SAN FRANCISCO -- Bond lawyers expressed guarded optimism last week about California localities' use of sales tax revenue bonds for transportation purposes, despite a recent court decision muddying the outlook for these bonds.

"I don't think the [state] Supreme Court really wants to come around and knock these things off" for transportation, said Richard M. Jones, a partner at the law firm of O'Melveny & Myers.

But Mr. Jones also cautioned that the authority of many districts established to collect sales tax increases with majority-vote approval "is murky."

About a dozen local transportation authorities are relying on statutes of limitation that bar claims challenging the validity of their sales taxes, Mr. Jones noted. But "the bond counsel community appears to be divided" on the degree of protection afforded by such statutes if constitutional questions arise regarding the legality of a tax, he added.

Mr. Jones and other officials appeared Thursday at the spring meeting of the California Society of Municipal Analysts to discuss the validity of securing debt with sales tax revenues.

The California Supreme Court in December cast a cloud over certain sales tax increases when it struck down a San Diego County sales tax increase for courts and jails in the so-called Rider case.

The high court ruled that the San Diego County tax required two-thirds voter approval, instead of the simple majority it received, under voting requirements for local special taxes imposed by Proposition 13, the 1978 property tax-cutting measure.

Part of the high court's decision hinged on its finding that San Diego County purposely circumvented Proposition 13 when it created a new justice facility financing agency.

The Rider case presented "terrible facts" that probably gave the Supreme Court little choice but to strike down the tax, noted Eric Tashman, a partner at the law firm of Brown & Wood. But the court's ruling and its guidelines for determining the circumstances under which other districts' taxes might be invalidated raised additional unresolved issues, including whether its decision should be applied prospectively, Mr. Tashman said.

The uncertainty complicates the marketing of new sales tax bonds, primarily because bond lawyers cannot give an unqualified opinion on the validity of such sales taxes, the speakers noted Thursday. That uncertainty prompted rating agencies to pass on rating a bond issue by the San Bernardino County Transportation Authority earlier this year, but the debt sale moved forward when Financial Guaranty Insurance Corp. elected to insure the deal.

The state supreme court said it will consider other legal challenges to such district taxes on a case-by-case basis. Earlier this month it declined to hear a challenge to a half-cent sales tax increase for the Los Angeles County Transportation Commission, and a similar case is pending for Orange County.

But the high court ordered in the Los Angeles County case that a lower court opinion be depublished, meaning that the case cannot be cited as precedent. Mr. Tashman said the decision to depublish may mean that the high court harbored some reluctance over concurring with parts of the decision.

The speakers at Thursday's meeting also noted that pending state legislation would specifically allow approval of certain sales tax measures with majority approval rather than a two-thirds vote. But anti-tax legislators in the state Assembly generally fight such proposals, noted Jean Ross, a legislative analyst for the Assembly Revenue and Taxation Committee.

She added that some legal questions exist regarding a separate bill that would grandfather any sales taxes adopted by simple majority prior to the Rider decision.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.