LOS ANGELES -- The California Supreme Court last week struck down a 1988 sales tax increase in San Diego County in a decision that could affect millions of dollars of local taxes and potential bond issues.
In a 5-to-2 ruling Thursday, the court said a majority vote approval for the tax rendered the measure invalid. The court ruled that the tax violates Proposition 13, the property tax-cutting measure approved by voters in 1978, which requires a two-thirds approval vote for all new local special taxes.
The decision directly affects only San Diego's Proposition A, approved by 50.6% of voters and designed to raise $1.6 billion over 10 years to fund jail and court improvements in San Diego. The ruling throws into question $330 million already collected by the San Diego Regional Justice Facility Financing Authority.
Municipal market participants have followed the case closely because other California local governments are considering or currently have similar sales tax increases to fund judicial and transportation improvements. New tax increases could generate billions of dollars of revenues across the state that may secure bonds.
Lawyers said they were still sorting out the court documents but that it was not likely that the decision would affect existing majority vote sales tax increases for transportation if the tax had not been challenged within 90 days of passage.
"We are still evaluating the decision," said Richard M. Jones, a partner of the law firm of O'Melveny & Myers in Los Angeles. "I was hoping they'd leave the door open for other transportation taxes and they did. Now we just have to see how wide it is," he said.
Most lawyers agreed that the court did not make a blanket ruling and that it will judge each majority vote case on individual merits to see if the tax was created as a ploy to get around the two-thirds requirements of Proposition 13.
"There is a good basis for holding [from the court's ruling] that any agency with a tax that has passed the 90-day statute is probably okay and can be bonded against," said Barney A. Allison, a partner with Nossaman, Guthner, Knox & Elliott, in Los Angeles.
The decision last Thursday sent shock waves through California's local governments as officials and lawyers worked to interpret the ramifications of the court's ruling for their local jurisdictions.
"What a lump of coal in my stocking," said Mr. Allison. He said worried transit officials in San Bernardino, Contra Costa, and Sacramento counties had called to find out if the decision impacts county sales tax increases in their areas. In some cases that revenue stream backs bonds or not issues.
The decision in Richard J. Rider v. County of San Diego could affect current litigation pending against other majority vote sales tax increases throughout the state, including a challenge to a Measure M, a 1990 sales tax increase for transportation in Orange County and a lawsuit filed against a general sales tax increase for health-care and transit needs in Monterey County. It could impact a legal challenge to Proposition C, a half-cent sales tax approved in 1990 by a majority of voters for transportation purposes in Los Angeles County.
"Rider did not resolve the pending litigation issues," said Mr. Allison, whose firm is representing the Los Angeles County Transportation Commission in its case. But about the Los Angeles case "we see Rider as a positive in that it continues to validate levies by entities created prior to Proposition 13," he said.
Mr. Allison said the Rider decision did not overturn an earlier court ruling upholding the legality of a 1980 sales tax increase in Los Angeles because the agency implementing the tax, the Los Angeles County Transportation Commission, was created before Proposition 13.
The decision could have a chilling affect on other local governments, such as Ventura County, which had expressed interest in putting a majority-vote sales tax increase for transportation improvements on the ballot next November.
Lawyers said it was unclear what will happen to the $330 million already collected by San Diego.
Bruce MacLeish, deputy county counsel for San Diego County had speculated that sales tax collection in the area may be suspended or reduced for a certain amount of time.
Steven Zimmermann, senior vice president for Standard & Poor's Corp., said the rating agency was already evaluating the plan's impact on local governments. Despite the decision, the agency affirmed its ratings on San Diego County's approximately $277 million of lease-backed bonds and certificates of participation. Some of those securities are rated A-plus, while others are rated A-plus provisionally.
The state's high court ruling last Thursday overturned an appellate court 1990 decision that said the tax is valid. The California Fourth Appellate District Court of Appeals said that a lower court erred in 1989 by deciding that the San Diego sales tax increase required a two-thirds voter approval, rather than the simple majority support it received.