Cerritos to Challenge State Tax Shuffle

Launching an effort that could deepen the state’s cash crisis, the city of Cerritos will challenge the state’s plans to take sales tax revenues away from California municipalities and use the money to cover its own operating deficit.

The Cerritos lawsuit, if successful, will heighten chances that the state government will run out of cash in June. The lawsuit, approved by the Cerritos City Council in a 5-0 vote Monday night, is expected to be filed within the next few months.

City Manager Art Gallucci told the council he would meet with representatives of other cities to see if they’re interested in joining the lawsuit.

“As city government, we should spend within our means, and I think the state government should do the same,” said Councilwoman Laura Lee.

Gallucci decided to recommend the lawsuit after the failure of the state Legislature last week to approve Gov. Arnold Schwarzenegger’s proposal for a $15-billion deficit-recovery bond.

That bond would have replaced a $10.7-billion bond, approved under Gov. Gray Davis, that would be paid for by having the state hold back half of the one-cent sales tax dedicated to cities. After Schwarzenegger’s proposed bond was defeated, he said he would grudgingly support the $10.7-billion bond so the state will have enough cash flow to pay billions in short-term loans due in June 2004.

“Our position is that the sales tax money belongs to the city,” Gallucci told a reporter. “It’s not our intent to hurt the state at all. We’re not trying to be vindictive or mean-spirited. This is just us protecting what we believe belongs to us.”

Lloyd de Llamas, whose firm does sales tax analysis for 265 cities and counties around California, said Cerritos is likely to find many allies.

“Most cities simply feel that if the state is going to use short-term borrowing to take care of their own deficit problems, they should use their own money, not local governments’ money,” De Llamas said.

The lawsuit challenges the so-called “triple flip,” under which the state takes away the sales tax money (the first flip) and promises to replace it by giving cities more property tax money (the second flip). That property tax money, however, is already promised to education; the state has made another promise to replace that money to schools with other state funds that have not been identified (the third flip).

The Cerritos lawsuit, which could cost the city as much as $250,000, will argue that the first flip, by taking sales tax money from the cities, violates the state Constitution’s provision guaranteeing home rule to charter cities like Cerritos. The state’s diversion of sales tax revenues intended for localities would set “a dangerous precedent which could lead to total state control of local finances,” says a legal opinion created for the City Council.

City officials also say the state can’t be trusted to keep its promises to make up for the sales tax loss with property tax money. If the state doesn’t keep its promise to cover the sales tax loss, the city would lose just under $13 million in operating revenue, more than 16% of the city’s operating budget.

The Pacific Legal Foundation already has challenged the $10.7-billion bond on other grounds. The foundation says the bond is unconstitutional because voters did not approve it and because the bond funds would go to cover the deficit in the state’s general fund, rather than to a specific state project, as most bond issues do.

Harold Johnson, an attorney for the foundation, said the proposed bond is so “jerry-built” that litigation against it was natural. “It’s not surprising that something that looks like a Rube Goldberg machine would draw a legal challenge,” Johnson said.

Nathan Barankin, a spokesman for the state attorney general’s office, would not comment on the specific merits of the case. The attorney general is expected to seek court approval for $10.7 billion in deficit bonds by the end of the week. It is through that court proceeding that Cerritos, other cities and the Pacific Legal Foundation will probably make their challenge.

The state’s proposed use of cities’ sales tax money is not the only area in which cities could lose state money. The cities were to have received money from an increase in the car tax, but Schwarzenegger revoked that increase immediately after taking office. Although the governor has pledged to make up that lost money, no method has been settled on.

The car-tax money is unrelated to the sales tax diversion, but the state’s similar behavior on both fronts is fueling frustration among municipal officials toward state government. Cerritos, for example, has already lost nearly $2 million because of state decisions to redirect certain local funds. That is on top of some $12 million that the state has taken away from the city in recent years; the state’s promises to repay have gone unfulfilled.

“Cities want to draw a line in the sand that says, ‘This far and no further,’ ” said Steve Mayer, a San Francisco attorney who will represent Cerritos in its legal challenge.

Cerritos’ challenge to the state is notable because the southeast Los Angeles suburb has been a winner in the state’s current system of finance, which forces cities to rely on sales tax revenue for much of their budgets.

Cerritos has proven so adept at attracting sales tax-generating retail businesses that the city has built a well-regarded performing arts center and a new, world-class library.