Pismo Beach officials will not reimburse a local agency’s legal costs for fighting a lawsuit stemming from a now-defunct development proposed just outside the city.

City officials say they aren’t bound to pay the litigation costs because the lawsuit alleges that the seven-member San Luis Obispo Local Agency Formation Commission board “acted intentionally and willfully to harm” the developer of a project known as Los Robles del Mar.

The city isn’t taking a position on the lawsuit. However, because the suit alleges LAFCO intentionally overstepped its authority instead of acting within its powers, the city’s attorney has determined Pismo Beach should not be on the hook for legal costs.

“We do not believe we’re obligated to pay the fees,” city attorney Dave Fleishman said.

The city’s decision has prompted the countywide agency, which decides city boundaries, to dip into its small reserve account to cover the cost of the litigation — $21,471 to date.

Last summer, Pismo Beach officials submitted an application requesting a 182-acre property be annexed into the city, where it could be developed with more than 250 homes and 60 senior apartments.

At that time, the city signed an agreement pledging to cover the cost of any litigation against LAFCO, which considers annexation requests. So did Larry Persons, president of Simi Valley-based Pacific Harbor Homes and developer of the Los Robles del Mar project.

Such an agreement is standard in annexation requests so that litigation costs aren’t passed on to the city, county and special districts that collectively fund the agency, LAFCO executive officer David Church said.

Over the past year, the LAFCO board has considered and rejected the annexation, halting the Los Robles del Mar development from moving ahead.

In response, Persons filed a lawsuit against LAFCO, alleging the agency board abused its authority by rejecting the annexation and singled out the project for disparate treatment.

Persons’ civil suit also alleged that LAFCO’s action violates his constitutional rights by depriving him rights to use his property and the groundwater beneath it. He’s asking the court to approve his annexation without any conditions, including allowing him use of on-site wells.

LAFCO attorneys have denied the allegations.

A hearing will be held Nov. 29 in San Luis Obispo Superior Court to determine whether LAFCO’s decision will be upheld or overturned.

The LAFCO board has twice voted against allowing Pismo Beach to annex the property into the city for development. In both cases, concerns about water derailed the proposal.

Three on-site wells were proposed to be used in 2008, the first time the board denied the annexation.

Though state water was proposed this time, LAFCO board members were still concerned. They denied the proposal in April, finding the city’s future water supply was uncertain and would limit its ability to provide water to current and future residents.