Lights Out! Redevelopment Agencies After the California Supreme Court Decision

Joanne Greene (Eden Housing): We’re looking at a deadline of February first for California’s redevelopment agencies to begin dissolution, and we know there are a number of eleventh hour efforts to either prolong the agencies’ lives or replace them with some other way to encourage green growth. Before I ask you to speculate on how all this will unfold, let’s talk about the court’s ruling on the two bills. Now, as I understand it, they upheld AB 26 and struck down AB 27.

Lynn Hutchins (Partner, Goldfarb and Lipman LLP): That’s completely correct. What the court decided is that legislature has the right to create redevelopment agencies, and, therefore, it has the right to dissolve them. Nothing in the California constitution prohibited that, including proposition 22, which was passed by California voters in November 2010. Basically, it prohibits the state from redirecting property tax revenues from redevelopment uses to other state uses. However, it was the same proposition that the court used to find that AB 27, which was the bill that allowed redevelopment agencies to continue if they made payments to the state, could not pass constitutional muster. This was because the actual pay-to-stay-alive provisions of AB 27 were not truly voluntary payments, if you had to make the payments to stay alive. For that reason they held that it was a constitutional violation of both prop 22 and some other constitutional provisions. The end result is that redevelopment agencies must dissolve by February 1st. 

Joanne Greene: Who benefits from this decision, not the cities and certainly not affordable housing development? 

Lynn Hutchins: Yes, well, some would say the Governor, since this was ultimately his proposal, and others say financially the schools and other local jurisdictions that receive property tax revenues will eventually see more funding through this property tax funding mechanism, and therefore they will benefit in the long run.

Joanne Greene: So how does eliminating redevelopment agencies actually help the state solve the budget crisis? 

Lynn Hutchins: Redevelopment agencies do not have the power to levy a property tax. What happens is, the property tax is levied (it’s about 1.5 percent of the value of the property), and then the funds are collected by the county and distributed to various jurisdictions within specified areas of the community. The agencies that receive those property tax dollars are typically redevelopment agencies, cities, counties, schools, and special districts. If you can imagine this pot of money is a pie, what this bill does – the dissolution act, AB 26 – is basically say, “redevelopment agencies, you’re out of business; what we’re going to do with this money is pay off any debts or obligations you have incurred, and the rest of the money is now going to get distributed to other taxing entities.” What, in effect, is happening, probably more over time, is the slice of pie that redevelopment agencies are getting will be reduced, and the slice that the other taxing agencies have will get larger. There is the same number of eaters of the pie, but their respective shares will change. 

The state believes that there are two ways that the state budget will benefit: first, if the amount of funding a school district receives from these local property tax dollars increases, then the state can reduce the amount of payment it needs to make to that school district to meet its proposition 98 guaranteed funding limits. That applies for this fiscal year only with the way the bill is written. The additional dollars that flow to the cities and the counties will offset some of the responsibilities that the state is pushing down to the local level. For instance, there has been a lot of press lately about low risk prisoners being transferred to county, rather than state, facilities. That increase to the counties is supposed to alleviate some of the new obligations they have to house those prisoners. 

Joanne Greene: So now that the Court has made its ruling, is there any hope to save redevelopment agencies?

Lynn Hutchins: Well since the deadline is February first, I think the hope is pretty slight now that they may be reenacted. There was a bill being sponsored to extend the date for elimination, primarily to deal with logistics. The court took what was supposed to be a three-month period to dissolve and compressed it into a one-month period, so folks have been scrambling quite a bit. The other thought was that maybe with the extension bill there could be time to start a new type of redevelopment or community development program. But at this point I don’t think that many people have much hope, although you never know with legislation. 

Joanne Greene: Assuming that no extension is provided and the agencies go out of business on February 1st, who takes over their work? How do cities proceed? 

Lynn Hutchins: Well, first of all, the work disappears at some level. There are two mechanisms in place, and I say two because the way non-affordable housing work is handled is a bit different from the way the affordable housing work is carried out. On the non-housing side, the cities and counties that formed the redevelopment agencies will act as what is called the successor agency to the redevelopment agencies, unless those cities and counties elected not to do that by January 13th. One of the big name players that elected not to do that was Los Angeles, but for the most part cities and counties are electing to wind down their agency. What the successor agencies are charged with doing is paying what are called ‘enforceable obligations’, binding commitments that the redevelopment agency had entered into already, and then winding down their assets. For instance, selling assets and using the money in designated ways, such as being distributed as property taxes to the schools, the cities, and the counties. 

On the housing side, again, there is a choice that the city makes. The city chooses if it wants to serve as the housing successor to the housing obligations and functions of the redevelopment agency. If it chooses not to do so, then the local housing authority that has jurisdiction would do so, and if there is no local housing authority that has jurisdiction that task would fall to the state department of housing and community development known as HCD. 

Joanne Greene: So is it conceivable that some projects that are in progress will proceed and others won’t? 

Lynn Hutchins: Absolutely. The enforceable obligations that are ongoing, items for instance, if there was a construction contract to build some public improvement that was entered into a year and a half ago with some private party and is close to completion, that project will absolutely continue. There is really no authority to impair that contract. For contracts that have entered into design work, they have a design finished for a public improvement, but they haven’t got the construction contract yet, it’s unlikely that those projects will continue because there is not a binding agreement for those particular projects. It is going to be somewhat of a case-by-case determination agreement on whether those projects can continue or not. 

Joanne Greene: What about the assets of redevelopment agencies? Will those have to be sold? And if so, how? 

Lynn Hutchins: The law requires the liquidation of redevelopment agency assets, including properties. The successor agency is charged with selling off those properties as fast as possible, but also at maximum value. The successor agency serves at the direction of a new oversight board, which is made up of the representatives of the affected taxing agencies, such as schools, the county, and some redevelopment representatives that oversee what the successor agency is doing. The oversight board might direct the redevelopment agency to sell the XYZ property because they think it is the right time to sell that property. Or, they might say, “Gee, the market looks pretty bad right now, maybe we should wait and see before we sell it.” That’s going to be very much a case-by-case determination; no one really knows how that’s going to work yet. 

That’s kind of one of the unknown features of this bill that’s going to unfold in the next few months. I will say for affordable housing properties, properties that were purchased with the affordable housing funds of the redevelopment agency, those are treated a bit differently. Those transfer to the successor housing entity. (I’m going to use the term city here just for ease). The city is then supposed to use that property for affordable housing purposes. It may choose to sell that property to an affordable housing developer in order to develop low and moderate income housing, or it may choose to sell that property and use the proceeds of that sale to generate funds to subsidize affordable housing development in its community. We believe, although this isn’t crystal clear in the legislation, that the oversight board does not have any oversight authority over the housing assets, so the housing successor can basically negotiate and make those determinations as it has always done as a redevelopment agency, but in this context as a city or housing authority instead.

Joanne Greene: So State Senator Darrell Steinberg is sponsoring SB 654 that will protect the existing housing funds, how will that work?

Lynn Hutchins: Currently the bill is a little inconsistent in the treatment of existing housing funds. As you mentioned, 20 percent of the tax increment that redevelopment agencies received were placed in these housing funds. In three places in the legislation it says that the housing funds that are unencumbered are to be sent to the state controller for distribution as property tax revenue to the other affected taxing agencies, and in one place it says the housing funds stay with the housing successor entity. One of the major things that SB 654 would do is clarify that the housing funds actually stay with the housing successor for use for affordable housing in those communities. 

Joanne Greene: It is a monumental undertaking to shut down and unwind all of these agencies. Did the legislature anticipate how this would happen in the law? Are there any fixes that will be needed to make this all work smoothly? 

Lynn Hutchins: The way I like to look at it is that the legislation has a macro view of how the dissolution process might work. It’s somewhat like a bankruptcy proceeding – here are all the assets; here are all the debts; let’s sell everything and settle everything up. But for those of us who are in the weeds, actually trying to implement it, we’re finding there are a number of issues that we’re frankly using our best judgments to resolve since it is not clear in the legislation. For instance, I just mentioned whether the oversight board has any oversight role with the housing assets. That’s not 100 percent clear in the legislation. The inconsistency with the use of existing housing funds that are unencumbered again is inconsistent in the legislation and is something that the legislation SB 654 would attempt to fix. 

Exactly what housing obligations are transferred to a housing successor isn’t particularly clear. There are certainly a number of contractual ones that clearly will transfer to the housing successor, but the redevelopment agencies had at least three statutory housing obligations, and it is not particularly clear if those transfer to the successor housing entity. There is certainly debate in the housing community and redevelopment community about how that is going to work. Clarification on that would certainly be helpful, however, except for SB 654, the smoke signals at the capital are indicating that there is no need for a clean up. So I’m not holding my breath for clean up legislation. 

I will say there are a number of committees from across the state working on implementation issues. Many have suggested some recommended practices to address some of the lack of clarity in the dissolution bill. For instance the County Property Tax Managers Group has issued a set of guidelines about how certain things need to be accounted for. Although these practice suggestions are not binding, I think some of these problems will be worked through on an administrative level with some practicable suggestions. 

Some of the issues I think, quite frankly, might end up in litigation. In fact there have been two court cases filed since the Supreme Court decision came out. 

Joanne Greene: Redevelopment agencies also had a specific tool they could use to make redevelopment happen. One of those was the Polanco Act, which helped provide liability protection on the cleanup and reuse of environmentally contaminated sites. What happens in those kinds of situations? 

Lynn Hutchins: Again, it’s not completely clear in the legislation, but we believe the oversight board has less authority to oversee the activities of the housing successor to the redevelopment agency. Therefore, we believe that for those particular properties, to the extent that they have remediation issues, those housing successors should be able to use the provisions of the Polanco Act to clean up the properties and get liability protection for those properties and pass that on to future developers of those properties. But again, that would be in the affordable housing context. 

Joanne Greene: So what happens next in the long term? How will the localities be able to carry out redevelopment projects? These programs have been very important for revitalizing many Californian communities. Does the state have any sort of a plan to help the cities replace this tool?

Lynn Hutchins: Well, that’s certainly the billion-dollar question. We certainly are not aware of any proposals at the moment that are very concrete. The one replacement program that folks were discussing quite a bit last year was a mechanism called the Infrastructure Financing District. That’s a program that has been around in California for about 20 years, and in all that time there have only been about two or three that have ever been activated. That’s because it is very difficult to use, and they don’t generate nearly the amount of funding, so folks felt that they were not a very good replacement for redevelopment. Now that redevelopment is basically gone I have a feeling people will be looking at those with greater interest, seeing if there isn’t a way to use them effectively to do some redevelopment. But I don’t think it will nearly be on the same scale as redevelopment in terms of impact and fighting blight issues. 

Joanne Greene: I am an eternal optimist, but it seems like the consequences for affordable housing are pretty severe. Rents went up in San Francisco and San Jose by more than ten percent just last month, so we continue to have a huge need for affordable housing. Historically it has been virtually impossible for most communities to meet their low income housing needs without some sort of subsidy source. Is there a plan for a replacement at the local or state levels?

Lynn Hutchins: Boy do I wish I had a better answer for this question. As you pointed out the need is certainly very great here in California still. Despite the perception that there are a lot of foreclosed units available, they’re actually not available to folks that are in need. They don’t qualify to purchase those homes. There have been funding cutbacks at both the state and federal level, so the loss of redevelopment agency housing funds at this particular time is very difficult. I have not heard of any replacement sources at the state level. I have heard a lot of talk from administration officials, from affordable housing advocates and even some legislative leaders, about plans to reinstate affordable housing at some level by maybe coming up with a permanent source of affordable housing funding. But I have heard of no definite program at this moment. I’m really hopeful that something will develop shortly, but at the moment it’s pretty grim.