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California Supreme Court Ruling Dissolves 400 Local Redevelopment Agencies

3 min readBy: Joseph Bishop-Henchman

About $5 billion in California taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue is allocated not by the State Legislature but by approximately 400 different local redevelopment agencies. These agencies arose after World War II to undertake ill-defined “slum clearance” and “eliminating blight,” but now carry out a wide array of activities, primarily condemning property for private developers and constructing public projects (although ones that often benefit private interests, such as restaurants or sports team owners).

They are generally funded by Tax Increment Financing (TIF): an exclusive power to tax any property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. growth in the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. from the time of their formation. This is a sizeable chunk of revenue, growing each year and insulated from having to compete with other state and local funding priorities.

California Governor Jerry Brown (D), arguing that state budget priorities overrode these districts’ desires for new projects, had sought to shut them down and transfer much of their funds to the state. The Legislature was reluctant, so they passed two companion bills:

  • ABX1 26, which dissolved all the local redevelopment agencies in the state.
  • ABX1 27, which cancelled ABX1 26 if the agencies turned over $1.7 billion to the state, followed by $400 million annually. Redevelopment agencies characterized this as a ransom note and challenged it in court.

Well, they got their way but also they didn’t in a big way. Yesterday, the California Supreme Court ruled (PDF) that ABX1 27 was unconstitutional, violating state constitutional language that prohibits the state from “[r]equir[ing] a community redevelopment agency (A) to pay, remit, loan, or otherwise transfer, directly or indirectly, taxes on ad valorem real property and tangible personal property…to or for the benefit of the State, any agency of the State, or any jurisdiction….” (One justice disagreed with this rather open-and-shut reading of the state constitution.) The issue is one of the surprisingly undeveloped doctrine of “unconstitutional conditions”-how many conditions can a superior government attach to funding before its acceptance no longer becomes voluntary?

While they struck down ABX1 27, they upheld ABX1 26 as a valid exercise of the state’s power. (The Court considered the argument that ABX1 26 be invalidated, but the Legislature stupidly (or intentionally?) put a severability clause ensuring that one would survive the other.) Consequently, local redevelopment agencies in California are now hasta la vista, and must close up shop by May 2012.

Redevelopment agency lobbyists promise that they’re going to fight this:

Advocates for the agencies are expected to return to the Legislature to ask lawmakers to recreate them, probably under some sort of revenue-sharing agreement.

“We hope the Legislature goes back to fix this,” said Chris McKenzie, executive director of the League of California Cities. “This is a tool the state cannot afford to lose.”

Cities may fight to keep the ruling in place, however:

Los Angeles County Board of Supervisors Chairman Zev Yaroslavsky said redevelopment over the years “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,” Yaroslavsky said.

Deputy Santa Clara County Counsel James R. Williams, whose office advocated the positions taken by the court, said the ruling would eventually add $90 million to the county’s coffers and provide schools in Santa Clara County with $150 million annually. In the past, the state has been “backfilling” the loss to schools, Williams said.

“All counties will benefit in the sense that they will ultimately receive this money back as general fund money,” he said, although some have their own redevelopment agencies or agreements with city agencies to share revenues.

“What happens now is the state subsidizes redevelopment agencies by backfilling losses to school districts when schools lose money to redevelopment,” Williams said.