South Bay Cities Join in Property Tax Suit

El Segundo landowners will pay $49 million in property taxes in 1988-89, but the city will collect only $2.2 million of it.

The town is not alone in its plight.

More than 250 cities statewide that levied low or no property taxes at the time Proposition 13 was passed in 1978 now find themselves receiving a small share or no share of the property tax pie under state legislation enacted to implement the measure. In the South Bay, both El Segundo and Carson are affected.

“Our position is we are being punished because prior to 13, we were a well-run city,” El Segundo City Manager Fred Sorsabal said.

Temple City, which has never levied a property tax, receives nothing. “We were excluded forever” from receiving benefits, City Manager Karl Koski said.

El Segundo, Carson, Compton, Rancho Cucamonga and Temple City have joined in taking the issue to court.

Constitutional Issue

Charging that their residents are being taxed without receiving due benefits, the cities filed a suit with the state Supreme Court challenging the constitutionality of the present system of tax revenue distribution.

The Supreme Court declined without comment to hear the case, but John Sturgeon, the attorney for the petitioners, filed the suit April 7 in San Bernardino Superior Court. The suit was filed there because Rancho Cucamonga is the biggest loser among the five cities under the present system.

The suit was originally filed with the state’s highest court because it involves a constitutional issue and the decision could shift millions of dollars among city coffers 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 Supreme Court’s action.

“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.”

The cities want the court to invalidate legislation that was adopted to implement the landmark tax-cutting initiative.

The suit charges that the legislation unfairly penalizes cities that levied low property taxes, or none at all, before Proposition 13. If successful, it would benefit 270 California cities, according to Sam Olivito, executive director of the California Contract Cities Assn.

The organization, which supports the action, represents 65 California cities, 46 of them in Los Angeles County.

However, not every city would gain.

For example, six cities in the San Gabriel Valley, including Pomona and Pasadena, would stand to lose hundreds of thousands of dollars each year. In the South Bay, Hermosa Beach would lose more than $230,000 annually.

“It would have a negative impact and we’re not a rich city,” City Manager Kevin Northcraft said.

Proposition 13 limits property taxes to 1% of the full cash value of the property. The full cash value of real property existing when Proposition 13 was enacted was rolled back to that shown the county assessor’s 1975-76 tax bill. Property developed or purchased since the passage of Proposition 13 is taxed at 1% of the appraised value at the time of construction or purchase. Tax increases are limited to 2% annually.

“The Legislature’s scheme allocates property taxes without regard to who paid them,” attorney Sturgeon stated in the suit. He said the “completely arbitrary” formula punishes cities that had shown fiscal restraint before Proposition 13 by imposing low taxes, while rewarding those with high taxes.

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

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.

Pomona, which had a 2.56% property tax, would be hurt more than any other city in the San Gabriel Valley, Olivito said. Under the proposed formula, it would have received about $1 million less than it did in 1986-87.

Pasadena, South Pasadena, San Marino, Sierra Madre and La Verne also would get less.

Expressing disappointment that other cities are seeking a solution that would penalize his city, Pomona City Manager A. J. Wilson said the larger picture of who needs the money most should be examined. Each city’s per capita spending also needs to be considered, he said.

“We’re not going to give away the resources of our community,” Wilson promised, adding that Pomona is exploring grounds for a countersuit.

Concern Acknowledged

Pasadena City Manager Donald McIntyre acknowledged that the petitioning cities have a legitimate concern but said it was their choice not to levy higher taxes initially.

South Pasadena City Manager John Bernardi agreed: “I certainly feel for them, but I don’t know why South Pasadena should suffer for (their) not imposing a property tax. We can’t afford to lose any more than we’ve already lost.”

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 Rodney Smith, economic consultant for the petitioners.

Los Angeles would bear 95% of the losses under the proposal, Smith said. Besides the six San Gabriel Valley cities, Long Beach and Hermosa Beach would be the only others in the county to suffer if the court agrees that changes should be made.

Smith stressed that county tax revenues are in a separate pool from the cities’ revenue 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.”

The lack of tax revenues has limited the services the petitioning cities have been able to provide their residents, the suit alleges. For example:

Inadequate flood control facilities were a main reason that Rancho Cucamonga was incorporated, yet the city has been unable to afford community-level flood control projects.

Compton has been forced to put off several youth programs and cannot fund Neighborhood Watch projects.

Carson cannot afford to rehabilitate four toxic chemical sites and 20 abandoned landfills. The city, which incorporated in 1968, has no city property tax.

“I think it is primarily a fairness issue,” Carson City Administrator Jack R. Smith said. “Cities that did not have property taxes prior to 13 have been unfairly put upon.”

Temple City has postponed implementing a school drug-awareness program and cannot afford a senior center. Law enforcement levels have not been increased to keep up with growth since 1978.

‘Spending Our Money’

“We’re struggling to keep our heads above water, and other cities are spending our property tax money,” said Temple City’s Gillanders. As a property owner, Gillanders is also a petitioner in the suit.

As mayor in 1984, Gillanders began consulting with Smith, also director of the Lowe Institute of Political Economy at Claremont McKenna College, about the validity of the allocation policy.

The following year, the City Council commissioned Smith to research the issue. “In 1986 I discovered the constitutional flaws,” said Smith, who now serves as an independent consultant.

The other cities decided to join in the suit within the past year, Koski said.

Times Staff Writer Tim Waters contributed to this story.

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 South Bay under the existing system and the distribution under the proposed reforms.

City Tax Allocation Tax Allocation Net Gain/Loss ‘86-’87 Under Reform Avalon 290,111 348,887 58,776 Carson 0 8,754,693 8,754,693 El Segundo 1,745,130 8,719,146 6,974,016 Gardena 2,039,015 2,918,655 879,640 Hawthorne 2,579,650 4,584,877 2,005,227 Hermosa Beach 2,077,174 1,846,964 -230,210 Inglewood 3,514,440 4,556,865 1,042,125 Lawndale 0 1,174,027 1,174,027 Lomita 0 1,093,797 1,093,797 Los Angeles 349,442,366 232,469,181 -116,973,185 Manhattan Beach 3,564,899 4,543,768 978,869 P.V. Estates 1,468,951 2,458,075 989,124 Rancho P.V. 429,427 4,868,695 4,439,268 Redondo Beach 5,801,261 6,790,967 989,706 Rolling Hills 122,249 545,401 423,152 R.H. Estates 0 1,499,362 1,499,362 Torrance 9,570,594 13,978,881 4,408,287

Source: California Controller’s Annual Report