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The Ghosts of Redevelopment Linger California—Third District Court of Appeal Strikes Down City’s Attempt to Preserve Redevelopment Funding

In the aftermath of the Great Recession the California state government was scrounging for funding anywhere it could find it. One target in particular turned out to be irresistible: the numerous local redevelopment agencies. In 2011 the California Legislature and Governor Brown took a budgetary axe to these entities, sacrificing them for greater revenue for local funding needs. But the agencies and their sponsoring entities did not go quietly into the night. Right on the cusp of the demise of redevelopment, the City of Big Bear Lake and its redevelopment agency attempted to preserve at least some of the projects and funding in the redevelopment pipeline. However, these efforts proved mostly unavailing as shown in City of Big Bear Lake v. Cohen. In this case the Third District Court of Appeal struck down the city’s attempts to preserve redevelopment funding, but also threw a wrench in the state’s efforts to recover monies the city had improperly spent. [City of Big Bear Lake v. Cohen, ___Cal.App.5th___, Case No. C076576 (3rd Dist. June 14, 2017).]

On June 28, 2011 Governor Brown signed AB 1X 26, the so-called “Dissolution Law.” Effective immediately upon Brown’s signature, the Dissolution Law dissolved redevelopment agencies in California, allowing those projects they had in the pipeline to continue as “enforceable obligations” overseen by their successor agencies, but prohibiting (or “freezing”) any new projects or obligations.

On June 27, 2011, the redevelopment agency and city signed a cooperation agreement by which the city agreed to undertake certain projects and the redevelopment agency agreed to transfer $23.5 million to the city. That same day the city signed a $2.5 million agreement with Matich Corporation to install street and drainage improvements, which also entailed contract work with Cylwik Property Management. On June 28, the redevelopment agency entered into a $900,000 contract with RRM Design Group for professional services as to several of its projects.

The Dissolution Law required the redevelopment agency to disclose its enforceable obligations to the Department of Finance. The redevelopment agency did so with respect to Matich, Cylwik, and RRM. But it did not disclose the cooperation agreement or the fact that the redevelopment agency was to transfer $2.6 million to the city to cover those contracts. Prior to the formal dissolution of the redevelopment agency, it paid the $2.6 million to the city, which disbursed the funds to Matich, Cylwik, and RRM.

The Dissolution Law was subsequently amended to exclude from the definition of “enforceable obligations” contracts between a redevelopment agency and its sponsoring entity (aka “sponsor agreements”). It also required an audit of successor agencies to see if there were additional tax increment revenues available.

The city’s audit revealed the $2.6 million payment under the cooperation agreement. The DOF took the position that this was invalid as a sponsor agreement and that the $2.6 million would have to be redistributed to local taxing entities. The city disagreed and filed suit. The trial court agreed with the DOF and the city appealed.

Ultimately, the question in this case turned on whether the contracts at issue were “enforceable obligations” for which the redevelopment agency could make payment or not. There were four contracts at issue: 1) the cooperation agreement between the city and redevelopment agency; 2) the redevelopment agency’s contract with RRM; 3) the city’s contract with Matich; and 4) the city’s contract with Cylwik.

The city made three arguments that these were enforceable obligations. First, it argued that the agreements would be “enforceable obligations” if they were enforceable when the payment was made from the redevelopment agency to the city. Second, it argued that the RRM contract was not subject to the Dissolution Law’s freeze, even though it was signed after the freeze was in place. Third, the Department of Finance approved the transfers from the redevelopment agency to the city by failing to object to them. Finally, the city presented a constitutional argument that the Dissolution Law violated Proposition 22.

With respect to the first argument, the court noted that the city’s position was essentially that the sponsor agreement was an enforceable obligation when entered into and the money was transferred, and the California Legislature could not retroactively make it unenforceable. As the city cited no authority for this argument and the Legislature had in fact abrogated sponsor agreements, the court had little difficulty discarding it.

The city’s second argument fared no better. Even though the RRM contract was signed on June 28, the day the Dissolution Law freeze went into effect, the city had approved it on June 27. The court simply noted that the contract was not effective until signed, and because it was signed after the freeze it could not have taken effect.

As for the “tacit approval” argument, the city claimed that by failing to object to the RRM, Matich, and Cylwik agreements when identified as “enforceable obligations” to the DOF, the DOF essentially confirmed that they were in fact enforceable. But the court noted that the city didn’t identify any authority to the effect that the DOF’s actions here could transform non-enforceable obligations into enforceable ones. The fact was that the three contracts were with the city or under the aegis of the invalid sponsor agreement and so were not enforceable obligations.

Finally, the city argued that Proposition 22 prevents the state from invalidating otherwise valid payments. The court noted, however, that the city failed to identify the cooperation agreement as an enforceable obligation to the DOF. In addition, the Third District had previously ruled that such invalidation was not unconstitutional in City of Brentwood v. Campbell, 237 Cal.App.4th 488 (2015).

Accordingly, all of the city’s substantive arguments foundered, and the court affirmed the judgment.

The death of redevelopment in California has been protracted and painful. Redevelopment agencies may be gone, but they are certainly not yet forgotten, and while the particularities of their demise may be of lesser import going forward, the general principles espoused in the resulting case law may significantly shape future conflicts between the state and local governments. Here the state was legally vindicated, but how it goes about getting relief is another question. All that can be said for certain on this point is that further disputes are inevitable. The court’s decision is accessible online at: https://scholar.google.com/scholar_case?case=18156273494746694940&q=City+of+Big+Bear+Lake+v.+Cohen&hl=en&as_sdt=2006&as_vis=1

(Matthew Henderson)

California Land Use Law & Policy

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