Santa Ana City Council members Friday in a 4-0 vote declared they would refuse to pay the state’s $56-million bill, due by 5 p.m., arguing that the state Department of Finance is overreaching in its bid to divert housing funds leftover from the city’s defunct redevelopment agency.

Instead, City Council members at a special Friday meeting said they would fight the state’s demand with an intensive lobbying effort and possible legal measures.

“I think we have to not only fight this, we have to fight it intelligently,” said Mayor Miguel Pulido, adding that the city leaders needed to enact a “full-court press” advocacy charge in Sacramento.

Councilman David Benavides noted, “We have no choice but to stand beside our community and residents.”

Council members Michelle Martinez, Angelica Amezcua and Sal Tinajero did not attend the meeting.

The State Department of Finance sent a strong rebuke late Friday in reaction to Santa Ana’s city council vote.

“It’s unfortunate that the city doesn’t want to make a good-faith effort to comply with what is clearly a lawful order,” said H.D. Palmer, chief spokesman for the State Department of Finance. 

“The return of these unspent monies is critical to schools and local governments’ ability to maintain essential public services.  In light of this decision, we will be evaluating our options – which could include exercising the tools available to us under the law,” Palmer said.

In official correspondence from the last month, state officials have twice threatened the use of “claw-back” measures, which include withholding property and sales tax revenue, the primary funding streams for the city’s general fund, which pays for city services like police and libraries.

They also have threatened criminal penalties against individuals resisting the state order.

At Friday’s public meeting, City Attorney Sonia Carvalho said she didn’t think the state would be likely to implement such “draconian” measures soon.

Prior to Friday’s vote, State Department of Finance officials also described the measures are last resort options.

The state’s payment demands — a total of $257 million from Orange County and its cities — 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, citing abuses, pushed to eliminate the agencies last year 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 be distributed to school districts and other local governments in the area.

But Santa Ana and other cities have stated they have already spent the money on housing projects. The cities argued that these projects are enforceable obligations, essentially redevelopment commitments like agreements with developers that were made before the agencies were axed.

The state’s position is that the projects are not enforceable obligations.

Santa Ana has already spent $12 million of the funds demanded and will continue spending the money on housing projects, city officials said.

If the state order were to be implemented, several housing projects with developers that have contributed to council member campaigns would lose funding mid-construction.

One project was scheduled to pour concrete Saturday.

Among the projects at risk to lose funding are the Station District development, the Vista Del Rio affordable housing project, which would house disabled residents, single-family homes under construction by Habitat for Humanity Orange County and a low-income housing project by C&C Development.

“I just think about the families that can’t be served if we can’t solve this,” said Mark Korando, senior vice president at Habitat for Humanity.

City leaders chastised the state Department of Finance for what they called a “reckless” approach in demanding the funds.

They argued that the state had previously approved the projects as enforceable obligations but reversed those approvals in the latest phase of the messy process that has been redevelopment’s demise.

“The frustrations in dealing with the state have been immense,” said City Manager Paul Walters.

Councilman Vincent Sarmiento criticized the Department of Finance for taking a “boiler plate” approach to cities that are successfully implementing important low-income housing programs.

“There’s no reason they should be going after the most vulnerable in our community,” Sarmiento said. “We don’t roll over on this one. If anything, we need to be a little bit stronger in our opposition.”

Other cities are facing similar confrontations with the state.

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.”

The county is contesting more than $29 million of a $50 million demand, according to county spokesman Howard Sutter. County officials have been negotiating with the state and expect a final determination soon, Sutter said.

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