The California attorney general's office filed a lawsuit against Orange County last Thursday to prevent the county from diverting money from education in order to balance its budget.

The lawsuit stems from a conflict that arose last year after the state announced it planned to change distribution of the vehicle license fees, which cost Orange County $48 million. County officials voted to divert $73 million in local property taxes from the schools to cover the shortfall.

"Certainly I am disappointed that they think one out of 58 counties should make a larger contribution to the state's spending problems," said John Moorlach, chairman of the Board of Supervisors. "We think a judge will take a good hard look at revenue code 97.70 and rule in our favor."

County officials expected the state would be forced to backfill the school's money under Proposition 98, an equalization law that requires the state to make up for property tax shortfalls in school districts, so the schools would not actually be harmed. It has worked out that way for K-12 schools, but the law doesn't apply to the community colleges, which are named, along with the state's Department of Finance, as plaintiffs in the lawsuit.

"What Orange County has attempted to do is not only illegal, but is shortchanging community colleges not just in Orange County but throughout the state," said H.D. Palmer, spokemann for the Department of Finance. "While the state has to backfill K-12 schools, the community colleges will have to get a separate bill passed by the state Legislature to make up for the $12 million to $15 million they are not receiving."

California officials took the county's vehicle license fees in June 2011, saying it was the only municipality still receiving money from that source following a funding shift in 2003.

That year, the state traded sales tax and vehicle-license fee revenues going to counties and cities for property taxes to repay $15 billion of bonds issued to pay down the 2003 deficit. The shift meant that property taxes flowed to counties through a vehicle license-fee adjustment account.

Orange County, however, had pledged its VLF revenues to pay its bondholders as part of the recovery plan stemming from its 1994 bankruptcy, so the state passed legislation allowing the county to keep its VLF.

When the county refunded its bankruptcy-related debt for savings the following year, it eliminated its legislative guarantee of VLF funding. The state capitalized on that during last June's budget process.

County leaders contend they have been able to keep a smaller amount of property tax than the state's other counties in order to receive the VLF since the funding shift in 2003, but state officials argue the county was receiving extra money and they just shut off the siphon.

Orange County supervisors plan to meet in a closed session next week to discuss their legal strategy, Moorlach said.

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