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Constitutionality of ERAF Tax Shift Upheld By Court

The shift of $200 million per year away from redevelopment agencies to school districts as part of the state's property tax reallocation beginning in 1992 did not constitute a "reimbursable state mandate," the Third District Court of Appeal has ruled. The ruling clarifies a question that first emerged when redevelopment agencies reluctantly agreed to the shift of funds in 1992. The City of El Monte had filed a test claim on the issue with the Commission on State Mandates. However, the city lost all the way down the line, with the commission, a trial judge, and a three-judge panel of the Third District ruling against the city. The key to the decision was an earlier court ruling concluding that property tax-increment funds, to which redevelopment agencies are entitled under Health & Safety Code Section 33678, are not "proceeds of taxes" subject to the "Gann limit" (Article XIII B of the state constitution), which prohibits major spending increases by local government without a vote. Section 6 of the Gann limit also requires the state to reimburse local governments for state-mandated costs. Wrote Presiding Justice Arthur Scotland for the Third District panel: "[A] redevelopment agency cannot accept the benefits of Health & Safety Code Section 33678 while asserting an entitlement to reimbursement under Article XIIIB, Section 6." Beginning in 1992, the state shifted more than $2 billion annually in property taxes to school districts from other local agencies, including redevelopment agencies. The purpose of this shift was to save the state money, so an adverse ruling in this case certainly would have been ironic. These funds, known technically as the Educational Revenue Augmentation Fund (ERAF), have never been fully restored to local agencies. There was some question about the constitutionality of the redevelopment agency shift, but the agencies reluctantly agreed to the shift because they were under considerable pressure for legislative reform. (Major reform occurred the following year.) On appeal, El Monte made two arguments. First, the city argued that the re-allocation of funds away from redevelopment agencies created a new program or an increased level of service under an existing program for which the state should bear financial responsibility. The court disagreed, noting that the issue was not programming but funding. "[B]efore the enactment of the ERAF legislation, a substantial, although variable, portion of local property tax revenues were utilized for the support of schools. In this respect, a utilization of local property taxes in support of schools and community colleges is not a ‘new program,'" Scotland wrote. In deciding this issue, the Third District compared the redevelopment agency situation to the state's decision to permit counties to charge cities booking fees for arrestees. The ERAF legislation, the court said, "was merely the most recent adjustment in the historical fluidity of the fiscal relationship between local governments and schools." El Monte's second argument had to do with the applicability of Section 6 of the Gann limit to redevelopment agencies. Among other things, the Third District noted that Article XIII B calls for reimbursements only when "the costs in question can be recovered solely from tax revenues." The ERAF legislation did not specify what source of funds redevelopment agencies must use; therefore, the court said, "It follows that the ERAF legislation did not impose costs to a redevelopment agency that can be recovered solely for tax revenues within the meaning of article XIII B …." The Case: City of El Monte v. Commission on State Mandates, No. C025631, 00 C.D.O.S. 7159 Issued July 27, 2000; published August 23, 2000. The Lawyers: For City of El Monte: William D. Ross, (213) 892-1592. For Commission on State Mandates: Gary D. Hori, legal counsel, (916) 324-4014.
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