$146-Million Tax Battle with State Could Slash OC Budget

An attorney for the state argued Tuesday before a Superior Court judge that Orange County officials were using an accounting trick to withhold about $146 million in property tax revenue over two years.

Orange County's attorneys, however, argued that the state made a mistake in its accounting, and county officials made an adjustment.

According to the state, Orange County officials withheld about $73 million per year in fiscal 2011-12 and 2012-13. Orange County's department heads are preparing budget requests now that reflect 10 percent cuts across the board, said Frank Kim, director of the county's budget office. It will be up to the Board of Supervisors to determine where cuts would be made if Orange County Superior Court Robert J. Moss rules against the county, Kim said.

`This is big game,'' Supervisor John Moorlach said. ``This is big and it's frustrating as all get out. You can't treat one county different than 57 others.''

That's essentially the county's argument -- that the state has had one funding formula for Orange County and another for the rest of the state.

Attorneys for the state argue otherwise -- saying there is one tax formula that
applies to everyone, and Orange County officials are ``going their own way,''
said Deputy Attorney General Ross Moody.

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 of 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 fiscal 2010-11, 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. 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 suit in April.

``I think everyone agrees what happened -- the issue is statute interpretation,'' Moss told the attorneys.

``From our point of view it's a relatively simple case,'' Moody said, adding there's a ``straightforward'' tax formula the county must adhere to.

``There are no exceptions to go back in time and make corrections,'' Moody argued. ``There are 58 counties in this state. If every county used self-help when they think something's wrong, there'd be chaos.''

Moody argued that county officials should have taken their beef to the courts, not unilaterally change their tax obligation. Attorney Thomas Hiltachk, who represents the county, argued it was a ``dollar for dollar swap'' when lawmakers started using property taxes revenue to distribute to municipalities instead of revenue from license fees.

Hiltachk added that in Orange County's case, ``the alternative is a $73-million shortfall, which the Legislature did not intend.''

Orange County's auditor-controller made the $73-million adjustment because that's the auditor-controller's job, Hiltachk said.

``Sometimes mistakes are made and those mistakes are meant to be corrected,'' Hiltachk said.

Moss said he would issue a ruling soon.

 - City News Service