Redevelopment Agency SERAF Payment Requirements Upheld; CRA Will Appeal

May 4, 2010

In a setback for redevelopment agencies, Judge Lloyd Connelly ruled today to deny petitions seeking to overturn AB 26 x4 which mandates a statewide contribution from redevelopment agencies equal to an aggregate $1.7 billion during fiscal year 2009-10 and an additional $350 million in fiscal year 2010-11. The 2009-10 payments are due to county auditor-controllers on May 10. In the 24-page ruling, the court denied the California Redevelopment Association’s (CRA) petition to stay the transfer of funds; however, the CRA Board of Directors has announced that it will file an appeal to the ruling, and will again seek a stay pending the appeal.

Redevelopment agencies should be advised that as detailed in prior e-alerts, the legislation imposes a number of sanctions on agencies that fail to timely pay or arrange for payment of the SERAF payment on the agency’s behalf. CRA has advised redevelopment agencies to hold payments until the status of the stay request can be determined. Meyers Nave is monitoring developments and will provide updated information as it becomes available.

Summary of the Ruling

No constitutional violation. CRA and other petitioners had argued that by requiring a transfer of tax increment funds to school districts, AB 26 x4 violates the state constitution because it requires redevelopment agencies to expend tax increment funds for purposes inconsistent with redevelopment. However, Judge Connelly ruled that the legislature has broad discretion to define the meaning of redevelopment and the scope of indebtedness that redevelopment agencies may incur. The ruling acknowledges that absent special circumstances, courts may not set aside or disregard the legislature’s determination of facts justifying statutory enactments unless the determination is clearly erroneous or “palpably arbitrary,” and further states that there is no case law that has restricted the legislature’s past exercise of its discretion to control and direct redevelopment agencies’ use of tax increment funds. With respect to AB 26 x4, the court held that the legislative findings “delineate a reasonable basis in fact and logic relating the achievement of economic and residential redevelopment objectives to the use of RDA’s SERAF payments to maintain adequate school programs that attract residents, support new businesses and generate employment in redevelopment areas.”

No impairment of contracts. The court held that the SERAF payment obligations do not constitute an impairment of contracts, finding that the SERAF requirements will not inevitably impair tax increment pledges and that the payments are subordinate to pledges securing payment of bonded indebtedness. The court supported this view by noting that agencies can avoid default under existing obligations by using existing unencumbered fund balances or by borrowing other funds to make the SERAF payment, noting that the legislation permits redevelopment agencies to meet the SERAF payment obligations by borrowing funds from a joint powers entity, from the local legislative body, or from the agency’s own low- and moderate-income housing fund. In addition, the court noted that if an agency becomes subject to sanctions for failure to make the SERAF payments, it may, nonetheless, continue to make payments on existing indebtedness and contractual obligations.

No violation of Propositions 1A, 13 or 4. The court rejected petitioners’ contention that AB 26 x4 violates Proposition 1A because property taxes would be improperly diverted from local taxing entities if an agency extends the life of a redevelopment plan as permitted by the legislation. The court also rejected the argument that the legislation violates Proposition 13 by directing the allocation of property taxes for the purpose of reimbursing state contributions to state-funded services. In addition, referring again to the legislative determination that the SERAF payments serve redevelopment purposes, the court rejected the argument that by requiring redevelopment funds to be used for purposes that primarily benefit the state, AB 26 x4 violates the annual appropriation limitation applicable to local governments.

No violation of equal protection; no violation of Proposition 98. The court rejected petitioners’ argument that AB 26 x4 will create disparities in educational funding because it directs tax increment revenue to only certain schools. The court found that the intent of AB 26 x4 is to support schools that serve students who reside in redevelopment project areas or in housing assisted by redevelopment agencies, and that the focus of AB 26 x4 is on the “adequacy of school programs and operations, not on individual students attending the schools.” The court also noted that California’s complex educational funding process can be expected to eliminate funding inequities with respect to schools that receive SERAF funds. Similarly, the court rejected the petitioners’ argument that SERAF funds cannot lawfully offset the state’s obligation under Proposition 98 to fund school districts because the funds are intended to support only students residing in redevelopment areas and assisted housing. The court noted again that the SERAF payments are intended to support schools, not individual students.

No gift of public funds. The petitioners argued that the transfer of SERAF payments violates the public funds doctrine because the transfer benefits the recipient schools, but not the redevelopment agency. In rejecting this argument, the court relied on the legislative findings that the SERAF payments benefit redevelopment of the project area, and thereby serve redevelopment purposes.

No violation of special fund doctrine. Again relying on the legislative findings and intent that the SERAF payments benefit redevelopment, the court determined that AB 26 x4 does not violate the constitutional requirement that tax increment funds be deposited into a special fund dedicated to redevelopment purposes.

CRA will appeal.

The CRA Board of Directors has unanimously voted to appeal the ruling and to seek a stay of the payment requirements pending the appeal. John Shirey, Executive Director of CRA, said: “We strongly disagree with Judge Connelly’s ruling which effectively says the Legislature has unlimited discretion to redirect local redevelopment funds to any purpose it wishes. Under that logic any state program could be called redevelopment. The Legislature needs to deal with its budget problems by making hard decisions using its own limited resources -- not by taking away local government funds. Despite this ruling we continue to believe taking local redevelopment funds and using them to fund State obligations is unconstitutional.”

Meyers Nave will be closely monitoring this case and will provide further updates. For more information on this case or other redevelopment issues, contact Susan Bloch at 800.464.3559.