SAN RAMON -- Who should foot the bill for the full cost of city services -- such as police, street maintenance and lighting, stormwater treatment -- that is required to support new housing developments in the city: new residents or all of the city's residents?

And should that answer change if the housing development is a) a large community of single-family homes erected on greenfields of open space or b) townhomes and condos in multifamily buildings built in already developed, urbanized areas?

Those are two of the central questions at the crux of a lawsuit filed by the Pacific Legal Foundation and Building Industry Association of the Bay Area against the city of San Ramon last month. The groups allege the city's creation of a special taxation district is a violation of the state's Mello Roos Act, which they say makes it unlawful to charge special taxes unless they help to pay for "new" services that specifically benefit those in the district who pay the special taxes.

"Property owners will have to pay a new tax, but they won't get any new or enhanced return," said Damien Schiff, principal attorney for the Pacific Legal Foundation. "Instead the money will be used for existing municipal services."

"New homeowners would be paying more than their neighbors, with no more or better parks and police services than their next-door neighbor," said the BIA Bay Area General Counsel Paul Campos.

But the city says their creation of the taxation district is legal and it will help to balance the city's budget more effectively.

"We want to make sure that every new housing project pays for itself," so the city would be "held revenue-neutral" when new developments come in, said Mayor Bill Clarkson.

And taxes collected in the special district would provide "new and enhanced services, by picking up the additional costs that the new development requires, above and beyond the present use of the land," said city attorney Bob Saxe.

But Campos argues that virtually "all of the new units that San Ramon is going to tax are principally multifamily smart growth, infill projects," and these types of multifamily housing developments do "pay their way" by encouraging smart growth that the state encourages.

On Feb. 25, the City Council adopted the formation of the special taxation district, called a Community Facilities District. The Acre project, the first development to agree to be a part of the district, would redevelop a 3-acre site of two vacant office buildings at 125 and 130 Ryan Industrial Court into three residential buildings, consisting of a total of 48 townhomes, six of which would be live-work units. Its two landowners voted unanimously to join the district, and it will result in eventual homeowners there having to pay at least $500 a year on top of their regular property tax.

The Community Facilities District is expected to generate about $28,560 per year for services to the Acre project, according to the city, and it could generate up to $2 million a year if the 2,500 residential units left to be built within city limits, excluding Bishop Ranch and Dougherty Valley, were annexed, too.

Yet, PLF and BIA also charge that the district is a violation of Proposition 218, which requires voter approval of any increases in taxes for "general purposes," since they believe the taxes collected will actually go to pay for general fund services, including pensions and other city costs. They also say that developers are essentially forced to join the taxation district if they want to build in San Ramon.

"The scheme could be called a 'pension tax,' or a 'pay something but get nothing' property tax," Schiff said. "It's an end-run around the voters by creating a new tax for general purposes and camouflaging it as a special property tax."

But Saxe also said that the taxes would "not be used to pay for pensions or other general governmental purposes."

In fact, the city would have to keep that special tax revenue in a separate fund from the general fund, said Chris Lynch, a bond lawyer at the Feb. 25 city council meeting. And developers must vote unanimously to be included in the district and have a choice to join the district or not.

"A community facilities district is only one way to do this -- and obviously it's not a mechanism that's favored by BIA," Saxe said. "But if a developer says that they don't want to use Mello-Roos, and they'd rather provide some other arrangement, that would be fine."

Chas Cardall, a bond attorney at Orrick, Herrington and Sutcliffe in San Francisco, one of the largest bond counsels in the country, said that although Mello Roos is generally associated with new, greenfield developments, here are a fair amount of examples of existing, fully built-out residential areas laying on these community facilities districts.

And cities are in a bind when it comes to raising taxes to pay for city services due to Proposition 13, which severely limited local government's ability to impose property taxes, freezing taxes assessed on homes at the original value it was purchased and capping tax hikes at 2 percent annually. Also, cities can have difficulty in getting the required two-thirds of residents to vote to raise new taxes.

"They don't really have the ability to raise property taxes," Cardall said, "so they are just left in a circumstance, that if they need more money, where are they supposed to get it from?"

Contact Joyce Tsai at 925-847-2123. Follow her at Twitter.com/JoyceTsaiNews.

---