SAN JOSE -- The city of San Jose has won an important initial ruling against Santa Clara County after a judge said that over the past year, the county has wrongly withheld from the city $7 million derived from an unusual property tax the county has collected to pay for a portion of county employee pensions.

The county argued that a special property tax it has collected since 1945 meant to help fund its employees' retirements are "special taxes" that may be used only to meet the county's pension obligations.

But for decades, the county has set aside a portion of that tax for the city's redevelopment agency, which it wants to end. San Jose has objected.

Sacramento County Superior Court Judge Allen Sumner last week agreed, saying the county can't take back the property tax, and that it must return the revenues to the city to repay that agency's massive debts.

"This is $7 million they took off the top that they say is a PERS levy," or pension money, said City Attorney Rick Doyle. "But we said 'no.' It's been a tax increment, and you cannot change your mind after 50 years and say it's something else."

While Doyle said Wednesday that he is confident the judge will make a final ruling in San Jose's favor in the issue, his office must still return to court on June 21 to argue a second part of the case.


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That also involves an argument between the county and the city over how property tax dollars will be distributed in the aftermath of the state's 2011 dissolution of almost 400 redevelopment agencies.

In the county, several successor agencies are managing the wind-down of their former redevelopment agencies. Since the county collects all the property taxes, it is in charge of determining how much each successor agency should receive to pay its remaining bills.

As it did last year, the county is seeking to first extract its share of $20 million in annual property taxes it says San Jose owes the county, based on a 1992 agreement between the two local governments.

But San Jose officials have argued that its former redevelopment agency's bondholders are first in line for payments, and the county remains last in line. Without the $20 million, city officials have said, the city will default on its debt payments.

"They cannot leapfrog ahead of us," said Doyle. "The county is at the bottom of the list, in our view."

County Counsel Orry Korb declined to comment on the substance of the case but said the county will submit its briefs to the judge for the June hearing.

Contact Tracy Seipel at 408 275-0140.