UPDATE: Supreme Court Affirms Court Of Appeal’s Holding That The County Incorrectly Calculated The Fee It Charged Local Governmental Entities For Allocating And Distributing Funds Pursuant To Triple Flip And VLF Swap Tax Statutes

The California Supreme Court recently found unlawful a county’s method of calculating administration fees for local governmental entities for the services the county performed under the Triple Flip and the VLF Swap tax statutes.  The Court held that Educational Revenue Augmentation Fund monies diverted by the Triple Flip and VLF swap are still exempt from the property tax administration fee.  (City of Alhambra v. County of Los Angeles, (--- P.3d ----, 12 Cal. Daily Op. Serv. 12,771, Cal., November 19, 2012).


Counties are responsible for assessing and collecting local property taxes and disbursing them to cities, schools, special districts, and other entities within the county.  A county may impose a property tax administration fee on each city or entity in order to cover the cost of administering the county’s property tax system.  Due to a budget crisis and the need to meet the state’s minimum guaranteed education funding requirements, the Legislature in 1992 created an Educational Revenue Augmentation Fund (“ERAF”) in each county, which shifted billions of dollars from counties, cities, and other local entities to the ERAFs.  Although the property tax administration fee imposed by a county is generally based on the amount of revenue allocated to each city or entity, any revenues allocated to the county’s ERAF are exempt from the property tax administration fee.

The A.B. 8 allocation system provides that “in every current fiscal year, each local entity receives property tax revenues equal to what it received in the prior year . . . plus its proportional share of any increase in revenues due to growth in assessed value within its boundaries.”  The sum of the amounts of the prior base year plus the current year’s proportional share of the tax increment or decrement becomes the jurisdiction’s new base amount for the following year’s calculations.  The Legislature’s enactment of the ERAF system permanently modified the A.B. 8 allocation system because it reduced the property tax base for each city and county by the amounts specified by implementing statutes for the ERAF.

The cost of a county’s property tax administration system is apportioned annually among the local entities within the county’s borders pursuant to Revenue and Taxation Code section 95.3.  Section 95.3 provides that a county auditor must calculate an annual property tax administration fee for each local jurisdiction, ERAF and community redevelopment agency to ensure that each local entity bears a proportionate share of the total administrative costs.  However, a school entity or ERAF is exempt from the imposition of an administration fee by the county. 

California voters approved Proposition 57, the California Economic Recovery Bond Act, in 2004, “which allowed the state to sell up to $15 billion in bonds to close the state budget deficit.”  Prior to voter approval of Proposition 57, Legislature had passed Revenue and Taxation Code section 97.68, which shifts revenue in a three-stage process that is known as the “Triple Flip.”  First, “0.25 percent of local sales and use tax revenues are diverted to the state for bond repayment.”  Next, “the lost local sales and use tax revenues are 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.”  Finally, “any shortfall to schools caused by the reduction of funds to the county ERAF is compensated out of the state’s general fund.”  The “Triple Flip” is set to end upon repayment of the Recovery Act bonds. 

In 2004, the Legislature also reduced the annual vehicle license fee (“VLF”) from 2 percent to 0.65 percent of a vehicle’s market value.  The VLF had been a significant source of local revenue so the Legislature passed Revenue and Taxation Code section 97.70, referred to as the “VLF SWAP,” to divert “property tax revenue to fully compensate each city and county for the VLF revenue that they otherwise would have received.”  The “diverted property tax revenue, which otherwise would have been allocated to each county’s ERAF, is placed in a Vehicle License Fee Property Tax Compensation Fund established in each county’s treasury, and the county then distributes the fund to each city in lieu of the lost VLF revenue.”

The Legislature also enacted Revenue and Taxation Code section 97.75, which provides a county may  not impose a fee, charge, or other levy on a city, or reduce a city’s allocation of ad valorem property tax revenue for the 2004-05 or 2005-06 fiscal year to reimburse the county for services it performs under the Triple Flip or the VLF Swap.  However, for the 2006-07 fiscal year and “thereafter, a county may impose a fee, charge, or other levy on a city for these services, but the fee, charge, or other levy shall not exceed the actual cost of providing these services.” 

Beginning with the 2006-07 fiscal year, Los Angeles County (“County”) no longer treated the property tax revenues diverted by the Triple Flip and VLF Swap as ERAF funds that are exempt from the property tax administration fee.  County instead added the diverted revenue to the base of the 47 cities within its borders (“Cities”) when the County apportioned property tax administration costs.  This resulted in County withholding from Cities an additional $4.8 million as property tax administration fees for the 2006-07 fiscal year and an additional $5.3 million for the 2007-08 fiscal year.  County’s actual annual cost to administer the Triple Flip and VLF Swap is approximately $35,000. 

Cities petitioned the trial court for a writ of administrative mandate challenging County’s calculation of the property tax administration fee.  A referee ruled that the County’s method of calculating the fee did not violate section 97.75.  The court of appeal reversed finding that County’s method of calculating the fee was invalid. 

Supreme Court Decision

The Supreme Court concluded the court of appeal correctly held that section 97.75 does not authorize County to collect the disputed administration fee on funds diverted through the Triple Flip and the VLF Swap.  The Court, however, noted that the court of appeal did not fully analyze the issue of whether the Legislature intended these Triple Flip and VLF Swap funds to remain exempt from the administration fee through section 95.3.  The Court concluded that the Legislature’s “2004 budgetary measures did not alter the basic allocation of property tax revenues to local entities” and “the Legislature did not intend to change the effect of the ERAF exemption from the property tax administration fee or to authorize County to add the diverted property tax revenues to Cities’ allocation for purpose of distributing administrative costs.”

The Court found section 97.75 is not ambiguous and does not authorize the method that County used to calculate the disputed administration fee.  Section 97.75 provides that a county may not impose a fee for the fiscal years 2004-05 and 2005-06 under the Triple Flip and VLF Swap statutes and thereafter a fee may be imposed but may not exceed the county’s actual cost of providing the tax administration services.  The Court concluded section 97.75 allows “a county to charge cities for only the new, incremental costs associated with a county auditor’s services in administering the Triple Flip and VLF Swap.” 

The issue before the Court was “whether the Legislature intended to alter section 95.3’s property tax administration fee calculations by eliminating the ERAF exemption from the property tax administration fee for those monies designated for an ERAF but diverted by the Triple Flip and VLF Swap.”  The Court found that although the Legislature failed to directly address “the effect of the 2004 budgetary measures on the exemption status of ERAF monies diverted by the Triple Flip and VLF Swap, it did express the intent that the diversions (or adjustments) not fundamentally alter the A.B. 8 allocation system.”  The court held that County’s withholding of the disputed administration fee is inconsistent with the Legislature’s intention to not fundamentally alter the A.B. 8 allocation system. 

The Court found that “under the revenue-neutral principles of the Triple Flip and the VLF Swap, County should be no better, or worse, off in recouping its costs of property tax administration as a result of the adjustments required by those 2004 budgetary measures.”  The calculation of property tax administration fees remains unchanged after the imposition of the Triple Flip and the VLF Swap tax statutes.  The County must continue “to absorb any proportional administrative costs attributable to property tax revenues that were first assigned to the ERAF, even if some of those revenues are eventually redirected to Cities for other tax revenues these 2004 budgetary measures have diverted from Cities.”


If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Jeffrey L. Massey | 916.321.4500

Brett L. Price | 661.864.3800


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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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