Concluding that Fontana has dodged its affordable housing obligations since 1987, the Fourth District Court of Appeal has blocked the Fontana Redevelopment Agency from issuing $40 million in tax allocation bonds because the agency has exceeded its debt limit. The court also declined to "validate" a settlement between Fontana and the state Department of Housing and Community Development concerning a $67 million shortfall in affordable housing funds.

The ruling issued in late July is complicated, as is situation behind the decision. The bottom line according to housing advocates is that Fontana must return $53 million to one project area's affordable housing fund and halt the diversion of housing funds to a developer. Fontana officials, however, say the ruling will have little affect on their redevelopment practices, and an HCD attorney said the settlement agreement remains in place.

The ruling is the latest phase in ongoing scrutiny of Fontana's redevelopment practices. In November 2001, the Department of Housing and Community Development (HCD) released an audit that said the Fontana Redevelopment Agency (RDA) had underfunded low- and moderate-income housing efforts, failed to account for and produce required low/mod housing, provided inaccurate information, and spent housing money on ineligible neighborhood beautification projects.

The basis for much of HCD's concern is an owner participation agreement (OPA) between the city and developer Ten-Ninety of Corona. Under the agreement originally signed in 1982 and amended in 1984, 1987 and 1992, the city turns over all tax increment revenue from the Jurupa Hills redevelopment project area to Ten-Ninety, which provided capital financing for infrastructure for its own 8,000-unit Southridge housing development. The agreement makes no provision for withholding 20% of tax increment for low/mod housing. The audit said Fontana must cease transferring the required 20% set-aside to Ten-Ninety.

In a 25-page response, the city said it was too late for HCD to challenge provisions of the OPA because it and several bond issues had been validated in court. "There is simply no legal basis to now set aside those agreements and the lawful expectations of the parties to them," said the response from City Manager Kenneth Hunt.

Nevertheless, city officials initiated settlement talks with HCD, and in November 2002 the city and HCD adopted an agreement in which the city pledged $6.1 million to the redevelopment agency's housing fund (although none for the Jurupa Hills project area) in exchange for HCD not pursuing the audit issues any further.

A few months later, Fontana filed an action in court seeking to validate the agreement and a $40 million bond issue for the Jurupa Hills project area. The idea behind such validation actions is to prevent questions of legality in the future. Housing advocates at the Western Center on Law and Poverty, and the California Housing Law Project objected, but San Bernardino County Superior Court Judge John Wade ruled for the city.

However, a three-judge panel of the Fourth District, Division Two, ruled that the settlement agreement is not subject to validation under the general validation statute (Code of Civil Procedure § 860) or under Government Code § 53511, subdivision (a), which permits validation actions for certain financial contracts.

"Therefore, we cannot decide the validity of the settlement agreement because it was not subject to a validation proceeding," Justice Barton Gaut wrote for the court. "We express no opinion about whether defendants [the housing advocates] may challenge the settlement agreement in an alternative proceeding."

Lynn Martinez, a Western Center attorney, said advocates were considering options but would likely challenge the settlement in a new lawsuit.

The proposed bond issue was eligible for validation proceedings, but the Fourth District blocked it because the project area has exceeded its debt limit. All parties appear to agree that the project area debt limit is $135 million. The city said the project area currently has debt of $174 million, while the housing advocates and the court seized on the city's statement of indebtedness, which says the city ultimately will owe Ten-Ninety $1.3 billion in principal and interest that accrues at 15.5% annually.

The city argued that, under the OPA, debt beyond $135 million is permissible as "reserve debt." The court, however, said there is no distinction between non-reserve and reserve debt.

"Quite clearly, both kinds of debts are repayable from tax increment and will finally be paid, if at all, with tax allocation bonds. Both kinds of debt qualify as secured indebtedness subject to limitation," Justice Gaut wrote. "Calling the same kind of debts by different names should not allow Fontana RDA improperly to circumvent the statutory limitations of the Jurupa Hills redevelopment plan."

Simply because the previously validated OPA allows additional debt does not mean the debt can be approved now. "The courts cannot validate ongoing illegality," Gaut wrote, in a none-too-subtle swipe at the trial court judge.

Gaut's conclusion was equally blunt: "What the record inescapably demonstrates is Fontana RDA's lack of compliance with the required 20% contribution for affordable housing since 1987. Instead, all tax increment revenues appear to be diverted to Ten-Ninety to pay off almost a billion dollars in interest. Any previous findings made in 1981 that payment toward the infrastructure benefited affordable housing were made under the law and circumstances existing at the time, not in 2003 when the new tax allocation bonds were proposed.

"The present and future benefits to affordable housing appear to be nonexistent. Although defendants [housing advocates] may not be able to challenge earlier actions by Fontana RDA, they should be able to curtail this most recent effort to evade the statutory obligation to provide and promote affordable housing," Gaut wrote.

The decision pleased both liberals and conservatives. Martinez said the court properly held Fontana to its affordable housing obligations.

"We will be doing everything possible to get this $53 million paid to the low/mod fund instead of to Ten-Ninety, and to get the housing built," Martinez said.

Chapman School of Law Dean John Eastman, who filed an amicus brief in the case for the conservative Claremont Institute Center for Constitutional Jurisprudence, said the court caught Fontana in "a giant shell game" that is ripe for corruption. He questioned why Fontana would still be paying 15.5% interest on bond debt, an interest rate that has not been common since the 1980s. "Whenever you see something that out of whack, something is going on," Eastman said.

The city, however, appears less than chastened. Fontana Management Services Director Lisa Strong — who made clear the Ten-Ninety deal predated the current city administration — said the agreement with HCD requiring payment of only $6.1 million to the housing fund remains in place, as does the OPA with Ten-Ninety.

"We are contractually obligated to pay all of the tax increment to the developer. If we were to set aside the 20%, the developer would sue us," Strong said. Nor does the city need to set aside the money, she said, because the units developed by Ten-Ninety "were low/mod housing," she said. "We didn't say we wouldn't do the low/mod housing. We think the obligation has been met."

According to the state controller's office, the Jurupa Hills project area generated $13.8 million in tax increment during the 2005-06 fiscal year. Strong said the city has paid about $125 million to Ten-Ninety over the years. She contended that the 15.5% interest rate on the Ten-Ninety financing does not matter because the OPA requires the city to turn over all tax increment, and both the city and the developer know the debt will not be paid in full when the project area expires in 2032. Proceeds from the proposed bond issue would have gone to Ten-Ninety as an advance payment.

Dennis Beddard, HCD's chief counsel, said that although the 2001 audit uncovered "glaring" disparities, there was little the department could do because of past validation actions. The settlement was a way of ensuring Fontana's low/mod housing fund was repaid in part and assumes Fontana will follow the rules in the future, he said. "The department views this as a success story," Beddard said.

Promulgated under a different administration, the settlement between HCD and Fontana is the only one of its type, according to Beddard.

"I'm hoping," said the Western Center's Martinez, "that it's a one-time deal and they will never do it again. We really think it's necessary for HCD to have the audit authority. But we didn't want to start the precedent of them settling based on the results of the audit."

What HCD should have done, said Martinez, is refer the matter to the attorney general's office for enforcement.

The Case:
Fontana Redevelopment Agency v. Torres, No. E038366, 2007 DJDAR 11464. Filed July 26, 2007.
The Lawyers:
For Fontana: Victor Wolfe, Best, Best & Krieger, (909) 686-1450.
For Torres: Lynn Martinez, Western Center on Law and Poverty, (707) 373-4572.
For Ten-Ninety, Ltd.: Joseph Coomes Jr., McDonough, Holland & Allen, (916) 444-3900.