California’s Third District Court of Appeal has held that the California Department of Finance properly held that approximately $30 million in funds for affordable housing set aside under a series of stipulated judgments were enforceable obligations under the dissolution of California’s Redevelopment Law, but that the judgments did not prohibit recapturing the unspent tax increment funds. [Cuenca v. Cohen ___Cal.App.5th___, Case No. D076814 (3rd Dist. Feb. 6, 2017).]

Under California’s former Redevelopment Law, redevelopment agencies were required to transfer 20 percent of their tax increment to a Low and Moderate Income Housing Fund. Health & Safety Code §§ 33334.2, 33334.4, & 33334.6. The City of Santa Ana entered into four stipulated judgments in 1984 and one stipulated judgment in 1994 that required the city to set aside various percentages of the tax increment for low- and moderate-income housing projects. After entry of the stipulated judgments, the city funded affordable housing projects slowly, and eventually amassed more than $56 million in moneys set aside under the stipulated judgments.

Here, plaintiffs challenged a Department of Finance (DOF) determination that approximately $30 million set aside under the stipulated judgments was unencumbered and must be remitted to the county auditor-controller. The trial court affirmed DOF’s determination except for a $3.5 million loan pledged to Habitat for Humanity for construction of 17 affordable houses.

Plaintiffs appealed, contending that: 1) the five stipulated judgments were enforceable obligations under the Dissolution Law, 2) the tax increment moneys set aside under the stipulated judgments remained available for use by the Redevelopment Agency’s housing successor, 3) the stipulated judgments were contracts subject to protections of the contract clauses of the United States and California Constitutions, and 4) DOF’s “taking of $30 million in pre-dissolution tax increment violates [California Constitution article XIII, § 25.5(a)(3) (Proposition 1A) and § 25.5(a)(7) (Proposition 22)].” Slip Op. at 3.

The court held that the language of the stipulated judgments, which are regarded as contracts between the parties, mandated the set aside of certain percentages of tax increment for affordable housing. Given that the Dissolution Law eliminated tax increment, there was no longer any money to set aside and no legal authority to continue to collect tax increment.

The court held that the Dissolution Law “unequivocally provides unencumbered moneys originally collected for redevelopment projects must be remitted to the county auditor-controller” and thus the remaining affordable housing funds were subject to this transfer. Slip Op. at 28.

The court then held that the stipulated judgments did not provide a vested right to use of tax increments.

Finally, the court rejected the challenges under Propositions 1A and 22, holding that the Proposition 1A argument was rejected by the court in City of Cerritos v. State, 239 Cal.App.4th 1020 (2015) because redevelopment agencies were not local agencies, but rather creatures of the state. Slip Op. at 34.

This case is significant because it construes the impact of stipulated judgments on unspent tax increment funds and reaffirms that absent clear encumbrance of existing funds obtained pursuant to tax increment, the funds must be returned to the county auditor-controller. The court’s decision is accessible online at: http://www.courts.ca.gov/opinions/documents/C076814.PDF

(Alex DeGood)