Lawsuit Challenges Redevelopment Tax Shift

Dec 5, 2008
The California Redevelopment Association has filed its threatened lawsuit over a state budget provision shifting $350 million from redevelopment agencies to schools. The CRA argues that directing tax increment revenue away from the redevelopment agencies violates the state and federal constitution and even amounts to an uncompensated taking of property.

But I have to wonder: Is anyone listening?

State lawmakers and the Schwarzenegger administration used the $350 million shift or 5% of tax increment revenues, whichever is greater to "balance" the 2008-09 state budget (see CP&DR Capitol Update, October 2008). The move reduces the state's education funding obligation. The Legislative Analyst's Office recommends increasing the shift to $400 million and making it a permanent part of the budget.

The last time the state grabbed redevelopment agency revenues, it extended the life of redevelopment project areas by one year under the theory that the agencies could make up the lost revenue during the additional year. This time around, there was no time extension.

Filed in Sacramento County Superior Court by CRA, the Moreno Valley Redevelopment Agency and CRA Executive Director John Shirey against state Finance Director Michael Genest, the lawsuit points to California Constitution Article XVI 16, which voters approved in 1952. That section says tax increment revenues shall be allocated to redevelopment agencies to pay off indebtedness used to finance redevelopment projects. In 2004, voters approved Proposition 1A, which, among other things, protected local government revenues from state raids. But Proposition 1A specifically excluded redevelopment agency tax increment because the state constitution already protected those revenues, notes the CRA, which quotes from the ballot pamphlet argument signed by Gov. Schwarzenegger. (Read all about the suit on the CRA website.)

The CRA argues that the funding shift violates state and federal constitutional provisions protecting the integrity of contracts, as the shift takes money that redevelopment agencies have pledged to bond purchasers. Breaking the contractual bond amounts to a taking of property in violation of the Fifth Amendment, the CRA suit argues.

If the shift is allowed to occur, agency bond ratings will fall, the cost of borrowing will go up, and fewer redevelopment projects will be completed, according to the CRA.

The CRA had asked for volunteers to join the suit and ultimately selected Moreno Valley. The shift would cost that city's redevelopment agency about $1.1 million this fiscal year, potentially forcing the cancellation of a storm drain project and water system improvements that would ensure adequate fire flow in the Edgemont area, and portions of the Sunnymead Boulevard Revitalization project.

All of this is a really big deal to redevelopment agencies, their host cities and counties, and people who work in the redevelopment industry. But the lawsuit appears to have generated little more than a shrug at the Capitol. Remember, the state is facing a $28 billion shortfall for the current and next fiscal year. Everyone is insisting that their programs and projects can't possibly be cut. The redevelopment lobby is no different than the proponents of education, public health, law enforcement, transit, parks or anything else that's on the chopping block.

I'm not arguing the CRA's legal contentions are faulty. In fact, they sound convincing to me. What I am suggesting is that there are no painless solutions to the state's dire fiscal condition. Compared to what's coming, we have felt barely a pinprick.

Paul Shigley