Schools Sue San Diego County for Millions in Taxes

SAN DIEGO (CN) — Nine school districts have sued San Diego County for millions of dollars, claiming property tax payments to schools were miscalculated after a raft of legislation in Sacramento, including termination of the redevelopment agencies.

The May 31 lawsuit in Superior Court centers around the state’s continuing budget crises, the California’s Community Redevelopment Act of 1945 and with its countermeasure, AB X1 26, The “Dissolution Act” of 2011, and how the Legislature has tried to maintain education funding with development.

Lead plaintiff the San Diego County Office of Education is joined by the San Diego Unified School District and eight other Southern California school districts.

The Community Redevelopment Act of 1945 was enacted to “protect and promote the sound development and redevelopment of blighted areas.” It created redevelopment agencies (RDAs) that were primarily funded through property taxes. When a redevelopment zone was established, the current property tax rate would be the base rate. The RDA helped finance improvements, and as property taxes went up, the RDA would get a share of the increase over the base rate.

This system often put the RDA at odds with other government entities that relied on property taxes, particularly public schools. Cities and counties were often accused of creating redevelopment zones where they were not necessary to fund dubious projects for cronies through RDAs. Over time, legislation attempted to address this.

After voters approved Proposition 13 in 1978, reducing property taxes by more than half and severely limiting tax increases, California schools immediately began cutting programs, starting with art and music, as a way to address the funding crisis.

In 1988 voters passed Proposition 98, which mandated that 40 to 50 percent of the state’s budget would be spent on education. The primary way to achieve this was to require cities and counties to send a fixed percentage of property taxes into educational revenue augmentation funds (ERAFs).

RDAs also were required to contribute to the ERAFs, but if too much money was tied up in the RDAs, and the ERAFs fell short of the required funding, the law required the state to make up for any shortages out of its General Fund.

As California suffered through repeated budget problems, legislation gradually reduced the state’s burden on its General Fund and yoked it to local governments. According to the schools’ lengthy complaint, a series of Senate bills from 1992 to 1994 required local governments to put more property tax revenue into ERAFs and reduced the state’s burden by more than $4 billion.

In 1993, the Legislature approved AB 1290, the Community Development Law Reform Act. It put more restrictions on how redevelopment money could be used and required the RDAs to give a bigger share of property taxes to the ERAFs by way of pass-through payments.

In 1994, AB 3347 clarified that ERAFs were to receive a share of property taxes through three mandates: a share of property taxes allocated to them according to their base percentage share of the property taxes; property taxes allocated to them through the ERAF; and, whenever tax revenue has been diverted to redevelopment projects, reimbursement for the share of tax revenue they would have received had the money not been diverted.

California’s financial problems in the early 2000s brought even more changes to the laws, which dramatically affected ERAFs.

In 2004, Gov. Arnold Schwarzenegger pushed for, and voters approved, Proposition 57 and the “triple flip.” This was a three-step process that gave the state a larger share of the sales tax, while local governments’ share was reduced. To make that up, some property taxes were diverted from ERAFs to local governments.

After that, Schwarzenegger struck another deal, this time reducing the amount of revenue the state would give local governments from Vehicle License Fees; in exchange, more money would be diverted to local governments from ERAFs.

These acts had the unintended consequence of reducing the pass-through payments made to schools, so more legislation was needed.

AB 2115, also passed in 2004, provided that RDAs would calculate school districts’ share of the property taxes as if the swap and flip had not occurred. A few years later, Los Angeles Unified School District sued Los Angeles County for not following this directive, and won.

The victory was reaffirmed in 2010 when the Court of Appeal ruled that any property tax revenue diverted from the ERAF by the Triple Flip or VLF Swap legislation must be counted as property taxes received by schools for the purpose of AB 1290 pass-through payments.

Then in 2011, the Dissolution Act ended RDAs. They were dissolved on Feb. 1, 2012 and local governments set up successor agencies to wind down their affairs. One of the responsibilities these agencies have is to calculate the pass-through payments once required of the RDA.

This brings us to the latest lawsuit, in which the successor agencies are among the defendants.

According to the schools, San Diego County has “historically calculated pass-through entitlements pursuant to calculations that impermissibly exclude property taxes received by schools via the ERAF.” This has shorted the schools of millions of dollars.

As evidence, the complaint cites a statement from the San Diego auditor-controller that appears to admit to the miscalculation from 2010 to 2014.

With the Los Angeles case having been affirmed in 2010, San Diego County should have been using the calculations prescribed in that ruling. But on Sept. 15, 2014, a statement from the auditor-controller to local educational agencies said: “We will be implementing the court’s ruling starting Oct. 1, 2014. … The percentage share of property taxes will be adjusted to include ERAF for statutory pass-through payments and residual/other money distributions.”

The county’s error might have been caught earlier, the schools say, but when the San Diego County Auditor-Controller became responsible for making pass-through payments on Feb. 1, 2012, upon dissolution of the RDAs, it gave only summary reports of the total amounts paid and did not include any information on how the payments were calculated.

“In the absence of data used to calculate the amounts, even an expert in forensic analysis of pass-through payments would not have been able to discern whether pass-through amounts were correct of not, including specifically whether such amounts included ERAF’s share of pass-through payments as required by law,” the complaint states.

The school districts are represented by Gregory Luke and Dale Larson with Strumwasser & Woocher in Los Angeles, who not reply to emails seeking comment time.

The San Diego County Communications Office did not respond to a phone call seeking comment.

The schools districts ask the court to order the defendants to pay them the pass-through payments wrongfully withheld since June 30, 2011, and to calculate the payments correctly.

The plaintiff school districts are San Diego, Sweetwater, Solana Beach, South Bay, Escondido, San Marcos, Oceanside, Chula Vista Elementary, and Santee.

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