May 08, 2012
In California Redevelopment Assn. v. Matosantos1 the California Supreme Court upheld a law dissolving the state’s redevelopment agencies, while simultaneously striking down the agencies’ last vestige of hope, a pay-to-play companion bill. The court’s December 2011 decision thereby eliminated the state’s redevelopment agencies entirely.2
By way of background, over the last several decades California’s property tax revenue allocation system has been subject to a tug of war between local interests and the state’s obligation to achieve equality in school funding. As a result of multiple constitutional amendments and judicial decisions, and through a rather complex system of transfers, the state essentially collects all property tax revenue and then redistributes that revenue back to the schools and other local governments.3 Enter redevelopment agencies. Created after World War II and tasked with remediating urban decay, the agencies, in and of themselves, do not have the power to levy taxes. However, they are a powerful tool used (and sometimes abused4) by local governments to fund economic development (arguably, at the expense of other governmental agencies). Redevelopment agencies operate on a tax increment financing basis.
Under this method, those public entities entitled to receive property tax revenue in a redevelopment project area (the cities, counties, special districts, and school districts containing territory in the area) are allocated a portion based on the assessed value of the property prior to the effective date of the redevelopment plan. Any tax revenue in excess of that amount—the tax increment created by the increased value of project area property—goes to the redevelopment agency for repayment of debt incurred to finance the project.5
Because the redevelopment law does not really limit the amount of revenue the agencies can collect per year (so long as it does not exceed the given agency’s total debt), some blighted municipalities have been able to shield all of their property tax revenue.6 In an attempt to remedy the inequity, the Legislature has put certain tax transfer obligations on redevelopment agencies.7 Some of these obligations have been more successful than others,8 but the tax increment financing remains controversial. It gives the redevelopment agencies and their sponsoring municipalities a great advantage over school districts and other entities that rely on tax revenues, subsequently burdening the state, which scrambles to fill in the budgetary gaps. As a result of one of the most recent skirmishes between state and local interests (and pertinent to this case), in 2010, voters passed Proposition 22, which amended California’s state constitution in order to limit the state’s ability to require payments from redevelopment agencies for the state’s benefit.9
Last summer California’s Governor, Jerry Brown, responding to a declared state fiscal emergency and a $25 billion operating deficit, proposed the elimination of redevelopment agencies to redirect property tax revenues back to state and local governmental units. At the time, four hundred redevelopment agencies were receiving 12% of all property tax revenues in California.10 The Legislature, employing a slightly different approach, enacted Assembly Bill 2611 and Assembly Bill 27,12 two measures intended to stabilize school funding (thereby easing the deficit) by reducing or eliminating the diversion of property tax revenues to community redevelopment agencies. AB26 provided for the dissolution of redevelopment agencies entirely, and outlined winding up procedures for pending projects and outstanding debts; while AB27 provided agencies with an “opt-in” or “pay-to-play” option—the agencies could continue to operate if the sponsoring cities or counties agree to make payments into funds benefiting the state’s schools and special districts.
The California Redevelopment Association, the League of California Cities, and other affected parties brought a constitutional challenge directly to the California Supreme Court. In reviewing this case, the court considered two issues: (1) “[whether under the state constitution] redevelopment agencies, once created and engaged in redevelopment plans, have a protected right to exist that immunizes them from statutory dissolution[;]” and (2) whether under the state constitution “redevelopment agencies and their sponsoring communities have a protected right not to make payments to various funds benefiting schools and special districts as a condition of continued operation.”13 The court answered the first question no and the second question yes, effectively upholding AB26 (and its elimination of California’s redevelopment agencies) as a proper exercise of legislative power and striking down AB27 as unconstitutional, thereby eliminating the agencies’ opt-in alternative.14
The court reasoned that dissolution of the redevelopment agencies “is a proper exercise of the legislative power vested in the Legislature by the state Constitution. That power includes the authority to create entities, such as redevelopment agencies, to carry out the state’s ends, and the corollary power to dissolve those same entities when the Legislature deems it necessary and proper.”15 The court rejected the argument that the state constitutional amendment authorizing allocation of property taxes to redevelopment agencies created an implied right for those agencies to exist, or somehow impaired the Legislature’s power to dissolve those agencies.16 Quoting prior case law, the court reasoned that “[i]n our federal system the states are sovereign but cities and counties [along with redevelopment agencies, which are political subdivisions thereof] are not; in California as elsewhere they are mere creatures of the state and exist only at the state’s sufferance.”17 Thus the court rejected the petitioners’ argument and held that AB26 is not unconstitutional and is properly within the Legislature’s plenary powers.
The court then turned its attention to AB27, which was meant to provide redevelopment agencies an opt-in alternative—an exoneration, as it were. If an agency, or its sponsoring municipality, were to pay into a fund benefiting the schools and special districts (in theory easing the state’s financial burden), the agency would have the option to continue to operate uninterrupted and conduct new business.18 The petitioners argued that this provision is unconstitutional because it squarely conflicts with Proposition 22, which bars the state from requiring direct or indirect payments from the agencies for its benefit.19 The court agreed.20 Relying on drafters’ and voters’ intent, the Court reasoned that despite respondent’s characterization of the payment as voluntary, the bill is facially invalid.21 Thus the court struck down AB27 as unconstitutional.
The Chief Justice concurred that AB26 is not unconstitutional, but dissented in that he would have upheld AB27, as he didn’t see it in conflict with Proposition 22.22 Conceding that they aren’t perfect, the Chief Justice noted that the Public Market Building in Sacramento, the Bunker Hill Project in Downtown Los Angeles, Horton Plaza and the GasLamp Quarter in San Diego, the HP Pavilion in San Jose, and Yerba Buena Gardens in San Francisco are all successful redevelopment agency projects which “create jobs, encourage private investment, build local business, reduce crime and improve a community’s public works and infrastructure.”23
On the other hand, others have applauded the outcome,24 as it not only alleviates the state’s budgetary problems25 but “also has the beneficial side effect of curtailing eminent domain abuse.”26 For nearly a decade, following the U.S. Supreme Court’s decision in Kelo v. New London, redevelopment agencies have been the target of intense scrutiny and at times political beatings. The Kelo decision prompted a domino effect of state legislative enactments drastically reducing eminent domain powers for redevelopment.27 This case can be seen as an unintended (or perhaps intended) extension of the post-Kelo anti-redevelopment sentiment that swept the nation.
Ironically for petitioners, by losing their AB26 challenge and winning their argument with respect to AB27, they drove the final nail into their own coffin.28 Had they not challenged the constitutionality of AB27, the agencies would have been able to pay to maintain their existence; “an alternative [they would have] vastly preferred to being shut down altogether.”29 This may not be quite the end of redevelopment as agency representatives are expected to go back to lawmakers and petition the Legislature to recreate them.30 In the interim, Californians watch as the state’s Department of Finance unwinds redevelopment projects, “throwing into question the fate [of] hundreds of millions of dollars that the cities say must be paid, while the state says, not so much.”31
* Angela Kopolovich is a former litigator with a large international firm on the east coast. She currently works as a consultant in law practice management and recruiting in California.
1 53 Cal. 4th 231, No. S194861 (Dec. 29, 2011).
2 Assem. Bill Nos. 26 & 27 (2011-2012 1st Ex. Sess.) enacted as Stats. 2011, 1st Ex. Sess. 2011-2012, chs. 5-6; see also Assem. Bill 1X 26, § 1, subds. (d)-(i); Assem. Bill 1X 27, § 1, subds. (b), (c).
3 The system is much more complex, but for the purposes of this article, the nuances are not entirely relevant.
4 According to Los Angeles County Board of Supervisors Chairman Zev Yaroslavsky, “[Over the years, redevelopment has] evolved into a honey pot that was tapped to underwrite billions of dollars worth of commercial and other for-profit projects . . . . [The projects] had nothing to do with reversing blight, but everything to do with subsidizing private real estate ventures that otherwise made no economic sense.” Quoted in Maura Dolan, Jessica Garrison & Anthony York, California High Court Puts Redevelopment Agencies out of Business, L.A. Times, Dec. 29, 2011, available at http://articles.latimes.com/2011/dec/29/local/la-me-redevelopment-20111230.
5 Slip Op. at 10 (emphasis added).
6 Slip Op at 11.
7 The Legislature has required that twenty percent of the agencies’ revenue must be deposited in a fund for low- and moderate-income housing. Additionally, redevelopment agencies must make payments to local government taxing agencies on projects adopted or expanded after 1994. Relevant to this case, the Legislature has often required redevelopment agencies to make payments for the benefit of school and community college districts. In each of the 2004-2005 and 2005-2006 fiscal years, redevelopment agencies were charged amounts intended to generate a combined $250 million. Slip Op. at 11-12.
8 In the 2008-2009 fiscal year, the Legislature required a combined $350 million or five percent of the total statewide tax increment, whichever was greater, to be transferred to school district funds, but that was ultimately invalidated in litigation. Similar provisions for shifts of tax increment revenue in the 2009-2010 and 2010-2011 fiscal years are still in litigation. Slip Op. at 12.
9 See Cal. Const. art. XIII, § 25.5, subd. (a)(7) (added by Prop. 22, as approved by voters, Gen. Elec. (Nov. 2, 2010)).
10 Slip Op. at 8, 11.
11 Stats. 2011, 1st Ex. Sess. 2011-2012; Assem. Bill 1X 26, § 1, subds. (d)-(i).
12 Stats. 2011, 1st Ex. Sess. 2011-2012; Assem. Bill 1X 27, § 1, subds. (b), (c).
13 Slip Op. at 2-3.
15 Slip Op. at 3.
16 Slip Op. at 20-32.
17 Slip Op. at 22.
18 See note xii.
19 Slip Op. at 24.
20 Slip Op. at 44.
21 Slip Op. at 35.
22 Slip Op. at 26 (dissent).
24 Libertarian groups, such as Institute for Justice, that have been on the forefront of these challenges consider this decision a “landmark victory for private property owners . . . . California redevelopment agencies have been some of the worst abusers of eminent domain for decades, violating the private property rights of tens of thousands of home, business, church, and farm owners. The Institute for Justice has catalogued more than 200 abuses of eminent domain across California during the past ten years alone. Dolan et al., supra note 4.
25 Gov. Jerry Brown expressed satisfaction with the Court’s decision: “[It] validates a key component of the state budget and guarantees more than a billion dollars of ongoing funding for schools and public safety.” Id.
26 Posting of Ilya Somin to The Volokh Conspiracy, California Supreme Court Upholds Law Abolishing Redevelopment Agencies (Dec. 30, 2011, 00:11 EST).
27 Prior to the court’s decision, only eight states had prohibitions against use of eminent domain for redevelopment (except for blight). By mid-2007, forty two states had enacted reforms to limit (to varying degrees) the power of local governments to invoke eminent domain for the purpose of redevelopment. Eminent Domain Legislation Status Since Kelo, http://www.castlecoalition.org/pdf/legislation/US_States_ED_Legis_Map_2007.pdf (last visited May 3, 2012).
28 Steven L. Mayer, a lawyer for the petitioners, declined to second-guess their legal strategy to sue to overturn both provisions. “Hindsight is always 20-20, isn’t it?” Mayer said. Quoted in Dolan et al., supra note 4.
31 Teri Sforza, Undoing Redevelopment: State Slaps down O.C. Cities, Orange County Reg., Apr. 24, 2012, available at http://taxdollars.ocregister.com/2012/04/24/undoing-redevelopment-state-slaps-down-o-c-cities/153778/.