Cities’ Taxes Appear Valid After Ruling, League Report Finds

A California Supreme Court ruling that severely limited the ability of local governments to raise taxes does not appear to immediately invalidate dozens of utility taxes and hotel occupancy fees charged by municipalities, according to the League of California Cities.

The league’s legal analysis provides some temporary relief to city officials who anticipate major cutbacks if the taxes are voided by the Sept. 28 ruling. Still, local leaders said Monday that they remain concerned about the potential damage the ruling could cause cities.

“I think the issue is still muddy,” La Habra Councilman James Flora said. “It’s going to take some time for this to be fully resolved. . . . All we can do right now is wait and see.”

Faced with cuts in state funding and a sluggish economy, many city councils have turned to utility, hotel and other special taxes in an effort to close budget shortfalls and maintain community services.

League attorneys spent the past two weeks analyzing the high court decision, which upheld the constitutionality of a 1986 ballot measure requiring voter approval of general and special taxes.

The attorneys found that the ruling does not address whether taxes imposed by city councils after 1986 are now voided, said Debbie Thornton, the league’s communications director.

The question might not be settled until the Supreme Court considers another case dealing with general and special taxes, or if it decides to amend its Sept. 28 opinion. The league might also push for state legislation that would clarify whether the decision is retroactive, Thornton said.

“There is still a lot of legalese involved in this process that needs to be resolved,” she added. “There are still questions that need to be answered.”

The court’s ruling upholds Proposition 62, a voter-ratified measure requiring that taxes for general purposes be approved by a majority of voters, and that taxes for special purposes be passed by a two-thirds majority.

The judgment reversed a 1986 lower court decision that found Proposition 62 unconstitutional. Because of the 1986 ruling, many government officials and judges believed that cities and counties could raise taxes for general purposes without voter approval.

Local activists already have vowed to use the Supreme Court ruling to challenge Measure M, the 1990 transportation sales tax that generates $130 million a year. Measure M was approved by a simple majority of voters, but because proceeds go to transportation projects, critics said the ballot measure required a two-thirds majority to pass.

A preliminary review by the county counsel’s office concluded that Measure M should not be jeopardized by the court ruling, which officials said was not intended to affect taxes approved years ago.

Orange County’s 21 general law cities--including La Habra, Stanton, Tustin and Fountain Valley--have the most to lose from the decision. Because they do not have charters, the cities appear to be bound by the outcome of the case. In contrast, Orange County’s 10 charter cities, which are governed by individually written sets of laws, appear to be exempt from the ruling.

Invalidation of La Habra’s 6% utility tax would be “disastrous,” Flora said Monday, because the levy generates 27% of the city’s general fund revenue. Without the tax, La Habra would be forced to make huge cuts in police and fire service and perhaps even consider bankruptcy, he said.

Flora said the city began placing utility tax revenue in a special escrow account while awaiting word on the ruling’s impact.

Other cities such as La Palma and Stanton also rely heavily on their special taxes. Voiding them would cause city officials to drain reserves and slash services, they predicted.

In response to queries from cities, the league has scheduled a special Oct. 22 session during its annual convention in San Francisco to discuss the ramifications of the court ruling, Thornton said.

* MONEY CRUNCH

La Habra officials fear ruling could kill city’s utility tax. B2