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L.A. School District Wins Pass-Through Payment Dispute

Counties and cities must let go of another share of property tax revenues to school districts under the redevelopment law's distribution of the property tax increment.

The case at hand involved a tug-of-war between a county and a school district over a share of the property tax increment distributed by redevelopment agencies. In the wake of Proposition 13, property tax revenues are limited and their allocation is coveted by local government, special districts and school districts. Under redevelopment law, redevelopment agencies must give a portion of the incremental increase in property tax revenues to local entities, including schools, based on the percentage of property tax revenue received by the entity in that fiscal year. These are known as "pass-through payments" from redevelopment agencies.

In this case, the Los Angeles Unified School District argued that it was entitled to a larger share of the property tax increment than it had been allocated because the defendants, which were 13 redevelopment agencies, the County of Los Angeles and the City of Los Angeles (collectively "county"), failed to take in account certain property taxes received by the school district. The trial court disagreed with the school district, and the Second District Court of Appeal reversed.

The argument in this case centered around the overlap between two statutes: the pass-through legislation under Health & Safety Code 33607.5, and the Educational Revenue Augmentation Fund (Revenue & Taxation Code 97.2, 97.3), which is known as ERAF. The Legislature enacted ERAF to require the distribution of a portion of property taxes, along with other funds, to schools, to the detriment of county and city coffers.

Health & Safety Code 33607.5 deals with the allocation of the property tax increment, which is the increase in property tax revenues resulting from the redevelopment of property. In order to ensure that local entities are not financially burdened by the adoption of redevelopment plans, state lawmakers enacted pass-through legislation (Health & Safety Code 33607.5) whereby redevelopment agencies must, according to the court, "share or pass-through a portion of the property tax increment to local taxing entities, including schools." This portion of the property tax increment is based on the proportion of property taxes allocated to the entity in the same fiscal year that the property tax increment is allocated.

In this case, the county did not take into account the amount of property taxes received by the school district through ERAF when calculating the percentages of property taxes received by each local entity. Because the county's calculation of the percentage of property tax revenue received by the school excluded the additional ERAF amount, the pass-through payment allocated to the school district was too small, the school district argued. The school district sued the county on the grounds that the ERAF funds had to be included in the pass-through calculation.

On appeal, the Second District held that the county acted unlawfully in excluding the ERAF allocations. According to the court, subdivision (d)(5) of 97.2 and 97.3 of the Revenue & Taxation Code clearly and unambiguously includes ERAF distributions as property tax revenue, and therefore, "any property tax revenue deemed allocated to ERAFs under subdivision (d)(5) necessarily qualifies as property tax revenue to the school that received it." The court did point out that any money allocated through the ERAF to the school that was not property tax revenue should be excluded from the pass-through calculation.

Thus, the court concluded that the county's calculations were unlawful and remanded the matter to Los Angeles County Superior Court to determine the right to reimbursement.

The Case:
Los Angeles Unified School District v. County of Los Angeles, No. B213703, 2010 DJDAR 1422. Filed January 27, 2010.
The Lawyers:
For the school district: Gregory Luke, Strumwasser & Woocher, (310) 576-1233.
For the county: Paul Gale, Troutman Sanders, (949) 622-2704.

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