When Gov. Jerry Brown took office earlier this year, he was faced with a massive budget deficit. While he considered a variety of measures to reduce California's glaring budget problem, the governor – like many of his predecessors – ultimately turned to redevelopment agencies to narrow the gap. In January, he proposed completely eliminating redevelopment agencies as a means of gaining control over their property tax increment payments. Unable to garner the required legislative support, in July, Brown and the Legislature "compromised" with the enactment of two bills, Assembly Bill X1 26 and Assembly Bill X1 27. The first eliminated redevelopment agencies, while the second provided for the agencies' reinstatement upon their transferring to local school districts money ($1.7 billion this year and about $400 million annually thereafter) that the state would have otherwise been obligated to pay.
Declaring the laws an illegal "ransom" scheme, the California Redevelopment Association and the League of Cities challenged them in a lawsuit filed directly in the state Supreme Court, California Redevelopment Assn. v. Matosantos, 2011 DJDAR 18559. While many redevelopment agencies intended to make the required payments, they figured they'd take a shot: Either the Court would uphold the bills, in which case redevelopment would proceed subject to the annual payments, or the Court would declare the bills unconstitutional, and redevelopment would proceed as normal. But there was a devastating potential third option: The Court could uphold ABX1 26 while striking down AB1X 27. As the case proceeded in the Supreme Court, this "worst case" scenario started to look more and more likely.
On Dec. 29, the Court issued its opinion, and the outcome was the nightmare redevelopment agencies feared most. It upheld ABX1 26, allowing the dissolution of California's redevelopment agencies to proceed, but struck down ABX1 27, the "voluntary" payment program that would have allowed redevelopment to continue.
The Court had little difficulty upholding ABX1 26, the law eliminating California's redevelopment agencies. It reasoned that because redevelopment agencies were created by the Legislature, the Legislature could also eliminate them: "A corollary of the legislative power to make new laws is the power to abrogate existing ones. What the Legislature has enacted, it may repeal."
When it came to ABX1 27, the Court felt differently. All but Chief Justice Tani Cantil-Sakauye concluded that the "voluntary payment" portions of ABX1 27 run afoul of Proposition 22 (enacted by the voters in 2010 which prohibits the "required" transfer of local funds to satisfy other State obligations). The Court further concluded that the balance of ABX1 27 was not severable from the improper payment provisions, and it struck down ABX1 27 in its entirety.
While this outcome certainly qualifies as a "worst case scenario" for redevelopment proponents, it is not entirely surprising to those who followed the case. In particular, at the oral argument in November, the Court focused on three issues. First, redevelopment agencies were created initially by the Legislature, which would, absent some constitutional prohibition, mean that the Legislature could also abolish them. Second, the "voluntary" payments under ABX1 27 were not particularly voluntary, since failure to make them meant the redevelopment agency would be eliminated. And, if not voluntary, the payments seemed to run afoul of Proposition 22. Third, the two bills appeared independent with the ability to stand on their own, meaning they were not so intertwined that striking down one (presumably, ABX1 27) would necessitate striking down both.
Much as it telegraphed during oral argument, the Supreme Court's opinion started by concluding that ABX1 26 – the dissolution bill – passed constitutional muster. Rejecting the argument that Proposition 22 created a constitutional right for redevelopment agencies to exist, the Court explained: "The constitutionalization of a political subdivision – the alteration of a local government entity from a statutory creation existing only at the pleasure of the sovereign state to a constitutional creation with life and powers of independent origin and standing – would represent a profound change in the structure of state government."
In reviewing Proposition 22, the Court found no discussion of redevelopment agencies taking on constitutional stature, and without some explicit mention of such a profound shift in the law, it would not imply any such intent. As the Court summarized, the drafters of legislation do "not, one might say, hide elephants in mouseholes."
The Court moved on to ABX1 27, focusing its attention on the "voluntary" payment program. It concluded that ABX1 27 was substantively indistinguishable from earlier efforts by the State to shift property tax increment from redevelopment agencies to the State's educational revenue augmentation funds ("ERAFs"). "Like all prior ERAF legislation, [AB1X 27] operates as a levy on the receipt of tax increment funds."
The Court then put the nail in the ABX1 27 coffin: "A condition that must be satisfied in order for any redevelopment agency to operate is not an option but a requirement. Such absolute requirements Proposition 22 forbids."
With respect to AB1X 27, Chief Justice Cantil-Sakauye disagreed with the majority, concluding that Proposition 22 forbids only payments required of the redevelopment agencies themselves, and since ABX1 27 contemplates payments by the agencies' community sponsors, it survived a facial constitutional challenge. Unfortunately for redevelopment agencies, the other justices disagreed, and the Court struck down ABX1 27.
Finally, the Court turned to the severability question, needing to decide whether ABX1 26 could stand alone or whether it must fall given ABX1 27's fate. It responded to claims that a number of legislators had reportedly opined that the Legislature would not have wanted such an outcome by looking at the statute's specific severability clause stating the opposite, concluding that: "whatever individual legislators may have said at one point or another, what the Legislature actually did establishes it would have passed [ABX1 26] irrespective of the passage of [ABX1 27], and that [ABX1 26] is volitionally separable. Consequently, it is severable."
Thus, the Supreme Court's final conclusion: ABX1 26 stands, while ABX1 27 falls.
Having reached its decision on the merits, the Court turned to implementation, noting that in light of the partial stay and the passage of time, some of the law's time frames had become impossible. The Court concluded that it had the power to reform the law, and it chose a superficially simple solution: All initial dates in ABX1 26 are shifted four months, representing the time period during which the Court's partial stay was in place.
But there is a twist. For any obligations that span multiple fiscal years, the Court did not reform the deadlines. Instead, only those trigger dates falling before May 1, 2012 get shifted. This means, for example, that for the distributions required to be made on Jan. 16 and June 1 every year, the Jan. 16, 2012, distribution is now due May 16, 2012, but the June 1, 2012, distribution (and all future distributions) remain due as set forth in ABX1 26.
Moving beyond the technical issues, the real question is what happens to redevelopment obligations and assets. This will be the subject of considerable discussion, but there are a few, bright-line rules. First, for obligations incurred prior to Jan. 1, 2011, the obligations remain valid and binding. Second, for deals under negotiation when the Supreme Court stay was issued, the redevelopment agencies have no power to consummate the deals. Third, remaining redevelopment assets will be sold. And fourth, if the agency transferred any assets to its city/county or another public agency after Jan. 1, 2011, the transfer is potentially subject to ABX1 26's "claw back" provisions.
Finally, starting the very day the Supreme Court issued its opinion, speculation began concerning a potential legislative compromise designed to reinstate some form of redevelopment. Whether any such compromise sees the light of day remains to be seen. And even if it does, considerable obstacles may exist.
Rick E. Rayl is a partner at Nossaman in the firm's Eminent Domain and Valuation and Real Estate Practice Groups and an experienced trial attorney dealing with eminent domain, inverse condemnation and other real estate and business disputes. He is editor of the blog, "California Eminent Domain Report." He can be reached at firstname.lastname@example.org or (949) 833-7800.
Bradford B. Kuhn is an associate in Nossaman's Eminent Domain and Valuation Practice Group. He frequently blogs about eminent domain news and developments at http://www.CaliforniaEminentDomainReport.com/.