Prop. 13 Suit May Return $10 Billion

The state and counties throughout California will owe as much as $10 billion to property owners if an appeals court in December upholds a controversial 2-year-old ruling on the intent of Proposition 13, according to court papers filed this week.

It is the first time state officials have put a price tag on the potential statewide cost of a December 2001 ruling by Orange County Superior Court Judge John M. Watson.

The judge found that some Orange County property assessments violated Proposition 13, the landmark tax rollback measure passed by California voters in 1978. He ruled that the assessor, following a practice used by his colleagues statewide, illegally raised the assessed value of a Seal Beach home more than the 2%-a-year limit mandated by Proposition 13.

County attorneys appealed the ruling to the state 4th District Court of Appeal in Santa Ana. A hearing is set for Dec. 16, but any decision would probably face further court appeals.

Assessor Webster Guillory has defended the practice, used after properties dropped in value and their assessments were lowered. When the values rebounded, the new assessments routinely exceeded the 2% limit, a method called recapturing. The county maintains that the practice is legal because the increase merely allowed the assessed value to recover from temporary declines.

If Watson’s ruling is ultimately upheld, it will devastate state and local government financing, state officials argued in a 28-page brief.

The state Department of Finance estimated that $5.3 billion would come from state coffers to backfill refunds from school districts, according to the brief filed by Atty. Gen. Bill Lockyer. County and city governments would be hit with a $4.7-billion loss from refunds and from a drop in their tax base.

“For perspective, this is nearly equivalent to all funding for youth and adult correctional functions performed by the state,” the brief said.

Tax attorney Rob Pool, who challenged the assessment on his Seal Beach home, said he had no reason to doubt the estimated hit. But that doesn’t excuse government, he said, adding: “It’s not often that you get the thief who stole from you to account for exactly how much he’s taken.”

Previous estimates from Orange County Auditor-Controller David Sundstrom put the impact at $4 billion if the ruling is extended statewide. Orange County’s general fund would have to repay $18.6 million in excess tax revenue to property owners, he said.

Besides funding county and city governments, property taxes also fund school districts, which are guaranteed minimum funding through voter-approved Proposition 98. That means the state would have to cover refunds owed by the schools.

Last year, the Orange County Board of Supervisors voted 4 to 1 against appealing Watson’s ruling. Supervisors said it was up to the assessor to defend his assessment practices, and his office filed the appeal.

Watson’s ruling expanded refunds back to 1978, if applicable. Assessment officials have said most of the recapturing was done after the real estate slump of the mid-1990s.

Based on information from the largest counties, researchers with the state Board of Equalization estimated that property assessments statewide had been reduced more than $240 billion from the passage of Proposition 13 in 1978 through 2001-02 during real estate market downturns.

About $190 billion in value has already been restored through recapturing, with some $48 billion left to be restored.

The Board of Equalization estimated that refunds, along with the valuation revenue lost to local governments and regained by property owners, would total $8.5 billion. The state Department of Finance added $1.5 billion in interest required to be paid with the refunds.