Aug. 13--Los Angeles could pay up to $92.5 million to taxpayers and attorneys to resolve a lawsuit over a city telephone tax that has endured nearly nine years, under a class-action settlement that was granted preliminary approval by a Superior Court judge Thursday.
The $92.5-million figure is a cap: The ultimate amount that L.A. would pay depends on how many people seek and obtain refunds for telephone taxes paid during a roughly 2 1/2-year period that ended in 2008. Any money not claimed would revert back to the city.
City Administrative Officer Miguel Santana, the top budget official in the city, said the settlement marks an important step toward Los Angeles resolving "looming liabilities" that could threaten its financial stability if left unaddressed.
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"We'd much rather be in a position of planning for them and resolving them than allowing a court to make a decision that puts the city in a tailspin," Santana said Thursday.
Nearly nine years ago, taxpayer Estuardo Ardon filed a lawsuit against the city arguing that its telephone users tax was illegally collected because it had been levied on services that were not subject to a federal tax. Ardon demanded a refund for himself and other taxpayers.
The city had sparred with Ardon in court over whether he could even file such a suit, arguing that each member of the alleged group had to pursue a government claim with the city first. But the California Supreme Court rejected that reasoning four years ago, allowing the lawsuit to proceed.
City officials have previously estimated that if the case had gone to trial, the possible liability for Los Angeles -- once believed to be as high as $750 million -- would have been under $300 million, according to Assistant City Administrative Officer Benjamin Ceja.
"I'm very pleased we've solved what for nine years had been one of the City's most significant legal challenges -- in a way that both limits the potential impact on basic city services and allows for appropriate refunds to Los Angeles telephone customers," City Atty. Mike Feuer said in a written statement Thursday.
Under the settlement plan, the city will deposit a payment of $50 million into an escrow account -- a sum that Los Angeles officials had already set aside this year for the tax case.
If more people seek refunds, however, L.A. will need to raise added money to cover those costs. Santana said the city could pursue a judgment obligation bond or possibly withdraw money from its reserve funds, since the legal settlement would be a one-time expense.
It is unclear exactly how many Angelenos could be eligible: The court order issued Thursday states simply that there were about 1.6 million residents of Los Angeles and roughly 569,000 businesses registered with the city during the period targeted in the case, "most of which are likely members of the class" covered by the lawsuit.
However, the court order also states that attorneys representing Ardon and other taxpayers believe the claims rate will range between 20% and 30% of those eligible. An outside company will be tasked with notifying Angelenos that they might be able to claim refunds.
Taxpayers must file claims to get either a flat rate or full refund: The flat rate will be $30 for customers with residential land line service and $50 for either a business land line or mobile service. To get a full refund, taxpayers will have to submit copies of their telephone bills.
Refunds will be offered only to people who paid such taxes between Oct. 19, 2005 and March 15, 2008. That was before the telephone users tax targeted in the lawsuit was replaced with a new, slightly lower tax that was approved by Los Angeles voters seven years ago.
Finance officials say the new tax, called the communication users tax, brought in more than $200 million in revenue last budget year. Ceja said the new tax is not affected by the case.
UPDATE
11:39 p.m.: This report has been updated to report a judge gave preliminary approval to the proposed settlement.
