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L.A. County is facing unusually large lawsuit payouts

August 13, 2009|Molly Hennessy-Fiske

At a time of budget cuts and belt-tightening, Los Angeles County officials now face tens of millions in payouts to settle two lawsuits brought on behalf of taxpayers, plus a new taxpayer lawsuit filed this week. The payouts -- described by county officials as unusually big -- put the county on pace to far exceed last year's settlements.

In June, the county agreed to a $172-million settlement to end a class-action lawsuit involving an illegal utility tax paid for years by nearly 400,000 residents and businesses in unincorporated areas.

This week, county lawyers were in talks on another case having to do with interest on property tax refunds owed to 100,000 property owners. Steven Carnevale, senior assistant county counsel, said the county may settle the decade-old case in coming weeks for up to $45 million.

Carnevale called the utility and property tax cases "large" and "rare." County lawyers are handling more than 1,500 liability cases, he said, but most involve only one or two people, such as accident and injury cases. In all, legal settlements cost the county more than $45 million last year, with an average settlement of more than $141,000, according to Supervisor Gloria Molina.

The utility tax case is the only class-action suit to be settled so far this fiscal year, officials said. Taxpayers who filed the suit successfully argued that county supervisors imposed the tax in 1991 without notifying taxpayers or placing it on the ballot as required by law.

Pushing limits

Some attorneys who have represented taxpayers in the lawsuits say they believe county officials engage in a pattern of pushing the limits of tax law. Even after settling the utility tax suit, they note, the county kept well over half of the taxes collected, about $500 million over the seven years it was charged.

Paul Heidenreich, who was the lead attorney for taxpayers in the case, said he believed the county acted with "contempt for the taxpayers."

"They just decided let's keep taxing and see how long it takes for someone to call us on it," Heidenreich said.

Hermosa Beach businessman Roger Bacon, who first filed the property tax suit against the county 10 years ago, said a settlement in that case was long overdue.

"They have delayed it with the intent of trying to get rid of it," Bacon said. "They just stalled. They've wasted the county's money."

Molina and Supervisor Zev Yaroslavsky said county officials refused for years to settle the taxpayer lawsuits because they believed their interpretation of tax policy was correct and they would prevail.

"It's not a case of 'tax first, ask questions later,' " Yaroslavsky said. "We did what we thought, and I thought, was right."

A new suit filed Tuesday, however, alleges that the county settled the utility tax case only to turn around and misrepresent a ballot measure that successfully restored the tax found improper by the court.

The 2005 lawsuit maintained that the county had illegally imposed a 5% utility tax on residents and businesses in unincorporated areas for gas, electricity and telephone services beginning in January 1991. Supervisors agreed in July 2008 to refund taxes assessed from February 2004 to November 2008.

As a condition of the settlement, the county put a 4.5% utility tax up for a vote on the November 8 ballot.

Measure U passed and replaced the previous tax. A pair of taxpayers are now challenging the legality of the measure, arguing the wording was confusing and led voters to believe a "no" vote would have allowed a 5% utility tax to stand, even though the settlement reached with the county did away with the tax.

"The county was just sued over doing it wrong, and then they turn around and in what just seems like a purposeful attempt to deceive the voters, they did it again," said Stephen Garcia, the lawyer representing taxpayers in the case filed this week.

County officials said that when the initial utility tax suit was filed four years ago they set aside $190 million, about three years' worth of utility taxes, to pay a potential settlement.

"We set aside money so that if we lost the case, we wouldn't have to absorb a shock," Yaroslavsky said.

The property tax settlement will likely be paid out of the county's annual general liability fund of about $60 million, county staff said.

As part of the utility case settlement, the county also paid more than $7.6 million for taxpayers' lawyers' fees and costs, plus about $1 million for county counsel and two private law firms hired to defend the county, Carnevale said.

The county also spent between $200,000 and $300,000 to advertise the settlement and process claims, Carnevale said. About a third of those eligible, 135,000 taxpayers, filed claims by the April deadline, officials said.

"At the end of the day the ones who really win out are the lawyers," Molina said. "We're vulnerable because they see a weakness. We are the deep pockets."

But taxpayer advocates said county officials should have acted sooner to refund taxpayers' money and prevent added fees.

"They only dig themselves in a deeper hole when they continue to litigate the issue," said Jon Coupal, president of the Howard Jarvis Taxpayers Assn., a watchdog group with offices in Los Angeles and Sacramento. "It's reflective of poor risk management."

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molly.hennessy-fiske@latimes.com

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