O.C. Must Defend Its Use of Planning Fees

Orange County must prove to a Superior Court judge next month that $18.5 million in disputed fees collected by its planning department was properly spent rather than diverted to other uses. Orange County Superior Court Judge C. Robert Jameson ruled last week that the county bears the burden of proof in a Sept. 13 trial to determine how the money was spent.

Homebuilder Barratt American Inc. sued in 2001, alleging that the county overcharged for its tract-home fees. State law requires that building and planning fees cover only those costs reasonable and necessary to pay for the services provided. Collecting more is considered an illegal tax, and any excess must be credited against future fees.

Barratt’s attorney, Walter McNeill, charged that Orange County embarked on a multi-year spending spree that consumed $18.5 million in surplus fees. By mid-2002, the money was gone, diverted to cover general government expenses and a $7-million computer system and a fleet of Ford Explorers. County supervisors then supplied another $8 million to keep the department afloat.

The county’s outside attorney, Jeffrey Dunn, argued before Jameson last week that governments would be subject to “consistent harassment by disgruntled citizens” if they were expected to justify spending in court. He characterized the Barratt lawsuit as a common taxpayer challenge in which the burden of proof should be on the plaintiff to show that the use of government resources had been improper.

It would be absurd, Dunn said, to expect the county to come into court with records for multiple years showing millions of dollars in planning department expenses and “prove the reasonableness and necessity of all those expenses.”

But McNeill, citing state law that requires justification for building and planning fees, said the county has both the means and the obligation to do so.

Jameson acknowledged that the county wouldn’t be expected to provide details on every sheet of paper or paper clip used. He said county officials could rely on reports from a special master he appointed earlier in the case to help determine what spending would be at issue.

The special master, Robert P. Mosier, predicted that the county would have to reimburse the building fund for about $10 million in questionable expenses, which would be credited against future developer fees. Barratt attorney McNeill estimated the reimbursement at closer to $14 million.

Another court-appointed expert, accountant William W. Holder of Newport Beach, told Jameson that the county had failed to justify how it spent most of the $18.5 million.

The financial crisis in the planning department in 2002 prompted the early retirement of Director Tom Mathews, layoffs of 39 workers and the eventual firing of then-county Executive Officer Michael Schumacher.

A review by The Times of department finances showed that, despite clear indications of a slowdown in housing development and a corresponding decline in fees paid, the department failed to adjust its spending to better track its actual workload.

Revenues for fiscal year 2001-02, for example, were estimated to be $11.2 million, but the department ultimately received only $7.7 million. For the 2002-03 budget, planners estimated that revenues would jump to $19.5 million, but they eventually were less than half of that.

The battle over building fees hasn’t been confined to Orange County.

The California Supreme Court announced in October 2003 that it would review a similar case involving Barratt American and Rancho Cucamonga in San Bernardino County. The lawsuit, filed by Barratt and former Palm Springs developer Richard McCarthy, contended that California cities and counties routinely violate state law requiring planning and building inspection fees to reflect only the cost of providing the service.

Attorneys in the case said the Supreme Court probably was influenced to accept the case for review because Barratt and McCarthy’s group, the Paladin Fair Housing Coalition, had filed many similar lawsuits, including the one in Orange County.

The lawsuits have had mixed success. A judge in Riverside County tentatively ruled in March, for example, that Corona had the discretion to set fees but said officials there failed to show that the method for setting fees had any “reasonable relationship to the cost.” A final ruling was postponed pending Supreme Court action.

Appellate justices had earlier ruled in Rancho Cucamonga’s favor, agreeing that local governments have complete discretion to set fees. In a published decision, the court said fees could be challenged, but only within 120 days of adoption. If the fees were later deemed excessive, they weren’t refundable.

In March 2003, Orange County began charging fees based on the actual amount of time and materials spent toward specific projects. The county required developers to post a hefty deposit, however -- even larger than the fees that originally prompted Barratt’s lawsuit against them.

Earlier this year, the county again revised and increased its fee deposits for plan checks and inspections. McNeill said he also plans to challenge those fees as excessive.