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California Court of Appeal Offers Its Solution to Redevelopment Area Tax Increment Payment Calculations

California Court of Appeal Offers Its Solution to Redevelopment Area Tax Increment Payment Calculations
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By Travis Brooks

After  the California Legislature disbanded more than 400 redevelopment agencies in 2011, county auditors and controllers have dealt with a fundamental lack of clarity as to how redevelopment property tax increments that used to be paid to redevelopment agencies (and other funds) should be distributed to local agencies. The method of calculation is important, because Proposition 13 severely limits the amount of property taxes that local agencies collect and often results in a shortfall in the amount of property tax funds paid out to local agencies based on statutory calculations. This case was a dispute between local agencies with pre-1994 redevelopment passthrough agreements and agencies without them. The Third District Court of Appeal concluded that despite fundamental conflicts in post 2011 statutes, county auditor controllers must pay the  full amount owed to local agencies under passthrough agreements before determining each local agency’s proportionate share of property tax and redevelopment tax increments. [City of Chula Vista v. Sandoval, ___Cal.App.5th___, Case No. C080711 (3rd Dist. May 27, 2020).]

Factual and Procedural Background

In the wake of the last fiscal crisis, the California Legislature dissolved the state’s redevelopment agencies, numbering more than 400, and redistributed the former tax increment generated by redevelopment between various local taxing entities. Sandoval emerged as a fight between local agencies that negotiated various favorable “passthrough agreements” allowed under state law before 1994 for direct payment of tax increments from redevelopment areas,  and those agencies without such agreements.

Before  voters approved Proposition 13 in 1978, cities and counties in California levied their own property taxes. Proposition 13 capped ad valorem taxes (i.e. taxes based on the assessed value of property, including real property taxes) imposed by all local agencies at one percent of the taxed property. Proposition 13 did not however resolve how property taxes collected should be allocated, meaning that the proposition:

“. . .largely transferred control over local government finances from the state’s many political subdivisions to the state, converting the property tax from a nominally local tax to a de facto state-administered tax subject to a complex system of intergovernmental grants.”

As the court noted:

“. . .this created a zero-sum game in which political subdivisions (cities, counties, special districts, and school districts) would have to compete against each other for their slices of a greatly shrunken pie.”

In the years since 1978, multiple propositions approved by voters, complicated the allocation process of property tax funds and further strained the local agency budgets. This gave rise to a “shell game” among local entities where the only way to obtain more funds was to take them from another agency. Redevelopment Agencies, with their collection of significant amounts of tax increments were powerful mechanisms for winning out in these shell games, and they received approximately 12 percent of all property tax revenue in the state in 2011. Before 1994, state law allowed local agencies to negotiate passthrough agreements with redevelopment agencies to directly offset the fiscal impacts (schools, police, public services, etc.) of development in redevelopment areas. After 1994, state law required mandatory statutory passthrough payments.

In 2011, the Legislature dissolved all of the state’s redevelopment agencies and transferred control of redevelopment agency assets to successor agencies. The legislation implementing this dissolution required unencumbered balances of redevelopment agency funds, and proceeds from redevelopment agency asset sales to be remitted to county auditor controllers for distribution to local agencies. Moreover, tax increment revenues that previously went to redevelopment agencies were deposited in a local trust fund administered by county auditor controllers. Accordingly, county auditor controllers played a crucial role in winding down redevelopment agencies. One of their many responsibilities vis-a-vis the disbanded redevelopment agencies was to administer trust funds from which payments and distributions are made of remaining tax increment payments.

A Conflict of Legislative Mandate Exists

Unfortunately, the direction the Legislature provided to county auditor controllers in 2011, in how they disburse funds previously slated for redevelopment agencies by prior legislation includes two statutes that are fundamentally in conflict. First, Health and Safety Code § 3183 provides that payments pursuant to passthrough agreements that predated 1994 must be made before proportionate distributions of property tax increments are made to other taxing entities. However, Health and Safety Code § 34188 provides that the pro-rata share of what redevelopment tax increments (and other funds) to be paid to the redevelopment agencies, be paid out to all taxing entities, without first paying out passthrough agreements in full. Subsequently, in 2012, Assembly Bill 1484 passed, which stated that passthrough agreement payments should be made in full before other local agencies receive disbursements.

San Diego County Moves Forward

The defendant in the case, the County Auditor for the County of San Diego interpreted the above statutes as requiring her to pay out passthrough agreements in full  before determining each local agency’s share of tax revenues based on each party’s proportionate share of the pool of remaining funds based on statutory calculations. Accordingly, when determining each party’s pro rata share of funds, the San Diego County Auditor did not include: 1) amounts that were first required to be paid through passthrough agreements, 2) other enforceable obligations, 3) administrative costs. If available, the residual amount of tax proceeds, including redevelopment tax increments, was then paid out based on the statutory shares. This meant that a local agency with a pass-through agreement could receive residual amounts on top of their full pass-through payment that were greater than their pro-rata shares of the defined pool of property tax revenues.

Cities Sue for Clarification

Multiple Cities without passthrough agreements sued arguing that the pool of tax revenue to be paid based on statutory pro-rata shares should include the amounts owed in passthrough payments and other obligations and administrative costs. The Superior Court agreed with the cities’ interpretation and the San Diego County Auditor appealed.

The Court of Appeal’s Decision

The Third District Court of Appeal began by noting that there was a fundamental inconsistency between §§ 3183 and 3188, but that AB 1484 did not provide any real clarity. While § 3183 and § AB 1484 included language indicating that passthrough payments must be paid in full to local agencies with passthrough agreements before each agency’s pro rata share of residual tax revenues is calculated, § 3188 required passthrough payments to be included in the calculation of each agency’s pro-rata share of tax revenues. The court re-iterated each of the arguments outlined above noting that each party was simply trying to surmise legislative intent by construing both statutes together in a manner that made sense. Ultimately the court found that this was a rare instance where no such sense could be made:

“Simply put, this is one of the rare cases in which a court cannot divine harmony where there is none. ..The requirement that courts harmonize potentially inconsistent statutes when possible is not a license to redraft the statutes to strike a compromise that the Legislature did not reach…”

Ultimately the court determined that because portions of §§ 3183, 3188 and AB 1484 cannot be harmonized, certain uncodified language of AB 1484, a later enactment must prevail. The Court of Appeal determined that AB 1484, which stated that passthrough payments must be paid in full before pro-rata payments are made, impliedly repealed language in § 3188 that appeared to require passthrough payments to count towards the pool of tax revenue paid out on a pro-rata basis to each local agency within a county. Accordingly,  the San Diego County Auditor’s distribution method must prevail. Pursuant to the court’s decision, when county auditors distribute incremental tax revenues previously paid to redevelopment agencies, and other funds,  on a statutory pro-rata basis, entities with passthrough agreements will receive passthrough payments in full before pro-rata distributions are made.

Conclusion and Implications

Ultimately, the Sandoval decision highlights the confusion that the legislation disbanding redevelopment agencies in 2011 caused for local agencies and county auditor controllers in determining how to distribute tax increments from redevelopment areas after redevelopment agencies folded. Whether or not the court’s solution, boosting payments to local agencies with passthrough agreements, and leaving those agencies without them at a disadvantage, makes sense or not, in the end, it will likely fall on shoulders of the Legislature to remedy the fundamental conflict in the relevant statutory language found in §§ 3183, 3188, and AB 1484. The court’s opinion is available online at: