Appeal of city-county tax dispute likely to get pricey

Santa Cruz County is preparing to appeal a judge’s decision that the county wrongly withheld tax revenues destined for Scotts Valley, virtually ensuring that taxpayers will end up footing legal bills exceeding $1 million.
County supervisors on June 9 authorized the appeal in a case in which the city argued that the county should not have deducted from its property tax revenues an amount equal to the taxes collected by the city redevelopment agency.
San Mateo County Superior Court Judge Steven Dylina agreed with the city in a May 18 decision, ordering the county to pay Scotts Valley $2.1 million in back taxes and $400,000 a year in the future in addition to the tax revenues the county would otherwise allocate to the city.
The appeal won’t be filed for several weeks, but to date the city has spent $329,282 in attorney fees and other expenses to pursue the case, according to City Manager Steve Ando. The county’s expenses have totaled about $230,000, county spokeswoman Dinah Phillips said.
City Attorney Kirsten Powell acknowledged that by the end of the appeal, both sides together likely will have spent more than $1 million on the case in attorney’s fees and other expenses.
“It’s ridiculous that we got to this point,” Powell said. “When we first talked about this with the county, we asked for a tolling agreement, and they refused.”
A tolling agreement would have suspended the statute of limitations and allowed negotiations to continue without the city losing the right to ask for the oldest back taxes.
Attorney Bill Marticorena of Costa Mesa, a specialist in tax cases who is representing the county, said the basis of the appeal is that the judge misinterpreted the state law that spells out how taxes are to be allocated to cities.
“It’s not the way the allocations are intended to be paid,” Marticorena said. “The key issue is that the judge just got it wrong.”
Not surprisingly, Powell disagreed.
“The judge got it right,” she said. “He read the clear language of the statute and decided our interpretation was correct.”
The city has argued that the redevelopment tax income shouldn’t be considered part of the city’s revenues because redevelopment taxes are restricted for certain uses.
The appeal is expected to be filed in the California Court of Appeal in San Francisco after Dylina certifies his decision as final.
The appeal court could decline to hear the case, however, because two remaining points of contention in the original case remain undecided. Dylina told the two sides he would indicate in his final decision that the tax allocation issue was so important that the appeals court should hear the case even with the other points unresolved.
One of the undecided points is whether Skypark is large enough to qualify as the park that the city promised to build in its original agreement with the county that set up the redevelopment agency.
The other point is whether the affordable-housing provisions in the city’s general plan are adequate. The initial redevelopment agreement called for the city to provide affordable housing.
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