Cerritos, the Los Angeles suburb that lays claim to having the world’s biggest auto mall, is one of 36 California cities, including Oakland and bankrupt San Bernardino, facing a state land grab that mayors say will devastate their finances.

Controller John Chiang has ordered Cerritos, a city of 50,000 about 20 miles southeast of Los Angeles, to liquidate $171 million in assets including land leased to dealers at the auto mall and a performing-arts center. The city’s redevelopment agency held the property before the state dissolved blight-fighting districts in 2011.

Chiang, a Democrat, said three dozen cities improperly took over similar assets when Governor Jerry Brown, a 75-year-old Democrat facing a budget gap, scrapped their development agencies to free about $1 billion. Cities were to sell the holdings to repay bonds for the projects and use the rest to help cover state obligations to schools, health care and public safety, according to Chiang’s website.

“This is very, very serious,” said Mayor Bruce Barrows, a 66-year-old Republican whose community depends on leases of city-owned redevelopment land for almost 10 percent of its $79 million general-fund revenue. “As soon as you take away our business model by fiat in Sacramento, our cash flow goes away.”

San Bernardino officials cited the loss of redevelopment funds as part of the reason they sought Chapter 9 protection from creditors in August 2012. Barrows said bankruptcy in Cerritos would be a “worst-case scenario” that would take a decade or more to play out.

Auto Mall

The Cerritos Auto Square, described as the world’s largest auto center in the city’s continuing disclosure filings, has side-by-side dealerships for 23 marques from General Motors Co.’s Chevrolet and Ford Motor Co.’s Lincoln to Tata Motors Ltd.’s Jaguar and Daimler AG’s Mercedes-Benz.

Chiang ordered the city to sell the land under dealers for Jaguar/Land Rover and Kia Motors Corp., as well as the Cerritos Center for the Performing Arts, a 2,000-seat venue that has hosted singers such as Smokey Robinson and Chris Isaak.

Redevelopment helped to transform Cerritos, incorporated in 1956, from dairy pastures to a modern suburb with a 100,000- square-foot library, 40,000-square-foot senior center, 9-hole municipal golf course and other amenities, City Manager Art Gallucci said.

Redevelopment agencies were set up to reduce blight by helping finance road, sewer, lighting and affordable-housing projects in designated areas. The agencies received property-tax revenue increases resulting from new development, known as the tax increment. About 40 percent of Cerritos’s 8.9 square miles was encompassed by redevelopment zones.

Farms Transformed

Gallucci, who has worked for the city since 1971, said redevelopment funds bought 100 acres to begin developing the auto mall in the late 1970s, building roads and electrical wiring to accommodate dealers.

“We were after sales tax because there was no property tax,” Gallucci said in an interview at City Hall, referring to limits on property assessments from California’s Proposition 13 in 1978. “From the auto mall, it kept mushrooming from all the increment.”

Cerritos has grown to a community with a median household income of $87,853 in 2011, more than 40 percent above the state level, U.S. Census data show. Yet because taxes on improvements helped cover the costs of those projects and others, Cerritos maintains the third-lowest property-tax rate of the 88 cities in Los Angeles County, according to the county auditor.

Cash, Too

In addition to selling land under the auto mall and the arts center, Chiang ordered Cerritos to turn over $21.3 million in cash that he said the redevelopment agency improperly transferred to the city.

The law dissolving the redevelopment agencies required cities to hand over assets to “successor agencies” to be sold to pay bondholders and cover costs of local public services. The agencies typically are run by city managers with city council oversight.

In June 2012, Moody’s Investors Service downgraded $11.6 billion in California redevelopment debt to junk, saying legal and political disputes over the agencies may disrupt bond repayments. California’s former redevelopment agencies had $29.8 billion in debt as of June 30, 2010, Chiang’s office said last year. Three of the agencies — in Mendota, Riverbank and the Southern California Logistics Airport Authority, based in Victorville — are in default, said Matt Fabian, managing partner of Municipal Market Advisors in Concord, Mass.

Cities Scrutinized

Chiang’s office has scrutinized 88 cities for compliance so far, spokesman Jacob Roper said by email. In 30, no unauthorized transfers were found, and in 22 more, violations that were found have been rectified, he said. The remaining 36 received orders to divest properties that were wrongly transferred, Roper said. Another 121 cities are under review, he said.

Cerritos may have an opportunity to retain control of some of its former redevelopment land, if the city can demonstrate that doing so would serve a public purpose, Roper said, but first, the city needs to comply with the law.

“Moving away from a long-time dependence on redevelopment and now sharing those funds has been a difficult transition for many cities,” Roper said in a statement. “While we appreciate their frustration, the legislature and the courts have made it clear that redevelopment assets must be used to pay off the RDA debts and support other community services.”