Loss of S & L Taxes Seen as Huge Blow to L.A. : City Hall: Officials say state high court ruling will cause problems more worrisome than recent budget deficit. Layoffs termed possible.

A California Supreme Court decision that Los Angeles had illegally collected $230 million in business taxes from financial institutions could result in layoffs and take a staggering $50 million annually from the city coffers for the next 10 years, city officials said Tuesday.

The unanimous ruling means the city must give back to some 40 savings and loans and other financial institutions a total of $230 million in taxes, plus interest since 1982.

The city also will lose $20 million in annual revenue from taxes on the institutions that the Supreme Court says it no longer may charge. City officials said the exact amounts were still being calculated Tuesday.

Officials said the judgment is believed to be the largest against the city, at least in recent decades.

It surpasses the $177-million projected budget deficit during this year’s deliberations. The judgment will have such a severe impact, officials said, that they hope to use an obscure government “hardship code” to repay the money on the installment plan over a decade. The $230 million equals roughly 10% of the city’s annual general fund.

“This decision makes every other financial problem we’ve had in the past couple (of) years pale by comparison,” said Councilman Zev Yaroslavsky, head of the powerful Budget and Finance Committee. “This will have a devastating effect on Los Angeles. . . . It even makes the $177-million deficit problem--well, now we will look back at that with nostalgia.”

Yaroslavsky predicted that the judgment will result in either a “hard freeze” in hiring at the Los Angeles Police Department or layoffs of other city employees. Budget hearings on how to make up the shortfall will start next week, he said.

Yaroslavsky vowed to oppose any increased taxes on Los Angeles residents as a result of the ruling. He indicated that the ruling makes it unlikely the Fire Department soon would end its controversial “rolling brownouts” at local stations. The $230-million judgment is 10 times the department’s $23-million budget cutback that prompted the brownouts.

“When response time of our paramedics increases, when response time of police officers responding to crimes increases, don’t call your councilman,” Yaroslavsky said angrily. “Call CalFed (California Federal Savings & Loan). . . . Call your local savings and loan institution.”

Martin S. Schwartz, an attorney representing CalFed and other financial institutions, criticized the city for proceeding with its tax collections and failing to set aside money for the possibility that it might lose the case.

“This is a situation where the city mugged us, and then said they couldn’t pay us back,” Schwartz said. “This was a situation where the city acted as a scofflaw. It did so knowingly and willingly, because there was a state statute prohibiting what it was doing.”

The statute, passed in 1979, barred such taxes on non-bank financial corporations. The city continued to impose the tax in the belief that it eventually would triumph over the financial institutions in court.

As it turned out, the financial institutions won a lower court ruling, the city won an appeal in 1989 and the financial institutions won the final verdict from the state Supreme Court on Monday. No appeal is likely because no federal issues were involved, city officials said.

Early in the dispute, the city set aside a reserve account to hold the funds in case it lost the case. After the city won its case at the appeals level and faced budgetary constraints, it dipped into the fund to meet operating costs.

Mayor Tom Bradley issued a brief news release Monday describing the ruling as a “serious financial blow.”

“The exemption of the savings and loan industry from taxation presents an unfair and inequitable burden upon commercial and residential taxpayers,” he said.

Some city officials and an attorney for the savings and loans said that at least part of the $230 million will go the state.

While the lawsuit was pending, state legislation established tax credits for savings and loans. These credits offset some of the business taxes paid to Los Angeles and a handful of other cities that levied similar taxes.

Now, if the savings and loans are repaid, they must in turn repay the state, according to Assistant City Atty. Richard Dawson, who handled the case.

The Resolution Trust Corp., the federal agency that oversees the savings and loan bailout, also could receive some of the funds because a handful of the savings and loans that had sued the city along with CalFed have since failed, Schwartz said.