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Huntington Beach Tax Override to Fund Pensions is Thrown Out

A Huntington Beach property tax override intended to fund employee retirement benefits violated Proposition 13, a divided Fourth District Court of Appeal panel has ruled. The court majority held that the tax override approved by voters in 1978 allowed the city to assess property owners only for retirement benefits offered at that time � and not for increased benefits the city had given to employees since. Huntington Beach officials estimated the city would have to refund about $27 million that taxpayers paid from 1997 to 2001. The City Council voted 5-2 not to ask the state Supreme Court to consider the case, even though the Fourth District ruling was 2-1. As of mid-August, the City Council was considering issuing a judgment bond to generate cash for refunds. The ruling appeared to allow the city to continue collecting a portion of the tax. Twenty-four other cities and Santa Clara County have similar tax overrides to pay for retirement programs, according to a Senate Local Government Committee report. At least some of those jurisdictions are certain to face lawsuits similar to the one that hit Huntington Beach. During the same June 1978 election in which state voters approved Proposition 13, Huntington Beach voters backed a city charter amendment allowing the city to participate in any retirement system, rather than only the state-run system. The charter amendment also permitted the city to impose property taxes to meet its obligations for the retirement system � a provision in the city charter since 1966. In the years since 1978, the city has increased retirement benefits it offered employees, relying on the tax override to fund the benefits. Proposition 13 capped property taxes at 1% of assessed value. But it contained an exception � Article XIII A � 1, subdivision (b) � for overrides to pay for indebtedness approved by voters prior to July 1, 1978. In December 1999, the Howard Jarvis Taxpayers Association and Huntington Beach resident Charles Scheid filed a lawsuit contending that the tax override for the 1999-2000 fiscal year violated Proposition 13. Orange County Superior Court Judge Robert Gallivan ruled for the Jarvis association and Scheid. Judge Gallivan concluded the measure that city voters approved in 1978 did not "commit the city to an indebtedness for future enhancements in the type or level of city employee retirement benefits beyond those to which city employees were entitled at the time of the election." Thus, taxes levied to fund enhanced retirement benefits violated Proposition 13, he ruled. The city appealed and a Fourth District, Division Three, panel upheld the lower court. The city and dissenting Justice William Bedsworth relied heavily on Carman v. Alvord,, (1982) 31 Cal.3d 318. Interestingly, the court majority also relied on Carman but offered the case a different reading. In Carman, the state Supreme Court ruled that a tax override approved by City of San Gabriel voters in 1948 could be used to fund retirement benefits for employees hired after July 1, 1978. The city and Bedsworth argued that Carman's logic could be extended to cover new benefits offered after July 1, 1978. But the majority said no. "In the trial court, city asserted that the new [1978] charter language gives it the right to levy an excess tax for virtually anything, including �giving a house � to every employee as they retire � as long as it's a retirement related purpose.' City's construction of the exception created by subdivision (b) eviscerates Proposition 13," Justice William Rylaarsdam wrote. "Under city's interpretation, it would have virtually unfettered power to spend whatever sum of money and levy excess taxes to obtain the revenue, as long as the expenditure was designated �retirement.' This was one of the very things Proposition 13 was enacted to combat," Rylaarsdam wrote. "For any obligations not approved prior to Proposition 13, the tax is automatically capped, regardless of the charter or the voters' intent," the majority opinion continued. "Instead, the voters must intend to authorize a tax in excess of the 1% limit for a specific obligation." The authorization to participate in a retirement system does not constitute a prior obligation, and in this case indebtedness "does not encompass benefits the city added after the passage of Proposition 13." In his dissent, Justice Bedsworth said that the Huntington Beach case was just like the Carman case. "[A]s the Supreme Court explained in Carman, Proposition 13's exemption for excess taxation approved by the voters may be applied to future obligations under a city's retirement plan, even when those obligations are not yet entered into or known at the time of approval, as long as the future obligations would have been anticipated by the voters," Bedsworth wrote. "Unfortunately, the majority opinion � build[s] its analysis on the purported distinction between �obligations,' which can be funded by the tax override provision, and the �benefits' voluntarily offered to city employees in the wake of Proposition 13," the dissent continued. "In my view, this analysis ignores the city's charter provision expressly giving the council continuing discretion to establish reasonable and appropriate fringe benefits." The court ordered the city to refund overpaid taxes collected since 1997. The city stopped collecting the tax in 2001. The Case: Howard Jarvis Taxpayers Association v. County of Orange, No. G029292, 03 C.D.O.S. 6726, 2003 DJDAR 8423. Filed July 30, 2003. The Lawyers: For Jarvis: Jonathan Coupal, (916) 444-9950. For Huntington Beach: Steven L. Mayer, Howard, Rice, Nemerovski, Canady, Falk & Rabkin, (415) 434-1600.