ORANGE COUNTY IN BANKRUPTCY : Cities Plan Suits Over Frozen Tax Revenue : Recourse: Several have threatened legal action over millions of dollars in property tax funds being withheld by the county. Huntington Beach has set a Jan. 6 deadline.

In a move likely to compound the county’s financial woes, several cities threatened Wednesday to file lawsuits to gain access to millions of dollars in property tax revenue tied up in the county treasury because of the bankruptcy.

The Huntington Beach City Council voted to file a lawsuit against the county unless it works out an agreement by Jan. 6 for the release of about $2.5 million in revenue. Costa Mesa officials also threatened legal action if the disputed funds are not disbursed.

“What is acceptable to us is that 100% of the property taxes due us come to us,” said Richard Barnard, Huntington Beach’s deputy city administrator. “Anything less would be unacceptable.”

The county announced last week that it was withholding more than $20 million in property tax revenue due cities and school districts because the funds were collected before the Dec. 6 county bankruptcy filing and are now frozen in the county treasury.

The county’s action prompted Costa Mesa City Manager Allan L. Roeder to contact other cities this week in an effort to craft a plan to recoup the money.

“One thing we agree on is that we don’t want to go in 30 different directions,” he said. “We wanted to find out if other cities were interested in one filing instead of going in different directions.”

Roeder said several cities expressed interest in a joint lawsuit, but he declined to say which cities or exactly how many. He said officials have asked the bankruptcy creditors committee to find ways for the cities to receive the frozen tax revenue.

Huntington Beach is trying to reclaim about $2.5 million in property taxes that the county held back last week, said city officials Wednesday. The city received $6 million in property tax revenue, money collected from Dec. 7 to 15.

While other cities and school districts have expressed outrage at the county’s stance, Huntington Beach is the first to issue an ultimatum. The city set a deadline after pleas to the county for the frozen funds went unheeded, city officials said.

“There are several legal alternatives we can pursue,” said Huntington Beach Mayor Victor Leipzig after a special closed-session meeting. “The council is anxious for the city attorney to vigorously pursue our tax money.”

City officials argued that the county has no legal ownership of the property taxes earmarked for cities and that its only role is to collect and distribute the tax revenue.

“The county is holding that money in trust,” Barnard said. “We are not creditors. We are beneficiaries. . . . We have not lost any of that money.”

Added Costa Mesa Mayor Joe Erickson: “It’s our opinion (that property tax funds) weren’t part of the bankruptcy.”

But Chuck Hulse, the county’s chief deputy auditor-controller, said that the county was forced to freeze the property taxes because they were in the county treasury at the time the bankruptcy was declared. He said the cities would have to go through the bankruptcy court for disbursement of the tax money.

Over the last week, Huntington Beach officials have taken their case to top county officials. On Tuesday, Leipzig sent a letter to outgoing Supervisor Thomas F. Riley saying he was “disappointed” that the city would not collect all its property tax revenue.

“The freezing of city assets in the county investment pool was difficult enough,” Leipzig wrote. “However, the withholding of duly collected tax revenues is simply not acceptable.”

Leipzig added in the letter: “These (tax) revenues, of course, are our legal right. And as a practical matter, they are the essential lifeblood of city services. They are vital to our continued operations. The city must demand payment in full.”

However, other cities expressed reservations about suing the county for the funds.

“It could be more confusing than helpful,” said Los Alamitos Assistant City Manager Gerard Goedhart. “Right now, the best way is to collect more information. Nobody wants to be held in limbo.”

Anaheim officials said they are still weighing whether to join possible legal action against the county. Anaheim has $169 million invested in the county pool.

The dispute comes as cities and school districts received new property tax payments a week earlier than normal. County officials said they released the money early to help agencies with cash-flow problems.

Anaheim received $3.2 million Wednesday in property taxes, which were available since they had been collected after the county’s bankruptcy filing. The county also gave the city $6.9 million in property tax monies last week. But Anaheim still has another $4.5 million in tax revenue tied up in the county treasury.

“We don’t know the fate of those funds,” said Bret Colson, an Anaheim city spokesman.