Capitol Alert: Cities threaten lawsuits over potential garnish of local taxes

California cities are considering legal action over a new budget provision that allows the state to garnish local tax revenue if it believes governments are keeping too much money formerly dedicated to redevelopment.

Assembly Bill 1484 gives the California Department of Finance new ability to withhold money from cities if it determines they have not returned enough dollars to state coffers. The new budget relies on $1.4 billion in revenues from former redevelopment assets, as well as $1.7 billion in property tax dollars that would have otherwise flowed to redevelopment agencies had the state not shuttered them last year.

Under the elimination of redevelopment, cities generally took over the payments of debt still owed by redevelopment agencies and are allowed to keep as much as is necessary to retire the remaining borrowing. Those making the debt payments are called "successor agencies."

But cities disagree with the state about how much money they need to retire debt, and the League of California Cities fears that AB 1484 gives the state too much power to keep sales tax money. The bill also allows counties to withhold property tax revenues for the same reasons.

The Senate passed the bill this afternoon and sent it back to the Assembly.

"I suspect the stakes will be very high, and you might see some lawsuits," said Chris McKenzie, executive director of the League of California Cities. "There are serious disagreements between Finance and successor agencies how much they should be receiving for debt service payments."

McKenzie said he believes the blockage of sales and property taxes would violate voter-approved initiatives that local governments won to block state transfers.

The issue bogged down the Senate budget committee on Tuesday night and prompted a meeting of Democratic lawmakers in Senate President Pro Tem Darrell Steinberg's office to assuage concerns. Steinberg agreed to send a letter to Gov. Jerry Brown asking for a "fair and open review" that gives local governments advance notice of their redevelopment calculations.