LOS ANGELES — Tax revenue some California cities use to fund employee pensions has been dragged into the process of shutting down the state's redevelopment agencies.

The diversion is threatening his city with layoffs and deficits, said Julio Morales, Huntington Park's finance director.

Morales said Huntington Park has lost half of the annual revenue it has historically received from a voter approved property tax levy to pay its pension costs.

Eleven other Los Angeles County cities are experiencing the same loss of voter-approved property taxes they were anticipating to help pay pension costs and make bond payments on pension obligation bonds, Morales said.

More than half of the cities are located on the county's east side, but also include Inglewood located west of Huntington Park, and San Fernando located north in the San Fernando Valley.

Huntington Park, population 58,000, filed a lawsuit against the county auditor-controller, and the state Department of Finance as a real party of interest, last year.

But facing a deficit for fiscal 2013 that could result in the layoff of 20 employees, Morales and Huntington Park tried to take more immediate action via the state Legislature.

Another affected city has sought legislative relief only to find the lawmaker carrying its bill sidelined by unrelated legal trouble.

Huntington Park hired Tony Rice, a lobbyist with Rice/Englander & Associates, in the hope of broadening the stalled legislation, written specifically for Inglewood, to include other cities.

The legislation, Senate Bill 921, was introduced by Sen. Roderick Wright, D-Inglewood on Jan. 28, the same day he was convicted on charges of perjury and voter fraud. Wright has been placed on a leave of absence while he fights the conviction and the bill has gone nowhere.

The lobbying firm hired by Morales has been speaking with other senators seeking a sponsor for broader legislation based on that introduced by Wright. The finance director said they hope to have legislation introduced within a few weeks.

Wright's bill only applies to cities whose voters approved an additional property tax levy to pay for pension programs before Jan. 1, 1948.

Huntington Park's levy was approved by voters in 1976.

It hasn't been possible to pass a new levy since the property tax-limiting Proposition 13 of 1978, but pre-existing levies have been allowed to continue.

The levies have become tied up in the statewide elimination of redevelopment, which took effect in early 2012.

Under redevelopment, local governments created project areas that captured incremental property tax growth resulting from new development.

Prior to the RDA dissolution, rather than separating out funds from the voter-approved levy that was supposed to go to the city for pension costs, some of that money was being sent by the county-auditor to the cities' redevelopment agencies. The redevelopment agencies would then pass on to the cities the portion of tax increment that was intended to be used for pension costs, Morales said.

Since the dissolution of redevelopment that money is being shunted into the city's Redevelopment Property Tax Trust Fund. Money put in that trust fund is then redistributed by the county to cities, the county, schools, and special districts that receive a share of the area's property taxes.

Huntington Park officials want the money levied for pension costs to be sent to the city separately and not included in the redevelopment property trust funds. Those funds were established for each city after the redevelopment agencies were dissolved.

The tax increment amounts should not include the voter-approved rate intended for city employee pensions, said William Ihrke, a partner with Costa Mesa-based Rutan &Tucker, LLP, who is Huntington Park's attorney on this issue.

The city's lawsuit deals with the issue of whether a voter-approved ad valorem tax intended to fund pension indebtedness is subject to the tax increment allocation system; and whether the increment portion of the pension tax is legally required to be allocated to a redevelopment agency's successor agency.

"The city had approved bonds to pay for some of its pension obligations," Ihrke said. "Those bonds did allow the city to use other funding sources, if the pension tax was not available, but the security for the bond was the voter-approved pension taxes."

The tax increment should have been based solely on the standard levy of 1% of assessed value, Ihrke said; it should not have included revenues based on the separate pension levy. Those should have been treated separately and not included in tax treatment that went to redevelopment agencies, he said.

The way it is being handled means that half of the $5 million annually the city of Huntington would receive for pension taxes is going to the redevelopment pot to be divided up. In its response to the request for a temporary restraining order, the county argues the city has demonstrated no harm is resulting. Morales said however, that his city has a $3 million projected deficit, of which $2.5 million is from the artificial pension shortfall created after redevelopment was cut.

All told, the combined total lost by the 12 L.A. County cities is roughly $16 million a year that is going to the fund, rather than to pay for pension costs, Morales said.

"I think the [Department of Finance] is just playing dumb and they are going to take the money as long as they can until the court or the legislature takes action," Morales said. "That has been their M.O. since the dissolution of redevelopment three years ago."

Huntington Park sought a temporary restraining order to prevent the Los Angeles County auditor-controller from collecting the increment portion of the pension tax and including it in the redevelopment property tax trust fund.

In December, Judge Allen Sumner heard oral argument in Superior Court in Sacramento and denied the request for a temporary restraining order. The judge hasn't ruled on the larger issues, however.

In its opposition document, John Krattli, county counsel, argued that the city had not exhausted remedies of getting the money, including having the pension tax obligation placed on the redevelopment successor agency's recognized obligation payment schedule.

The county also referred to the city's request as asking the court to create an "exemption to the tax allocation system," that could only be done by the legislature.

Morales said the way the process is being interpreted is thwarting the will of voters, who voted in favor of the pension tax.

The city's lawsuit argues that by taking this money, the county auditor-controller is violating voter's constitutional rights.

"When voters approve a property base tax, they approve it for that use," Ihrke said. "They are not concerned with whether it's base tax or tax increment."

The city is a separate entity, and is not supposed to be impacted by the dissolution of the redevelopment agencies, but in these circumstances, that is what is happening, Ihrke said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.