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CRA, League Sue to Overturn Redevelopment Remissions

Here we go again. 

In 2009 the redevelopment agencies of California, represented by the California Redevelopment Association, filed suit to block the state's requisitioning of over $1 billion of tax increment financing. That suit failed. 

In Nov. 2010 voters passed Proposition 22, which was backed by the CRA and League of California Cities, to forbid the state from demanding such payments in the future. Facing a $26 billion budget deficit upon coming into office in January, Governor Jerry Brown made an end-run around Prop. 22 by seeking the dissolution of all redevelopment agencies. 

With the passage of Assembly Bill 1X 26 and Assembly Bill 1X 27, a pair of budget bills that force agencies to shut down unless their parent jurisdictions – cities and counties – pay a total of $1.7 billion to the state by Jan. 15, 2012, the CRA and League have yet again filed suit. 

Same objective. Higher stakes. Different law. 

The suit, which was threatened from nearly the first moment that the governor announced his plan, was filed July 18 in the California Supreme Court. The plaintiffs' petition for writ of mandate asks the court to find AB 1X 26 and AB 1X 27 unconstitutional on the grounds that they violate Prop. 22 and Prop. 1A. The petition refers to the options to pay or shut down as a "Hobson's Choice" that amounts to no choice at all. 

The petition also asks the court to stay the implementation of the laws no later than Aug. 15 so that agencies can await the suit's verdict before mustering funds or commencing shutdown proceedings. Otherwise, agencies could dismantle themselves to such an extent that they would not be able to reconstitute themselves if the suit succeeds. 

"We think we've shown the court that if the redevelopment agencies are dissolved as of October 1 in those jurisdictions…and then the bills are later invalidated that that would be a terrible situation," said Steven Mayer, an attorney at the firm Howard Rice, who is representing CRA and the League.  "Once the egg is broken it's very difficult to put it back together again. "

Prop. 22 outlaws both the "direct and indirect" transfer of tax increment funds from redevelopment agencies to the state. Plaintiffs argue that the elimination of agencies constitutes an illegal indirect transfer. 

"The governor and Legislature have blatantly ignored the voters and violated the State Constitution," said League executive director Chris McKenzie in a statement. "We must now go to the Supreme Court to uphold the voters' will and the Constitution by overturning this unconstitutional legislation." 

The state's defense rests on the claim that even if TIF funds are protected, agencies themselves are not. Though the state's lawyers have yet to be named, they will likely argue that Prop. 22 does not obligate the state to support or allow redevelopment agencies. 

"Prop. 22 did not address the broader, fundamental underlying issue of the existence of RDAs," said H.D. Palmer, deputy director for external affairs at the California Department of Finance. 

Moreover, Palmer notes that AB 1X 27 requires payments not from redevelopment agencies but rather from their parent jurisdiction. Therefore, the state may argue that cities and counties are choosing to give up funds in exchange for the opportunity to sponsor redevelopment agencies. But TIF funding need not contribute to their voluntary payment. 

"If redevelopment is to continue, then the parent agencies – whether it's a city or a county – makes a payment for schools," said Palmer. "It can come from revenue from base property tax, sales tax, or vehicle license fee – or any combination thereof. It does not specify or require that that money, should they choose to continue redevelopment, come from tax increment."

The petition rejects both of these positions. 

The petition notes that the amounts that cities and counties "nominally" would have to pay the state are "apportioned according to RDA revenues, and the money used to make them will inevitably come from the RDAs' tax increments." Furthermore, it contends that redevelopment agencies "fulfill…constitutional and statutory responsibilities" to invest in blighted areas, per the original 1954 legislation that established them.  

Whether the court will agree to hear any of these arguments remains to be seen. The petition entreats the Supreme Court to hear the case as an original matter because the petitioners consider the matter "of statewide importance" and because a Superior Court would likely be unable to rule in a timely manner. 

Mayer said that the $1.7 billion that is at stake gives petitioners "a reasonably good claim on the court's attention."

If and when the court agrees to hear the case, Mayer said that the parties will be entering uncharted territory. He noted that because Prop. 22 is less than a year old, "obviously there are no court cases that interpret what that particular initiative means."  

In the absence of prior rules, Mayer said that precedent calls for the court to construe the law according to its stated purpose. On that count, Mayer believes that his side has the advantage. 

"The purpose of Prop. 22 is plainly stated to stop the state from interfering with local government revenues," said Mayer. "If the court construes the measure according to its purpose, hopefully we will prevail."

Joining the CRA and League in the suit as petitioners are the cities of Union City and San Jose. The cities of Brentwood, Oakland, Modesto, West Sacramento, and Guadalupe also filed declarations in support of the suit.

Mayer said that the plight of those cities illustrate reasons why the Legislature's scheme will be costly to cities and devastating to projects that agencies' are pursuing. 

"They tell, each in its own way, a variety of stories about the way that the redevelopment bills will affect various cities," said Mayer. "I think they are compelling narratives." 

"We're very proud to be part of the lawsuit," said Union City Redevelopment Agency manager Mark Evanoff. "We have a good story to tell. We can document how the local community, how the region, and how the state are going to be hurt by these disastrous new laws."

Union City joined the suit in part because, according to Evanoff, it offers a particularly compelling tale of hardship. The agency has invested $56 million in projects around its BART station that are designed to support Senate Bill 375 by clustering development around a transit hub. Either dissolution or the remittance could cripple these projects. 

"We're also doing what the region has called for, which is to focus 90 percent of new growth around our local transit hub," said Evanoff. "We're implementing the goals of the State Legislature to reduce greenhouse gases by having housing and jobs around the transit hubs."

CRA spokesperson Kathy Fairbanks said that the CRA does not have authoritative information on the number of the state's nearly 400 active redevelopment agencies that might fold, but reports indicate that the vast majority are prepared to make the payments. But merely staying in business does not, according to many officials, mean that agencies will be able to conduct business as usual. Under the laws as passed, agencies would have to notify the Department of Finance of their intentions by Oct. 1; remittance payments would be due Jan. 1. 

"Since the budget bills passed, many redevelopment agencies have notified us that they cannot afford the ransom payment and will cease to exist," said CRA executive director John Shirey in a statement. "And those agencies that are planning on making the payment tell us that it will greatly diminish their ability to pursue vital local projects."

Barring a stay, Palmer said that the Department of Finance will be preparing to receive word from agencies about their intentions. He said that the final amounts of each jurisdiction's remittance payments will be calculated and made public by Aug. 1. 

If the suit succeeds and the state receives neither remittances nor TIFs recovered from defunct agencies, then—regardless of the economic benefit of intact redevelopment agencies—

Sacramento will have another budget headache on its hands. 

"If revenues are not going to be part of the equation, then we're talking about extremely deep and difficult reductions above and beyond those that have already passed," said Palmer. 

Contacts & Resources: 

Text of CRA/League Petition [.pdf]

Mark Evanoff, Redevelopment Manager, Union City Redevelopment Agency, 510. 675.5345

Kathy Fairbanks, California Redevelopment Association, 916.448.8760

Steven L. Mayer, Director, Howard Rice Nemerovski Canady Falk & Rabkin PC, 415.434.160

H.D. Palmer, Deputy Director for External Affairs, California Dept. of Finance, 916.445.3878

 

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