SANTA CRUZ -- Santa Cruz County could face claims exceeding $1 million from four local cities for improperly charging an administrative fee related to handling some property taxes, the Sentinel has learned.

The Santa Cruz City Council discussed in closed session Tuesday the possibility of filing a lawsuit to recover $454,000 in fees dating back five years. Such a suit would mirror one filed by Watsonville last month asking the Santa Cruz County Superior Court to award the city $367,000 in fees paid since the 2006-07 fiscal year.

The state Supreme Court unanimously ruled in November that Los Angeles County improperly withheld millions in property taxes by charging cities a fee on funds set aside for education purposes. The city of Alhambra argued that state statute requires the funding stream to be exempt from the fee, which Santa Cruz County and other counties also had charged their local cities.

Santa Cruz County officials said they don't dispute the fact that they can no longer charge the fee, and the county budget no longer counts on the money.

But County Counsel Dana McRae said Tuesday she believes a statute of limitations means the county owes far less than the five years' worth. She said there is a dispute about whether the county owes three years or one year of back fees prior to a 2009 agreement in which the county and its four cities consented to wait on a Supreme Court ruling.


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But the high court did not say which formula should be used, and the matter was sent back to a lower court in Los Angeles to decide. McRae said she has suggested everyone wait for that case to be resolved before determining how much the county owes.

What isn't clear is whether local cities are willing to do that.

"They made a mistake, and $450,000 that should have come to the city of Santa Cruz, all paid by city of Santa Cruz property taxpayers, didn't come to the city," City Attorney John Barisone said. He added that he doesn't believe the county should withhold the money just "because we didn't go after them quickly enough."

The Santa Cruz council decided Tuesday to seek further clarification from the county before authorizing Barisone to file suit. If other local cities do join Watsonville in taking the matter to court, the cases could be consolidated against the county, Barisone said.

Capitola City Manager Jamie Goldstein said he believes the county owes his city about $140,000 for the past five years, money he said could be put toward street repair or other initiatives. He intends to discuss the matter with the Capitola council Thursday.

"At the end of the day, these matters are best resolved in a collaborative way," Goldstein said regarding the possibility of filing a suit.

Scotts Valley City Manager Steve Ando believed his city is due about $75,000 since 2006-07. He said he would discuss the issue Wednesday with the city's attorney.

The case against Los Angeles County was filed in 2008. The Supreme Court has until February to decide whether to grant the county's request for a rehearing, an attempt that is widely suspected to fail because the court's ruling was unanimous.

If eventually forced to repay the fee going back five years -- an amount on the order of $1 million depending on interest calculations by local cities -- Santa Cruz County stands to lose an amount that is more than twice the annual revenue anticipated from a lodging tax increase approved by voters in November.

Sentinel staff writers Jason Hoppin and Donna Jones contributed to this report. Follow Sentinel reporter J.M. Brown on Twitter at Twitter.com/jmbrownreports

At a glance

PROPERTY TAX FEES


Santa Cruz County's four local cities could seek reimbursement from the county for five years' worth of fees improperly collected on some property taxes. Below are the estimated amounts city officials say they would be owed.

Santa Cruz $454,000
Watsonville $367,000
Capitola $140,000
Scotts Valley $75,000

Total $1.036 million


SOURCE: Sentinel reporting