County Incorrectly Calculated Service Fee it Charged Local Governmental Entities for Allocating and Distributing Funds Pursuant to Triple Flip and VLF Swap Tax Statutes

In City of Alhambra v. County of Los Angeles, (— Cal.Rptr.3d —-, Cal.App. 2 Dist., July 7, 2010), a court of appeal considered whether a county properly calculated the fee the county charged local governmental entities for the services the county performed under the Triple Flip and the VLF Swap tax statutes. The court held the county’s method of calculating its fees was unlawful.


Counties are responsible for both “assessing and collecting ad valorem property tax revenues from assessed property within their borders.” Counties must calculate and then distribute property tax revenue to the various local governmental entities within their borders. Prior to 1978, counties were able to set their property tax rates at a level that allowed them to recoup their cost of administering the property tax collection system. The passage of Proposition 13 capped property tax rates to one percent of a property’s assessed value, which left counties without a means to recover their costs of administration.

The Legislature passed several measures between 1990 and 1994 aimed at allowing counties to get reimbursed from cities for the counties’ share of the cost of property tax administration. The Legislature created an Educational Revenue Augmentation Fund (“ERAF”), which “is a fund into which property tax revenue is shifted to pay for the State’s constitutional responsibility to fund public education.” Property taxes that are paid to local schools and the ERAF are exempt from the requirement of paying the property tax administration fee (“PTAF”). The Legislature also enacted Revenue and Taxation Code section 95.3 “that, with the exception of schools and funds schools receive from ERAFs, permits counties to fairly apportion the burden of collecting property tax revenues by recovering from each city within its borders a PTAF that correlates to the property tax revenues allocated to that city.”

Generally the PTAF for a city is calculated in the following manner: (1) “The County calculates the prior year property tax administration costs of the assessor, tax collector, assessment appeals board, and the auditor-controller;” (2) “The County calculates each city’s proportionate share of such costs by calculating an apportionment factor from the ratio of the property tax revenue received by each city to the total property tax revenue distributed;” and (3) “The County multiplies the administrative costs incurred in the immediately preceding fiscal year by each city’s cost apportionment factor to determine each city’s PTAF.” The County then withholds each city’s PTAF when it distributes the city’s property tax distributions for the year.

California voters passed the Economic Recovery Bond Act in 2004, which authorizes the issuance of bonds to preserve public education. To fund the bonds, the Legislature passed Revenue and Taxation Code section 97.68, which is a “temporary measure for a revenue swap known as the Triple Flip.” Section 97.68 reduced the Bradley-Burns Sales and Use Tax rate by one-fourth cent. The “first flip” occurs when the State retains the one-fourth cent and uses it to repay the recovery bonds issued by the State. To compensate counties and cities for the loss of revenue “counties take an equivalent amount in property tax revenue that would otherwise have been allocated to each county’s ERAF and deposit it in a Sales and Use Tax Compensation Fund set up in each county’s treasury.” The “second flip” occurs when the county allocates and distributes the revenue deposited in that Fund to each city in lieu of the lost one-fourth cent sales tax revenue. The “third flip” occurs when the State uses funds out of its general fund to replace funds that local schools would have otherwise received from the ERAF.

The State permanently reduced the vehicle license fee (“VLF”) payable to counties and cities from 2% to 0.65% of the assessed value of a vehicle. Section 97.70 of the Revenue and Taxation Code replaces the lost VLF revenue with property taxes. This process is known as the VLF Swap. Pursuant to the VLF Swap “counties take an amount of property tax revenue, otherwise required to be allocated to each county’s ERAF, that is equivalent to the lost vehicle license fee revenue . . . and deposit that money in a Vehicle License Fee Property Tax Compensation Fund established in each county’s treasury.” Counties then distribute the money in this Fund to the cities to replace lost VLF fee proceeds.

The County of Los Angeles (“County”) must annually allocate and distribute the Triple Flip and VLF Swap revenues to the appropriate cities. Revenue and Taxation Code section 97.75 provides: “Notwithstanding any other provision of law, for the 2004-2005 and 2005-2006 fiscal years, a county shall not impose a fee, charge, or other levy on a city, nor reduce a city’s allocation of ad valorem property tax revenue, in reimbursement for the services performed by the county under sections 97.68 and 97.70. For the 2006-07 fiscal year and each fiscal year 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.” (Emphasis added.) County did not charge the cities for administrative services relating to the Triple Flip and VLF Swap for the 2004-2005 and 2005-2006 fiscal years. However, beginning in the 2006-2007 fiscal year, “the County included the property tax funds paid under the Triple Flip and VLF Swap as additional property tax share to each city and apportioned the total PTAF costs to each city based on this share.” County charged the cities collectively $4.8 million for the 2006-2007 fiscal year and $5.3 million for 2007-2008 fiscal year. County’s actual cost of administering the Triple Flip and VLF Swap for the 2006-2007 fiscal year was only approximately $35,000.

Forty-seven of the general law charter cities (“Cities”) in the County petitioned for a writ of administrative mandamus to challenge County’s method of calculating the PTAF beginning in the 2006-2007 fiscal year. The trial court found in favor of the County.


Cities asserted County charged them more than the actual cost of providing services for the Triple Flip and VLF Swap in violation of section 97.75. County asserted “that the Legislature intended it to recoup from cities the costs associated with property tax administrative efforts of assessing, collecting, and allocating the share of property taxes that are included in the Triple Flip and VLF Swap.” The court held County’s method of calculating the fee for its services is not authorized by section 97.75 and is unlawful.

The court found the plain language of section 97.75 reveals that the “services” referred to in that section “are those that counties render pursuant to the Triple Flip (section 97.68) and VLF Swap (section 97.70) only.” “The tasks the Triple Flip and VLF Swap direct the County to undertake are to transfer, allocate, and distribute amounts, the size of which are specified by the State Director of Finance . . . . [and] do not include the additional activities of equalizing, assessing and collecting property tax, processing appeals, or otherwise administering the property tax system as a whole.” The language of section 97.75 also clearly provides County “may only recover ‘the actual cost of providing these services.’”

The court concluded “the Legislature intended that section 97.75 stand alone with respect to the administrative costs incurred in performing the services required for the Triple Flip and VLF Swap, while assuring that counties would still be reimbursed for those efforts.” If “the Legislature meant for the ‘services’ performed pursuant to the Triple Flip and VLF Swap to encompass those governed by the property tax administrative fee statutes including Revenue and Taxation Code sections 95.2, 95.3, and 96.1, it could have said so in section 97.75.”

The court concluded that the trial court erred in granting judgment in favor of County. The court of appeal remanded the matter back to the trial court for further proceedings.


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