The State Department of Finance on Tuesday issued a harsh rebuke of Orange County government officials for defying Sacramento’s budget allocations on property taxes.

“The county’s intended decision to withhold property taxes is not only misguided but very likely illegal,” said H.D. Palmer, deputy director of the state Department of Finance.

Palmer said a legal challenge is likely. “We’re looking at a range of legal options,” Palmer said.

Orange County officials have been locked in an increasingly tense battle over tax revenues since earlier this summer when Gov. Jerry Brown’s budget staff took away nearly $50 million in vehicle license fees from Orange County to help balance the state budget.

Orange County Supervisors left their vehicle license revenue unprotected by legislative authorization when they refinanced the 1994 bankruptcy debt in 2005. Brown’s budget staff identified the error and took the money earlier this year.

County supervisors and local labor leaders have been shuttling to Sacramento in recent months to lobby for a legislative fix, which failed in the last session.

This week, they decided to simply take the nearly $50 million back and then some. In all, the supervisors told Orange County Auditor-Controller David Sundstrom to defy Sacramento’s budget allocations for property taxes in Orange County and redirect a total of $73 million in property taxes away from local schools and toward county coffers.

Redirecting tax revenue instead of suing Sacramento or using a ballot initiative is a rare move in local government.

Yet Orange County Supervisors Chairman Bill Campbell said the action was “a must,” the direct result of legal research by the county counsel’s office and verified through a private law firm.

That legal review, Campbell said, concluded that supervisors were required to redirect property taxes to maintain the same level of taxation adopted in a 2004 budget deal to swap property taxes for vehicle license fees.

The move has already triggered a tense reaction from the county education department.

Orange County Superintendant of Schools Bill Habermehl wrote to supervisors Tuesday asking them to withhold action until further legal analysis could be provided. County officials have made assurances that the state would replace the lost school funds because Proposition 98 guarantees certain levels of education funding.

Nonetheless, Habermehl has been critical of the stealthy nature of supervisors’ moves, telling the Orange County Register’s Kimberly Edds that the way county officials unveiled their action was “almost a slap in the face.”

Palmer confirmed county officials’ contention regarding guaranteed local school funding but added a caveat.

“While the redirection of property tax revenue available from K-12 school districts in Orange County would be automatically backfilled with state general fund, the loss of property tax revenue available to community college districts would not,” Palmer said.

“General apportionment funding for K-12 schools is continuously appropriated, and the state general fund makes up the difference between the amount of property tax revenue received by a school district and the “revenue limit” it is entitled to by state statute,” Palmer added.

“However, the state general-fund portion of community college revenue limits is appropriated each year in the budget act,” Palmer said.

That means restoring any shortfall for Orange County community colleges will have to be made by a special appropriation by the Legislature.

“Orange County’s decision to redirect property taxes from schools will result in a funding reduction to community colleges unless the Legislature acts to backfill the money,” Palmer said.

Orange County Supervisor John Moorlach on Tuesday published an analysis of the background on the controversy in his online “Moorlach Update” that concluded with a dig at state fiscal leadership.

From Moorlach’s post:

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.”

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