A recent appellate court decision could lead to the loss of hundreds of thousands of dollars annually to the recently formed cities of Menifee and Wildomar.

The ruling is the latest chapter in a 2-year-old lawsuit filed by Gerard Ste. Marie. The Wildomar resident sued the county in May 2008, alleging that the county's promise to give money to the new cities for their first 10 years was an unconstitutional "gift of public funds."

In July 2007, the county signed off on the transfer of the money to pay the two cities, should voters opt to incorporate, for fire protection and services it would no longer have to provide directly to residents there.

Although a trial court decided in the county's favor in December 2009, Ste. Marie appealed that decision, and a Court of Appeals panel in Riverside ruled in his favor last week.

Deputy County Counsel Bruce Fordon said he and County Counsel Pamela Walls need to analyze the court's ruling, which, barring a rehearing or appeal to the state Supreme Court, directs the case back to the trial court. Ultimately, the county Board of Supervisors will decide on the response, Fordon said.

In agreeing in 2007 to make the payments, county officials reasoned the agency would be saving money as the cities assumed financial responsibility for functions such as public safety that had been funded by the county.

At the time, financial planners for the county estimated that Wildomar's incorporation would save the county about $2.2 million through June 2018. Planners estimated that Menifee's incorporation would save the county $3.8 million to $14 million, depending on where the new city's boundaries would be set.

The actual amounts received by the cities fluctuate annually because the allocation formula takes into account how much sales tax revenues the cities receive. The county gave Wildomar $237,579 in its first year, starting July 1, 2008, and $244,700 in the fiscal year ending Wednesday. Wildomar expects $252,000 from the county for the coming fiscal year. Menifee received $830,444 from the county in 2008-09 and $855,357 this year. The city anticipates $881,000 in the coming fiscal year.

The appellate court panel agreed with Ste. Marie's position that the payments were illegal.

"We conclude that the (Board of Supervisors') resolution contributing funds to the new cities of Wildomar and Menifee is in excess of the County's authority and consequently that it does constitute an unconstitutional gift of public funds," the opinion states.

The panel agreed the law allows the county to provide services to the new cities, but not cash.

Yet, while ruling in Ste. Marie's favor and awarding him "costs on appeal," the panel decided it could not grant the writ of mandate sought by Ste. Marie to stop the payments. The panel determined the county's decision was a legislative act over which it lacks jurisdiction, kicking the suit back to Superior Court.

So at least for the time being, county and city officials are scratching their heads about what to make of the decision, which was released as an unpublished ruling, meaning it cannot be used as a precedent in future cases.

"It was a bizarre ruling," Menifee City Councilman Scott Mann concluded.

It's possible Menifee will have to live without the county money, he said, though that poses no threat to the city's survival.

"It will have a little bit of an impact on our general fund revenue stream, but it's not a showstopper," Mann said.

He said that, with $7.2 million salted away in reserve, the city could absorb the revenue loss without much harm.

"It's a minor hit," he said. "Is it a showstopper? No. Would we like to have it? You bet."

The budget situation is tighter in Wildomar, which is much smaller than Menifee, both geographically and in population.

The city's proposed general fund, money that can be spent as the City Council sees fit, amounts to just a little more than $9 million in revenues and expenditures for the coming year, with a reserve of $1.3 million. That $252,000 loss could come on top of $192,000 annually that the city might lose as a result of another recent appellate court ruling.

In that ruling, the panel concluded that an assessment district levying a fee on property owners for landscaping and maintenance of Wildomar's parks violated a section of Proposition 218, a 1996 amendment to the state constitution requiring most local tax increases to be approved by two-thirds of the voters.

County attorneys lost their bid for a rehearing of that case, filed by Wildomar resident Steven Beutz before Wildomar incorporated.

In discussing the coming year's budget with the Wildomar City Council this week, Assistant City Manager Gary Nordquist said that, should the city lose the county's contribution as a result of the Ste. Marie case, he is confident an agreement could be reached in which the county would continue to provide some form of nonmonetary assistance.

Call staff writer Michael J. Williams at 951-676-4315, ext. 2635.