LOS ANGELES — San Bernardino, Calif. is only one of dozens of cities to receive a letter from the California Department of Finance demanding that it hand over redevelopment funds or risk having the money deducted from future sales tax or property tax proceeds.

The city's ongoing bankruptcy adds a twist to the process, however. It filed for Chapter 9 bankruptcy in August.

State finance department spokesman H.D. Palmer said that 31 successor agencies to the state's 402 dissolved redevelopment agencies have either not sent confirmation that money has been transferred to their county auditor-controller or have told the state they do not intend to make the transfer.

The Department of Finance began sending letters to successor agencies in December demanding that they hand over the remaining affordable housing funds of their defunct redevelopment agencies. State legislation, supported by a late 2011 Supreme Court ruling, dissolved the state's redevelopment agencies, which were required to use 20% of their revenue to support low- and moderate-income housing.

Many of the successor agencies were required to hand over the housing money, which is to be redistributed to cities, schools and other local government entities in their respective counties.

"This is not unique to San Bernardino," Palmer said. "Part of the unwinding process is determining how much unencumbered funds the successor agencies had."

San Bernardino City Attorney James Penman said if the state tries to dun the city for the $15.2 million it is claiming must be paid by April 3, the city will sue the state.

"We sent a letter on Friday that said that even threatening to withhold sales tax is a violation of the bankruptcy code," Penman said. "If the state doesn't send a letter assuring us that it is not going to attempt to interfere with any of our assets in violation of federal bankruptcy law, we will take appropriate action against them."

Penman sent nearly identical letters to Finance Director Ana Matosantos and Controller John Chiang.

The finance director's letter isn't the only dispute San Bernardino is engaged in regarding assets of its former redevelopment agency.

The controller's office also completed an audit and revealed findings last week that the city failed to properly transfer $529 million in former redevelopment agency assets and ordered that they be turned over to the successor agency.

The review found $108.4 million of the redevelopment agency's properties, cash, and invested funds were inappropriately transferred to the City of San Bernardino Economic Development Corp., and another $420.5 million of assets are still being held by the city, according to the controller's office. The controller's office ordered that the assets be transferred to the successor agency.

"I'm working to make sure redevelopment assets go where they belong: to retiring RDA debt and paying for critical services at the local level," Chiang said in a news release.

The controller's office wouldn't comment directly on Penman's letter.

Properties can be transferred back to the city if they serve a legitimate government purpose such as a fire house, said Jacob Roper, the controller's spokesman. In order for that to happen, the successor agency's local oversight board has to approve the transfer and then it has to be approved by the state Department of Finance.

So far, the controller's office has completed audits on 20 of the state's 402 former redevelopment agencies, Roper said.

San Bernardino began transferring RDA assets in March 2011 to the Economic Development Corp., months before the state introduced dissolution legislation in June 2011 and long before the Supreme Court validated the dissolution in January 2012, Penman said.

Chiang's office disagrees with San Bernardino's contention that the Economic Development Corp. is independent of the city government.

Many California cities continue to face financial struggles in the aftermath of the Great Recession, but San Bernardino and Stockton are the only ones working through their problems in bankruptcy court.

According to Palmer, the state could withhold tax proceeds from San Bernardino, but would only take that step as a last resort. He added that state officials are willing to set up payment plans with the cities.

Stockton filed for bankruptcy protection just a few months before San Bernardino, but is much further along in the bankruptcy process with its eligibility hearing scheduled for the end of this month.

Stockton's successor agency hasn't, however, submitted its independent audit showing what the city's unobligated balances are in the low to moderate income housing fund, Palmer said. They can't transfer government properties until they complete that audit.

"There is no penalty for taking longer to complete the audit," Palmer said.

According to Penman, San Bernardino, which filed bankruptcy in August, isn't close to having its eligibility hearing scheduled.

"We are early in the process," Penman said. "We have another status hearing on discovery set for March 21."
The city of 213,000 has laid off 200 employees and is restructuring all city departments in an attempt to whittle down a $45.8 million deficit, Penman said.

"I feel the bankruptcy is giving us insulation from our creditors to restructure the city and rearrange our finances so we can develop a final plan of adjustment and emerge from bankruptcy court and the bankruptcy process far ahead of where we are now," Penman said.

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