Two Southern California redevelopment agencies have lost separate lawsuits over the allocation of property tax revenue from redevelopment project areas. In the first case, the Second District Court of Appeal ruled that Los Angeles County can withhold from a redevelopment agency the cost of administering property taxes, and that the amount of money withheld should be counted against a redevelopment project area's maximum allowable tax increment. In the second case, the Fourth District Court of Appeal ruled that the Santa Ana Unified School District is entitled to its share of the 2% inflationary increase in property tax revenues from an Orange County redevelopment project area even though the school district did not request the money until 10 years after the redevelopment project was adopted. At issue in the case from Los Angeles was approximately $5.2 million that the Los Angeles Community Redevelopment Agency (CRA) argued has been — or will be — illegally diverted by the county. The city's argument failed at both the trial court and appellate court levels. The case centered on interpretation of a law that allows counties to bill other government entities for the cost of various administrative functions, such as collecting property taxes. The Legislature first approved of such funding schemes in 1990. In 1994, the Legislature enacted Revenue and Taxation Code § 95.3, which provided for "property tax administrative funding" or "property tax administrative fees" or simply "PTAF." Los Angeles County relied on § 95.3 subdivision (b)(1) to deduct its costs of administering property tax collections for the CRA. The CRA argued that this deduction was improper. The CRA also argued that the amount the county deducted for administrative purposes should not count against a project area's tax increment cap. The city argued about the effects on three redevelopment project areas: Pico Union, with a lifetime cap of $14 million in tax increment; Crenshaw, with an annual cap of $500,000; and the Central Business District, with a lifetime limit of $750 million. The Pico Union project area hit its cap in 1994, at which time CRA ceased receiving tax increment. However, the county determined in 1996 that the city owed it an additional $107,000 for administration of Pico Union project area taxes, so the county deduced that amount from subsequent allocations to the CRA. The county also deducted $67,000 for administering the Crenshaw Plan for three years during the mid-1990s when the project area hit its annual tax increment ceiling. When the Central Business District project area hits its ceiling in either 2003 or 2004, the county will have withheld about $5 million in administrative fees. The city argued that the county was impermissibly reallocating property tax revenue to itself, and that the way the county implemented the PTAF violated the state constitution. But the Second District disagreed, saying the county's procedure is "exactly" as prescribed by § 95.3 (b)(1). "The plain language of the statute here permits County to deduct the PTAF from CRA's tax increment allocation and is in harmony with the legislative intent to allow counties to cover their administrative costs," Presiding Justice Roger Boren wrote for the unanimous three-judge panel of the Second District, Division Two. "To follow CRA's interpretation of § 95.3 would allow redevelopment agencies with capped plans to avoid those costs." The court cited Arcadia Redevelopment Agency v. Ikemoto, (1993) 16 Cal.App. 4th 444 (see CP&DR Legal Digest, July 1993). In that case, the City of Arcadia argued that the PTAF violated Article XVI, § 16 of the state constitution, which protects a redevelopment agency's tax revenue. But the court in Arcadia said the Legislature can alter the levying and collection of taxes from redevelopment projects if the Legislature treats other taxes in the same manner. "Whether a redevelopment agency's tax revenues are reduced by a proper alteration of the levy and collection of taxes or by a charge for administrative costs, the principle is the same," Boren wrote. "The Legislature is so empowered as long as it acts with an even hand. … We explicitly approve and adopt the rationale of the Arcadia opinion." The court also said the deductions should count against a redevelopment project's revenue limit. "A redevelopment agency ultimately pays all of its financial obligations from its tax revenue allocations. The PTAF is a proper obligation [of the redevelopment agency] and payable to the county administering and collecting the taxes," Boren wrote. The Orange County case was significantly different, but the outcome was still a loss for the redevelopment agency. In 1996, the Santa Ana school district Board of Trustees approved a resolution electing to receive its portion of the 2% inflationary increase in property taxes from within the Santa Ana Heights Redevelopment Project area. The county, which runs the redevelopment project, refused to give up the revenue. The county said the school district should have made such a request before the county adopted the redevelopment plan in 1986. In 1999, the school district sued, saying that the 2% should be automatically allocated. Superior Court Judge David McEachen ruled for the school district and ordered the county to pay about $90,000 — the district's share of the 2% increase for 1996 through 2000, plus 8% interest — and to continue paying the school district its share of the 2% increase until the redevelopment project expires. The unanimous three-judge panel of the Fourth District, Division Three, upheld the decision. The case turned on the interpretation of Health and Safety Code § 33676. Before the Legislature amended that section in 1984, the law said that, prior to adoption of a redevelopment plan by a legislative body, any taxing agency may elect to receive its portion of 2% tax increases from within a redevelopment area. The 1984 amendment said that every school district "shall elect" to receive those revenues. Orange County argued that the Santa Ana school district lost the right to the money because it failed to make the election prior to the county's adoption of the redevelopment plan. The appellate court disagreed. "The amended language at issue here removes plaintiff's [the school district's] option to elect; it requires the election, reflecting the intent that school districts are to be paid the funds," Justice William Rylaarsdam wrote for the court. The county's emphasis on the timing of the election missed the "overarching purpose" of the legislative amendment, the court held. "The change from permissive to mandatory election only reinforces the conclusion that the Legislature's objective was to require that the funds be paid," Rylaarsdam wrote. A 1993 amendment (part of the much broader AB 1290 redevelopment reform) strengthens this interpretation, the court ruled. That amendment eliminated the "elect" language so that the statute simply says school districts "shall be allocated" their share of inflationary property tax growth. The appellate court also rejected the county's argument, supported by the California Redevelopment Association, that the school district's claim was submitted so late that the county could not adequately defend against it, and that the claim would upset the redevelopment agency's "financial apple cart." The court said that the county had not produced evidence that its defense was harmed by the timing of the claim, and that the county presented no evidence that its contracts with bondholders would be impaired. First Case: Community Redevelopment Agency of the City of Los Angeles v. County of Los Angeles, No. B136115, 01 C.D.O.S. 4466, 2001 DJDAR 5466. Filed May 31, 2001. The Lawyers: For CRA: Ronald Low, deputy city attorney, (213) 977-1802. For the county: Thomas Tyrrell, principal deputy county counsel, (213) 974-1880. Second Case: Santa Ana Unified School District v. Orange County Development Agency, No. G027331, 2001 DJDAR 6835. Filed June 29, 2001. The Lawyers: For the school district: Wendy Wiles, Bowie, Arneson, Wiles & Giannone, (949) 851-1300. For the county: Ward Brady, deputy county counsel, (714) 834-3300.