Tax Dispute With State Cost Orange County $148M

The decision reached behind closed doors was mostly a formality because Gov. Jerry Brown signed legislation in September changing the formula for calculating Orange County's share of tax revenue from the state.

"This is just wrapping up the agreement signed with the governor," said Orange County Board Chairman Shawn Nelson. "We just didn't want to settle (the lawsuit) until everything else as resolved. It's the "I" dotting and "T" crossing."

The law will help the county avoid deep cuts in services and layoffs this year, according to Assemblywoman Sharon Quirk-Silva, D-Fullerton, who introduced the bill.

County officials pursued the legislative fix after Orange County Superior Court Judge Robert J. Moss sided with the state in the tax dispute.

Orange County's tax revenue from the state now is calculated by the same formula that applies in every other county of the state.

The county can expect to receive $53 million from the state from the vehicle license fee, and officials will have six years to repay the $145 million or so owed to the state.

County officials decided to seek a legislative solution to the dispute because they figured there was a bigger risk continuing to fight it in the courts, which might deepen political tensions with Brown and legislators, Nelson said.

The new law eliminated an annual $50 million the county was getting that Correa won in 2009 for the county during state budget negotiations, Nelson said.

This year the county would not have to pay any of the past due money back, but could do so without interest, and in the second year the county would owe at least $5 million and then at least $15 million in the third year, Quirk- Silva said.

The dispute stems from Orange County's 1994 bankruptcy when the county pledged part of its revenue from vehicle license fees to the bondholders, because it was a guaranteed source of money.

The state changed the way it distributed vehicle license fee revenue to counties in 2004, but left its arrangement with Orange County alone because of the agreement with bondholders.

Other counties instead received property tax money, which was on the rise, while vehicle license fee revenue declined, according to county officials.

In 2011, state officials decided to stop sending $48 million to Orange County, which had refinanced its bankruptcy debt and no longer needed it securitized.

County officials retaliated by withholding $73.5 million in property taxes. County officials arrived at that number by using the same formula other counties use to calculate how much they are due in property taxes.

That's why county officials demanded $23 million in a claim filed last year -- it's about the difference between the vehicle license revenue and the property tax figure county officials came up with.

The state, in turn, sued the county in April 2012. County officials have cut their budget and are dipping into reserves to pay back the $147 million or so in withheld taxes.

While it could be argued the county would be better served by continuing to receive the $50 million, Nelson said county officials were concerned that when Correa is termed out of office that the Democratic majority in Sacramento would take that money too, leaving the county with nothing.

Even with the same funding formula as the state's 57 other counties, Orange County would receive $53 million from the state because it would be calculated under terms in place in 2011, Nelson said.