The Malibu policeman's immortal warning "keep out of my beach community!" in the 1998 leisure-sport epic The Big Lebowski could just as easily have been uttered last autumn by certain residents of Orange County's unincorporated community of Sunset Beach. In this case, though, they would not be shouting at The Dude but rather at the entire City of Huntington Beach.
Instead, a group of Sunset Beach residents are suing the City of Huntington Beach for, they say, unfairly imposing a 5% Users Utility Tax on them.
Last year residents of Sunset Beach, which has roughly 1,100 residents, commissioned an incorporation study that ultimately demonstrated a lack of viability, according to the Orange County Local Agency Formation Commission. Instead, because of Orange County's aggressive pursuit of so-called "small island" annexations, Sunset Beach was slated to be subsumed by Huntington Beach late last year. That decision was met with mixed reviews in the fiercely independent community.
"Some people thought that the study justified becoming our own city," said Mike Van Voorhis, president of the Sunset Beach Community Association. "There are others, me included, that when I looked at the study to become a city, it…made more sense to become part of Huntington Beach."
Small island annexations are supposed to proceed without much fuss and without a popular vote. But the lawsuit suggests that a potential contradiction in state law could – in the absence of a clear court ruling on the Sunset Beach case – complicate countless other small island annexations throughout the California.
"The Sunset Beach situation has the capacity to have statewide implications," said Huntington Beach City Attorney Jennifer McGrath.
This merger will take place against the backdrop of a lawsuit that has exposed a potentially troubling conflict between the Knox-Cortese-Hertzberg Local Government Reorganization Act of 2000 -- the law that governs annexations and local agency formations -- and Proposition 218, the 1996 ballot measure that requires voter approval for most local tax increases.
In 2000 Knox-Cortese-Hertzberg was updated to include a Section 56375.3, a provision for the streamlined annexation of unincorporated islands of less than 150 acres. The law gives LAFCOs the discretion to approve, but not to deny, island annexations without protest or popular votes. The provision was designed to do away with small islands in order to promote efficient governance.
For the most part, these annexations take place smoothly, as the law intended.
"There's been a lot of island annexations that have occurred over the last few years with this provision in the law," said Bill Chiat, executive director of the California Association of Local Agency Formation Commissions. "In almost all cases they're done collaboratively. LAFCOs' commissions and cities rarely want to do an annexation where the residents aren't at least neutral if not supportive."
Sunset Beach is not literally an island, but it comes fairly close, occupying a thin spit of coastline with Los Alamitos Bay on one side and the Pacific on the other.It's also adjacent to the Naval Weapons Station in Seal Beach. In the 107 years since its founding as a railroad depot, Sunset Beach has attempted to remain a place of houseboats, dive bars, and flip-flops while its larger, richer neighbor has gamely marketed itself as "Surf City, USA."
This marriage of beach bum and trophy wife comes about as a result of Orange County LAFOO's assignment of the 134-acre community to Huntington Beach's sphere of influence in 2009. Sunset Beach is one of 26 remaining small islands in the county that are being eyed for annexation. The Huntington Beach City Council began annexation proceedings in August of 2010. In January a court issued a preliminary injunction against the annexation, which has yet to be recorded by LAFCO.
A group of Sunset Beach residents called the Citizen's Association of Sunset Beach filed a suit Dec. 9, claiming that a 5% Utility User Tax that is charged throughout Huntington Beach violates Prop. 218. The suit originally challenged the annexation in its entirety but, following a January ruling that stayed the annexation, the suit is now limited to the utilities tax but is not challenging the annexation.
Plaintiffs have argued that the imposition of the tax violates their right to consent to the tax under Prop. 218. City officials contend that it is not a new tax per se but rather the expansion of city boundaries, which thus applies an existing tax to new residents. City Councilmember Keith Bohr, who was mayor when the council approved the annexation, said that Huntington Beach's 5% UTT is actually the lowest such tax among all the options that Sunset Beach faced. Annexation by Seal Beach, to the north, would have likely resulted in a higher tax, and the community's own incorporation study estimated that utilities taxes would have to be as high as 10%.
The City Council had initially not intended to levy the utilities tax but, acting on advice from McGrath, determined in November that existing Huntington Beach residents might sue if Sunset Beach was exempted from the tax. In any event, they say that the tax was not an issue during the discussions leading up to the approval of annexation and that they did not expect Prop. 218 to force their hand.
"When we sat down with them initially, they gave us 14 points that were really important to them and we agreed on 13 of the 14 points. This utility tax came up later after that," said Joe Carchio, mayor of Huntington Beach. "We were hopeful that we not going to tax them. We didn't realize—at least I didn't realize—that Prop. 218 would come into play."
McGrath contends that Prop. 218 does not, and should not, come into play because the tax is not "new" as such. Instead, she argues that it is an existing tax being levied on new taxpayers. LAFCO's annexation study projects that Huntington Beach would net roughly $600,000 annually on just over $1 million in tax revenues collected in Sunset Beach; Sunset Beach's portion of the UTT would amount to roughly $200,000.
"These are taxes that residents of Huntington Beach pay," said McGrath. "By LAFCO's decision to annex that unincorporated area into the City of Huntington Beach they will be merely paying the same taxes as would any other resident of the city."
If the UTT was not imposed until a citywide vote took place – which would not be until 2012, according to the city's current election calendar – then Huntington Beach would be forced to withhold some services from the residents of the untaxed area. If it did not, then, McGrath said, the city could face a lawsuit from existing residents who would likely see Sunset Beach as getting a free ride.
"Obviously the citizens of Huntington Beach don't want to subsidize the citizens of Sunset Beach," said McGrath. McGrath said that she is confident in her position in part because the 2000 update of Cortese-Knox-Herzberg came after the passage of Prop. 218, meaning that legislators have implicitly addressed any issue that Prop. 218 would raise.
"The Legislature is presumed to know what the law is when they're creating new legislation, so an inconsistency would have been remedied if it was needed," said McGrath.
Opposing counsel says that Prop. 218 requires that the consent of the annexed residents must take precedence or else the annexation should not take place.
"If you get a vote for purposes of annexation, that is sufficient to satisfy your right to a vote under 218," said plaintiff's attorney John McCarron, of law firm Stern, Van Vleck, and McCarron. "In the standard annexation, your vote (to annex) kind of qualifies as both and the constitution is satisfied. Here, that's not the case."
While the suit has been a headache for Huntington Beach, it could foreshadow further complications for countless future island annexations around the state.
Fresno County LAFCO has already faced a similar issue. In 2009 the City of Fresno was set to annex, and impose its city utilities tax on, 49 acres comprising a relatively upscale residential neighborhood through the islands annexation law. That annexation was suspended when the Howard Jarvis Taxpayers Association threatened a lawsuit. The city then sued LAFCO for suspending the annexation on the grounds that it was treating the Jarvis letter as a "protest" and thus violating Knox-Cortese-Hertzberg.
That case settled with an unpublished opinion.
"Courts have never settled the question as to whether or not a protest proceeding satisfies the requirements of Proposition 218," said attorney Kenneth J. Price, of Baker, Manock & Jensen, which represented Fresno LAFCO. "This is really a two-part analysis: the first question is, is there this conflict between the statute and 218? And even if there were a protest, does the protest satisfy the requirements of 218?"
Thus, the relationship between small island annexations and Prop. 218 remains very much an open question. This apparently intractable conflict in Sunset Beach will likely lead to a precedent-setting ruling if and when the suit goes to trial in August.
"I expect the question will continue to be raised as annexations occur in the future and there is some kind of assessment that comes with the annexation that people will be concerned if their costs increase," said Chiat.
If a court was to find in favor of the plaintiffs in Sunset Beach, the ruling could undermine the small islands annexation provision in Knox-Cortese.
"The whole point of an island annexation is to fast-track simple, small annexations," said Price. "And if a 218 proceeding is imposed that's exactly like a protest proceeding. It's going to slow down the process."
Cities could, of course, agree not to impose contestable taxes, but doing so would, according to McGrath, eliminate cities' incentive for annexing islands in the first place.
"They encourage this type of annexation so that counties are basically getting out of the business of running cities. They designed it this way," said McGrath. "If the city can't collect the taxes there's no incentive for the city to take it on."
Many opponents of the lawsuit feel that it amounts more to an expression of civic pride than of genuine concerns over governance.
"There is a legitimate legal issue that needs to be determined, but I believe that the people who have this lawsuit simply are trying to find a way to crush the annexation," said Voorhis. Representatives of the Citizen's Association of Sunset Beach were not available for comment before press time.
Huntington Beach officials insist that the Sunset Beach faithful have nothing to worry about.
"In the long run, [Sunset Beach residents will be] much happier that they're going to be part of Huntington Beach and still maintain that small-town flavor in that their name is still there," said Carchio. "We're not going to go in there and start bulldozing properties and start putting up large hotels."
Contacts:
Joe Carchio, Mayor of Huntington Beach, 714-536-5553
Bill Chiat, Executive Director, California Association of Local Agency Formation Commissions, 916.442.6536
John McCarron; Partner; Stern, Van Vleck, and McCarron, 916.442.1298
Jennifer McGrath, Huntington Beach City Attorney, (714) 536-5555
Kenneth J. Price, Attorney, Baker, Manock & Jensen, 559.432.5400
Mike Van Voorhis, President, Sunset Beach Community Association
