Monday, Nov. 14, 2011 | 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 Sundtrom 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 prpoerty 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.

Correction: An earlier version of this story incorrectly stated that Orange County would hold back vehicle license fees from the state rather than property taxes. Also, a quote by Chairman of Supervisors Bill Campbell incorrectly identified the type of state funds that would be impacted by Orange County holding back property taxes.

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