California Eminent Domain Report

The opening skirmish in the next phase of the battle between cities and the state over control of property taxes played out in Sacramento Superior court yesterday afternoon.  At issue was property taxes formerly controlled by redevelopment agencies.  While the court ruled against the petitioning cities, as with every other aspect of the California’s budget battles, it is difficult to say that there were any real winners.   

In City of Palmdale, et al. v. Ana Matosantos, Palmdale and eleven other cities sued the Department of Finances and various county auditor-controllers contending that the state has been too stingy in approving enforceable obligations of the former redevelopment agencies.  The first disbursement from the Redevelopment Property Tax Trust Funds is scheduled to occur tomorrow and the petitioning cities argued that money for the disputed obligations should be held back.  They also argued that the June 1 disbursement should include extra money to the cities to make up tax revenue they should have received earlier in the year.

As it turns out, the cities were asking for a greater share of tax revenue that simply does not exist.  This has to be as disappointing for the cash strapped state as it is for cash strapped cities.                      

To put all of this into context, it is important to look back at why redevelopment was abolished in the first place.  Its end came not because of any philosophical objections by the Governor or Legislature.  Rather, in the face of an anticipated $25.4 billion budget deficit, property tax increment controlled by redevelopment agencies proved to be an irresistibly tempting source of funds for the state.  The expectation was that ending redevelopment would free up property tax revenue which could be used to narrow the state’s budget deficit.  Unfortunately, as with everything having to do with the state’s budget, things haven’t worked out exactly as planned. 

The unwinding of redevelopment agencies and the payment of their debts involves the establishment of Redevelopment Property Tax Trust Funds into which the former tax increment for each project area is deposited.  Successor agencies are charged with preparing Recognized Obligation Payment Schedule (ROPS) delineating enforceable obligations payable by the successor agency.  An oversight board, comprised of appointees from various local agencies within the redevelopment project areas, decides which of the items qualify as enforceable obligations to be submitted to the Department of Finance for approval.  Those obligations deemed to be enforceable will be disbursed, twice annually, by the county auditor-controller from the Trust Funds.  Any residual balance will then be distributed to school districts and other local agencies.   

According to press accounts, the state Department of Finance has questioned hundreds of millions of dollars in purported enforceable obligations.  Fearing that money needed to pay those contested amounts would be disbursed to school districts and other local entities, the city of Palmdale and 11 other cities banned together to file.  At yesterday’s hearing they asked the Court to issue an order preventing property tax revenues from being paid on Friday to school districts and other local entities, and that this money must be held in trust until after their disputes with the state are resolved. 

But here is the rub.  In most instances, after paying undisputed ROPS items there will be no money left over to sequester.  In fact, for a majority of these petitioning cities, there will not be enough property tax revenue to pay all of the undisputed ROPS items. 

The petition was denied and the June 1 disbursement to successor agencies will occur as planed.

Despite the state having prevailed in court, there are no real winners.  The shortfall in property tax revenue to pay existing enforceable obligations comes as a major blow to cities charged with winding up their former redevelopment agencies.  It also comes as a blow to the state, which had planned on surplus funds being available to offset its funding obligations for school districts.

In the short run, it seems that little has changed.  There is still insufficient tax revenue to pay all of the obligations of the state and local entities.  New legal challenges are being filed almost daily and the battle for control of those revenues rages on.