Redevelopment Dissolution: The End of an Era

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For over 60 years, many California cities and a few counties utilized redevelopment agencies as their primary tool for facilitating revitalization of local communities. The basic theory of redevelopment was that blighted areas would not be able to attract private investment needed for economic development without governmental assistance. Hence the creation of redevelopment agencies, into which was funneled “tax increment,” or the increase in property tax revenue above a specified base year generated by properties within a defined redevelopment project area.

These agencies were given broad powers to assemble development sites by condemning private property, to issue bonds backed by tax increment revenue and to provide financial subsidies to developers to facilitate urban revitalization. A portion of tax increment revenues was set aside to fund affordable housing. Nearly all redevelopment agencies, over 400 in total, were governed by a board consisting of the county board of supervisors or city council that created the agency.

Over the years, redevelopment was touted by its supporters as an effective economic development program. There are many examples of successful projects that were created using redevelopment funding and powers. On the other hand, redevelopment was also vilified due to real or perceived abuses, and it was the focal point of intergovernmental tension created by the diversion of property tax revenues that otherwise might have flowed to schools and other taxing entities. This long-running policy debate recently came to an abrupt end when the state Legislature passed a law, later upheld by the courts, compelling the dissolution of all redevelopment agencies.

Much to the consternation of local governments, the Legislature had periodically responded to extreme budgetary pressures by passing laws which ordered cities and redevelopment agencies to transfer a portion of their property tax revenues to help fund school districts, and thus ease pressure on the state budget. In an attempt to block further state takeaways of local tax revenues, the California Redevelopment Association and League of California Cities obtained passage of two voter initiatives amending the California Constitution.

Proposition 1A, enacted in 2008, limited the Legislature’s power to divert property tax, sales tax and other local funding sources from cities and counties. Proposition 22, enacted in 2010, prohibited further state raids of
redevelopment funds.

In 2011, the Legislature passed two companion bills which attempted to circumvent the restrictions of propositions 1A and 22. Assembly Bill 1X 26 required redevelopment agencies to cease their activities and wind up their affairs. Assembly Bill 1X 27, however, allowed redevelopment agencies to continue to operate if the cities and counties that had created them “voluntarily” agreed to make payments into funds benefiting schools and special districts. Rather than capitulate by paying what were referred to as “ransom payments,” the California Redevelopment Association and League of California Cities challenged these laws by way of a writ filed with the California Supreme Court.

Although the Supreme Court agreed to hear the case, its ultimate decision was the worst possible outcome for the petitioners. In California Redevelopment Association v. Matosantos (2011) 53 Cal.4th 231, the Supreme Court upheld AB 1X 26 and invalidated AB 1X 27. As to the first bill, the Supreme Court reasoned that because the Legislature was vested by the California Constitution with the power to create redevelopment agencies, it necessarily had the implied power to dissolve them as it deemed appropriate.

Proposition 22 limited the Legislature’s fiscal powers over these agencies, ruled the Court, but did not prevent dissolution. As to the second bill, the Supreme Court held that Proposition 22 expressly forbade the Legislature from requiring payments from redevelopment funds to benefit schools and special districts. The payments were not voluntary because they were a requirement for continued operation. AB 1X 27, therefore, was declared invalid. This was a Pyrrhic victory: Redevelopment agencies were not forced to pay a portion of their revenues to the state, but they were forced to dissolve and ultimately give up all their revenues not needed to satisfy existing financial obligations.

Under the provisions of AB 1X 26, as modified by the Matosantos decision and by subsequent clean-up legislation (AB 1484), all the California redevelopment agencies ceased to exist by February 1, 2012. They were replaced by newly created “successor agencies,” which were charged with duties such as preserving the assets of the former redevelopment agencies, continuing to pay valid obligations and ultimately winding down the affairs of these agencies.

Most actions of successor agencies must be reviewed by “oversight boards,” consisting of representatives of local taxing entities, and ultimately by the State Department of Finance. For each six-month period, successor agencies must submit a schedule and receive approval for the payment of their financial obligations. Any remaining tax increment revenue is distributed to the other local taxing entities in a similar manner to property tax revenue. These fund transfers help the state budget by alleviating its obligations for the funding of school districts.

Under AB 1X 26 and AB 1484, collectively referred to as the redevelopment dissolution law, successor agencies have been required to conduct audits of the general funds and affordable housing funds of the former redevelopment agencies. Any moneys not needed to pay obligations recognized by the state have been transmitted to county auditor-controllers and then distributed to local taxing entities.

The enforcement provisions of the redevelopment dissolution law authorize the Department of Finance to order offsets from sales and property tax revenues otherwise due to the cities and counties that created the redevelopment agencies as a remedy for nonpayment. After these audits are concluded and the required amounts are paid, successor agencies are entitled to receive “findings of completion” from the Department of Finance, allowing them to move into the next phase of the wind down process, which will include disposition of real property assets held by the former redevelopment agencies.

Not surprisingly, the redevelopment dissolution process has been anything but smooth. Although in many instances the working relationships between successor agencies and oversight boards have been collaborative, there have been frequent differences of opinion between successor agencies and the Department of Finance regarding many issues. Topics of dispute include payments for financial obligations of former redevelopment agencies, “claw-backs” of assets transferred from the agencies to their host cities and counties and amounts due as a result of the audits.

To date, over 120 lawsuits have been filed by successor agencies against the state. Under the redevelopment dissolution law, the venue for these cases is the Sacramento County Superior Court. In one of the more significant cases, the League of California Cities is seeking a declaratory judgment invalidating the statutory provisions authorizing offsets of sales and property tax revenues. The league has argued that these provisions are facially invalid as inconsistent with Propositions 1A and 22. In July, however, the trial judge issued a tentative decision declining to reach the merits of this issue on the ground that it will not be ripe for judicial review until after the penalties are actually imposed on a specific city or county.

One of the casualties of the demise of redevelopment agencies has been funding for affordable housing projects. Tax increment revenues had long been the primary source of funding for local government subsidies to developers of low- and moderate-income housing projects. With existing fund balances swept away and the tap turned off for future revenues, logic might dictate that the state would revisit its legislative policies which require local governments to plan for meeting the need for housing affordable to residents at various income levels through the housing element process.

Instead, all indications are that the state will continue along the path of pressuring cities and counties to meet ambitious affordable housing goals, as defined by the state through local councils of governments, notwithstanding the lack of resources to achieve those goals.

Although it will take years to resolve disputed issues regarding the wind down of redevelopment in California, the process is well under way. In Sacramento, several bills are pending to create alternative tools for economic development, such as infrastructure financing districts. These tools may ultimately replace a small portion of the revenue diverted from redevelopment agencies and be of use in certain areas of the state, but it is clear that the age of redevelopment in California is over.

Craig Labadie is a sole practitioner who serves as legal counsel to 11 Redevelopment Dissolution Oversight boards located in Alameda, Contra Costa and San Mateo counties and also as contract City Attorney for the City of Albany. He advises the Local Reuse Authority for the Concord Naval Weapons Station on the ongoing transition of that closed military base to civilian use. The views expressed in this article are solely those of the author.

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