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California Redevelopment Association et al v. Ana Matosantos

January 24, 2013

CALIFORNIA REDEVELOPMENT ASSOCIATION ET AL., PLAINTIFFS AND APPELLANTS,
v.
ANA MATOSANTOS, AS DIRECTOR, ETC., ET AL., DEFENDANTS AND RESPONDENTS. CALIFORNIA REDEVELOPMENT ASSOCIATION, PLAINTIFF AND RESPONDENT,
v.
ANA MATOSANTOS, AS DIRECTOR, ETC., DEFENDANT AND APPELLANT. COUNTY OF LOS ANGELES ET AL., PLAINTIFFS AND APPELLANTS,
v.
ANA MATOSANTOS, AS DIRECTOR, ETC., ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from a judgment of the Superior Court of Sacramento County, Lloyd G. Connelly, Judge. (Super. Ct. No. 34200980000359CUWMGDS) (Super. Ct. No. 34200800028334CUWMGDS) (Super. Ct. No. 34200980000362CUWMGDS)

The opinion of the court was delivered by: Hull , J.

CERTIFIED FOR PUBLICATION

Affirmed in part and reversed in part.

Responding to a fiscal emergency declared by the Governor on July 1, 2009, the Legislature enacted Assembly Bill No. 26, requiring redevelopment agencies throughout the state to contribute portions of their property tax increment funding for the 2009-2010 and 2010-2011 fiscal years into supplemental educational revenue augmentation funds (SERAF's) to be used for financing K-12 education in redevelopment areas. (Assem. Bill No. 26 (2009-2010 4th Ex. Sess.) enacted as Stats. 2009, 4th Ex. Sess., ch. 21, §§ 6-9 (hereafter Assembly Bill 4X 26).) However, because Assembly Bill 4X 26 further required that the funds deposited in SERAF's be counted toward the state's overall obligation to fund education, the legislation effected no net increase in school funding. Instead, redevelopment agencies were forced to transfer funds to the state general fund as reimbursement for other state-funded local programs.

In these consolidated appeals, we conclude the Legislature acted within its constitutional authority in directing redevelopment agencies to deposit portions of their property tax funding into SERAF's. In California Redevelopment Association v. Matosantos (2011) 53 Cal.4th 231 (Matosantos), the California Supreme Court upheld the Legislature's power to dissolve redevelopment agencies altogether. Inherent in the power to dissolve is the power to limit funding available to redevelopment agencies. And because Assembly Bill 4X 26 does not otherwise violate constitutional limitations on the use of property taxes or impair contractual obligations of redevelopment agencies or their successors, we conclude it is a valid exercise of the Legislature's inherent budgetary powers.

In a related matter, we conclude the trial court erred in awarding attorney fees to the prevailing plaintiffs in connection with a challenge to an earlier legislative attempt to reallocate property tax funding from redevelopment agencies to the state.

FACTS AND PROCEEDINGS

Legislative Background

"In the aftermath of World War II, the Legislature authorized the formation of community redevelopment agencies in order to remediate urban decay." (Matosantos, supra, 53 Cal.4th at p. 245.) The Community Redevelopment Law (CRL) (Health & Saf. Code, § 33000 et seq.; further undesignated section references are to the Health and Safety Code) was designed to assist local governments in revitalizing blighted areas. (City of Cerritos v. Cerritos Taxpayers Assn. (2010) 183 Cal.App.4th 1417, 1424.) In 1952, following voter approval, the CRL became part of the California Constitution as article XIII, section 19, later renumbered article XVI, section 16. (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 866, fn. 7; further undesignated article references are to the California Constitution.) By the end of 2011, there were nearly 400 redevelopment agencies operating in the state. (Matosantos, at p. 246.)

Redevelopment agencies may "prepare and carry out plans for the improvement, rehabilitation, and redevelopment of blighted areas" (§ 33131, subd. (a)) by acquiring real property (§ 33391, subd. (b)), clearing land and constructing infrastructure necessary for building on project sites (§§ 33420, 33421), undertaking certain improvements to other public facilities in the project areas (§ 33445), and disposing of property by lease or sale (§§ 33430, 33431).

Because redevelopment agencies generally cannot levy taxes (Huntington Park Redevelopment Agency v. Martin (1985) 38 Cal.3d 100, 106), "they rely on tax increment financing, a funding method authorized by article XVI, section 16 . . . and section 33670 . . . . [Citations.] Under this method, those public entities entitled to receive property tax revenue in a redevelopment project area (the cities, counties, special districts, and school districts containing territory in the area) are allocated a portion based on the assessed value of the property prior to the effective date of the redevelopment plan. Any tax revenue in excess of that amount--the tax increment created by the increased value of project area property--goes to the redevelopment agency for repayment of debt incurred to finance the project. [Citations.] In essence, property tax revenues for entities other than the redevelopment agency are frozen, while revenue from any increase in value is awarded to the redevelopment agency on the theory that the increase is the result of redevelopment." (Matosantos, supra, 53 Cal.4th at pp. 246-247.) In this way, "the redevelopment project in effect pays for itself." (Redevelopment Agency v. County of Los Angeles (1999) 75 Cal.App.4th 68, 71.)

"The property tax increment revenue received by a redevelopment agency must be held in a special fund for repayment of indebtedness (§ 33670, subd. (b)), but the law does not restrict the amount of tax increment received in a given year to that needed for loan repayments in that year. [Citation.] The only limit on the annual increment payment received is that it may not exceed the agency's total debt, less its revenue on hand. (§ 33675, subd. (g).) Once the entire debt incurred for a project has been repaid, all property tax revenue in the project area is allocated to local taxing agencies according to the ordinary formula. (§ 33670, subd. (b).)" (Matosantos, supra, 53 Cal.4th at p. 247, italics omitted.)

At the time the CRL was adopted, local governments had exclusive control over property tax (art. XIII, former § 10, enacted by Sen. Const. Amend. No. 1, Gen. Elec. (Nov. 8, 1910)), with each local jurisdiction (city, county, special district, and school district) having the power to levy its own property tax. (Matosantos, supra, 53 Cal.4th at p. 243.) However, because of inherent inequities in property taxes from jurisdiction to jurisdiction, the California Supreme Court invalidated this scheme of financing for schools on equal protection grounds in Serrano v. Priest (1971) 5 Cal.3d 584, 608-609 (Serrano I) and Serrano v. Priest (1976) 18 Cal.3d 728, 765-766 (Serrano II). "The Serrano decisions threw 'the division of state and local responsibility for educational funding' into ' "a state of flux." ' [Citation.] In their aftermath, a 'Byzantine' system of financing [citation] evolved in which the state became the principal financial backstop for local school districts. Funding equalization was achieved by capping individual districts' abilities to raise revenue and enhancing state contributions to ensure minimum funding levels." (Matosantos, supra, 53 Cal.4th at pp. 242-243.)

"A second event of seismic significance followed shortly after, with the voters' 1978 adoption of Proposition 13 (Cal. Const., art. XIII A, added by Prop. 13, as approved by voters, Primary Elec. (June 6, 1978) [(hereafter Proposition 13)].) . . . Proposition 13 capped ad valorem real property taxes imposed by all local entities at 1 percent (Cal. Const., art. XIII A, § 1, subd. (a)), reducing the amount of revenue available by more than half [citation]. In place of multiple property taxes imposed by multiple political subdivisions, it substituted a single tax to be collected by counties and thereafter apportioned. [Citation.] Significantly, Proposition 13 did not specify how that 1 percent was to be divided, instead leaving the method of allocation to state law." (Matosantos, supra, 53 Cal.4th at p. 244.) Thus, Proposition 13 largely transferred control over local government financing to the state, thereby "converting the property tax from a nominally local tax to a de facto state-administered tax subject to a complex system of intergovernmental grants." (Ibid.) Proposition 13 also created a zero-sum game in which local governmental entities must compete against each other for a slice of the diminished property tax pie. (Id. at pp. 244-245.)

Adding a further complication to the local funding picture, the voters approved Proposition 98 in 1988, thereby establishing "constitutional minimum funding levels for education and requir[ing] the state to set aside a designated portion of the General Fund for public schools. (Cal. Const., art. XVI, § 8 . . . [hereafter Proposition 98].) Two years later, the voters revised and effectively increased the minimum funding requirements for public schools. (Prop. 111, as approved by voters, Primary Elec. (June 5, 1990) . . . ." (Matosantos, supra, 53 Cal.4th at p. 245.) "In response to these rising educational demands on the state treasury, the Legislature in 1992 created county educational revenue augmentation funds (ERAF's). [Citations.] It reduced the portion of property taxes allocated to local governments, deposited the difference in the ERAF's, deemed the balances part of the state's General Fund for purposes of satisfying Proposition 98 obligations, and distributed these amounts to school districts." (Ibid.) "Periodically thereafter, the Legislature . . . required local government entities to further contribute to the ERAF's in order to defray the state's Proposition 98 school funding obligations." (Ibid.)

Over the years, and especially after the passage of Proposition 13, the use of redevelopment agencies to finance local economic development has proven a powerful weapon for cities in the zero-sum game for allocating scarce funding, at the expense of school districts and other local taxing agencies. (Matosantos, supra, 53 Cal.4th at pp. 247-248.) By the end of 2011, redevelopment agencies were receiving 12 percent of all property tax revenue collected in the state. (Id. at p. 247.) In light of Proposition 98's requirement that the state provide minimum levels of school financing, the diversion of funds to redevelopment agencies created increasing obligations on the state's General Fund. (Id. at p. 248.)

In response to these increased obligations, the Legislature has required redevelopment agencies to allocate tax increment revenues for other local purposes, such as low and moderate income housing, and to make graduated payments to other local agencies for redevelopment projects adopted or expanded after 1994. (Matosantos, supra, 53 Cal.4th at pp. 247-248.)

In the general election of November 2004, the electorate approved Proposition 1A, which added article XIII, section 25.5 to the state Constitution. (Stats. 2004, res. ch. 133, hereafter Proposition 1A; Matosantos, supra, 53 Cal.4th at p. 249.) Proposition 1A prohibits the Legislature from enacting any law that modifies the manner of allocating property tax revenues "so as to reduce for any fiscal year the percentage of the total amount of ad valorem property tax revenues in a county that is allocated among all of the local agencies in that county below the percentage of the total amount of those revenues that would be allocated among those agencies for the same fiscal year" under the laws in effect before the adoption of Proposition 1A. (Art. XIII, § 25.5, subd. (a)(1)(A); Stats. 2004, res. ch. 133.) In effect, Proposition 1A prohibits the Legislature from raiding local property tax allocations to help balance the budget.

However, Proposition 1A permits suspension of this prohibition under certain conditions for any two out of 10 consecutive years beginning in fiscal year 2008-2009. (Art. XIII, § 25.5, subds. (a)(1)(B) and (C); Stats. 2004, res. ch. 133.) Proposition 1A also does not apply to redevelopment agencies. (Matosantos, supra, 53 Cal.4th at p. 249.) Accordingly, the Legislature continued to require redevelopment agencies to make ERAF payments for the benefit of school and community college districts. "In each of the 2004-2005 and 2005-2006 fiscal years, redevelopment agencies were charged amounts intended to generate a combined $250 million." (Id. at p. 248.)

Assembly Bill No. 1389

In the 2008-2009 fiscal year, the Legislature approved Assembly Bill No. 1389 which, among other things, enacted sections 33685 through 33689, which required the transfer of a combined $350 million from redevelopment agencies to ERAF's. (Stats. 2008, ch. 751 (hereafter Assem. Bill 1389), §§ 53-57; Matosantos, supra, 53 Cal.4th at p. 248.)

California Redevelopment Association (CRA), the Community Redevelopment Agency of the City of Moreno Valley (Moreno Valley RA), the Madera Redevelopment Agency (Madera RA), and John Shirey, an individual taxpayer, initiated a mandamus proceeding against the Director of the California Department of Finance (Director) and the Auditor-Controller of Riverside County, seeking to block enforcement of sections 53 through 57 of Assembly Bill 1389. (Cal. Redevelopment Assn. v. Matosantos (Super. Ct. Sac. County, 2008, No. 34-2008-00028334-CU-WM-GDS (hereafter CRA v. Matosantos I).)

According to the petition in CRA v. Matosantos I, CRA is a California nonprofit corporation established in 1979 whose members are redevelopment agencies and whose associate members are businesses having interests in redevelopment activities. Moreno Valley RA and Madera RA are community redevelopment agencies under the CRL suing on behalf of themselves and all other redevelopment agencies in the state and the residents and businesses within the jurisdictions of such agencies.

On April 30, 2009, the trial court issued its decision in CRA v. Matosantos I, granting the requested relief and invalidating the transfer of tax increment funds from the redevelopment agencies to the ERAF's under Assembly Bill 1389. The court explained article XVI, section 16 prohibits the use of tax increment funds for other than redevelopment purposes. The court further explained Assembly Bill 1389 contains no provisions assuring that funds transferred to the ERAF's will be used for educational purposes solely within the redevelopment project areas. The court entered judgment for the plaintiffs, finding sections 33685 through 33689 unconstitutional and enjoining the defendants from enforcing those provisions. The court reserved jurisdiction on the issue of attorney fees for the prevailing plaintiffs.

The Director filed a notice of appeal from the trial court's decision. The plaintiffs moved for an award of attorney fees in the amount of $629,408.48, pursuant to Code of Civil Procedure section 1021.5 and section 1988 of title 42 of the United States Code. The trial court deferred ruling on the motion for attorney fees until resolution of the Director's appeal. On September 23, 2009, the Director abandoned the appeal.

The trial court thereafter determined the plaintiffs are not entitled to attorney fees under section 1988 of title 42 of the United States Code, because its ruling on the merits was based on state law alone. However, the court then issued an order awarding the plaintiffs attorney fees pursuant to Code of Civil Procedure section 1021.5 in the amount of $316,622.74, approximately half of the amount sought. The court found that at least half of the hours detailed in the plaintiffs' billing statements were either unnecessary or unrelated to the relief obtained in the litigation. The Director appeals from the order awarding attorney fees.

Assembly Bill 4X 26

For fiscal years 2009-2010 and 2010-2011, the Legislature again sought to appropriate tax increment funds from redevelopment agencies to help balance the budget. In doing so, the Legislature expressly sought to avoid the deficiencies in Assembly Bill 1389 identified by the trial court in CRA v. Matosantos I. Section 1 of Assembly Bill 4X 26 declares: "It is the intent of the Legislature in enacting this act to create a procedure to ensure that the funds contributed by a redevelopment agency pursuant to this act are allocated to serve persons living within or in the vicinity of any project area of that redevelopment agency." (Stats. 2009, 4th Ex. Sess., ch. 21, § 1, subd. (b).)

Assembly Bill 4X 26 added sections 33690 and 33690.5 to the Health and Safety Code. (Stats. 2009, 4th Ex. Sess., ch. 21.) Among other things, section 33690 required the various redevelopment agencies to remit, prior to May 10, 2010, an aggregate $1.7 billion to SERAF's. (§ 33690, subd. (a).) It also required county auditor-controllers to distribute the funds in the SERAF's to K-12 school districts or county offices of education located partially or entirely within the project areas of the redevelopment agencies. (§ 33690, subd. (j)(1).) Such school districts or county offices of education are in turn directed to use such funds for pupils living in the applicable redevelopment areas or in housing supported by redevelopment agency funds. (§ 33690, subd. (j)(5).)

However, section 33690 also provides that the amount of property tax revenues otherwise apportioned to the affected school districts shall be reduced by the amount of SERAF funds received (§ 33690, subd. (k)(1)), thereby resulting in no net increase or decrease in funding to those school districts.

In order to avoid any problems with the requirement of article XVI, section 16, that tax increment funds be used for redevelopment activities, Assembly Bill 4X 26 added section 33020.5, which defines "redevelopment" to include "payments to school districts in the fiscal years specified in Sections 33690 and 33690.5." (§ 33020.5.) Assembly Bill 4X 26 also provides that redevelopment agencies are not required to use tax increment funds to fulfill their obligation to the SERAF's, but may use "reserve funds, proceeds of land sales, proceeds of bonds or other indebtedness, lease revenues, interest, and other earned income." (§ 33690, subd. (b).) To ameliorate any adverse financial effects on redevelopment agencies from the transfer of funds mandated by Assembly Bill 4X 26, new section 33331.5 provides that, upon full payment by a redevelopment agency into an SERAF, the legislative body that created the redevelopment agency may amend the redevelopment plan to extend the time limits for completion of redevelopment activities by one year. (§ 33331.5.)

For fiscal year 2010-2011, new section 33690.5 required the redevelopment agencies to remit an additional $350 million to the SERAF's by May 10, 2011. (§ 33690.5, subd. (a).) These funds again would be used to reduce the state's obligation to fund education. (See § 33690.5, subds. (j)(1), (j)(5), and (k)(1).)

Assembly Bill 4X 26 also added section 33691, which provides that a given redevelopment agency may reduce its required transfer to the SERAF under section 33690 or 33690.5 by whatever amount is necessary to allow the agency to pay "existing indebtedness," which is defined as the amount due in the given fiscal year on bonds and other such obligations previously incurred by the agency. (§§ 33691, subd. (a)(1), (b).) In effect, current fiscal year debt payments, but not the amount of the overall debt obligations, are given priority over SERAF payments.

On October 20, 2009, the Community Redevelopment Agency of the City of Union City (Union City RA) and Fountain Valley Agency for Community Development (Fountain Valley RA), on behalf of themselves and all other California redevelopment agencies, along with CRA and John Shirey (hereafter collectively the CRA Plaintiffs), initiated a mandamus action against the Director and the Auditor-Controller of Alameda County, on behalf of himself and all other auditors in California counties having redevelopment agencies, seeking to block enforcement of Assembly Bill 4X 26. (Cal. Redevelopment Assn. v. Matosantos (Super. Ct. Sac. County, 2009, No. 34-2009-80000359-CU-WM-GDS (hereafter CRA v. Matosantos II).) The CRA Plaintiffs allege, among other things, that Assembly Bill 4X 26 violates article XVI, section 16, and Propositions 13 and 1A.

Two days later, The Counties of Los Angeles, San Diego, San Bernardino, San Mateo, Riverside, Orange and Alameda, along with Don Knabe (hereafter collectively the County Plaintiffs), initiated a separate mandamus action against the Director and the Auditor-Controller of Alameda County seeking to block enforcement of Assembly Bill 4X 26. (County of Los Angeles v. Matosantos (Super. Ct. Sac. County, 2009, No. 34-2009-80000362-CU-WM-GDS (hereafter County v. Matosantos).) As in CRA v. Matosantos II, the Auditor-Controller of Alameda County was sued on behalf of himself and as the representative of all other auditors of California counties having redevelopment agencies.

On November 2, 2009, the trial court determined CRA v. Matosantos II and County v. Matosantos are related and assigned both cases to Judge Connelly, who had presided over CRA v. Matosantos I.

On December 18, 2009, in County v. Matosantos, the trial court certified a defendant class of county auditors in the 51 California counties having redevelopment agencies.

On January 22, 2010, in CRA v. Matosantos II, the trial court certified a plaintiff class of California redevelopment agencies and a defendant class of county auditors.

On February 5, 2010, the trial court conducted a hearing on both matters, at the end of which it requested supplemental briefing.

On March 30, 2010, the CRA Plaintiffs moved for a preliminary injunction or stay to maintain the status quo in order to prevent the scheduled transfer of tax increment funds on or before May 10. The County Plaintiffs joined in the motion.

In lieu of ruling on the motion for preliminary injunction or stay, the trial court issued its ruling on the merits of the plaintiffs' petitions on May 4, 2010. The court first found no violation of article XVI, section 16's requirement that all tax increment funds be used for redevelopment purposes. The court deferred to the Legislature's explanation and specification in Assembly Bill 4X 26 designating funding for local schools as part of the redevelopment process and explained that the fact the transfer of funds also relieves the state of some school funding obligations does not invalidate the legislation.

The court next concluded Assembly Bill 4X 26 does not unconstitutionally impair the redevelopment agencies' contractual obligations to bond holders, inasmuch as SERAF payments are subordinated to liens on redevelopment property and current fiscal year debt payments and SERAF payments are not required to be made from tax increment funds. The court further found no violation of Proposition 1A, inasmuch as redevelopment agencies do not fall within the scope of its protection. Although the plaintiffs also argued Assembly Bill 4X 26 permits the extension of redevelopment agency obligations for one year, which could result in a decrease in funding to the sponsoring agency as prohibited by Proposition 1A, the court concluded the significance of this delay is too uncertain. Finally, the court found no other constitutional infirmity in Assembly Bill 4X 26. In light of its ruling, the court denied the plaintiffs' request for a stay of the scheduled May 10, 2010, transfer of funds.

On May 5, 2010, the CRA Plaintiffs filed a petition in this court for supersedeas or mandate to block enforcement of the trial court's judgment and to maintain the status quo pending appeal. On May 7, we denied the petition.

On May 13, 2010, the trial court entered judgment denying the petitions in CRA v. Matosantos II and County v. Matosantos. The plaintiffs in both cases appeal.

Proposition 22

In November 2010, the voters approved Proposition 22 which, among other things, added section 25.5, subdivision (a)(7), to article XIII of the state Constitution, extending the protections of Proposition 1A to redevelopment agencies. (Matosantos, supra, 53 Cal.4th at p. 249.)

Assembly Bills 1X 26 and 1X 27

In the summer of 2011, the Legislature enacted two measures to reduce or eliminate the diversion of property tax revenues from school districts to redevelopment agencies. (Assem. Bill Nos. 26 & 27 (2011-2012 1st Ex. Sess.) enacted as Stats. 2011, 1st Ex. Sess. 2011-2012, chs. 5-6 (hereafter Assembly Bill 1X 26 and Assembly Bill 1X 27).) "Assembly Bill 1X 26 bars redevelopment agencies from engaging in new business and provides for their windup and dissolution. Assembly Bill 1X 27 offers an alternative: redevelopment agencies can continue to operate if the cities and counties that created them agree to make payments into funds benefiting the state's schools and special districts." (Matosantos, supra, 53 Cal.4th at p. 241.)

In December 2011, the California Supreme Court issued its decision in Matosantos, upholding Assembly Bill 1X 26 (Matosantos, supra, 53 Cal.4th at pp. 262, 264) but finding Assembly Bill 1X 27 in violation of Proposition 22 (Matosantos, at p. 270). The court also found the two provisions severable. (Ibid.) As reformed by the court, Assembly Bill 1X 26 required all redevelopment agencies to dissolve effective February 1, 2012. (Matosantos, at p. 275.) Since that date has now passed, all redevelopment agencies, including those who were parties to the present consolidated proceedings, have ceased to exist.

DISCUSSION

I Attorney Fees in CRA v. ...


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