Proposition 13 Tested Again: County of Orange v. Orange County Assessment Appeals Board No. 3

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1 City Attorneys Department League of California Cities Continuing Education Seminar February 2003 James C. Harman Deputy County Counsel County of Orange Proposition 13 Tested Again: County of Orange v. Orange County Assessment Appeals Board No. 3 James C. Harman Deputy County Counsel County of Orange 10 Civic Center Plaza P.O. Box 1379 Santa Ana, CA (714)

2 TABLE OF CONTENTS I. INTRODUCTION II. ASSESSORS POSITION A. Voters Enact Propositions 13 and B. The Legislature Implements Propositions 13 and C. Applying the Constitutional and Statutory Provisions D. The Errors of the Bezaire-Pool Method III. BEZAIRE-POOL S POSITION A. Bezaire-Pool s Position B. Plain Language of the Constitution Limits Annual Increases to 2% C. History of Proposition 8 Supports Limit on Annual Increases IV. CONCLUSION Page 1.

3 I. INTRODUCTION No issue regarding Proposition 13 has aroused as much interest in recent years as the 2% issue. Otherwise known under labels such as Proposition 8 or recapturing, the issue involves how to implement Proposition 13 for properties that have fluctuated in value. A December 2001 Orange County Superior Court ruling in County of Orange v. Orange County Assessment Appeals Bd. No. 3 (Case No. 00CC03385), if upheld on appeal, could radically change Proposition 13 implementation statewide. The consequences of such change have been estimated as high as $10 billion in lost tax revenue throughout the state. See, Dan Walters, State Has Huge Fiscal Headache, Which Could Get Even Worse, Sacramento Bee, December 30, Though Superior Courts in Los Angeles and San Diego counties have ruled contrary to the Orange County Superior Court, the Orange County case appears to be the case destined for appellate resolution of the 2% issue. Proposition 13 limits a property s taxes to 1% of its value at the time of acquisition. Assessors believe that annual increases in property taxes are limited to 2% from that acquisition value. Some taxpayers, including those involved in the Orange County case, Renee Bezaire and Robert Pool ( Bezaire-Pool ), believe that Proposition 13 limits annual increases to 2% from the prior year s enrolled value. The controversy involves valuing property that has recovered after suffering a decline in market value. Proposition 8, enacted shortly after Proposition 13, allows for taxes to be reduced where a property s value has declined. Where a property s taxes have been reduced due to a decline in market value, can the taxes be raised in subsequent years by more than 2% annually, so long as the taxes do not exceed the acquisition value (adjusted by no more than 2%)? The chart attached as Appendix A demonstrates a typical scenario. A property is purchased in Year 1 at $250,000. That value serves as the acquisition value or base year value for the property. According to assessors, Proposition 13 prohibits taxing the property on a value higher than the base year value, adjusted annually by an inflation factor not to exceed 2% (this limits is designated on the graph as Prop 13 Limit ). In Year 2, where the property s market value has appreciated beyond its acquisition value, the adjusted base year value is enrolled. In Years 3 through 5, however, where the market value has depreciated below the adjusted base year limit, the market value is enrolled, pursuant to Proposition 8. Year 6 is where the controversy begins. According to the assessors, the taxable value of the property is its market value, since it remains lower than the adjusted base year value. Bezaire-Pool claim the taxable value is limited to $204,000 (the Year 5 taxable value of $200,000 plus 2%). Under the Bezaire-Pool theory, the Year 5 value becomes a new base year from which taxes cannot be raised more than 2% annually. In Years 7 and 8, assessors would return to the adjusted base year limit of Proposition 13, since the market value of the property exceeded the adjusted base year value. From the assessors perspective, the law provides taxpayers the benefit of always receiving the lower of the market value or the Prop. 13 value. The following is a summary of the legal bases for the interpretations of Propositions 13 and 8 of the assessors and Bezaire-Pool. 1.

4 II. ASSESSORS POSITION A. Voters Enact Propositions 13 and 8 In 1978, California voters radically changed the manner in which property is assessed for taxation. The voters approved Proposition 13 in June 1978, which added Article XIII A ( Article XIII A ) to the California Constitution. The new Article of the Constitution changed assessment of property for taxation purposes from the common market value approach to an acquisition value system. (Nordlinger v. Hahn, 505 U.S. 1, 4-6 (1992)). Proposition 13 limited property taxes to 1% of the property s value at acquisition, also known as the base year value. (Cal. Const. Art XIII A, 2(a)). The base year value could be adjusted for inflation by no more than 2% per year. (Cal. Const. Art XIII A, 2(b)). Proposition 13 did not specifically provide for the reduction of taxable value of property when its market value declined due to disaster or destruction. (Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, 22 Cal. 3d. 208, 255 (1978) (Bird, C.J., dissenting)). This presented a problem. For those whose property values declined since purchase, Proposition 13 did not provide for a lowering of the taxable value of their homes, since Proposition 13 did not recognize market values. Accordingly, Proposition 8 was approved by the voters on November 7, 1978, and modified Article XIII A, section 2, subdivision (b) to its current language: The full cash value base may reflect from year to year the inflationary rate not to exceed 2 percent for any given year or reduction as shown in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced to reflect substantial damage, destruction or other factors causing decline in value. The effect of both Propositions 13 and 8 was to limit real property taxes and base them on the lower of a property s adjusted base year value or full cash value (i.e., market value). As said in Blackwell Homes v. County of Santa Clara, 226 Cal. App. 3d 1009, 1013 (1991): Proposition 13, which limited ad valorem property taxes to a maximum of 1 percent, changed the standard for determining full value of real property. It limited full cash value to the lower of fair market value or the property s base year value. (Cal. Const., art. XIII A, 2, sub. (b); 51.) Base year value was defined as the county assessor s valuation as shown on the tax bill or, if the property was newly constructed or changed ownership thereafter, the fair market value as determined under previous law on the date of the purchase, new construction, or change of ownership. (Cal. Const., art. XIII A, 2, subd. (a); 110, ) Increases in the base year value were limited to a maximum of 2 percent per year. (Cal. Const., art. XIII A, 2, subd. (b); 51, 110.1, subd. (f).) 2.

5 To briefly describe Proposition 8 and 13 as they impact on taxpayers in California, Proposition 8 requires the assessor to annually enroll either a property s Proposition 13 value (factored for inflation no more than 2% annually), or its current market value as of January 1 (lien date) of each year, whichever is less. When the current market value replaces the higher Proposition 13 value on the roll, that lower value is commonly referred to as a Prop 8 Value. The law requires the assessor to annually reassess all Proposition 8 properties and adjust them to reflect either their current market value on January 1st or their Proposition 13 factored base year value, whichever is less. Importantly, in no case may the assessor value a property higher than its Proposition 13 factored base year value. Although the annual increase for Proposition 13 values is limited to no more than 2% annually, the same restriction does not apply to values adjusted under Proposition 8. Actual market value must be enrolled and any subsequent increase or decrease in market value is enrolled regardless of its percentage. However, when the current market value of a Proposition 8 property exceeds its Proposition 13 value (factored for inflation), the Assessor simply reinstates the factored Proposition 13 value. B. The Legislature Implements Propositions 13 and 8 The Supreme Court recognized that the Legislature would need to implement the provisions of Article XIII A, as the new constitutional provision would, necessarily and over a period of time require judicial, legislative and administrative construction. This is a fairly common procedure. (Amador Valley, 22 Cal. 3d at 244). Shortly after Propositions 13 and 8 passed, the Legislature worked on statutory measures to comprehensively implement the propositions. On January 22, 1979, the California State Assembly Task Force on Property Tax Administration recommended that the implementing legislation for Propositions 13 and 8 provide that the taxable value would be the lesser of the adjusted base year value under Proposition 13 or full cash value. The task force reported that under Proposition 8, [t]he value of the property may rise by more than 2% annually only if the full cash value remains below that year s factored base year value for that property. In July 1979, Assembly Bill 1488 became law and created Revenue and Taxation Code section 51 with the following relevant language: For purposes of subdivision (b) of Section 2 of Article XIII A of the California Constitution, for each lien date after the lien date in which the base year value is determined pursuant to Section 110.1, the taxable value of real property shall be the lesser of: (a) Its base year value, compounded annually since the base year by an inflation factor, which shall be the percentage change in the cost of living, as defined in Section 2212; provided, that any percentage increase shall not exceed 2 percent of the prior year s value; or 3.

6 (b) Its full cash value, as defined in Section 110, as of the lien date, taking into account reductions in value due to damage, destruction, depreciation, obsolescence, or other factors causing a decline in value. Section 51 was not substantially amended until Senate Bill 821 ( SB 821 ) initially proposed a hard 2% cap on annual increases in taxable values of real property. The State Board of Equalization ( SBE ) advised that the proposal was unconstitutional because it made permanent the temporary reductions in taxable value authorized by Proposition 8. SB 821 was then amended to require the local assessor to annually determine the value of property that has received a Proposition 8 temporary reduction. Only where the market value of the property exceeds its trended base year value would the assessor no longer be required to annually appraise the value of the property. C. Applying the Constitutional and Statutory Provisions Section 51, subdivision (a), begins by establishing how taxable value is calculated under Propositions 13 and 8, For purposes of subdivision (b) of Section 2 of Article XIII A of the California Constitution, for each lien date after the lien date in which the base year value is determined pursuant to [Revenue and Taxation Code] section 110.1, the taxable value of real property shall... be the lesser of: The plain language of this provision demonstrates the Legislature intended to implement the constitutional provisions of Propositions 13 and 8. Moreover, the language clearly and plainly states that a base year is established before a reduction in taxable value can be assessed: for each lien date after the lien date in which the base year is established. The Bezaire-Pool interpretation is inconsistent with this plain language, as they would have each reduction in taxable value establish a new base year. Section 51 prohibits such an interpretation, since the base year is determined before any reduction in taxable value under Proposition 8 is determined. The new base year is only established upon a change of ownership or new construction. (Cal. Const. Art. XIII A, 2, subd. (b); Cal. Rev. & Tax. Code 110.1). Section 51 defines that the taxable value of real property as the lesser value based on two methods of valuing real property ( the taxable value of real property shall... be the lesser of ). The methods of valuing property are found in paragraphs (1) and (2) of subdivision (a) of Section 51. The relevant portion of Paragraph (1) reads: Its base year value, compounded annually since the base year by an inflation factor, which shall be determined as follows: * * * (C) For any assessment year commencing on or after January 1, 1998, the inflation factor shall be the percentage change... from October 1 of the prior fiscal year to October 1 of the current fiscal year... 4.

7 (D) In no event shall the percentage increase for any assessment year determined pursuant to subparagraph (A), (B), or (C) exceed 2 percent of the prior year s value. Paragraph (2) provides the alternative method of determining taxable value. Its full cash value, as defined in [Revenue and Taxation Code] Section 110, as of the lien date, taking into account reductions in value due to damage, destruction, obsolescence, removal of property, or other factors causing a decline in value. The limitation of 2% increases is found in subparagraph (D) of Paragraph (1). That is, subparagraph (D) modifies how base year value is determined under Paragraph (1). This is established by the other language in subparagraph (D), for any assessment year determined pursuant to subparagraph (A), (B), or (C) (i.e., the methods under which base year values are determined). Accordingly, the term value in subparagraph (D) refers to base year value found in Paragraph (1). The term value does not apply to Paragraph (2). Further support for this plain reading is found in the long-standing last antecedent rule of statutory construction, qualifying words, phrases and clauses are to be applied to the words or phrases immediately preceding and are not to be construed as extending to or including others more remote. [citation]. (White v. County of Sacramento, 31 Cal. 3d 676, 680 (1982)). The last antecedent for value is found in Paragraph (1) of section 51, not subdivision (a). That is, the last antecedent for value is base year value, not taxable value. The Assessment Appeals Board s ( AAB ) belief that value in subparagraph (D) refers to taxable value is unsupported by simply looking to the last antecedent of value, i.e., base year value. Interpreting value as referring to taxable value also does not conform to Article XIII A, section 2, subdivision (b) of the California Constitution. In that section, only the full cash value base cannot exceed a 2% inflationary rate. Section 51 conforms with this requirement, as subparagraph (D) limits the base year value from being increased more than 2% per year. There is nothing in the constitutional provisions of Propositions 13 and 8 that specifies the amount of increase in taxable value when the market value of a property has recovered to exceed the property s base year value adjusted for inflation. Moreover, the Bezaire-Pool interpretation has been flatly rejected by the appellate court in County of San Diego v. Assessment Appeals Bd. No. 2, 148 Cal. App. 3d 548, 556 (1983): Revenue and Taxation Code section 51 provides that the taxable value of the property shall be the lesser of: (a) The base year value, which for each appellant is the purchase price of his or her property, compounded annually by a maximum inflation factor of 2 percent, or (b) the property's full cash or market value taking into account the reduction in value due to damage or other factors causing a decline in value, or (c) the sum of (a) or (b) above, computed for both land and improvement. 5.

8 The above section requires the assessment appeals board determine not only the base year value or factored base year value of the property, but also its full cash value undepreciated for any damage. After the full cash value is determined, it is then reduced for damage or depreciation arriving at the depreciated cash value of the property. If the depreciated cash value is less than the base year value or the factored base year value, then it shall be the taxable value of the property. If the depreciated cash value is more than the base year value or in following years becomes more than the factored base year value, then the taxable value is the base year value or factored base year value. The Board failed to follow this procedure. The plain language of subdivision (e) of section 51 also supports the County s view of how the statute should be interpreted. Subdivision (e) instructs the local assessor that where she has reduced the value of property under Paragraph (2), she must annually reappraise at its full cash value until that value exceeds the value determined pursuant to paragraph (1) of subparagraph (a). Section 619 provides further support that the County follows the appropriate method of determining the taxable value of property. Subdivision (c) of section 619 states: In the case of an increase in a property's full value that is determined pursuant to paragraph (1) of subdivision (a) over the property's full value determined for the prior year in accordance with paragraph (2) of subdivision (a) of Section 51, the information shall also include the base year value of the property, compounded annually from the base year to the current year by the appropriate inflation factors. That is, where the assessor enrolls the adjusted base year value after having enrolled the full cash value in the prior year, the assessor must provide the assessee information regarding the base year, adjusted for the various inflation factors. This makes sense, because the assessee will likely want information as to why their assessment increased by a potentially substantial amount from the prior year. Where the County, from year to year, determines that the adjusted base year value is the taxable value (i.e. it is less than full cash value), then the County does not need to provide the notice. Section 619(f). The SBE has endorsed the assessors interpretation of Propositions 13 and 8. The California Constitution directs the SBE to ensure equity and uniformity relative to the assessment of all properties assessed by the 58 county assessors. (Cal. Const. Article XIII, section 18). Property Tax Rule 461 (Cal. Code Regs. tit. 18, 461) requires the enrollment of the lesser of the adjusted base year value or the market value. In Letter to Assessor 85/25, the SBE instructed: The correct value to be enrolled in any year is the lower of a property s factored base year value or its current market value.... Enrolling a value lower than factored base year value does not establish a new base year value. Letter to Assessor 86/36 further 6.

9 described the SBE s position on the issue in this case by directing: If there is a subsequent value decline, the new base year value remains and values can rise back to that level without the 2 percent per year limitation. The SBE also provided a letter supporting the assessor s position in the Orange County case involving the property of Bezaire-Pool. D. The Errors of the Bezaire-Pool Method Bezaire-Pool interpret Article XIII A, Section 2, subdivision (b) to mean that where there is a reduction in property taxes, that reduction becomes a new base year. Once that new base year is created, the acquisition base cannot be adjusted for inflation by more than 2% per year. While Bezaire-Pool are correct that base years cannot be adjusted more than 2% per year, there is no basis for their claim that a reduction in taxable value due to a decline in the property s value creates a new base year. In fact, the implementing provisions of Propositions 13 and 8 contradict Bezaire-Pool s interpretation. New base year values are only created when there is a change of ownership or new construction. The Bezaire-Pool interpretation contradicts the plain language of Article XIII A, Section 2, subdivision (b). The only reference to a 2 percent limit in that constitutional provision is in the context of the acquisition base year value. Article XIII A, Section 2, subdivision (b) states that the full cash value base may reflect from year to year the inflationary rate not to exceed 2 percent for any given year. (Emphasis added). Thus, the base year value is adjusted for inflation, not a value based on fair market value. Bezaire-Pool attempt to place a 2% limit on general, overall assessed values has no basis in Article XIII A of the Constitution. Where a constitutional provision is not self-executing, enabling legislation is required to implement the provision. (Cal. Building Industry Assoc. v. Governing Bd. of the Newhall Sch. Dist. of Los Angeles County, 206 Cal. App. 3d 212, (1988)). By definition, Proposition 8 s change to Article XIII A, Section 2, subdivision (b) does not prohibit the Legislature from lowering property values. The subdivision states or may be reduced to reflect substantial damage, destruction or other factors causing a decline in value. (Emphasis added). It is a well-settled principle of statutory construction that the word may is ordinarily construed as permissive, whereas shall is ordinarily construed as mandatory, particularly when both terms are used in the same statute. (Common Cause of California v. Board of Supervisors, 49 Cal. 3d 432, 443 (1989)). Both shall and may are used in used in Article XIII A, Section 2, subdivision (b). The may be reduced is permissive and, naturally, the discretion to exercise that permissive authority is vested in the Legislature. (Amador Valley, 22 Cal. 3d at 219). A danger inherent in Bezaire-Pool s interpretation of Proposition 8 is that it would violate the federal Equal Protection Clause of the Fourteenth Amendment of the United States Constitution, as discussed in Allegheny Pittsburgh Coal Co. v. Webster, 488 U.S. 336 (1989). In Allegheny, the United States Supreme Court held that unequal treatment of property owners in a 7.

10 property tax scheme violates the Equal Protection Clause where no rational basis for the discriminatory treatment exists. Id., at There is no rational policy that supports giving permanent tax relief to properties that suffered temporary declines in market value. Bezaire-Pool would have Proposition 8 give permanent tax relief to those whose property values temporarily declined. Long after the properties market values had recovered, those properties would enjoy relief from their share of the community s tax burden simply because they owned property that (at some point) had temporarily declined. It is important to note that those who would benefit from Bezaire-Pool s construction of Proposition 8 would never realize the loss in property value, since those who benefit under their view are those who own property the value of which temporarily declined and then later recovered. Those who sell their property in a depressed market would receive the Proposition 8 benefit under both the County s and Bezaire-Pool s theory. The new owner of the property would receive the acquisition value of the property, just like all other property owners in California. The difference in the interpretations becomes apparent when considering what happens for those owners who whether the storm and retain their properties until market values recover. There is no policy that supports giving permanent tax relief to this class of property owners to the detriment of other owners. III. BEZAIRE-POOL S POSITION 2 A. Voter Tax Revolt The United States Supreme Court has provided an authoritative thumbnail background to the tax revolt commonly called Proposition 13: In 1978, California voters staged what has been described as a property tax revolt by approving a statewide ballot initiative known as Proposition 13. The adoption of Proposition 13 served to amend the California Constitution to impose strict limits on the rate at which real property is taxed and on the rate at which real property assessments are increased from year to year.... Nordlinger, at 3. (Emphasis added). 1 / The high court distinguished Proposition 13 s use of acquisition value as a basis for property taxation in Nordlinger v. Hahn, 505 U.S. 1 (1992). The Nordlinger court found the policy of attempting to achieve the benefits of an acquisition value system served as a rational basis for Proposition 13 s enforcement. Id., at / The materials describing the Bezaire-Pool position are largely taken verbatim from their trial brief in County of Orange v. Orange County Assessment Appeals Bd. No. 3. Robert A. Pool, counsel for Bezaire-Pool, has authorized the inclusion of such materials in this paper. 8.

11 As in Nordlinger, which rejected challenges on federal constitutional grounds brought against California Constitution, Article XIII A, the California Supreme Court has repeatedly affirmed the vitality and constitutional soundness of Article XIII A. See Amador Valley Joint Union High School District v. State Bd. of Equalization, 22 Cal. 3d 208 (1978); City and County of San Francisco v. County of San Mateo, 10 Cal. 4th 554 (1995); Sinclair Paint Co. v. State Bd. of Equalization, 5 Cal. 4th 866 (1997); Apartment Assn. of Los Angeles County, Inc. v. City of Los Angeles, 24 Cal. 4th 830 (2000). Article XIII A limits both the valuation of real property for tax purposes and the maximum tax rate that can be imposed on the resulting real property valuation. It limits the valuation of real property owned since the 1975 assessment date to the full cash value of the property, increased for inflation by a maximum of 2% annually. (Art. XIII A, 2, subds. (a) & (b).) Shortly after the June, 1978, adoption of article XIII A, the Legislature recognized that the new constitutional provision lacked, among other things, a means by which a property s full cash value base might be adjusted downward to account for physical and economic events that inevitably occurred that caused real property to lose or decline in value. Thus, the Legislature, under Senate Constitutional Amendment 67 ( SCA 67 ), placed on the November, 1978, ballot the initiative known as Proposition 8. Proposition 8 handily passed in the November, 1978, general election with the approval of about 78% of the electorate. The California Supreme Court recently said, as between the Legislature s intent behind a statute and the intent that underlies Proposition 13, the June, 1978, voter initiative that added Article XIII A to the California Constitution: [The] argument appears to reveal a fundamental misunderstanding as to whose intent controls... [T]he question is what the voters intended when they adopted Proposition 13, and it is clear that, as far as they were concerned, the practice of budgeting first, taxing later was no longer acceptable. Ventura Group Ventures, Inc. v. Ventura Port District, 24 Cal. 4th 1089, 1099 (2001). (Emphasis in original.) In another recent opinion the California Supreme Court stated: The purpose of Proposition 13 was to cut local property taxes.... Its principal provisions limited ad valorem property taxes to 1 percent of a property s assessed valuation and limited increases in the assessed valuation to 2 percent per year unless and until the property changed hands. Apartment Assn. at 836. (Emphasis added.) B. Plain Language of the Constitution Limits Annual Increases to 2% Judicial construction and interpretation of Section 2(b), as with statutory construction, follows the fundamental rule that the main object of the interpretation is to ascertain the intent of the parties who made the instrument and to give that intent the fullest effect possible consistent with the language of the provisions and the related body of law. (State Bd. of Equalization v. Bd. of Supervisors, 105 Cal. App. 3d 813, 821 (1980). In addressing questions concerning Section 2(b) s valuation limitation, the court s task is to effectuate the voters intent in adopting Article XIII A. Id. 9.

12 The present version of Section 2(b) is unchanged since Proposition 8 on the 1978 ballot amended Article XIII A. With emphasis added, in relevant part Section 2(b) still reads: The full cash value base... may be reduced.... As is the case for statutory construction, judicial construction of a constitutional amendment looks first to plain meaning of the words actually employed in the text. Where the language is clear on its face, the court need not indulge in interpreting away the clear language in favor of a non-existent ambiguity. ITT World Communications, Inc. v. City and County of San Francisco, 37 Cal. 3d 859, 865 (1985). The grammatical structure of Section 2(b) contemplates that whenever the full cash value base actually is reduced, it is thereafter subject to the 2% year-to-year value limit. The disjunctive predicate phrase, or may be reduced, has base as its subject, as Proposition 8 amended Article XIII A in the phrase: The full cash value base... may be reduced.... In other words, the full cash value base always remains subject to the 2% limit year after year, whether that base remains unchanged, or is moved downward due to physical or economic impact on the fair market value of the property. Once a downward adjustment to the full cash value base occurs, whether due to substantial damage, destruction or other [read: economic] factors causing a decline in value, a local assessor remains bound by the 2% value increase limitation imposed under Section 2(b). The intent of California voters who amended Article XIII A can be gathered from the information presented to them in the form of the November, 1978 ballot. [W]hen, as here, the enactment follows voter approval, the ballot summary and arguments and analysis presented to the electorate in connection with a particular measure may be helpful in determining the probable meaning of uncertain language. (Amador Valley, at ) Taxpayers here assert that the plain language of Section 2(b) is not uncertain. Moreover, Taxpayers contend that the ballot summary and arguments and analysis presented to the electorate for Proposition 8 underscore the clarity of intent and certainty of the constitutional amendment as enacted. The extrinsic history of Proposition 8 amply supports the understanding of California voters who amended Article XIII A in November, 1978, that the assessment increase limitation continued after a decline in the full cash value base of real property. California voters in November, 1978, in relevant part read the following argument in favor of Proposition 8: [T]he purpose of this measure, Proposition 8, is to further the intent of Proposition 13 by easing the property tax burden of disaster victims who have recently lost their homes or suffered real property damage. [ ] Although Proposition 13 rolled back assessments to values, it overlooked the possibility that a person s property might have been damaged to the extent it has actually declined in value since [ ]... [ ]... [ ]... [ ] Again, in keeping with the spirit and intent of Proposition 13, Proposition 8 will allow assessors to reduce assessments to reflect 10.

13 substantial damage, destruction or other factors which cause a decline in property value. This will insure equal treatment under the law, and will prevent additional tax burdens from falling on those who have suffered major... property depreciation since Cal. Voters Pamphlet, Gen l Election, Nov. 7, 1978, at 37, (emphasis added; other italics original.) No argument against Proposition 8 appeared on the California Voters Pamphlet. Voters likewise read the following in relevant part of the analysis by the legislative analyst: Background: [ ] Proposition 13 on the June 1978 ballot substantially changed provisions in the California Constitution regarding the valuation of property for property tax purposes. In general, Proposition 13 requires county assessors to use property values as the basis for determining real property assessments in and subsequent years. The values may be increased by an inflation factor of no more than 2 percent per year. However, if the property is newly constructed, or if ownership of the property changes, the assessment is based not on the property s value in , but on its value at the time of construction or change in ownership. [ ] Proposal: [ ] This proposition would affect the determination of assessed value in three ways: [ ] [ ] [ ] [T]his would prevent the assessed value of such property from being increased by more than the 2 percent annual inflation factor. [ ] 3. Property which has declined in value since Proposition 13 does not allow the assessor to reduce the assessed value of property which declines in value while it is still owned by the same taxpayer. This proposal would allow the assessor to make such reductions when it has been substantially damaged or its value has been reduced by other factors such as economic conditions.... Cal. Voters Pamphlet, Gen l Election, Nov. 7, 1978, at 36. (Emphasis added; other italics original.) Thus, the 1978 California Voters Pamphlet never described any authority for assessors to increase by more than 2% the full cash value of real property from one year to the next after a Proposition 8 decline. The only instances mentioned on the ballot as grounds for an annual assessment increase greater than 2% from one year to the next remained those of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment. The voters who approved Proposition 8 reasonably understood that the 2% restriction on the assessor s power to increase the full cash value of real property from one year to the next continued to apply after a decline in value. 11.

14 C. History of Proposition 8 Supports Limit on Annual Increases The extrinsic evidence surrounding SCA 67 likewise supports the conclusions of AAB No. 3 below. As extrinsic aids, the court properly may rely on digests of the Legislative Counsel [citation] and legislative committee reports, which are presumed to express legislative intent [citation.]. Interinsurance Exchange v. Spectrum Investment Corp, 209 Cal. App. 3d 1243, 1252 (1989). The Legislative Counsel described the intent of SCA 67 as a measure that, [w]ould revise the definition of full cash value as it relates to real property reconstructed after a disaster and would make various clarifying changes in such definition. Even as SCA 67 moved through the Legislature, the extrinsic legislative history file of the resolution reflects an understanding as to Section 2(b) that the full cash base value would be capable of reduction according to physical and economic impacts on property value in the real world of California taxpayers. The Senate Revenue and Taxation Committee analysis dated August 9, 1978, described the problem: [M]any provisions of Article XIII A [sic] are vague and contain several technical inaccuracies. [ ] Proposed Law: [ ] Amends Article XIII A [sic] as follows: [ ] 1. Section 1 (a).... [ ] 2. Section 1 (b).... [ ] 3. Section 2 (a).... [ ] 4. Section 2 (b) [ ] Corrects four technical errors. [ ] Clarifies that property which declines in value due to substantial damage, destruction or other factors may be reduced to reflect such decline in value. Analysis of SCA 67 prepared for the Senate Committee on Revenue and Taxation, at (emphasis in original). Finally, the Assembly Republican Caucus legislative bill file on SCA 67 includes a memorandum on the letterhead of the California Legislature Senate Office of Research, dated July 14, 1978, directed to Senator James R. Mills, the original author of SCA 67 That memorandum also discloses the then-current understanding of the intent of SCA 67: [C]urrent Provisions of SCA 67 [ ].... [ ] 1).... [ ] 2).... [ ] 3).... [ ] 4).... [ ] 5) Amends Section 2(b) to allow for a reduction in the full cash value base in the event of substantial damage, destruction, or other factors causing a decline in value. Republican Caucus Memo, at 1. (Emphasis in original). SCA 67 and its extrinsic history, like the November, 1978, California Voters Pamphlet, describe only the well-known three exceptions to the 2% year-to-year limit of Article XIII A: 1) purchase; 2) new construction; and 3) change in ownership. There was no mention of a temporary decline that authorized a local assessor to increase in one year the highest market value previously enrolled, simply because market conditions dramatically improved by more than 2% over the prior year s value. 12.

15 On or about January 25, 1979, pursuant to its delegate power under Government Code, section 15606, the SBE enacted a regulation commonly known as Property Tax Rule 461(d), expressly to reflect the provisions of Proposition 8. In relevant part Property Tax Rule 461(d) enacted by the SBE on or about January 25, 1979, provided: [W]hen the current full value of property is less than its full cash value base, the full value shall be enrolled as the current taxable value and shall constitute a new base year value. Cal. Admin. Code [now Cal. Code Regs.], tit. 18, 461, subd. (d), 3d par. Contemporaneous with the amendment of Article XIII A itself, the SBE correctly implemented the will of the People of California by the SBE January, 1979, amendment of Property Tax Rule 461(d). The SBE correctly recognized that a decline in the full cash value base of real property remained subject to the 2% increase limit of Section 2(b). At about the same time of the SBE s amendment of Property Tax Rule 461, SBE legal staff participated in a task force established to advise the Legislature in 1979 on the implementation of Article XIII A. In the Report of the Task Force on Property Tax Administration, published January 22, 1979 ( January, 1979, Task Force Report ), some 34 members and alternates, and about 16 other participants, are identified. It is worth more than passing interest that most of the task force members and its participants were state or local elected or appointed officials and their staff, who endeavored to inform the Legislature on how best to implement Article XIII A. In a memorandum dated January 12, 1979, the SBE legal staff vociferously objected, inter alia, to the recommendation of the task force on the implementation of decline in value statutes: The staff of the Board of Equalization respectfully disagrees with the majority of the members of the task force on a number of the final recommendations, and accordingly, submits this minority report. The opinions expressed herein are those of the staff members who served on the task force.... The staff of the State Board of Equalization takes exception to the task force recommendation that property that has declined in value in a particular year can be increased in subsequent years to a value that does not exceed its base year value factored forward. We believe the correct rule to be this: In no case can the increase in assessed value exceed 2% of the previous year s enrolled assessed value. [ ] The task force recommendation: (1) is inconsistent with the language of Proposition 13; (2) is discriminatory since property that decreased in value prior to the 1975 lien date and has since increased in value for whatever reason cannot be increased more than 2% per year, unless new construction or an ownership change occurs; (3) can result in an increase in property value enough where no restoration has taken place after damage; and, (4) creates wasteful recordkeeping requirements in the assessor s office. 13.

16 Among other matters, the January, 1979, Task Force Report reflected two views of Proposition 8: (1) The adopted recommendation that the Legislature enact statutory language to the effect that [t]he assessed value of real property be the lesser of the Prop. [sic] 13 base year value compounded annually by 2%, or its full cash value and (2) Along with that of the SBE legal staff dissent quoted above, a second dissenting view by California attorney Robert H. Morris, of Ehrman, Flavin, Morris & McMahan, Inc., Attorneys at Law. Mr. Morris opined: The Task Force recommends that when the full cash value of a property is less than its factored base value, the assessment will be at the lower full cash value, but the base value shall not be revised down to that figure. I suggest we made that decision too rapidly. Article XIII A, [sic] as revised by Proposition 8, clearly requires revision of the base value. [ ] I therefore believe the Task Force recommendation is unconstitutional. Thus, the court can observe by the extrinsic history that surrounds the November, 1978, Proposition 8 amendment of Article XIII A that from the beginning not only did California voters reasonably understand and intend that a decline in the full cash value base of real property be subject to the annual increase limitation of 2% per year thereafter, so too did the very administrative agency of the State of California, the SBE. Consistent with the clear language of the amended Article XIII A, the SBE amended its own Property Tax Rule 461(d) in January, 1979, reflective of the voter intent. Almost word for word as recommended by the January, 1979, Task Force Report, the Legislature enacted AB 1488, and added, inter alia, section 51 to the Revenue and Taxation Code. Assessors vigorously argue that section 51, as originally enacted, and as subsequently amended, correctly implemented the will of the California voters who adopted Article XIII A. While Bezaire-Pool do not necessarily share the assessors view on section 51, it is possible to harmonize the seeming bifurcation of section 51 as enacted with the concise, straightforward language of Section 2(b) on the topic of the full cash value base. Simply put, if the focus is given to section 51(a)(1)(D) as to the full cash value, [i]n no event shall the percentage increase for any assessment year... exceed 2 percent of the prior year s value. This reading construes the statute in light of the controlling constitutional provision. Notwithstanding its own opposition to the Task Force s recommendation once AB 1488 added section 51 to the Revenue and Taxation Code, the SBE repealed and adopted a new Property Tax Rule 461(d) on or about August 16, As so adopted Property Tax Rule 461(d) provided in relevant part: [W]hen the current full value of property is less than its base year full value indexed to the current lien date, the full value shall be enrolled as the current taxable value. The court in State Bd. of Equalization v. County Bd. of Supervisors, 105 Cal. App. 3d 813 (1980), approved the trial court s statement: [I]t s my job to make the judgment. I can respectfully consider anyone s opinion, the Board of Equalization, the State Legislature and so 14.

17 forth, but it is still my job. Id., at p The State Bd. of Equalization court then continued: We agree, as did the Supreme Court in Whitcomb Hotel, Inc. v. Cal. Emp. Com. [citation.], where, in discussing the extent of the court s authority to review the Board s Legal Determinations, the court stated: Whatever the force of administrative construction... final responsibility for the interpretation of the law rests with the courts. Id., at IV. CONCLUSION The Orange County Superior Court adopted the Bezaire-Pool interpretation of the recapturing issue. Since the Court s December 2001 ruling, the case has lingered in the Superior Court while the parties have litigated class and discovery issues. Once those issues have been resolved and the Court issues a final judgment, the merits of the recapture method will be tested in the appellate courts. The consequences of a ruling averse to taxing entities could be substantial, perhaps even catastrophic, to cities. To those first learning of the recapture controversy, perhaps the most frequent question raised is: Why hasn t this issue been addressed by the courts before? There are many possible answers to this question. Since Propositions 13 and 8 were passed, California real estate did not generally suffer a decline in market values until the early 1990 s. The real estate market did not recover to pre-recession levels until the mid to late 1990 s. Thus, there was no opportunity to apply Proposition 8 on a wide-scale basis until the 1990 s. Another explanation many have proposed is that all major parties, including taxpayer organizations, believed recapturing was lawful. Others believe that the language of Revenue and Taxation Code section 51 has never been subject to different interpretations until the current Orange County case. Regardless of the reason, the issue of what the 2% limit of Proposition 13 means is now before the courts to resolve. 15.