LA’s $750 Million Time Bomb
by City Watch, Jack Humphreville
LA WATCHDOG – On Monday, the California State Supreme Court, in a unanimous decision, ruled that a class action lawsuit challenging the validity of the City’s Telephone Users’ Tax (‘TUT’) could proceed, overruling previous lower court decisions.
According to the City’s Official Statement, Los Angeles’ liability could be up to $750 million, the amount of the TUT collected between the time federal law changed and the effective date of Proposition S, the Communications Users Tax, that was approved by 66% of the voters in March 2008.
To put this in the proper perspective, $750 million equals 17% of this year’s General Fund.
In October 2006, Estuardo Ardon filed a class action lawsuit challenging the legality of LA’s TUT and seeking refunds for Angelenos of taxes illegally collected by the City over the previous two years, ever since the demise of the federal telephone excise tax.
However, in December 2006, Mayor Villaraigosa and the City objected, arguing that individuals must each file a government claim, putting the interests of the all knowing City ahead of those of ordinary, hard working Angelenos.
While the resolution of this issue will take years, the City is benefiting from the new 9% Communications Users Tax that is levied on telephones, cell phones, and other communication services. This new tax replaced the 10% TUT, but included other methods of communication other than just plain old telephones.
But ironically, while revenues for the CUT increased to $288 million in the fiscal year ending June 30, 2009, this year’s anticipated collections are projected to be only $243 million, a decrease of $45 million, or 15%, from its peak in 2009.
Underlying the lower CUT revenues is a decline in the use of plain old telephones and increased competition in the wireless market, resulting in significantly lower prices.
But this $750 million liability is a big league problem that is not going to go away. Rather, it will continue to fester and grow because of monstrous legal fees and interest expense on the outstanding balance. And when payment is due, it will become a major crisis.
While the Mayor will no doubt pontificate about the ‘devastating’ impact of this potential judgment on the City and its ability to provide core services such as public safety, and throw many barbs at the plaintiff’s evil supporters, City Hall needs to address this issue NOW rather than its usual response of ‘kicking the can down the road.’
To fund this $750 million liability, the City will probably issue yet another Judgment Obligation Bond, much like it did in June 2010 when it raised $51 million to fund its past sins on the backs of tomorrow’s citizens.
But this new Judgment Obligation Bond will be the mother of all judgment obligation bonds, costing Angelenos over $1 BILLION when you factor in the interest payments and legal fees. The annual hit to the General Fund will be over $100 million.
And thanks, Antonio. We will enjoy paying off this debt long after you have departed City Hall.
Note: Friends of the plaintiff included a diverse group: The Utility Reform Network (San Francisco), the Utility Consumers’ Action Network (San Diego), the Tax Foundation, the Consumer Federation of California, Consumer Action, and the Howard Jarvis Taxpayers Association.