True to their promise, the California Redevelopment Association, or CRA, and the California League of Cities, or CLC, petitioned the California Supreme Court on July 15, 2011 for a writ of mandate challenging the Legislature's adoption of ABX1 26, providing for elimination of California redevelopment agencies (RDAs), and ABX1 27, exempting from elimination any RDA that agrees to make its share of a $1.7 billion voluntary contribution of its revenues to other local government needs.1 The CRA also asked the Court to implement a temporary stay of ABX1 26 and 27 pending the outcome of the litigation. Separately, 10 Southern California cities and their redevelopment agencies2 filed a complaint for declaratory and injunctive relief and a petition for a writ of mandate with the Superior Court for Sacramento County on September 26, 2011.
The Court has indicated that it intends to rule in the case before the January 15, 2012 payment deadline for the first installment of the ABX1 27 voluntary payments. Until then, redevelopment activity is in suspense, other than speculation on the possible outcomes of the court case and advance planning for the period following the ruling.
SUMMARY OF LITIGATION
The Supreme Court Case
On August 11, 2011, the Court issued an order to show cause,
which allowed the matter to proceed to hearing, and issued a stay
on all aspects of ABX1 26 and 27 except for the provisions which
prevent RDAs from entering into any new obligations. In essence,
the Court preserved the status quo – the RDAs are not
dissolved, but they are not permitted to spend their money or incur
new obligations until the litigation is resolved.
The County of Santa Clara filed a motion to intervene on August 15,
2011 so that it could represent its own interests. None of the
parties objected, and the Court granted that request on August 22,
2011. As such, Santa Clara County is now a non-title respondent in
the lawsuit, meaning that the County has the right to file its own
briefs in opposition to the CRA/CLC.
The CRA/CLC filed a motion that same day, August 22, asking the
court to clarify or modify the stay it had issued so that RDAs in
cities that had passed a continuation ordinance pursuant to ABX1 27
prior to the issuance of the stay could continue to operate. The
CRA/CLC argued that those RDAs will continue to be in operation
regardless of whether the Court upholds ABX1 26 and 27 or strikes
them both down, so there is no reason to prevent those RDAs that
implemented continuation ordinances from conducting business during
the litigation. Foreshadowing the arguments it would ultimately
make in its return brief, Santa Clara County filed a brief opposing
the CRA/CLC's request to modify the stay, arguing that there is
a strong likelihood that ABX1 26 will be upheld and ABX1 27 will be
overturned. The Court denied the CRA/CLC's request to modify
the stay on September 14, 2011 and so it will remain in place until
the Court issues its decision on the writ petition.
The State and Santa Clara County both filed their return briefs on
September 9, 2011. The State argued, in essence, that redevelopment
was created by the Legislature and, therefore, absent an express
constitutional provision to the contrary, redevelopment legislation
could be repealed by the Legislature. The State then argued that
neither Proposition 1A nor Proposition 22 requires the preservation
of redevelopment, concluding that these measures also do not limit
the Legislature's power to repeal redevelopment legislation.
The State's brief then points out that ABX1 26 and 27 were
distinct legislative actions despite the CRA/CLC's attempts to
conflate the two, and that, pursuant to the terms of the
legislation, ABX1 26 would still survive even if ABX1 27 were found
to be unconstitutional. Finally, the State argued that the
Legislature has the authority to establish a voluntary replacement
to redevelopment – which is what it did in ABX1 27. While
ABX1 27 may force cities to make tough decisions, it does not
mandate any payment and, according to the State, is not prohibited
by Proposition 22.
Santa Clara County's arguments were similar to those made by
the State – the Legislature has the authority to repeal
redevelopment, ABX1 26 and 27 were distinct legislative acts, ABX1
26 survives even if ABX1 27 is struck down – but Santa
Clara County had a different analysis of the constitutionality of
ABX1 27. Santa Clara County argued that ABX1 27 violates the
California Constitution because the constitution restricts the
property tax increment that is diverted to RDAs to being used
"to finance or refinance, in whole or in part, the
redevelopment project."3 However, ABX1 27 allows
tax increment to be used to reimburse cities and counties for the
voluntary payments made under ABX1 27.4 Santa Clara
County contended that such an arrangement violates the constitution
because the ultimate expenditure of those funds would not be
restricted to the redevelopment project. Santa Clara County also
argued that ABX1 27 violated the constitution because it failed to
return excess tax increment to the appropriate taxing
agency5 and because it changed the pro rata shares by
which property taxes are allocated among local
agencies.6
The CRA/CLC filed their reply memorandum on September 23, 2011. In
that memorandum, the CRA/CLC argued that ABX1 26 and 27 are
fundamentally designed to redirect RDA monies to the State and
other taxing agencies and that redirection of funds violates the
intent of Proposition 22. The CRA/CLC analogized the
Legislature's actions to street crime, stating that the State
believed "that Proposition 22 is like a hypothetical robbery
statute that prohibits the theft of someone's money unless the
victim is killed first."7 The CRA/CLC stated that
it is a well established rule that the "Legislature cannot use
a constitutional power to achieve an unconstitutional
goal"8 and that there was ample evidence showing
that the Legislature's purpose in passing ABX1 26 and 27 had
been to divert the RDAs' funds to the State and other agencies.
As a result, concluded the CRA/CLC, the elimination of RDAs through
ABX1 26 was unconstitutional. Additionally, the CRA/CLC argued that
ABX1 26 and 27 could not be severed because the Legislature's
purpose in passing those bills had not been to eliminate RDAs, as
evidenced by remarks by the Senate Pro Tem that the legislation
would not eliminate redevelopment. Consequently, severing the two
bills would yield a result contrary to the legislative
intent.
The Superior Court Case
As noted above, a group of 10 Southern California cities and
their redevelopment agencies sued the State on September 26, 2011
in an effort to have ABX1 26 and 27 struck down. While the Superior
Court action includes the arguments raised in the CRA/CLC suit, it
goes beyond those arguments. The arguments are essentially that 1)
ABX1 26 and 27 fail because they unconstitutionally cause a
reallocation of tax revenue amongst taxing authorities; 2) ABX1 26
and 27 fail on procedural grounds because the bills, while passed
as budget trailer bills, are actually policy bills and not budget
bills; 3) ABX1 26 and 27 violate the constitutional requirement
that bills only address a single subject because they both make an
appropriation and alter the State's policy on redevelopment;
and 4) ABX1 26 and 27 violate both the US and California
constitutions because they impair legally enforceable commitments
between RDAs and private third parties. According to recent press accounts, the Petitioners and
Plaintiffs in the Superior Court action plan to file and amicus
brief in the CRA litigation and present these arguments.
The State responded the next day by filing a Notice of Related Case
with the Superior Court. In essence, the State said that the same
issue is already being considered by the California Supreme Court
in the CRA/CLC suit and whatever ruling the Court issues in the
CRA/CLC suit will be binding on the Superior Court and could
potentially make the Superior Court action moot. As such, it would
be a waste of judicial resources to proceed with the Superior Court
action prior to the resolution of the CRA/CLC suit.
POTENTIAL OUTCOMES
Santa Clara County has raised the stakes for the CRA/CLC by
suggesting that the Court should uphold ABX1 26 and strike down
ABX1 27. There are now three parties engaged in the litigation,
each arguing for a different outcome. The CRA/CLC is asking the
Court to strike down both pieces of legislation; the State is
asking the Court to uphold both pieces of legislation; and Santa
Clara County is asking for the Court to uphold ABX1 26 and strike
down ABX1 27.
RDAs and parties hoping to do business with RDAs should consider
what might happen under each scenario:
The Supreme Court Strikes Down Both Bills
If the Court agrees with the CRA/CLC and strikes down both
bills, then redevelopment will effectively go back to the way it
was before the budget process began. However, the Legislature
enacted and the Governor signed the two-bill approach in order to
fill a $1.7 billion hole in the budget and an anticipated ongoing
budget deficit problem. It is likely that they will react to an
adverse decision of the Supreme Court by trying again.
Whether the Legislature has the power to draft around the errors
found by the Court will depend in large part on whether the Court
holds that Proposition 22 implicitly prevents the legislative
dissolution of RDAs. If the Court holds that the Legislature is
constitutionally prohibited from legislatively dissolving RDAs,
then it is likely that either the Legislature or an interest group
will place a ballot measure before the voters amending the
California Constitution to dissolve RDAs.
If the Court does not hold that the Legislature is constitutionally
prohibited from dissolving RDAs, but strikes down the legislation
on other grounds, then it seems likely that the Legislature will
act quickly to pass new legislation that responds to whatever
concerns the Court has in order to recapture that money. This is
what happened following the CRA's judicial challenge to the
State's attempt to shift RDA revenues in 2009 to local
education. The court in that case upheld the CRA's challenge by
finding that the shift of property tax increment to education
purposes violated the constitutional prohibition on the use of such
funds in a redevelopment project area other than the one from which
they were generated. Taking guidance from that court's opinion,
the following year, the State acted again, but this time shifted
the funds for use at education facilities within the redevelopment
project areas from which they were generated. The CRA filed suit
again, but this time the same judge allowed the shift.
Because either a ballot measure or new legislation will take some
time, there may be a window of opportunity in which developers and
redevelopment agencies can complete deals. Because doing
redevelopment deals takes time, this opportunity may only be
available to deals that are already in the pipeline. Many
developers and RDAs are proceeding with negotiation of OPAs and
other documentation, despite the stay, in anticipation of
calendaring and acting on such transactions immediately following
such a determination.
The Supreme Court Upholds Both
Bills
If the Court agrees with the State and upholds both bills, then we
expect to see things unfold similarly to how we discussed in our
previous blog post – the RDAs that can, will make the
voluntary payment and continue operating, but with less money
available, and a few RDAs will be dissolved either because they
cannot, or do not want to, make the voluntary payment. Although
shrunken, RDAs and the bond markets could proceed with at least
some certainty and redevelopment activity, albeit shrunken, could
resume.
The debates leading up to ABX1 26 and 27 kindled some very public
criticism of redevelopment. Outrage over an unfavorable Supreme
Court determination may lead an anti-redevelopment interest group
to attempt place a ballot measure before the voters amending the
California Constitution to dissolve RDAs. However, given the
difficulty and expense of collecting signatures, and possibly lack
of legislative support for such a measure, the odds of such efforts
resulting in the elimination of RDAs seem low.
There is also a possibility that the Superior Court could
subsequently strike down one or both bills on the basis of an
argument that was not raised in the CRA Supreme Court suit.
However, the coalition of Southern California Cities made the same
arguments in an amicus brief, meaning that there is less of a
chance that the Supreme Court will not have considered and ruled on
all of the arguments raised in the Superior Court case.
Nonetheless, should the Superior Court find one of the
coalition's arguments compelling and strike down ABX1 26 and
27, the uncertainty concerning redevelopment would continue.
The Supreme Court Upholds ABX1 26 And Strikes Down ABX1 27
If the Court agrees with Santa Clara County, then RDAs will be out of business. However, ABX1 26 was only able to garner the votes it needed to pass the Legislature because it was paired with ABX1 27. Therefore, it is possible that there may be a legislative attempt to revive ABX1 27, or something similar to it, with changes to address the Court's concerns. It is not clear though whether there will be the votes necessary to resuscitate ABX1 27 or whether the Governor would sign such a bill.
SCHEDULE FOR LITIGATION
A total of thirteen amicus briefs were filed with the Court on
September 30, 2011.9 The parties to the case have until
October 7, 2011 to file and serve a reply to any amicus briefs. The
Court expects to hold oral arguments in 2011, shortly after the
replies to amicus briefs are filed, and issue a decision before
January 15, 2012.
LEGISLATIVE UPDATES
The 2011 state legislative session ended in the early morning of September 10, 2011. The Governor has until October 9, 2011 to act on the legislation that was passed by the Legislature. Only one of the proposed ABX1 26 and 27 "clean up" bills, SBX1 8, passed the Legislature. SBX1 8 contains some minor and some significant changes to ABX1 26 and 27. Generally, these changes grant additional flexibility to RDAs, cities and counties to make the voluntary annual payments, but also maintain the anticipated $1.7 billion of revenue. This bill also adds protection for low and moderate income housing (low-mod) funds by specifying that existing balances belonging to an eliminated RDA are retained for low-mod purposes and affordability covenants are retained. This bill also makes other technical changes. The Governor vetoed SBX1 8 on October 3, 2011.
Footnotes
1. The two bills were described in more detail in California Redevelopment Update: Governor Signs Trailer Bills To End Redevelopment Agencies Unless They Make Payments - Uncertainty Continues, July 1, 2011, California Redevelopment Update: Legislative Two Step To Cut Redevelopment Agency Funding Goes Down With Governor's Budget Veto, June 16, 2011, and California Redevelopment Update: No News is ...No News, April 26, 2011.
2. The complete list of Plaintiffs and Petitioners includes: City of Cerritos; Cerritos Redevelopment Agency; City of Carson; Carson Redevelopment Agency; City of Commerce; Commerce Community Development Commission; City of Cypress; Cypress Redevelopment Agency; City of Downey; Community Development Commission of the City of Downey; City of Lakewood; Lakewood Redevelopment Agency; City of Paramount; Paramount Redevelopment Agency; City of Placentia; Redevelopment Agency of the City of Placentia; City of Santa Fe Springs; Community Development Commission of the City of Santa Fe Springs; City of Signal Hill; Signal Hill Redevelopment Agency; Cuesta Villas Housing Corporation; and Bruce W. Barrows.
3. California Constitution, article XVI, section 16.
4. ABX1 27 §34194.2.
5. California Constitution, article XVI, section 16(b).
6. California Constitution, article XIII, section 25.5(a)(3).
7. Reply Memorandum of Petitioner at 1, California Redevelopment Association, et. al. v. Matosantos, et. al., No. S194861 (CA Sup. Ct. Sept. 23, 2011).
8. Id. at 2.
9. The complete list of parties of interest filing amicus briefs includes: The Community Redevelopment Agency of the City of Los Angeles; The County of San Bernardino; California Professional Firefighters; California Teachers Association; Association of Bay Area Governments; Affordable Housing Advocates; County of Riverside; City of Irvine; Public Interest Law Project; Long Beach Central, West and North Project Areas; Santa Clara Unified School District; Association of California Cities; and the coalition of ten Southern California cities referenced above.