LOS ANGELES -- The California Supreme Court ruled Monday that cities cannot levy business license taxes on savings and loan associations, a decision that might spur Los Angeles to sell a $240 million bond issue to cover refunds.
Los Angeles and two dozen other municipalities had argued that so-called charter cities with home-rule powers could impose the tax, despite a 1979 state law prohibiting such levies on nonbank financial institutions. California's Supreme Court, however, held that state law takes precedence in a matter "of statewide concern."
The justices said the state law represented a legitimate way to ensure uniformity in taxing banks and other financial institutions, such as savings and loans. The state constitution already exempts commercial banks from municipal business taxes.
The case in question, California Federal Savings & Loan Association v. City of Los Angeles, was a coordinated action involving more than 90 separate claims for refunds of business taxes paid by financial corporations.
A superior court in 1987 ruled in California Federal's favor, but a state appellate court subsequently reversed the portion of the decision that was unfavorable to the city.
Los Angeles discussed the litigation in its preliminary official statement for an upcoming $38.8 million general obligation bond sale, noting that an unfavorable outcome "could give rise to a liability of approximately $230 million on the part of the city."
The prospectus also said Los Angeles is considering a $240 million financing later this year to cover any liability if it loses the California Federal case.
A decision on the bond sale probably will be made later this summer, said David Brodsly, a senior administrative analyst. As an alternative to a bond sale, California's government code also allows municipalities to pay legal judgments over a 10-year-period, Mr. Brodsly noted.
"There are pros and cons to both approaches," and city officials plan in coming weeks to study whether a bond sale makes sense, he added.
A bond sale to pay the refunds "would be a fairly unique kind of security," Mr. Brodsly said.
Bond sales to fund obligations imposed by law are excepted from debt limitations, he continued. Nevertheless, the city would seek a judicial validation of such a transaction, he said. The tax-exempt bond sale would be secured by the city's general fund.
A few other California cities also had imposed the tax on nonbank financial institutions. San Francisco, for example, estimated it would be forced to refund $22 million if the tax challenge succeeded.
The cities had argued that their municipal powers overrode state law in permitting them to levy taxes. Under the state constitution, charter cities are generally independent of the state Legislature in matters relating to municipal affairs and in their ability to raise revenues.
"Time will tell" if Monday's court decision also affects other local taxes imposed by charter cities that conflict with laws at the state level, Mr. Brodsly said, adding that "it is a concern."
To help cover a budget deficit this year, for example, Los Angeles imposed a real property transfer tax designed to raise %52.7 million. But the prospectus for the upcoming GO sale said that "there are certain legal cases before various courts in California which could affect the ability of the city to levy this tax," including the California Federal case.
Los Angeles officials also face a budget adjustment in the current budget adjustment in the current fiscal year to cover about $22 million of lost revenues stemming from the court decision striking down the business license tax on nonbank institutions.
City officials are studying potential revenue-raising options and budget cuts to cover the lost revenue, Mr. Brodsly said.
A Los Angeles assistant city attorney on Monday criticized the court ruling, saying that home-rule cities are not really independent if they cannot raise the revenues needed to fund desired levels of service.
