Attorney General Rob Bonta held a press conference earlier Thursday announcing the suit.
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The lawsuit comes after the city of Huntington Beach stopped allowing permits for accessory dwelling units.
The state claims the city is violating California law, stifling affordable housing and contributing to the housing shortage.
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The city says the law is an overstep of government authority and plans to challenge it in court.
The dispute with the state centers on the Regional Housing Needs Allocation, a process that requires cities to formulate a plan every eight years on how they will meet housing demands - demand that is set by the state.
California has told Huntington Beach it must built 13,368 new homes over the next eight years. The city is supposed to come up with a plan on how they will do that, and that plan that must be approved by the state.
The state punishes cities that don't have state-approved housing plans by letting developers come in and build affordable apartment buildings without asking for local permission - a penalty known as the "builder's remedy." The Huntington Beach City Council is considering an ordinance at its next meeting that would exempt the city from this penalty, an ordinance state officials say is illegal.
A state law, passed in 2019, says a state judge can impose fines starting at $10,000 per month for cities that refuse to comply. The law also says the court can appoint someone "with all the powers necessary" to force the city into compliance.
This is the second time California officials have sued Huntington Beach for not following state housing laws. The city settled the first lawsuit back in 2020.
The Associated Press contributed to this report.