Unexpected debt

City of Chico to repay nearly $2 million due to county error

Gone to collections chart

Gone to collections chart

The week before Christmas, as Chico’s municipal offices prepared to close for a holiday break, city staff received a big surprise from Butte County—notice that, due to an error on the county’s part, the city was on the hook to repay nearly $2 million to the state of California.

“The exact number is $1,995,929.76,” Scott Dowell, the city’s administrative services director, said by phone Tuesday (Jan. 2). “It was shocking. How would you like to get a letter like that in the mail?”

That nearly $2 million debt is just a fraction of what the county overpaid cities and towns over the last 10 years, according to David Houser, the county’s auditor-controller. Houser said that an auditor from the state Controller’s Office discovered the county had over-disbursed more than $6.4 million in vehicle licensing fees since 2008 during an audit conducted last year.

Vehicle licensing fees are collected by the Department of Motor Vehicles, and the state Constitution dictates 75 percent of those funds be redistributed to counties, which in turn disburse most of that money to municipalities. At the county level, some funding goes toward health and welfare programs; the city’s share is discretionary money and goes into the general fund.

The amount each city receives is based on property tax evaluations calculated by the county’s auditor-controller office. The problem in Butte County, Houser said, is that—since the 2008-09 fiscal year—members of his staff included properties in recently annexed areas in those calculations. Those numbers shouldn’t have been included until the following year.

“Our staff deals with some very complex property tax calculations and it’s sometimes easy to not see a small thing when you’re dealing with assessments that result in $80 million in taxes,” Houser said, referring to the total amount of property taxes collected countywide. “The most important part is it was caught and fixed.”

Houser said the audit took place early last year, and that such audits occur regularly every few years. Another such audit conducted in 2014 failed to detect the problem. He said his office was informed there was a miscalculation in June, and it took until December for his staff to figure out how much had been overpaid and to inform the municipalities. The city of Chico was by far the most affected (see chart).

Though he acknowledged the mistake, Houser said that the state agreeing to recollect only funds overpaid since 2013-14 ultimately benefits municipalities here, as the city of Chico—which Houser noted has been cash-strapped for years and appeared on the state auditor’s list of six California cities at risk of financial insolvency in 2015—received nearly $3.6 million the state will not recollect.

“There were players that benefited on this, and the state was the one that got hit on the seven years [Chico] doesn’t have to pay back.”

Dowell said the city of Chico certainly doesn’t feel like it’s benefiting, and that staff is still reeling from the revelation.

“It’s a significant amount of money and we’re taking it very seriously,” he said. “This is all still very fresh. From the city standpoint, we are still researching the situation, getting verification of those amounts and trying to negotiate the repayment.

“[The state] originally wanted the money paid back in two years, but has already agreed to allow three years for repayment. We’re hoping they’ll agree to give us five years.”

To put the importance of vehicle licensing fees in perspective—and show how much of a burden repayment is—Dowell explained the city plans to receive $7.3 million into its general fund from the fees next year. The county intends to recollect the state’s money by withholding annual disbursements for the next few years. With a three-year repayment plan, that would mean the city would receive about $665,000 less each year in vehicle licensing fees through 2020.

Dowell said it likely will be several weeks before the final amounts and terms of repayment are settled.