LOS ANGELES -- A California appellate court struck down a voter-approved sales tax increase for transportation projects in Santa Clara County, a decision that could have statewide implications for similar issuers.
In a 2-to-1 ruling filed last Wednesday, the California Sixth Appellate District Court of Appeal overturned Measure A, which was approved a year ago by 54.1% of Santa Clara County voters to raise $3.5 billion over 20 years for mass transit projects.
The case has been watched closely by those in public finance because the agency targeted by the legal challenge -- the Santa Clara County Local Transportation Authority -- was carefully crafted in the wake of a previous court case known as Rider.
The Rider decision, which over-turned a sales tax increase in San Diego County for court-related facilities, hinged on whether a local agency was created to circumvent a portion of Proposition 13, the 1978 tax-cutting initiative.
After examining arguments in the Rider case, a local superior court concluded the financing agency in question qualified as a special district that needed two-thirds voter approval -- rather than a simple majority -- for a sales tax increase.
The Rider decision, eventually upheld by the California Supreme Court in December 1991, also cast a broader shadow by establishing a multipart test for determining whether a governmental entity is defined as a special district under Proposition 13.
The Santa Clara County authority was set up with the parameters of Rider in mind. As such, last week's appellate decision represented a blow to other agencies seeking a model that can sidestep the Proposition 13 two-thirds approval requirement and survive legal challenges.
"We believe that the impact of the appellate court level decision, if allowed to stand, will be devastating on the public finance market, on Santa Clara County, and on the state of California," said Will Kempton, interim executive director of the Santa Clara County authority.
Winfield D. Wilson, a partner of Nossaman, Guthner, Knox & Elliott, the authority's attorneys, said the authority expects to file a motion for rehearing with the appellate court. Denial of the motion would set the stage for the state high court appeal.
"I fully expect" the authority will appeal the decision to the Supreme Court, said Kempton, who also is a partner in the Sacramento, Calif.-based consulting firm of D.J. Smith & Associates.
A proposed $430 million bond issue by the authority later this year is "not going to go forward" as a result of the appellate decision, Kempton said. "We could not meet a legal validation for issuance of bonds at this point, obviously."
The most immediate implication for the transportation authority is its inability to provide a local revenue match for a light rail project "which has already been allocated federal transportation funds," Kempton said.
While the litigation proceeds, Kempton said the authority "will continue our operations such as they are. They are limited in nature because we don't have any resources pending final resolution of the issue."
The authority's half-cent sales tax increase was designed to replace a sales tax approved in 1984 for the Santa Clara County Traffic Authority. The existing tax expires in April 1995, at which time the new tax is supposed to kick in.
The Howard Jarvis Taxpayers Association and other groups challenged the new tax increase, citing the Rider case as precedent. The appellate court heard the case directly, rather than wait for a lower court to decide it, because the issues in dispute pose undeniable state significance."
The main factors for court consideration were twofold: whether the public agency was created to raise revenues to replace city or county property taxes lost because of Proposition 13, and whether the agency is under the "essential control" of another public agency with property taxing powers.
Christopher Cottle and Patricia Bamattre-Manoukian, the two appellate justices who sided against the tax, wrote in their 36-page opinion that "the dispositive question is not whether property taxes have been used to fund the local taxing agency's project, but rather whether -- but for Proposition 13 -- property taxes would or could now be used for that purpose."
The justices said the "record before us satisfies us that property taxes" could as readily have been used for the Santa Clara County improvements, which led them to conclude that the new sales tax represented an attempt to replace revenues lost due to Proposition 13.
But in a 38-page dissenting opinion, Justice William Wunderlich disagreed agreed with the other justice's line of reasoning.
Since the county never actually levied a property tax to fund transportation projects, Wunderlich wrote, "I fail to see how maintaining the current level of sales tax revenue would suddenly recoup losses from decreased property tax revenues or withdraw or deplete the real property tax savings resulting from Proposition 13."
Wilson and Kempton said they believe the appellate court ruling goes far beyond the limitations imposed by Rider, and also failed to make proper distinctions under Rider on a case-by-case basis.
"I can conceive of no local taxing agency that would not fall within my colleagues' expanded view of 'special district' " because property tax revenues "can theoretically be used to fund virtually any city or county purpose," Wunderlich wrote.
Jonathan Coupal, legal affairs director for the Howard Jarvis group, said "there has been some argument that this court went further than the Rider case did. I am not sure I agree with that."
Rather, Coupal said he believes "the upshot is that this ruling was a fairly straightforward application of Rider." He also predicted the authority would encounter difficulty pursuing an appeal.
"I don't see the Supreme Court retreating from Rider so soon after issuing the decision," Coupal said.
Coupal said the Santa Clara County case should not have "an earthshaking impact" on existing sales taxes now being collected by transportation authorities. But to the extent those taxes expire and local agencies "desire to renew them, they must be careful in putting together their taxing scheme to make sure they don!t run afoul of Rider -- and this case."
