Solorio has said he plans to reintroduce the legislation in January.

With pressure mounting for widespread layoffs in Orange County absent a permanent fix, supervisors apparently weren’t interested in waiting around for the legislature to address the issue.

While the county’s actions would mean a corresponding reduction in the fees going to local school districts, county officials argue that the state will be forced to backfill that funding cut because of the requirements of state Proposition 98, which locks in certain school funding formulas.

County officials met with countywide education officials Monday morning to advise them of their strategy and deliver a key message: "None of the school districts will be affected by this," Campbell said.

On Tuesday, Sundstrom will issue his annual estimates to local jurisdictions on the tax allocations he’ll be making next January, which will feature $73 million more for the county and a corresponding amount less for schools.

The county’s legal strategy stretches back to September when the county hired lawyers to advise them on legal options should legislative attempts fail. Those attorneys have since concluded that Orange County supervisors need not go to court. They need only call on Sundstrom to follow the law, as they see it.

During the session where county officials first hired private lawyers, county Supervisor John Moorlach hinted in open session at the kind of radical options that were coming, noting that county officials might start refusing to act as a local contractor for the state on fee-for-service contracts.

"I’m just wondering, if we were in the private sector, we wouldn’t condone doing business with this kind of deadbeat client," Moorlach said.

The central point in the supervisors’ legal position now is that Brown and legislators can’t treat Orange County differently than other counties.

"Under state law, the county should be treated like all other counties in the calculation," wrote Campbell in his Nov. 10 letter to Sundstrom. "California law and policy favoring uniform treatment is strong."

So while Brown and the legislature adopted a budget that trimmed Orange County’s share of vehicle license fees, Sundstrom is the official that actually makes the allocations. County supervisors are telling him he need not follow Sacramento’s dictates because they’re illegal.

So instead of cutting, Orange County supervisors calculate that their share of property taxes should be expanded to $73 million.

"Based on consultation with County Counsel and special counsel engaged by the County, the Board of Supervisors firmly believes that the Auditor-Controller has the duty and authority to calculate the County of Orange’s VLFAA (as of the next semi-annual adjustment in January 2012 and every six months thereafter) to increase the County’s VLFAA so that the County is treated on par (in terms of the method of calculation) with other counties, without any reduction or offset by any amount of VLF revenues received in prior years," Campbell wrote.

"The Board will vigorously defend any challenge to the legality of your allocation of county property tax pursuant to Revenue and Taxation Code 97.70," he added.

Orange County already gets one of the lowest returns on property taxes across the state, thanks in large part to formulas derived from Proposition 13. This year, leaders had been able to forestall deep cuts due to an uptick in local tax revenues and without using reserves. But Brown’s action reversed all that without notice.

That wild swing in fortunes struck a nerve among local political leaders.

"It was hasty legislation," Campbell said of Brown’s action. "It just struck us that this is so unfair that we have to do somebody about it for the taxpayers of Orange County. … It was just wrong."

The county was helped in advocacy efforts by Orange County Employees Association General Manager Nick Berardino as well as the county’s legislative leaders and lobbyists, Campbell said.

FIVE-YEAR LOOK BACKS

November 15

2001

The Fullerton School District was ready to pursue a bond measure for building improvements, including more electrical outlets for computers.  Barbara Giasone of the OC Register covered it in “Student data access may get new era.”  As I graded these bond measures, it was important for the school districts to get a high grade from me.  It also assured good fiscal stewardship should the bond measure succeed.  The districts that were serious about this effort would visit with me before they received approval from their elected bodies.

[Superintendent Cameron McCune] said he had recently discussed bond ratings with Orange County Treasurer John Moorlach, hoping to “get the best rating for the upcoming bond election.”  The board is expected to consider final approval of a bond measure at a special meeting at 8 a.m. Nov. 27 in the district boardroom.

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