With the State of California again facing financial calamity, the fight in Sacramento over tapping the revenues of local redevelopment agencies to fund schools is likely to intensify.

One of the latest developments came April 30, when a Sacramento County Superior Court judge blocked implementation of a portion of a 2008 law (AB 1389) requiring redevelopment agencies to transfer $350 million in tax increment revenue to schools. The ruling was a victory for the nearly 400 redevelopment agencies and the California Redevelopment Agency (CRA), which lead the litigation. The Schwarzenegger administration will almost certainly appeal.

A report released by the state controller's office days before the court decision only heats up matters. It found that more than one-quarter of redevelopment agencies face sanctions for being out of compliance for their pass-through payments to schools. That report, which infuriated the CRA and certain redevelopment agencies, will be updated shortly and is expected to show more agencies are in compliance, according to the controller's office. Still, the issue of pass-through payments remains, and it is the subject of potentially controversial CRA-sponsored legislation.

Signed into law last year, AB 1389 requires redevelopment agencies to transfer a portion of their tax increment revenues to school districts. The law also requires the state controllers' office to report on the separate issue of pass-through payments from redevelopment agencies to schools for the 2003-04 through 2007-08 fiscal years.

The April court ruling was the result of a lawsuit filed in October 2008 by the CRA and the redevelopment agencies of Moreno Valley and Madera County. The suit contended that the law's requirement that $350 million of tax increment revenues of the state's redevelopment agencies for the 2008-09 fiscal year be transferred to their county Educational Revenue Augmentation Funds (ERAF) violated the state and federal constitution for several reasons (see CP&DR Capitol Update, October 2008).

The ruling by Superior Court Judge Lloyd Connolly focused solely on legislative findings and declarations used by state lawmakers to legitimize the mandatory transfers. Lawmakers said the transfers were legal because the money would be distributed to schools serving students who live in redevelopment project areas and in housing built with redevelopment money.

In siding with the CRA, Connolly said, "[T]he ERAF funds are distributed without any procedures to assure that the schools and educational programs receiving funds contributed by the city RDAs [redevelopment agencies] are serving students within the redevelopment project areas or communities of the city RDAs or are serving students living in housing assisted by the contributing city RDAs. … These circumstances directly undermine the findings and declarations."

CRA Executive Director John Shirey said he would not rule out a settlement of the litigation, but he added, "There is no indication anybody wants to work out a compromise with us."

A legislative remedy might be the more likely outcome. Shortly after Connolly's ruling came down, legislative staff members were reportedly working on a remedy to the legal flaw Connolly cited.

But a legislative remedy may be too late for the 2009-10 fiscal year. Gov. Schwarzenegger's "May revise" contained no shift of money away from redevelopment agencies, even though the governor proposed "borrowing" $2 billion in property tax revenues from cities and counties.

The state controller's report on property tax pass-through payments covered the five fiscal years from 2003-04 through 2007-08. State law requires most redevelopment agencies to share a portion of tax increment with school districts – a "pass-through" payment. The amount of pass-through payments varies depending on the redevelopment project area's age and negotiations between the redevelopment agency and school districts. The Legislative Analyst's Office previously estimated that, over the five yeare period, redevelopment agency underpayment of pass-throughs to schools combined with school errors in reporting these pass-throughs to the state increased the state's education costs by about $98 million.

The controllers' office followed up last year with a report that said schools had underestimated the amount of pass-through payments received by more than $100 million in one year alone. The controller identified many other discrepancies in the complex and inconsistently implemented pass-through system.

The latest controller's report, issued in April, found that the redevelopment agencies were supposed to make $355 million in pass-through payments to school districts for the five-year period, and that agencies had paid $331 million by the end of February. At that time, 67 agencies had not fulfilled their pass-through obligations, according to the controller's office.

That number has since dropped but many agencies still lack a "finding of concurrence" from their county auditor. A total of 107 agencies face sanctions for not making payments, lacking a finding of concurrence or not filing a report, the controller concluded. Eighty-three agencies submitted statements of dispute with their county auditors.

The CRA's Shirey lambasted the report. "It was full of errors and mistakes. There has been no leadership or guidance on the part of the controller," he said.

Controllers' office spokeswoman Hallye Jordan said her office's role is merely to compile the information as required by law. She said the report would be updated as the state receives new information from redevelopment agencies and county auditors.

In an attempt to clarify the enormously complex pass-through requirements, the CRA is sponsoring SB 530 (Dutton). The bill initially met stiff resistance from schools.

 "It was kind of redevelopment agencies' wish list on how to allocate redevelopment money," said Dennis Meyers, lobbyist for the California Association of School Business Officials.

In response, the CRA dramatically narrowed the bill for the time being but intends to push for significant amendments later this year. Jean Hurst, a lobbyist for the California State Association of Counties, said her organization, CRA and the California Association of County Auditors continue SB 530 negotiations. "We've aired all the issues. We're trying to work it out," Hurst said.

School representatives, however, have not been closely involved with the talks.

Lawmakers last year approved a measure (SB 360 – Negrete McLeod) that would have given the authority to make and report pass-through payments to county auditors instead of redevelopment agencies. Schools and State Controller John Chiang endorsed SB 360, while county auditors opposed it. The bill was one of the victims of Schwarzenegger's mass veto of what he determined was not priority legislation.

John Shirey, California Redevelopment Association, (916) 448-8760.
Dennis Meyers, California Association of School Business Officials, (916) 447-3783.
Jean Hurst, California State Association of Counties, (916) 327-7500.
State Controller's Office report on pass-through payments: http://www.sco.ca.gov/Files-ARD-Local/ab1389_proptax_passthru_pments_0409.pdf
Court case: California Redevelopment Association v. Genest, Sacramento County Superior Court Case No. 34-2008-00028334-CU-WM-GDS.