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Redevelopment in California

Redevelopment Agencies

By Thomas Brom (2012)

In the courtroom of the California Supreme Court in November 2011, Justice Joyce Kennard asked: “Would it be accurate to state that what is going on here is a fight between the state and the schools on one side, and the redevelopment agencies on the other side in getting control of the property tax revenue?”

“That is certainly the effect,” responded Steven L. Mayer, representing the California Redevelopment Association (CRA) and the League of California Cities.

The courtroom was packed with attorneys representing or doing business with the state’s nearly 400 redevelopment agencies, a powerful constituency in Sacramento that suddenly and unexpectedly faces extinction.

Survival of the agencies had seemed assured by voter approval of Proposition 1A in 2009, by Proposition 22 in 2010, and finally by Gov. Jerry Brown’s June veto of a state budget that would have eliminated the agencies at the stroke of a pen. But the CRA misread the mood in Sacramento-and the depth of the state’s budget crisis: Before it adjourned, the Legislature passed two emergency bills, ABX1 26, which eliminated the existing agencies, and ABX1 27, which then permitted them to reorganize under a voluntary program that would contribute a percentage of their income from property taxes to schools and special districts. The result would be payments to the state totaling $1.7 billion this year and $400 million in 2013.

The CRA’s response to those bills may have been another miscue. It chose to file a facial challenge to the constitutionality of the statutes, heard on an expedited basis by the state Supreme Court (Calif. Redev. Ass’n v. Matosantos, No. S 194861). In early November, the petitioners got the oral argument they wished for-and Mayer, a partner at San Francisco’s Howard, Rice, Nemerovski, Canady, Falk & Rabkin, faced a skeptical panel.

“Do you dispute that the Legislature has the power to dissolve the redevelopment agencies?” Justice Goodwin Liu asked. “It all depends,” Mayer said. The “vice” of the new legislation, he emphasized, “is not that it dissolves the redevelopment agencies per se, but that it dissolves them and transfers property tax revenue to schools and special districts.”

Justice Marvin Baxter asked, “Is there anything in Prop. 22 that purports to give the redevelopment agencies perpetual existence?” Well, no, Mayer replied. “All the redevelopment agencies have is the right to their annual allotment of tax increment.” Later, he compared the Legislature’s action to a bank robber demanding, “Your money or your life.”

Only Justice Carol Corrigan seemed sympathetic to the agencies. When Deputy Attorney General Ross C. Moody, representing the Department of Finance, contended that the Legislature had not “required” the redevelopment agencies to make payments to the state, she said, “Your argument presumes that the choice to pay is free and voluntary-as opposed to ransom.”

“I don’t like ‘ransom,’ ‘hostage,’ ‘bank robbery,’ any of that stuff,” Moody replied. “The cities and counties-not the redevelopment agencies-are invited to make payments,” he argued. If the agencies choose not to participate in ABX1 27’s voluntary program, he said, those same sponsoring agencies would pay all legitimate debts.

At this point, Moody then interjected several asides from the real world. “The redevelopment agencies took a gamble on this lawsuit,” he said. “They could have just accepted the new fiscal reality that we’re all living in. Instead, they came to court, and they said these statutes are unconstitutional.”

“These are sophisticated people,” Moody continued. “They [CRA] participated in the drafting of Prop. 22. They could have added a provision that said redevelopment agencies are now constitutionally mandated-they are no longer creatures of statute.” But they didn’t.

Mayer openly feared “the worst of all possible worlds for my clients”-that the court would uphold ABX1 26 and invalidate ABX1 27 for attempting to redirect property tax revenue. Santa Clara Deputy County Counsel James Williams asked the justices for just that result, referring to the express severance clause in ABX1 27. If the county gets its wish, redevelopment agencies-and all the controversies they have generated-will be dead in California.

How could it come to this? The Legislature created redevelopment agencies in 1945 and empowered them via the miracle of tax increment financing, or TIF, in 1951. (See Cal. Health & Safety Code §§ 3300037964.) The alchemy for generating revenue had three parts: defining “blight” in urban areas, using eminent domain to acquire and assemble properties, and capturing the increase in property taxes resulting from development. The entire scheme depends on debt financing, permitted without voter approval. By 2006, according to a report by Municipal Officials for Redevelopment Reform (MORR), redevelopment agencies had captured 12 percent of all property taxes in California and incurred total indebtedness of $81 billion.

But from the beginning all three parts of the formula drew critics from both the left and the right. “Blight” was in the eye of the beholder; eminent domain could trump private property rights; and TIF created enormous slush funds while schools and special districts starved for tax revenue under the constraints of Proposition 13. Year after year advocates for schools, labor, and low-income housing pecked away at CRA’s support in Sacramento, joined by libertarians and property rights groups. Then the state budget crisis put the redevelopment agencies in play.

“This is a nightmare of CRA’s own making,” says Christopher Sutton, a Pasadena attorney who filed an amicus brief in Matosantos on behalf of MORR and Assemblyman Chris Norby (R-Fullerton). “Prop. 22 took the redevelopment agencies out of the shadows and made them vulnerable. They were fat pigs when everyone else was starving.”

The court promised a ruling by January 15, in time for the first “voluntary” payments to the state in the event it upholds ABX1 27. But regardless of the nature of its decision, further litigation is certain. “When Brown announced he intended to abolish RDAs last year, many of them transferred real properties they’d been holding to special districts, the city, or the county,” says F. Gale Connor, a partner at Nossaman in San Francisco who represents redevelopment agencies. “Those transactions will have to be unwound.”

“The question is, Who owns the property?” says Amy Freilich, a partner in the Los Angeles office of Armbruster Goldsmith & Delvac who represents developers. “The litigation would be about requiring successor liability. … I don’t think it was the intent of the Legislature to shut down the RDAs.”

But even the agencies’ critics say if the court abolishes RDAs without permitting voluntary replacements, the Legislature will act quickly to preserve tax increment financing. “TIF is not dead,” Sutton says. “Using it, city governments can borrow money for their pet projects-even paying operating expenses from the bond proceeds-without going back to the voters. It’s seen as free money.”

Stephen C. Ryan, a partner at San Francisco’s Cox Castle Nicholson who represents developers, says so-called infrastructure financing districts-already created by statute-could provide an alternative to redevelopment agencies. But according to Josh Stephens, editor of the Ventura-based California Planning & Development Report, “IFDs can be used to spruce up public assets, but they can’t redevelop a piece of private property.”

The early handicapping in Matosantos has the court upholding both statutes, which would accommodate the wishes of Gov. Brown and the Legislature while doing the least harm to city governments. “Under the voluntary program of ABX1 27, most RDAs will hardly miss a beat,” Sutton says. “They’re holding so much money, it’ll be almost like nothing happened.”

But even under that scenario, more property tax revenue will be wicked away to schools and special districts. Nossaman’s Connor considers the prospects of lawyers, consultants, and developers who depend on RDAs and says, “A lot of people are looking for work right now.”

Redevelopment Ready Communities and Authorities: Striking Down Redevelopment Agencies

January 2012: The State’s Supreme Court upheld the Legislature’s dissolution of 400 redevelopment agencies in order to use $1.7 billion from the agencies to help bridge the state budget gap.

The California’s Supreme Court also struck down a companion measure that would have allowed the agencies to continue by paying a part of their funds to the state. Chief Justice Tani Cantil-Sakauye dissented in part in the 6-1 ruling, writing that the majority went too far by also nixing the companion measure. Under the California law upheld by the State Supreme Court in 2011, some $5 million in property tax revenue once held by redevelopment agencies now flows to county auditors to disburse. But redevelopment bond debts totaling roughly $30 billion stayed with the cities or counties as “successor agencies.”

Redevelopment agencies had sued, claiming that the bills signed into law as part of the state budget, violated Proposition 22, which prohibits the state from dipping into local funds.
Some experts say the Legislature could still preserve the agencies while balancing the budget by reforming how the agencies are funded.

The agencies were dissolve in February 1, 2012, but they will be allowed to meet existing obligations, and their assets will be handed to “successor agencies.” Details of the process was needed to be clarified.

What will happen to enforceable obligations to investors and localities was not clear. Lawyers expected lawsuits to result from the uncertainty.

Municipal finance officers were growing concerned in May 2012 that ambiguity in the state law that dissolved California’s 425 redevelopment agencies could force cities and counties to default on bond payments that are coming due in 2012.

State legislators were trying to clean up the ambiguity in the law to make sure municipalities can service their debts.

The League of California Cities threatened to sue over, in July 2012, a budget provision – trailer bill AB 1484 – that lets the state keep local tax revenues if it believes that city governments are keeping too much money formerly slated for redevelopment.

The California budget relies on $1.4 billion in revenues from former redevelopment assets and $1.7 billion in property taxes that would have gone to the now shuttered redevelopment agencies.

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