Huntington Beach Faulted in Tax Ruling

In another setback to its already troubled finances, Huntington Beach has lost an appeal of a tax ruling that could cost City Hall $27 million and, according to one councilman, force the city to declare bankruptcy.

The state’s 4th District Court of Appeal on Wednesday upheld a Superior Court ruling that said the increase in a tax the city had collected for years to fund employee pensions was unconstitutional and that homeowners who paid it are entitled to a refund.

If the city decides not to appeal the decision, at least 15,000 homeowners who have so far filed a claim against the city over the increase would be due refunds that officials estimate would total $27 million.

This latest grim news about the city’s finances comes when officials have been forced to cut programs and lay off 37 employees to make up for an $11.5-million shortfall caused by a weak economy and revenue losses.

A $27-million debt could so flood the city in red ink as to warrant filing for bankruptcy, said Councilman Dave Sullivan.

“It’s a big problem for the city to come up with the money,” Sullivan said. “It isn’t as if they’ve put aside X amount to pay off the claims.”

The city attorney was not available to discuss what ramifications bankruptcy would have on the city.

Mayor Connie Boardman, unavailable for comment Thursday, had previously said the city could sell bonds to pay off the debt. Sullivan said he would oppose a measure that would add to the city’s debt.

“You are borrowing money, which is going to be at a pretty good interest rate, and who’s going to pay that? The citizens of Huntington Beach,” Sullivan said.

The suit was initiated by Chuck Scheib, a resident who argued that the city was collecting an illegal property tax when it increased the rate not long after voters passed Proposition 13, the 1978 statewide ballot measure that limited how much in property taxes cities could collect.

Proposition 13 allows collection of taxes that were approved by voters before its passage. So the rate of the benefits-funding tax that Huntington Beach collected before Proposition 13 -- and before the city raised the amount -- is not in legal question.

According to the League of California Cities, 26 other municipalities collect a tax approved by voters before Proposition 13 to finance their pension debt.

A spokeswoman for the league said she was not able to say whether other cities had been sued over the issue.

Scheib and the Howard Jarvis Taxpayers Assn. took the city to court in 1999 over the increase.

A Superior Court judge agreed that the increase violated the provisions of Proposition 13. The city appealed the decision in April 2001.

The refund, if paid, can be for only the four years before the suit was filed, because of the statute of limitations.

Sullivan said bankruptcy might allow the city to review its retirement benefits.

“The real killer is our excessive benefits we’ve given to employees,” he said.

“In a bankruptcy, as part of restructuring, you could ... take that back.”

The city has 40 days to appeal Wednesday’s ruling. The council will discuss the matter in closed session at its meeting Monday, but it will not be on the open agenda until Aug. 18.

At that time, Sullivan said he will ask the staff to begin the process of repaying the taxes.

“[The city’s] lost twice. Get over it. Give the money back; do the right thing,” Sullivan said.