Capitol Alert Breaking

Redevelopment wind-down a litigation battlefield with potential budget hit to state

The unwinding of California’s former anti-blight program has become a grinding courtroom fight involving more than 100 active lawsuits, with the state in recent weeks suffering legal setbacks that ultimately could cost it billions.

In the budget proposal he unveiled earlier this month, Gov. Jerry Brown warned that the state faces a hit of more than $3 billion if courts uphold rulings against parts of laws that eliminated the decades-old program known as redevelopment.

A December ruling puts in doubt the state’s ability to take a jurisdiction’s sales tax revenue if it refuses to shift former redevelopment money. Another ruling last month would shield any redevelopment money transfers that took place before the June 2011 law dissolving the program took effect.

The complex legal fights underscore that, two years after the California Supreme Court upheld the main state law eliminating redevelopment, the dissolution process is as contentious as ever. Some cases are destined for appellate courts or higher. Local governments, meanwhile, continue to invoke Proposition 22, the November 2010 initiative that enshrined local revenue protections in the state constitution but failed to prevent redevelopment’s elimination.

“It’s not every day that you shut down a $5 billion industry overnight, an industry that has tens of thousands of existing contracts,” said Brent Hawkins, a municipal law attorney who has worked on some of the cases. Adding to the turmoil, he said, is that the legislation eliminating redevelopment “was poorly conceived and poorly drafted.”

The Brown administration defends the law. Many differences of opinion between the state and local governments over settling the affairs of former redevelopment agencies have been resolved without litigation. But they warn that the general fund will suffer if some of the lawsuits ultimately go against the state.

“There are a number of different pressures beyond the state’s control that could move the state in the wrong direction,” Department of Finance spokesman H.D. Palmer said.

Created after World War II, redevelopment became a popular way for local governments to pay for projects ranging from revitalizing downtowns to sewer systems. Supporters called it a crucial way to improve communities without raising taxes. Critics, though, said the program increasingly became a slush fund for sweetheart development deals, while hurting the state’s bottom line.

By the time redevelopment shut down Feb. 1, 2012, there were almost 400 active redevelopment agencies with more than $30 billion in debt. Local oversight boards, Brown’s Department of Finance and Controller John Chiang have overseen the process.

Redevelopment’s dissolution sent $1.8 billion in previous program money to cities, counties and special districts through June 2013, with another $1.3 billion estimated through June 2015. In addition, schools will have received an estimated $4 billion in redirected redevelopment money through June 2015, and an estimated $1 billion in future years. That money reduces the state’s obligation toward the state’s school-funding guarantee.

“I think it’s amazing that we got as much out of redevelopment elimination as we did, so this is part of the cleanup. Nothing gets done in one day or one year. So there are some issues,” Brown said Friday in San Francisco. “So, yeah, there are lawsuits. Every year there’s 10,000 more lawyers, and they’ve got to find something to do.”

There have been almost 180 redevelopment lawsuits, virtually all of them filed in Sacramento, according to a Department of Finance court filing. Most stem from disagreements between the Department of Finance and a city or county about specific expenses by the former agencies.

“It’s certainly legislation that has led to many lawsuits,” said William H. Ihrke, a Costa Mesa attorney involved with several of the cases. “The state has won some and the state has lost some. Billions of dollars are at stake.”

A handful of lawsuits potentially have more far-reaching impacts. Ihrke is working on a lawsuit by the city of Cerritos that contends that the 2011 law should have required a two-thirds vote of the Legislature because it reallocates property tax revenue. That case is in appellate court.

In another case, the League of California Cities sued the state over a 2012 law meant to clear up parts of the 2011 law. The 2012 law allows the state to withhold sales and use tax money and property tax revenue as leverage against cities and counties that don’t comply with state directives to shift redevelopment money to schools and other local agencies.

The state said the penalties only “come into play on a case-by-case basis and only after a successor agency chooses not to follow the law.”

But in a Dec. 9 decision, Sacramento Superior Court Judge Michael P. Kenny wrote that the sales tax withholding violates Proposition 22. The initiative, he said, includes no language “that suggests that the votes intended to permit the Legislature to interfere with the revenues of even one or a few local governments, even those that could be described as wrongdoers.”

In a third case, the cities of Brentwood and Foster City challenge a central part of the 2011 law: that the state can “claw back” money transferred by redevelopment agencies to their sponsoring cities or counties from Jan. 1, 2011, through Jan. 31, 2012. State officials contend that agencies shifted their assets to try to protect them from the state. Local officials acknowledge that some transfers were bogus, but contend that many were legitimate, such as paying off loans by a sponsoring city.

In the Brentwood suit, Judge Allen Sumner wrote in a tentative ruling Dec. 6 that the provision of the law appears to violate Proposition 22.

About $15 million is at stake in the Brentwood case. But if Sumner’s ruling is upheld, jurisdictions around the state will seek to take advantage of it, according to a state filing Jan. 7. An estimated 150 jurisdictions made similar transfers, totaling $3.4 billion, and many likely will try to get the money back if the decision is upheld, according to the filing. “The issue before this court is a significant one with broad implications,” it reads.