(August 30) In what could prove to be a landmark case being closely observed by municipal officials up and down the state, the city of Ontario is inching ever closer to a legal showdown with the state of California over more than $21 million in tax revenue the state has announced it will unilaterally seize from the city next month as part of its move to shutter redevelopment agencies statewide.
Ontario has long asserted that $21,677,224 in sales-tax money generated within what had been Ontario’s redevelopment agency project areas is not subject to seizure by the state under the auspices of AB XI 26  and AB XI 27, two companion pieces of legislation that in 2011 closed out redevelopment agencies operated by California’s cities, counties and various political jurisdictions. Ontario utilizes the money in question to fund major portions of its police, fire and other service programs.
Redevelopment agencies were adjuncts to municipal government intended to transform troubled neighborhoods or districts while rejuvenating the local economy. Redevelopment agencies used a variety of funding mechanisms, including the issuance and sale of municipal bonds, to create infrastructure, promote economic development and eradicate blight. Theoretically, redevelopment bonds would pay for infrastructure improvements that would result in an increase in property values, in turn generating increased property tax. That property tax revenue increase, referred to as increment, would be utilized to pay the bondholders on a yearly basis.
In June 2011,  at Governor Jerry Brown’s behest, the legislature passed assembly bills XI 26 and XI 27, which set an abrupt timetable for the closing out of municipal redevelopment agencies by October 1, 2011. A coalition of cities delayed the implementation of that close-out by initiating a legal challenge of the law, but both XI 26 and XI 27 were upheld by the California Supreme Court in December 2011. Thus, the closures went into effect in February 2012. When the law passed, there were thousands of redevelopment agency projects that various cities had begun but had not finished, with millions of dollars left to fund the projects’ completion when the state foreclosed on the money.
Under AB XI 26 and AB XI 27, the redevelopment agencies’ proceeds were redirected back to the state, minus money generated by previous redevelopment agency-involved taxing arrangements that earmarked  the money to be used to debt service bond financing used by the agencies to pay for completed infrastructure. The discharging of that debt, under the provisions of AB XI 27, was to be handled by redevelopment agency successor agencies created in the wake of the redevelopment agencies’ dissolutions. In June 2012, the legislature passed a follow-up measure authorizing the state to withhold sales and property tax revenue if officials determine that an agency has failed to make good on its redevelopment obligations.  That law raised further hackles among cities, which howled with protest at this revenue-garnishing provision and then filed suit to test the constitutionality of that authority. The California Supreme Court again sided with the state.
In what is the first application of the sales-tax garnishing power, the state has laid claim to $21.7 million in sales tax revenue Ontario moved into accounts for the Ontario Housing Authority, which is utilizing the money on its mixed-use Town Square Project.
At the direction of Governor Brown, California Director of Finance Ana Matosantos on August 19 sent a letter to the state Board of Equalization, ordering the board to withhold Ontario’s sales tax revenue beginning in September. “Despite numerous orders by the Department of Finance, the city has refused to remit to the San Bernardino County auditor-controller $21,677,224 in unencumbered low-to-moderate income housing fund assets of its former redevelopment agency that are in the city’s possession,” Matosantos wrote. She instructed Cynthia Bridges, the executive director of the Board of Equalization, to withhold from Ontario beginning in September distribution of  “sales and use tax” equal to the sum of $21,677,224. “If the sums withheld in the first month are insufficient to satisfy the $21,677,224 that the city owes to the affected taxing entities, we direct the Board of Equalization to continue the withholding in each successive month until the owed amount is fully retired,” she wrote.
The state intends to follow up with a letter to the San Bernardino County auditor-controller’s office, instructing it to distribute the money to county schools, the county and other local agencies.
Three weeks ago, prior to Matosantos’s letter, Ontario City Manager Chris Hughes wrote to Matosantos, informing her that “Since the city is not in possession of the funds, the Department of Finance does not have the legal authority to order the city’s sales and use taxes to be withheld.” Hughes’ assertion that the city does not have possession of the funds is based upon his contention that the Ontario Housing Authority is an entity that is separate and distinct from the city of Ontario.
Ontario Mayor Paul Leon this week told the Sentinel, “I don’t believe the state has the right to balance its unbalanced budget on the backs of cities like Ontario. If the governor and the legislature had an issue with redevelopment, they should have gone after the cities that were abusing the system. They should not have killed the goose that was laying golden eggs by destroying a very valuable tool that responsible jurisdictions were using to instigate economic development.”
Leon continued, “The current issue with regard to the $21.67 million in this battle has to be fought between the state and the redevelopment successor agency, and they should not be robbing the city’s general fund. These are two distinctly different organizations. The city is a different entity than the housing authority. The state’s issue, if it has an issue at all, is with the housing authority, not the city of Ontario.  In my book, if you are going to fight, you should fight fair. We will do whatever it takes to get them to do what is right. They will have to withhold from the city of Ontario its sales tax base for a little over two months to recoup the amount the state says it is owed. The state never had the right to make that money grab and the way they are doing is completely wrong. It is fiscally irresponsible at the state level for them to be peering into local coffers and taking what they see. I will be darned if the city of Ontario is going to make it easy for them. If they have a right to recoup that money, they are going to have to prove it and they are going to recoup it from legal sources, and that does not include the general fund of the city of Ontario or the pockets of the people of Ontario.”
Either before or immediately after the Board of Equalization withholds the money, Ontario officials vowed, they will seek an injunction barring the Board of Equalization from garnishing the funds.
The city will need to seek that injunction in Sacramento Superior Court because AB X1 26 and AB X1 27 carry provisions requiring that any litigation challenging them be undertaken in Sacramento Superior Court. Ontario is better equipped than most cities to carry out an expensive and protracted legal battle with the state. It has a revenue stream greater than any other municipality in San Bernardino County, with a total of more than $462 million into all of its funds in fiscal 2013-14.
For that reason, Ontario’s battle against the state is being closely monitored by other municipalities. In San Bernardino County, the city of San Bernardino, the town of Apple Valley, the city of Hesperia, the city of Twentynine Palms and the county itself are disputing the state’s takeaway of their redevelopment money, or portions thereof. In Riverside County, that county and the cities of Desert Hot Springs, and Palm Springs are likewise at odds with the Department of Finance over left over redevelopment money. In Orange County, the city of Santa Ana is involved in a similar dispute.