Cities Fight California’s Giant Money Grab

     SACRAMENTO (CN) – Cities across California have sued the state twice, accusing it of raiding local coffers in an unending, and unconstitutional, effort to balance its budget.
     Both Superior Court lawsuits have roots in recent legislative history.
     In 2011, California lawmakers passed AB1X26, banning city redevelopment agencies. The redevelopment agencies (RDAs) were created to fight urban decay and revitalize blighted neighborhoods. And, as revitalization projects are wont to do, they racked up hefty bills.
     Before AB1X26, the RDAs issued tax allocation bonds to finance redevelopment projects. The bonds are secured by the promise of tax increment revenue – the expected tax increases generated by redevelopment – and are senior to all other potential uses of the money.
     California in 1952 became the first state in the nation to use tax increment financing.
     By 2008, more than 400 California redevelopment agencies had an aggregate of more than $10 billion per year in revenue, $28 billion in long-term debt and $674 billion of assessed land values.
     And according to one of the recent complaints, from 13 cities from across California, the Legislature “eliminated redevelopment agencies so that it could capture the revenue such agencies generate.”
     AB1X26 dissolved the RDAs, pushing their projects and expenditures onto the cities, unless the cities opted out.
     (The City of Bellflower, as successor of its dissolved RDA, is the lead plaintiff in that complaint. The lead defendants in both cases are state Finance Director Ana Matosantos, and the State Board of Equalization. The lead plaintiff in the second complaint is the California League of Cities.)
     This year, the Legislature passed AB 1484, amending AB1X26. According to Bellflower’s complaint, the Legislature designated AB 1484 as a budget trailer bill, meaning it took effect the instant Gov. Jerry Brown signed it, “even though it did not attain the 2/3 vote in each chamber of the Legislature required by California Constitution, Article IV, section 8 for urgency legislation.”
     “[T]he State fashioned AB 1484 as a mechanism inconsistent with the California Constitution and several established legal doctrines whereby it could unilaterally decide to withhold tax proceeds due local agencies based on the State’s unilateral decisions without judicial review or any of the checks and balances fundamental to fair administrative practice and to the checks and balances fundamental to our democracy,” Bellflower claims.
     The cities, as successor agencies for the RDAs, send two reports per year to their county’s auditor-controller, the State Controller and California’s Department of Finance, detailing the former RDAs’ repayment obligations for that time period. These reports are approved and signed off by seven-member oversight boards in each city that had RDAs.
     Bellflower calls AB 1484 an “unprecedented grant of power to the Department of Finance to eliminate or modify an enforceable obligation otherwise approved by the oversight board for a successor agency to a former redevelopment agency and to simply help itself to the successor agency’s or affected city’s (a legal stranger to the redevelopment agency, the successor agency and the oversight board) shares of the general sales and use tax, as well as the property tax which Proposition 13 … guarantees to local governments.”
     Bellflower claims that AB 1484 granted California’s Department of Finance the power to order the Board of Equalization to suspend sales tax payments to the cities if they miss the obligation repayment report deadline – even if the delay is caused by the state.
     In fact, Vallejo, along with the California League of Cities in the second lawsuit, claim that multiple errors by state finance officers meant cities could not comply with reporting rules and were punished with huge fines.
     “Successor agencies were required to create a Redevelopment Obligation Retirement Fund into which the revenue from the RPTTF [Real Property Tax Trust Fund] is deposited. However, successor agencies did not exist before Feb. 1, 2012. RDAs received the Dec. 2011 or early Jan. 2012 tax increment distribution and, as was the then-common practice, identified the revenues as ‘reserves.’ As a result, the first [Redevelopment Obligation Payments, or ROPs] prepared by successor agencies correctly identified ‘Reserves’ as the source of payment for certain ‘enforceable obligations’ rather than the RPTTF because the RPTTF was not then operative,” the League of Cities say in their complaint.
     But the California Supreme Court stayed AB1X26 pending its ruling after cities – desperate to keep the revenue from their own redevelopment agencies – filed California Redevelopment Association v. Matosantos.
     Though the court upheld most of AB1X26, the delays meant county auditor-controllers couldn’t make property tax payments to the successor agencies so that they, in turn, could meet their bond obligations for the second half of 2012.
     So the Department of Finance instituted a “True-Up” payment scheme with AB 1484, requiring county auditor-controllers to determine residual amounts due, based on the city’s first repayment obligation report, which identified the amount of property tax needed to pay the successor agency’s bond obligations.
     Unfortunately, the department failed to recognize that cities across California identified their funding source as “Reserves” in the first report, resulting in “erroneous requirements for unwarranted True-Up payments by successor agencies” for the second half of 2012, the League of Cities claims.
     To make matters worse, Vallejo – fresh out of the nation’s first-ever city bankruptcy – and the League of Cities say that in several cases the Department of Finance rejected without meaningful explanation reports approved by successor-agency oversight boards.
     “In some instances, DOF first rejected the obligations and then reversed itself once a lawsuit was filed,” according to the League of Cities complaint.
     Then, the League claims, the department changed the numbers in an online exhibit that county auditor-controllers used to assess the True-Up demands several times up to July 9, 2012 – after the county assessors were required to send out the demands. The cities were then given three days to make their payments.
     “The brief time between the July 9th demand and the July 12th mandated payment prevented any meaningful opportunity for cities or successor agencies to communicate with auditor-controllers and responsible individuals at DOF to resolve issues of fact or law relating to the amount and components of the demand, the calculations supporting the demand or similar concerns,” the League of Cities says.
     When questioned about the changing numbers and unexplained rejections, Vallejo and the League of Cities claim, county officials and the Department of Finance passed the buck – to each other.
     “Before True-Up payments were due and thereafter, various auditor-controllers and individuals purporting to speak for DOF each took the position that neither one had any authority to revise the specific True-Up payment or correct even clerical errors. Alternatively, each took the position that only the other one could make a correction,” the League of Cities says.
     Vallejo claims its experience with Solano County auditor-controller Simona Padilla-Scholtens, who is a defendant, underscores the madness and lack of accountability caused by California lawmakers’ money grab.
     “As an example of errors that occurred, defendant Padilla-Scholtens based the initial True-Up payment calculation for petitioner Successor Agency on the figures initially shown on DOF’s Exhibit 12 as of July 6, 2012 and sent Successor Agency a bill for $331,790. Based on further information, defendant Padilla-Scholtens revised the bill to $308,867. A few days later, DOF changed the numbers on DOF Exhibit 12 with respect to petitioner Successor Agency, so defendant Padilla-Scholtens revised the True-Up bill to Successor Agency to $192,747, which Successor Agency paid on July 12. Although the revised True-Up billing was based on DOF’s own revision to DOF Exhibit 12, DOF sent Successor Agency a letter demanding an explanation why the original billed amount had not been paid and threatening to impose penalties. Even now, DOF states that it may be unable to issue a Finding of Completion to petitioner Successor Agency. DOF has not offered any explanation why it cannot correct the numbers that were initially incorrect so that the correct numbers govern,” Vallejo and the League of Cities say.
     Screw-ups aside, the cities that are now successor agencies to their former RDAs claim that lawmakers’ intentions are clear: to plug holes in California’s budget.
     “Save for satisfying existing enforceable obligations (as defined by statute), redevelopment activities by RDAs throughout the state were suspended and, indeed, prohibited. The Successor Agency was to preserve all assets of the former RDA for ultimate distribution to affected taxing entities. The purpose for so doing was to enable the state to take control of the RDA assets not needed to satisfy enforceable obligations and to redistribute such assets to other local taxing entities and thereby reduce the state’s own funding obligations. For example, as property tax revenues increase over time because the Enforceable Obligations are retired, the increased revenue available to fund K-14 education will, in turn, reduce the state’s own Prop. 98 obligation to guarantee education funding from the General Fund,” the cities say in the RDA complaint.
     Proposition 98, passed by voters in 1988, requires a percentage of California’s overall budget to be spent on K-12 education. The amount required varies depending on economic growth, and is accomplished by shifting specified amounts of property tax revenue from cities, counties and redevelopment agencies to “educational revenue augmentation funds.”
     The successor agency/cities note that AB 1484 was “available in print only one day before its passage, and city officials and representatives were excluded from the drafting process. Indeed, legislators entered letters in the record of the adoption of the measure stating their concern that local views had gone unheard and encouraging DOF to work with local agencies to ensure their reasonable concerns were heard,” according to the Bellflower complaint.
     In both complaints, the plaintiffs claim they are being penalized for Department of Finance mistakes, because under AB 1484, successor agencies are subject to a $10,000 fine for each day an approved report of obligation payments is not in the hands of the department. Many cities have opted to pay their alleged True-Up bills – whether they owe them or not – to avoid the penalties or have their cut of property and sales taxes withheld.
     “Petitioner Successor Agency of the Dissolved Redevelopment Agency of the City of
     Bellflower received a demand from the Los Angeles County Auditor-Controller to pay $102,500.25. To avoid the penalties and the threatened withholding of taxes, on or about July 12, 2012, Successor Agency of the Dissolved Redevelopment Agency of the City of Bellflower paid the full amount although it disputes that it owes such amount. Petitioner Cerritos Redevelopment Agency Successor Agency received a demand from the Los Angeles County Auditor-Controller to pay $5,979,281.58. To avoid the penalties and the threatened withholding of taxes, on or about July 12, 2012, Cerritos Redevelopment Agency Successor Agency paid the full amount although it disputes that it owes such amount. Petitioner Chula Vista Redevelopment Agency Successor Agency received a demand from the San Diego Auditor-Controller to pay $5,529,373.37. To avoid the penalties and the threatened withholding of taxes, on or about July 12, 2012, Chula Vista Redevelopment Agency Successor Agency paid the full amount although it disputes that it owes such amount. Petitioner El Centro Redevelopment Agency Successor Agency received a demand from the Imperial County Auditor-Controller to pay $1,014,675.00. To avoid the penalties and the threatened withholding of taxes, on or about July 12, 2012, El Centro Redevelopment Agency Successor Agency paid the full amount although it disputes that it owes such amount,” according to the Bellflower complaint.
     Other cities say they paid $71,000 to $2.5 million to avoid penalties and withholding of taxes, and dispute that they actually owe what they paid.
     Lawmakers contend that AB 1484 “is constitutional and lawful and entitles them to withhold, or order the withholding of tax proceeds from successor agency petitioners before any judicial review of the amount respondents contend successor agency petitioners owe,” the cities say. But the cities say the law violates voter-approved Propositions 1A and 22, which protect local property and sales tax from the grabbing hands of the Legislature.
     Lawmakers also “violate the separation of powers clause [of the California Constitution] and the judicial powers clause [of the California Constitution] by purporting to empower the DOF to act as prosecutor, judge, jury and executioner because it may order sales and property tax withheld from affected cities and successor agencies without the benefit of a prior judicial decision on any disputed amounts. They violate the common-law fair hearing requirement and the requirement of due process that administrative decisions be made by a decisionmaker with no stake in the outcome of the dispute,” Bellflower says.
     Plaintiffs in both complaints seek a writ of mandate barring enforcement of AB 1484. Specifically, the successor agencies seek a ruling that the “self-help” provision of the bill, which entitles California to withhold property and sales taxes until repayment obligation reports are accepted by the Department of Finance, is unconstitutional.
     The successor agency cities are represented by Michael Colantuono, with Colantuono & Levin in Los Angeles.
     The League of Cities and Vallejo are represented by Iris Yang, with Best Best & Krieger, of Sacramento.

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