County Loses Tax Feud with State, May Owe $147 Million

An Orange County Superior Court judge has ruled against the county in its dispute with the state over property tax revenue, forcing the county to give up about $147 million and consider cutbacks in service.

"I don't like it, but we're ready," Orange County Board of Supervisors Chairman Shawn Nelson said. "Ready means, 'Ouch, this is going to hurt,' but -- as opposed to other governmental agencies up and down the state who ignore the circumstances -- we understand full well this will require drawbacks."

Budget Director Frank Kim assured residents they likely won't see draconian cuts in services.

"We asked all departments to prepare for the worst-case scenario and to make contingency plans of reduced funding by 10 percent and they've done that," Kim said. "We also have reserves and access to certain revenues, we'll look at all those options. ... Nobody at the county is panicking. We're disappointed, but we're going about this in a calm, reasonable manner."

H.D. Palmer of the state's Department of Finance said the county will have to make a higher contribution to the Educational Revenue Augmentation Fund when it is next due.

"From our standpoint, we're pleased with the court's ruling because it affirms the county has been withholding property tax from the schools was illegal," Palmer said, adding it was "a threat to the community college system" that would cost it $12 million to $15 million for 2011-12 fiscal year.

Orange County Superior Court Judge Robert J. Moss issued a tentative ruling on the dispute Tuesday, but state and county officials were not informed until Wednesday afternoon. A hearing was scheduled for July 8, but it was not clear if that will go ahead or be delayed as county officials appeal.

The dispute stems from Orange County's 1994 bankruptcy when the county pledged part of its revenue from vehicle license fees to the bondholders, because it was a guaranteed source of money.

The state changed the way it distributed vehicle license fee revenue to counties in 2004, but it left its arrangement alone in Orange County, because the agreement with bondholders.

Other counties were instead receiving property tax money, which was on the rise, while revenue from vehicle license fees was declining, according to county officials.

In the 2010-11 fiscal year, state officials decided to stop sending $48 million to Orange County, which had refinanced its bankruptcy debt and no longer needed it securitized.

County officials retaliated by withholding $73.5 million in property taxes for two years. County officials arrived at that number by using the same formula other counties use to calculate how much they are due in property taxes. That's why county officials demanded $23 million in a claim filed last year -- it's about the difference between the vehicle license revenue and the property tax figure county officials came up with.

State officials filed the suit in April 2012. An attorney for the state argued that county officials should have taken the issue to the courts, not unilaterally change its tax obligation.

Moss said in his ruling, "The court finds that the county of Orange received no special treatment in regards to VLF funds. The only difference was approximately $54 million was withheld to ensure payment to bondholders from the county of Orange's share of the VLF."

The judge said the case "presents an issue of pure statutory construction," and that state lawmakers were clear on the allocation of the funds.

However, Nelson and Supervisor John Moorlach complained Orange County was being treated differently.

"In the simplest forms, the county sought to do nothing but equally apply the law," Nelson said.

"We were the only people in this situation," Nelson said, referring to the funneling of some funds to the bankruptcy. "The state has the right to write laws that are not selective on its face, but unfortunately they were able to creatively do it in such a way that applies only to us. It's a tragedy because all it does is mean the average citizen of Orange County is treated differently than everybody else in the state."

Moorlach said the judge's ruling was "devastating" and he favors appealing the decision.

"I still believe we're right and the governor should not treat one county any differently than he does any others. We're already a donor county," Moorlach said.

The county will dip into its reserves and shave expenses where possible to come up with the $147 million, Nelson said.

"We are ready," Nelson said. "It doesn't make the pill go down any easier, but we had it available in case of an emergency."

-- City News Service