HomeMy WebLinkAboutCC AG PKT 2004-01-12 #S AGENDA REPORT
61 111
DATE: January 12, 2004 `/
TO: Honorable Mayor and City Council
THRU: John B. Bahorski, City Manager
FROM: June Yotsuya, Assistant City Manager
SUBJECT: CITY PARTICIPATION IN LAWSUIT AGAINST STATE OF
CALIFORNIA TO INVALIDATE THE PREEMPTION OF ONE -
QUARTER CENT OF LOCAL SALES TAX AS PART OF THE
"TRIPLE FLIP (AB9X5)"
SUMMARY OF REQUEST:
Authorization to participate in a lawsuit proposed by the City of Cerritos to challenge the partial
preemption of local sales tax by AB9X5 (the triple flip) and to approve budget amendment
" number 04 -16 for an increase in contract professional services of $1,000 as Seal Beach's
participation in such action.
DISCUSSION:
As part of the State's attempt to address its financial burdens, the Legislature passed in the 2003
budget a sales and property tax swap also referred to as the "triple flip ". Beginning in 2004 -05, the
budget package temporarily redirects a share of the local sales tax (equal to one -half of 1 percent of
taxable sales) to the State to use to repay the deficit reduction bonds. The budget package offsets local
sales losses (almost $2.5 billion in 2004 -05) by redirecting to cities and counties a commensurate
amount of property taxes from the Educational Revenue Augmentation Fund (ERAF). Increased state
education apportionments, in turn, would mitigate district revenue losses associated with the
redirection of ERAF monies. This swap of sales tax revenue for property tax revenue would end after
the deficit reduction bonds are repaid. However, at this time the bonds have not been issued due to
legal challenges and such bonds are an inherent part of the State's budget structure. Without them, the
Legislature will have to revisit or explore other ways to meet its expenses and prior experience weighs
toward more unwelcome impacts to local government agencies.
Given the uncertain nature of the current legislative environment in Sacramento, the budget bill may
become subject to further legislative interpretation in the near future. Adverse changes in local sales
tax places this tax along with property tax and vehicle license fees (VLF) as major revenue sources in
jeopardy that local governments can no longer depend to fund vital local services but are in fact very
dependent on to meet local needs and expenses.
Agenda Report s.
January 12, 2004
City Council Agenda Report-City Participation in Lawsuit to Invalidate Sales Tax Preemption
Page 2
The ongoing, unjustified transfer of local revenue from cities to the State is symptomatic of the
devastating impact that has been absorbed by local governments throughout California. Cities are
impacted in different ways according to their dependence upon specific revenues. However, a recent
analysis from CaliforniaCityFinance.com found that local governments throughout the state will lose
$43 billion during the current 2003 -04, even after large revenues such as the AB8 bailout and public
safety assistance payments are included. The City of Seal Beach, with its limited revenue sources and
greater dependence on sales tax revenue and VLF monies, would experience devastating additional
losses if the property tax backfill of sales tax revenue were not remitted as promised. Any future
suspension of the City's entire VLF revenue would cripple our ability to meet local service demands.
Local cities have expressed concerns over the impact of the "triple flip" for a variety of reasons.
Foremost, is the loss of local control. Traditionally, the Bradley -Burns sales tax law has been
administered to preserve local revenue and local control. If the triple flip were to be implemented, the
State would assume control over local sales tax for the first time and sets a dangerous precedent for
additional State control of local finances in the future.
In addition, the imposition of the triple flip would require local governments to lower their Bradley -
Burns sales taxes by as much as 50 percent, and then reinstate the full tax rate when the deficit bonds
are repaid. This requirement may conflict with Proposition 218 that may prevent local agencies from
reenacting the previous sales tax rate without a vote. There is also no constitutional protection for
local government revenues within the sales- for - property tax swap, placing local government revenues
at risk. The proposed repayment to municipalities is merely a budgetary promise, with no safeguards
or guarantees to local government that the repayment will occur. It can be argued that the State has
other options to mitigate its budgetary problems other than usurping local taxing authority or
confiscating existing local revenues.
The City of Cerritos has retained two well- respected attorneys with many years of experience in State
and local finance to sue the State to invalidate the sales -tax preemption portion of the triple flip. The
attorneys are Michael Colantuono of Los Angeles' Colantuono, Levin & Rozell and Steve Mayer of
San Francisco's Howard, Rice, Nemerovski, Canady, Robertson, Ralk & Rabkin. The estimated cost
of trying this case is $60,000 to $200,000 with court appeals estimated at an additional $45,000 to
$185,000. The City of Cerritos invites other cities to participate in the lawsuit by name and if possible,
through a share in lawsuit expenses. The pro rata share of lawsuit expenses is a maximum of $16,000.
The City Manager's Office has reviewed this issue and recommends that participation in this lawsuit
would be of benefit to the City of Seal Beach in protecting its rights as a charter city as well as its
current and future revenue sources. The lawsuit, among other important issues, would seek to establish
the constitutional principle that charter cities can control local sales tax revenues for the benefit of their
residents and property owners. As City of Cerritos' letter states, this would be an important victory not
only with respect to the current fight over the triple flip, but also with respect to the variety of
proposals threatening this important revenue stream. This includes last session's AB1221- Steinberg
(impacting mix of sales and property taxes to cities and counties) and a current initial proposal
associated with former Speaker Bob Hertzberg. Due to our limited budget situation, enumeration of
$1000.00 is suggested as the City's commitment financially to the lawsuit expenses.
January 12, 2004
City Council Agenda Report-City Participation in Lawsuit to Invalidate Sales Tax Preemption
Page 3
FINANCIAL IMPACT:
The increase in contract professional services will be applied to the General Fund. Total increase in
expenditures to the General Fund will be $1,000, which will decrease the estimated FY 2003/04 ending
undesignated General Fund fund balance from $4,113,112 to $4,112,112.
RECOMMENDATION:
It is recommended that the City Council approve budget amendment number 04 -16 and authorize the
City to participate as a plaintiff in the lawsuit to challenge the partial preemption of local sales taxes by
AB9X5 (triple flip).
Submitted by:
76 .14-1-)
J e Yots a, Assistant City Manager
NOTED AND • '.'ROVED:
It.,,
John B. . ah. ski, City Manager
A achments
AGENDA REPORT
6
DATE: January 12, 2004 /
TO: Honorable Mayor and City Council
THRU: John B. Bahorski, City Manager
FROM: June Yotsuya, Assistant City Manager
SUBJECT: ADDITIONAL INFORMATION REGARDING CONSENT ITEM S
The attached letter from the City of Cerritos requesting cities' participation in a lawsuit to invalidate the
preemption of sales tax was inadvertently left out during duplication of the agenda packets. In addition, staff is
also providing the latest figures provided through the League of California Cities website that estimates the
ERAF impacts based on Governor Schwarzenegger's most recent budget proposals.
j -T 41)- IN:PP
, a $ j\
411 q11 �'. - CIVIC CENTER • 18125 BLOOMFIELD AVENUE
TA ;=
^ ' P.O. BOX 3130 • CERRITOS, CALIFORNIA 90703-3130
PHONE: (562) 860 -0311 • FAX: (562) 916 -1373
•
OFFICE OF THE CITY MANAMA
ART GALLUCCI
December 26, 2003
Mr. John Bahorski _
City of Seal Beach
211 Eighth Street
Seal Beach, CA 90740
Re: Participation in Lawsuit against State of California to Invalidate the Preemption
of One - Quarter Cent of Local Sales Tax as Part of the "Triple Flip"
Dear Mr. Bahorski: • _ .
The City. of Cerritos is among a number of cities that are very ab the so-
called "triple flip by which • the Legislature adopted'a` State budget earlier this'year. The
"triple flip" uses some $15 billion in debt to "balance" the State's budget and proposes, to fund
that debt with a one - quarter cent sales tax with payback over a period of nine to thirteen
- years. To obtain support for the necessary State tax, the Legislature simultaneously reduced
the local sales tax by one - quarter cent. That loss of local revenues is made up, for the
present and if the State's promises are fulfilled, by a portion of the property taxes taken from
• local government by the ERAF shifts of the 1992 -93 and 1993 -94 State budgets. Thus, the
sales tax joins the property tax and the vehicle license fee as the third major revenue source
on which local government can no longer depend to fund vital local services.
We believe that the "triple flip" is an unconstitutional interference With the power of a
charter city to raise revenue for local services. We believe that general law cities can benefit
from a suit to enforce this charter -city principle for two reasons. First, it is doubtful that the
Legislature will maintain the triple flip if 100+ charter cities, including many of the largest
(such as Los Angeles with one -tenth the State's population), are exempt from it. Second, if
the Legislature did create such an important incentive to become a charter city, many general
law cities could be expected to persuade their voters to adopt charters to keep sales taxes in
the communities where they are generated.
•
It can be argued that the State has other options to solve its budgetary problems
other than usurping local taxing authority or confiscating existing local revenues Other State
options•could include either an increase in the overall.sales tax, or a reduction in the State's
portion of the sales tax with the imposition `of a corresponding'tax to repay the deficit
reduction bonds. Such a scenario, labeled the "double- flip" by proponents, would enable the
State to assume the entire responsibility for its budgetary shortfall without impairing local
revenues.
December 26, 2003
Page 2
Cerritos has retained two well- respected attorneys with many years of experience in
State and local finance to sue the State to invalidate the sales -tax preemption portion of the
triple flip: Michael Colantuono, of Los Angeles' Colantuono, Levin & Rozell; and Steve Mayer
of San Francisco's Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin. I write to
invite your city to join our suit as a co- plaintiff.
There are two roles your city may play. First, it may lend only its name to the case
and not commit any funding. Second, it may commit both to participate in the case in name
and to share in the cost of funding it. Messrs. Colantuono and Mayer estimate the cost of
trying this case at $60,000 to $200,000, depending on the State's tactics with respect to
discovery and the like. An appeal to the Court of Appeal (which would be likely regardless of
whether we win or lose) would cost from $45,000 to $75,000, they estimate, and appeal to
the California Supreme Court would cost up to $110,000. If just two dozen of the many cities
reliant on sales taxes shared these costs, each could expect to pay from about $5,000 to
$16,000 over the two years or so it will likely take to resolve the matter.
' Even if Governor Schwarzenegger succeeds in mooting the Pacific Legal Foundation's
challenge to the debt portion of the triple -flip by obtaining voter approval of the debt, the
sales -tax portion is worth fighting about. If we can establish the constitutional principle that
charter cities can control local sales tax revenues for the benefit of their residents and
property owners, that will be an important victory not only with respect to the current fight
over the triple -flip, but also with respect to the variety of proposals threatening this important
revenue including last session's A.B. 1221 (Steinberg) and a current initial proposal
associated with former Speaker Bob Hertzberg.
•
You can download the City of Cerritos staff report regarding the triple -flip lawsuit by
visiting our website: www.ci.cerritos.ca.us and clicking the link in the upper right corner of
the homepage.
If you have questions about this proposal, please contact me at (562) 916 -1301.
Alternatively, your City Attorney can contact Michael Colantuono at (213) 533 -4146 or
Steve Mayer at (415) 399 -3039. If you are prepared to join us in this suit, please complete
the attached form and return it to me by fax.
Thank you for considering ways to assist in this important fight for meaningful local
fiscal control.
Very truly yours,
G�cc_1
Art Gallucci
City Manager
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