Millions at Stake in Suit Challenging How Prop. 13 Allocates Property Taxes

Several Southeast cities could gain millions of dollars more a year in tax revenues if a lawsuit challenging the constitutionality of the property tax allocation system under Proposition 13 is successful.

Lakewood, for example, could get as much as $3 million more a year and Compton $1.4 million, depending on how the courts rule on the suit being pressed by Compton and four other small Los Angeles County cities. They are arguing that their residents pay more property taxes than their city governments get back under the tax distribution system created to implement Proposition 13.

“It violates the principle that the people that pay the tax ought to get the benefit from it,” said John Sturgeon, attorney for the five cities.

But Long Beach would lose about $7 million a year in property tax revenues if a court rules in favor of the small cities.

Join in Challenge

Carson, El Segundo, Rancho Cucamonga and Temple City have joined Compton in challenging the allocation formula, which favors cities that had high tax rates before Proposition 13, the statewide tax revolt referendum approved by California voters in 1978.

“This lawsuit is not about Proposition 13,” said Rodney Smith, economic consultant for the petitioners. “It is (about) the way the legislation was written that allocated the property taxes.”

Of 85 cities in Los Angeles County, Smith said, “there are only a few that are benefiting (under the allocation system). Most are losing and the reason is that (prior to) Proposition 13, the tax rates levied by the cities were very skewed. There were a handful of high tax rate cities (but) most were relatively low.”

Proposition 13 limited taxes to 1% of assessed valuation and restricted increases in the assessments to 2% annually, meaning the tax rate is the same for taxpayers regardless of the city. On the distribution side, however, the revenues are given back to the cities according to what their tax rates were prior to Proposition 13, meaning cities that had high rates now receive get back the biggest share of the tax dollar.

For example, Compton residents, who enjoyed a lower-than-average tax rate before Proposition 13, paid property taxes totaling $14.9 million in 1986-87 but their city government got back only $1.58 million.

That is about 14 cents on the tax dollar, according to data Smith supplied for the petitioners. By comparison, Smith says, the city of Los Angeles, which had a high tax rate before Proposition 13, got back about 36 cents on the tax dollar.

Some Cities Harder Hit

Some cities are even harder hit in terms of the property tax dollar. Temple City, for instance, does not get a single tax dollar back even though its residents paid $7.5 million in property taxes in 1986-87. The city did not have a property tax before Proposition 13.

“We were excluded forever” from receiving benefits, Temple City Manager Karl Koski said of his community, which has never levied a property tax.

About 33 cities in the county did not have a property tax or were not yet incorporated when Proposition 13 was passed, says Sam Olivito, executive director of the California Contract Cities Assn., which is supporting the suit.

The suit was filed in the state Supreme Court a month ago but the court declined without comment to hear the case. Last week, however, attorneys for the petitioners were filing suit in San Bernardino Superior Court. That county was chosen, he said, because Rancho Cucamonga is located there and is one of the biggest losers under the allocation system.

The suit was originally filed with the state’s highest court because the issue is constitutional and the decision could affect cities statewide, Sturgeon said. He had urged the court to act quickly because cities have to begin planning their 1989-90 budgets soon.

Temple City Councilman Ken Gillanders, who initiated the research leading to the suit, was not perturbed by the action by the Supreme Court.

“It’ll just take a little longer to resolve, but the constitutional issues are the same,” he said. “It will ultimately find its way to the Supreme Court.”

270 Cities Would Benefit

If the suit is successful and the allocation formula is changed, 270 cities statewide would benefit, said Olivito of the Contract Cities Assn. The group, which has written to the court in support of the action, represents 65 California cities, 46 of them in Los Angeles County.

The suit asks the court to order Los Angeles and San Bernardino counties to correct the alleged inequities. The counties were named as respondents in the suit because they collect residents’ property taxes and distribute them to cities.

The suit suggests that a fairer distribution system would rely on the total value of properties in a city to determine what proportion of the tax-revenue pie it should receive.

Temple City would have gained about $1.46 million in revenues in fiscal 1986-87 under the proposed system.

The biggest winner among the petitioners would be El Segundo, which would have received $7 million more that year. The city had a property tax of 0.15% in 1987.

As with Long Beach, six cities in the San Gabriel Valley, including Pomona and Pasadena, would lose hundreds of thousands of dollars each year if the court orders the allocation formula changed. The city of Los Angeles would lose almost $117 million.

The suit alleges that the current revenue allocation system violates a provision in the state Constitution requiring that taxpayers directly benefit from the taxes they are paying.

Cities with high pre-Proposition 13 tax rates receive more than their fair share of revenues, violating another constitutional provision mandating uniform taxation, the suit says.

Los Angeles, which had the county’s highest property tax, 2.76%, in 1978, is cited as profiting the most from the current system. The city received at least $117 million more in property tax revenues than its residents paid in the 1986-87 fiscal year, said Smith, the consultant for the petitioners.

Los Angeles would bear 95% of the losses under the proposal, Smith said.

Smith stressed that county tax revenues are in a separate pool from the cities’ revenues and would not be affected by the outcome.

Olivito said the petitioning cities have long felt that “something just wasn’t right” and have repeatedly approached the state Legislature about the problem.

“We’ve been trying to find a solution for the last 10 years, and we haven’t received a dollar,” he said. “The issue just kept snowballing.”

ALLOCATIONS OF PROPERTY TAX REVENUE A suit filed by five Southern California cities attacks- the way that property tax revenue is allocated to cities. Their suit challenges the constitutionality of the distribution system that was enacted to implement Proposition 13. If successful, the suit could shift millions of dollars among city coffers statewide. The following is a breakdown of the tax revenue received by cities in the Southeast/Long Beach area under the existing system and the distribution under the proposed reforms.

City Tax Allocation Tax Allocation Net Gain/Loss ‘86-’87 Under Reform Artesia 0 770,263 770,263 Bell 212,772 894,981 682,209 Bell Gardens 361,401 840,898 479,497 Bellflower 0 2,455,613 2,455,613 Cerritos 0 4,526,962 4,526,962 Commerce 0 3,722,859 3,722,859 Compton 1,584,421 2,997,846 1,413,423 Cudahy 0 382,274 382,274 Downey 4,083,116 5,254,799 1,171,683 Hawaiian Gardens 23,907 401,704 377,797 Huntington Park 691,357 1,524,591 833,234 La Habra Heights 356,077 674,269 318,192 La Mirada 0 2,834,869 2,834,869 Lakewood 553,655 4,013,631 3,459,976 Long Beach 37,339,347 29,889,322 -7,450,025 Los Angeles 349,442,366 232,469,181 -116,973,185 Lynwood 953,339 1,431,039 477,700 Maywood 229,148 459,973 230,825 Montebello 1,441,771 3,188,745 1,746,974 Norwalk 0 3,486,866 3,486,866 Paramount 0 1,902,221 1,902,221 Pico Rivera 0 3,239,936 3,239,936 Santa Fe Springs 1,080,061 4,326,716 3,246,655 Signal Hill 23,136 1,381,719 1,358,583 South Gate 820,872 2,930,252 2,109,380 Whittier 1,995,959 4,468,752 2,472,793

Source: California Controller’s Annual Report