California Supreme Court Affirms Dissolution of Redevelopment Agencies
On December 29, 2011, the California Supreme Court issued its ruling in California Redevelopment Association v. Matosantos, No. S194861 (Dec. 2011). The Court largely upheld AB 1X 26, the bill which provides for the windup and dissolution of the State’s redevelopment agencies (“RDAs”). The Court, however, invalidated AB 1X 27, which would have allowed RDAs to continue operating as long as their community sponsors (primarily cities, but also inclusive of counties and other local government entities) made payments to State funds benefiting schools and special districts.
The decision was based on a challenge to recent legislation passed in response to the State’s declared fiscal emergency. The intent behind AB 1X 26 and AB 1X 27 was, in large part, to reduce or eliminate the diversion of property tax revenues from school districts and special districts to redevelopment agencies. Historically, as noted by the Court, “[w]hile redevelopment agencies have used their powers in a wide variety of ways, in one common type of project the redevelopment agency buys and assembles parcels of land, builds or enhances the site’s infrastructure, and transfers the land to private parties on favorable terms for residential and/or commercial development.” (Id. at 9.) In this way, businesses were able to derive a benefit from the RDAs as the RDAs embarked on their task of helping local governments revitalize blighted communities. The California Redevelopment Association (“Association”) and other interested parties petitioned the Supreme Court to overturn AB 1X 26 and AB 1X 27, and argued that the bills were unconstitutional.
The Court considered: (1) whether redevelopment agencies, once created and engaged in redevelopment plans, have a constitutionally protected right to exist that immunizes them from statutory dissolution by the Legislature; and (2) whether 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.
With respect to the first question, the Court held that redevelopment agencies do not have a protected right to exist and, therefore, AB 1X 26 (the dissolution measure,) was a proper exercise of the legislative power vested in the Legislature by the state Constitution. The Association argued that article XIII, section 25.5, subdivision (a)(7) of the California Constitution, added by Proposition 22 in 2010, presumes and protects the existence of RDAs because it prohibits the Legislature from requiring RDAs to pay property taxes allocated to the agency, to or for the benefit of the State, or otherwise restricting or assigning such taxes for the State’s benefit. The Supreme Court rejected this argument. The Court held that even though Proposition 22 amended the California Constitution to impose new limits on the Legislature’s fiscal powers, it did not rescind the ability of the Legislature to dissolve redevelopment agencies. The Legislature remains empowered to create entities and dissolve those same entities as it deems appropriate. Redevelopment agencies were developed as a result of the Legislature’s exercise of its statutory authority and, therefore, are a creature of State statute. For this reason, the Legislature could exercise those same powers in enacting AB 1X 26 and dissolving redevelopment agencies.
With respect to the second question, the Court held that AB 1X 27 was constitutionally invalid. AB 1X 27 allowed for the continued operation of RDAs if the cities and counties that created them agreed to make payments into funds benefitting California’s schools and special districts. Due to the Constitutional limitations adopted by Proposition 22 regarding allocation or assignment of taxes for benefit of the State, the Court rejected AB 1X 27 in its entirety as facially invalid, and held that the continued existence of redevelopment agencies could not be conditioned in this way by the Legislature.
Ultimately, the Court upheld AB 1X 26, which provides for the freezing and dissolution of RDAs, but invalidated AB 1X 27, the exemption provision. The Court also implemented new deadlines to effectuate the Legislature’s intent and allow for the AB 1X 26’s valid enactment to have its intended effect.
The February 1, 2012 dissolution of the State’s RDAs has affected businesses that entered into development agreements with a RDA, and will also affect the way that property tax dollars are distributed in the future. If you have questions about this recent development and would like to speak with one of our state and local tax attorneys, please contact one of the individuals listed below.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.
| Chicago (312) 558-5600 | San Francisco (415) 591-1000 |
| Robert F. Denvir | Charles J. Moll III |
| Alan Lindquist | Troy M. Van Dongen |
| Bradley R. Marsh | |
| Jocelyn M. Wang | |
| Dina Bronshtein Segal | |
| Jasmine I. Tollette |