UPDATE: School District’s Share Of Diverted ERAF Revenue Must Be Included When Calculating Its Property Allocation Base

A superior court required a county to include in its calculation of a school district’s property tax allocation base the property tax revenue that the school district actually received from local Educational Revenue Augmentation Funds (“ERAFs”), but rejected the contention that LAUSD’s property tax allocation base also include, as ERAF revenue, its share of the property taxes that were diverted from its ERAF funds by virtue of the Triple Flip and VLF Swap legislation.  The increase in the school district’s property tax allocation base increases its passthrough payments pursuant to Health and Safety Code section 33607.5.  The court of appeal agreed with the school district that the superior court’s judgment did not sufficiently increase its property tax allocation which resulted in an insufficient increase in its passthrough payments.  (Los Angeles Unified School District v. County of Los Angeles, (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., June 26, 2013).

Note

This Legal Alert updates our previous Legal Alert entitled, “Redevelopment Pass-through Payments to School District Were Improperly Calculated Because County Ignored ERAF Payments in Determining District’s Percentage Share Of Property Taxes,” March 7, 2010.

What This Means To You

School districts must be vigilant to insure that all ERAF revenues are accounted for in determining the amount of passthrough payments they are entitled to under the provisions of Health & Safety Code § 33607.5.  In particular, ERAF revenues diverted due to the Triple Flip and VLF Swap should be determined and included in calculating passthrough payments.

Facts

Health and Safety Code section 33607.5, commonly known as the passthrough legislation, provides that the increase in property tax revenue after completion of a redevelopment project must be allocated among the affected local taxing entities.  The property tax increment is allocated “among the affected taxing entities . . . in proportion to the percentage share of property taxes each affected taxing entity . . . receives during the fiscal year the funds are allocated.”   The Los Angeles Unified School District (“LAUSD”) filed a petition for writ of mandate to compel County of Los Angeles, City of Los Angeles, and other local agencies (collectively, “County”) to increase LAUSD’s allocation of passthrough payments.  In doing so, LAUSD challenged “the omission of ERAF revenue from its property tax allocation base.”

The superior court initially denied LAUSD’s petition but the court of appeal later reversed that “ruling and concluded that ERAF revenue should be included in LAUSD’s property tax allocation base.”  The superior court conducted further proceedings and ordered “the County to include the ERAF revenue that was actually received by LAUSD in the calculation of LAUSD’s property tax allocation base.”  The court, however, rejected the contention that LAUSD’s property tax allocation base must “also include its share of the property tax revenue that was diverted from the ERAF’s by virtue of the Triple Flip and VLF Swap legislation as ERAF revenue.”  LAUSD appealed asserting that property tax revenue would have been received from the ERAFs had the funds not been diverted by the Triple Flip and VLF Swap legislation and must be included when calculating its property tax allocation base.  LAUSD asserts that this “will result in a corresponding increase in its allocation of passthrough payments.”

Decision

The court of appeal reversed the decision of the superior court.  The appellate court held that LAUSD’s “share of the diverted ERAF revenue must be included in the calculation of its share of passthrough payments under Health and Safety Code section 33607.5.”  Health and Safety Code section 33607.5, subdivision (a)(2) provides that passthrough payments must be allocated among the affected taxing entities in proportion to the percentage share of property taxes that each entity receives in the fiscal year the funds are allocated.  The percentage share must “be determined without regard to any amounts allocated to a city, a city and county, or a county pursuant to [the Triple Flip legislation and the VLF Swap legislation].”  The share must also be determined “without regard to any allocation reductions to a city, a city and county, a county, a special district, or a redevelopment agency pursuant to Sections 97.71, 97.72, and 97.73 of the Revenue and Taxation Code and Section 33681.12.”

The “Triple Flip” refers to a temporary measure that shifts revenue as provided in Revenue and Taxation Code section 97.68.  The first “flip” consists of 0.25 percent of local sales and use tax revenues being diverted to the state for bond repayment.  The second “flip” consists of lost local sales and use tax revenues being “replaced by property tax revenue that would have been placed in the county ERAF but are instead set aside in a ‘Sales and Use Tax Compensation Fund’ established in each county’s treasury.”  The final “flip” consists of any shortfall to schools that was caused by the reduction of funds to the county ERAF being “compensated out of the state’s General Fund.”  The “Triple Flip” is scheduled to end once the recovery act bonds are repaid.

The Legislature reduced the annual vehicle license fee from 2 percent of a vehicle’s market value to 0.65 percent and then passed Revenue and Taxation Code 97.70, which is commonly referred to as the “VLF Swap.”  The VLF Swap diverts property tax revenue to fully compensate cities and counties for the lost VLF revenue.  

The Supreme Court previously held that “the diversion of ERAF revenue pursuant to the Triple Flip and VLF Swap does not trigger a reallocation of property tax revenue under the A.B. 8 property tax allocation system.”  Based on this holding, the court of appeal held that because the Triple Flip and VLF Swap do not have an effect on the A.B. 8 Property Tax Revenue Allocation System, they also do not have an effect on the passthrough allocations. 

The court of appeal concluded that “the diversion of revenue from an ERAF neither increases the recipient entity’s property tax revenue base, nor decreases the donor ERAF’s property tax revenue base.”  The court of appeal previously held “that ‘any tax revenue deemed allocated to ERAF’s under [subdivision (d)(5) of sections 97.2 and 97.3 of the Revenue and Taxation Code] necessarily qualifies as property tax revenue to the school that received it.’”  When it applied the Supreme Court’s holding to this holding, the court of appeal reached “the inevitable conclusion” that the diversion of revenue pursuant to the Triple Flip and VLF Swap does “not alter the property tax revenue base of either the ERAF from which the funds were diverted, or the school (LAUSD) that would have received the funds in the absence of the diversion.”

The property tax revenue that is received by the LAUSD “from the ERAF’s should be deemed to include its share of the ERAF revenue that was diverted by the Triple Flip and VLF Swap legislation, thus avoiding either a decrease in LAUSD’s passthrough payment allocation, or an increase in a city or county’s passthrough payment allocation.”  Accordingly, the court of appeal reversed the decision of the superior court and remanded the matter for further proceedings.

Topics:  Education Budget, Educational Revenue Augmentation Funds, LAUSD, Property Tax, Property Valuation, Public Schools, School Districts

Published In: Civil Procedure Updates, Education Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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