City Sues State, County Over $1.76 Million "Demand for Payment"

Close observers of the messy, conflict-ridden predicted a legal quagmire. It looks like the forecast may be accurate.

El Cerrito filed suit Thursday against the state Department of Finance and the Contra Costa County Auditor-Controller, saying that a "demand for payment" of $1.76 million presented to the city last week by Auditor-Controller Robert Campbell is illegal and a "breach of duty."

The city refused to pay, and as a result faces heavy fines and a loss of its sales tax revenues until it complies. The city received the bill from Campbell on Monday, July 9, and was given a deadline of Thursday to pay.

At least eight other California cities filed similar suits on Wednesday and Thursday in Sacramento County Superior Court. They are among the many cities across the state that received "demand for payment" letters from their county auditor controllers last week.

The payment demands were authorized by a new state law, AB 1484, adopted June 27, which was described as "clean up" legislation for an earlier law passed last year (ABx1 26) abolishing the state's nearly 400 local redevelopment agencies.

The demand letters and suits filed last week represent the most recent outbreak of legal hostilities in the war between the state and local governments over the extra property tax revenues that were being collected by redevelopment agencies, whose mission was to combat blight with new development and housing.

The state legislature and Gov. Jerry Brown agreed last year to adopt ABx1 26 to dissolve redevelopment agencies in order to funnel more money to the state to help close the state's budget deficit. The move was challenged in court by the League of California Cities and others, but the law was ultimately , with redevelopment agenices officially dissolved Feb. 1.

El Cerrito's new suit, like several of the other suits, further says AB 1484 is unconstitutional because the penalties for non-compliance, including withholding of a city's sales tax revenues, violate Proposition 22 (passed by voters in 2010) and other laws designed to block the state from taking local revenues.

If the city is forced to comply with the $1.76 million payment, the suit says, it will run short of funds and face "the potential to default on bond debt service."

The city notified Campbell that it believes his calculations are wrong and that it does not intend to comply with the demand.

El Cerrito could pay a high price for non-compliance. Municipalities that don't pay what's demanded by county auditor controllers under AB 1484 are subject to strict penalties:

• suspension of sales tax revenue due to the city until the bill is paid
• a fine on the city of 10 percent of the bill and an additional penalty of 1.5 percent per month for as long as the amount goes unpaid
• a fine on the city in its capacity as the Successor Agency to the former Redevelopment Agency, again of 10 percent of the bill and an additional penalty of 1.5 percent monthly for as long as the amount goes unpaid
• a ban on paying obligations inherited from the city's former Redevelopment Agency, aside from bond payments

The suit asks the court to direct Campbell to reconsider the payment issue based on factors that the city says were neglected, to block enforcement of AB 1484 and to declare the law invalid and unconstitutional.

"Our real beef is not with the county Auditor-Controller," said Hilde Myall, senior housing program manager for El Cerrito. "It's really with the Department of Finance."

The city's suit adopts a more critical tone toward Campbell, the Auditor-Controller, saying he "was acting contrary to law and his actions constitute a clear breach of duty and abuse of discretion."

Myall said Campbell was following the formula passed on by the Department of Finance for what are called "true up" payments. The disputes and calculations of the payments revolve around property tax revenues that county auditors allocated to cities in December and January. 

El Cerrito's Redevelopment Agency, like others across the state, obtained revenue from the property taxes collected in the redevelopment zone. When property taxes rose because of increases in property values, the extra amount went to the Redevelopment Agency, with the provision that it be shared with other agencies who receive a share of property tax revenues, including school districts, AC Transit, East Bay Regional Parks and others.

But the payments made to local governments by county auditor controllers in December and January were clouded by many unknowns and confusion over how the assets and obligations of the former redevelopment agencies would be dissolved and transferred.

As a result, the legislature adopted AB 1484 to provide a mechanism to "true up" incorrect amounts given to cities. Broadly speaking, local governments are entitled to keep enough of the extra property tax revenues once collected by redevelopment agencies and the agencies' assets to continue paying the bonds of those agencies, to pay for projects that were approved before redevelopment agencies were abolished and to pay for certain administrative costs. 

So the $1.76 million bill given to El Cerrito was, in the calculations of the Department of Finance and Campbell's office, intended to "true up" the property tax proceeds that Campbell's office paid to the city on Dec. 16.

Campbell said he believes that his office's actions are legal, adding, "We believe we are following the instructions in AB 1484." He said he was not acting solely as a middleman in a decision directed by the Department of Finance and that his staff independently reviewed the calculations before issuing the payment demand.

"I do not blindly follow the Department of Finance," he said.

H.D. Palmer, a spokesman for the Department of Finance, defended his agency's action, saying, "We're confident that the courts will uphold the law."

He noted that a Superior Court Judge Friday rejected a request for an emergency injunction, or temporary restraining order, sought by five San Diego County cities who jointly filed suit on Thursday. The denial of the injunction does not hinder the suit itself from proceeding.

That suit – filed by Chula Vista, National City, Oceanside, San Marcos and Vista – disputes the characterization of AB 1484 as "clean up" legislation. 

"In fact," the suit says, "it is a hastily conceived and remarkable headlong rush to create new legislative crowbars to force yet additional funds from local entities."

Those five cities, unlike El Cerrito, paid the "demand for payment" bills "under protest," and asked the court to order the money returned or placed into a protected account until the issue is legally resolved.

In a statement on its Web site, the League of California Cities assailed AB 1484 for "unconstitutional sales and property tax clawback or garnishment provisions."

Other cities filing suit last week over the allocations of post-redevelopment property tax revenues included Galt in Sacramento County, Selma in Fresno County and Apple Valley in San Bernadino County.

Myall said El Cerrito was put into a bind by the demand for $1.76 million. "This money doesn't exist," she said. "That amount of money is over 50 percent of our general fund reserve."

She said the state and the Auditor-Controller are retroactively seeking to change the terms and conditions under which the property tax revenues were allocated to the city in December. 

The state Department of Finance says in a statement on its Web site that deadline delays and confusion caused by the Supreme Court case resulted in nearly all of the earlier property tax allocations being incorrect and in need of "true up" revisions.

The city's suit and supporting documents are attached to this article.

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