CALIFORNIA SUPREME COURT’S MATOSANTOS DECISION – THE END OF REDEVELOPMENT AGENCIES IN CALIFORNIA?

By Jon-Erik W. Magnus*

For more than half a century, redevelopment agencies (RDAs) have played a central role in transforming California’s cities.  The effect of RDAs on California’s urban landscape is much debated.  As a local example, the San Francisco RDA has recently been lauded for its redevelopment of Mission Bay – an area that transitioned from a dilapidated rail yard and industrial area to the state of the art UCSF Medical Center and a range of housing options.  The San Francisco RDA, however, was also the focus of criticism for its reshaping of the city’s Fillmore District, a project that displaced many minority communities and businesses.

Regardless of whether RDAs are seen as positive or negative, the California Supreme Court’s recent decision in California Redevelopment Assn v. Matosantos (Matosantos) may diminish their role going forward.  In Matosantos, the California Supreme Court upheld legislation which will result in the limitation, and possibly the eventual dissolution, of California’s RDAs.In response to California’s state budget crisis, newly elected Governor Jerry Brown proposed eliminating RDAs as a part of a plan to make up a $25 billion operating deficit.  Under California law RDAs cannot levy taxes but rather receive income as a result of increased tax revenue on redeveloped land.  In redevelopment areas, property taxes are allocated between the RDA, competing municipal interests and special assessment districts and are then “frozen” based on pre-redevelopment property values; the subsequent increases in property value and associated tax assessment accrue to the benefit of the redevelopment agency.  The net result of this arrangement is that RDAs receive 12 % of all property tax revenue in the State of California.

California Assembly Bill 26, from the 2011 1st Extraordinary Session (hereinafter “AB 1X 26”), placed significant new limitations on RDAs going forward and put in place mechanisms to facilitate dissolution of existing RDAs.  AB 1X 26 “freezes” RDA operations in that it restricts agencies from engaging in new development plans, taking on new indebtedness, in addition to preventing cities from creating new RDAs.  It also lays plans for the transition of RDAs’ past and existing obligations to a successor agency (such as the local municipality). In Matosantos, the California Supreme Court upheld the constitutionality of AB 1X 26, finding that the California legislature’s constitutional power to create RDAs was the same power that allowed the legislature to dissolve RDAs.

At the same time the Matosantos decision upheld AB 1X 26, it struck down a companion bill from the same session, California Assembly Bill 27 (AB1X 27) which provides an exception for RDA dissolution if a city makes “in lieu” payments mirroring the RDA’s property tax income.  The Court held that Proposition 22 which restricts the Legislature’s  fiscal power, specifically with respect to RDAs, made the compelled “in lieu” payments unconstitutional.  Specifically, because AB 1X 27 was passed as a companion bill and struck down while AB 1X 26 remains, the Matosantos decision will likely be met with additional legislative activity, on the basis that there was no consensus among legislators for the wholesale elimination of RDAs.

In the wake of Matosantos, cities and counties that rely on RDA financing may be scrambling for resources to fund proposed public works.  In other cities, such as Oakland, there is likely a larger impact as it is estimated that its RDA contributes approximately $26 million to the City’s operating budget. Additionally, the dissolution of RDAs may also curtail environmental cleanup efforts under California\’s Polanco Redevelopment Act, which provides RDAs will special authority to compel and fund remediation of contaminated properties in redevelopment areas.

The Matosantos ruling comes at a time when many RDAs in California were changing the types of projects they undertook.  In the 1950s and 1960s, many RDA projects involved clearing all the built structures in given neighborhood (usually with low income minority residents) and constructing housing projects on the cleared site.  This “slum clearance” agenda was often pursued over the objections of and with little input from the residence and business owners whose buildings were demolished.  In recent decades, however, RDAs have been generally more responsive to the concerns and priorities of local communities, and have focused more on redeveloping abandoned former industrial sites than clearing neighborhoods.  So for many, the Matosantos decision arrives just as many RDAs were starting to get it right.

Regardless of one’s views regarding RDAs, few doubt that the role of RDAs in California will be the same after Matosantos.  And a change in the role of RDAs is likely to translate into a change in how many urban areas are (or are not) redeveloped in California.

*May 2011 graduate of Golden Gate University School of Law and attorney in the environmental practice group at Wood Smith, Henning & Berman.  Mr. Magnus’ firm has represented parties responding to claims brought by redevelopment agencies under California’s Polanco Act.  The opinions expressed in this post are the author’s and not attributable to either Wood Smith Henning & Berman or its clients.

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