A six-year dispute between Shasta County and the new City of Shasta Lake regarding tax revenue has been decided in favor of the city. The Third District Court of Appeals upheld nearly all aspects of a ruling issued during binding arbitration by retired Siskiyou County Superior Court Judge James Kleaver. The appellate court said the city, which incorporated on July 2, 1993, has the right to receive Proposition 172 sales tax revenue and that the Proposition 172 revenue should offset the amount the county charges for providing law enforcement services. The appellate court — in an unpublished part of the opinion — overturned Kleaver only on the matter of whether the city owed the county interest on a portion of payments in dispute. The decision means the county must pay the poor city of 9,300 residents about $1 million. The appellate court decision, penned by Acting Presiding Justice Coleman Blease, came on a 2-1 vote. Justice George Nicholson said the court should dismiss the appeal because the court did not have jurisdiction to review a decision made in binding arbitration. Prior to incorporation, the Shasta County Local Agency Formation Commission performed a fiscal analysis that determined the proposed incorporation would result in a net gain for the county general fund of about $200,000 annually. Still, the county pressed LAFCO to reconsider the conditions of incorporation. The result was a mitigation agreement between the county and the city's predecessor, the Shasta Dam Area Public Utilities District. Almost immediately, the county and city began disputing the terms and conditions of the mitigation agreement. They stipulated to binding arbitration before retired Judge Kleaver. He ruled that revenues from Proposition 172 — a half-cent sales tax approved after the state had shifted property taxes from counties and cities to schools — should be treated as property tax revenue under terms of the agreement and they should offset a portion of the county's cost of providing sheriff's services to the new city. On appeal, the county argued that the mitigation agreement referred only to actual property taxes, not to property taxes plus replacement revenues, such as Proposition 172 sales taxes. But the court said money is money. "The court must determine whether the measure of the payment is the amount of property taxes which the County retains, as the County contends, or the amount of property tax benefit which the County receives, i.e., the property tax retained by the County plus replacement revenue given in lieu of property tax diverted by the state," Justice Blease wrote. "Since the declared purpose of the payment is to mitigate the so-called negative effect occasioned by property tax losses resulting from the incorporation, the City's candidate is the more reasonable. There is no incremental negative fiscal effect on the County attributable to the diversion of property tax revenue by the State to the extent that it receives either property taxes or replacement revenues." As for payment for law enforcement services, the court interpreted a law enforcement services agreement (LEA) between the city and county. The county argued that the agreement allowed the county to charge the city for the "entire cost" of sheriff's services within the city limits for the 1993-94 fiscal year, the city's first year of existence. The city contended it should be credited for revenues generated from inside the city limits but retained by the county, including Proposition 172 funds. The court determined that under the LEA the county could charge the entire cost of services only if the city had requested that the county discontinue the service. The city did not make that request, the court said. The court also ruled that the phrase "entire cost" in the LEA means the same thing as "net cost" under Govt. Code §57384, which addresses the subject of county services to a new city, the court said. The court also interpreted that section to say that the city should receive credit for Proposition 172 funds. "Such revenues were ‘generated' in the formerly unincorporated territory, even though the allocation of Proposition 172 revenues is not situs-based," Justice Blease wrote. "Proposition 172 revenues are allocated to cities according to the amount of property tax revenue diverted to ERAF. (§30054.) This is a calculable amount, and is an amount ‘generated' by the City." The Case: City of Shasta Lake v. County Shasta, No. C029036, 99 C.D.O.S. 7859, 1999 Daily Journal D.A.R. 9954, filed September 12, 1999. The Lawyers: For Shasta Lake: John Kenny, Moss & Enochian, (530) 225-8990. For Shasta County: Michael F. Dean, Kronick, Moskovitz, Tiedemann & Girard, (916) 321-4500.