Orange County Cities Fight State Demand for $257 Million

Santa Ana officials have called a special City Council meeting Friday morning to publicly address a $56-million payment demand from the state – due the same day as the meeting — that could drive the city into a financial crisis.

Despite the stark financial implications, Friday will be the first time city officials make public their dispute with the state since negotiations between the state Department of Finance and city officials intensified over the past month.

Santa Ana city officials and council members declined comment until the meeting, which has been scheduled for 11 a.m. at the City Hall council chambers.

Other cities facing similar demands are being more forthcoming.

The key factor to weigh for cities affected by the state decision is their ability to pay.

Santa Ana officials won’t publicly discuss how short they are, but sources close to the situation say it’s as much as $17 million. That money could come from the city’s general fund and would be devastating to the city’s already fragile financial picture.

“Based on what I know, Santa Ana is in a very dire economic situation, and they probably won’t be able to make the payment,” said state Sen. Lou Correa, who has been lobbying Sacramento to relieve the city of its obligation.

Among the 17 cities that received demand letters, Huntington Beach has been ordered to pay $31.1 million but is more than $26 million short, according to city spokeswoman Laurie Frymire.

Orange is about $7 million short, City Manager John Sibley said.

“The only other place to go for that money would be the general fund,” Sibley said. “We don’t have that kind of money sitting around either.”

Both Huntington Beach and Orange are contesting the payment demands, and Sibley has said Orange may file a lawsuit.

State legislators have been contacted, and there is also talk in Santa Ana of a potential lawsuit to reverse the payment demands.

In Santa Ana, the crisis comes after the city pulled itself from the brink of municipal bankruptcy by climbing out of a $30-million budget hole using a general fund reserve that was nearly spent.

The state’s payment demands stem from the dissolution of the state’s approximately 400 redevelopment agencies, which diverted local property tax revenues toward new development aimed at cleaning up blighted areas. Gov. Jerry Brown pushed to eliminate the agencies last year, citing abuses to help plug the state’s budget.

Redevelopment agencies were required to set aside for affordable housing programs 20 percent of their property tax increment revenue — funds that cities had diverted from going to their own general funds and to other local governments in redevelopment zones.

When redevelopment agencies were axed, some $2 billion in low-income housing funds were estimated to be left over, the Sacramento Bee reported earlier this year.

Now the state is demanding that leftover money.

The dispute between the state and the cities is over how much money is supposed to be left in the housing funds. Some 170 cities have asked to “meet and confer” with the state to hammer out the dollar amounts, according to Department of Finance spokesman H.D. Palmer.

Much of the amounts contested are related to what are known as enforceable obligations, essentially redevelopment commitments like agreements with developers that were made before the agencies were axed.

Under the redevelopment dissolution bills, such commitments are allowed to continue collecting diverted property tax revenue, known as tax increment.

But the state doesn’t accept many of the enforceable obligations that the cities claim.

In the case of Santa Ana, the state alleges that the city improperly claimed $30 million to pay for what the state views as illegitimate obligations.

While Huntington Beach is apparently the most short, the city has yet to exhaust its meet-and-confer option.

“The City does not have $31 million in housing funds and cannot plan to pay that amount," Bob Hall, assistant city manager, wrote in an email. "We believe there was an error in the State Department of Finance calculations therefore we have sent a 'meet and confer request' [appeal] to DOF [Department of Finance].”

Santa Ana has already conducted negotiations, which makes its Friday deadline far more serious.

Others are still negotiating with the state.

For example, state officials assert that Orange owes more than $19 million, but Sibley notes that the city has already steered $7 million of that fund to a developer to build an affordable housing project. If the state doesn’t withdraw  its demand, the city will have no choice but to sue, he said.

The county is contesting more than $29 million, according to county spokesman Howard Sutter. County officials have been negotiating with the state and expect a final determination soon, Sutter said.

In official correspondence, state officials warn that any local officials resisting the state's demands could have sales and property tax revenues withheld — measures known as “claw-backs.”  City officials could even face “criminal penalties,” according to the state.

While these measures are available to them under the law, Department of Finance officials characterized them as a last resort.

“Bear in mind that if there’s not a decision by when the sun goes down, that doesn’t mean we’re going to invoke the remedies available to us,” Palmer said.

The 17 Orange County cities that have received letters and the amounts demanded:

  • Santa Ana, $56 million,
  • Huntington Beach, $31.1 million,
  • Orange, $19.5 million,
  • Westminster, $15.9 million,
  • Tustin, $14.3 million,
  • Anaheim, $13.8 million,
  • Fountain Valley, $12.5 million,
  • Brea, $7.9 million,
  • Fullerton $7.6 million,
  • Mission Viejo, $5.4 million,
  • San Juan Capistrano, $5.8 million,
  • Buena Park, $4.6 million,
  • Garden Grove, $4.2 million,
  • Lake Forest, $4 million,
  • Costa Mesa, $2.3 million,
  • Stanton, $1.4 million and
  • Seal Beach, $1 million.

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