Supreme Court Upholds Legislation Abolishing Redevelopment Agencies

December 29, 2011

On December 29, 2011, the California Supreme Court issued its much-anticipated ruling on the fate of over 400 redevelopment agencies in the case of California Redevelopment Association v. Matosantos.  The Court upheld AB 1X 26, which bars redevelopment agencies (RDAs) from doing new business and requires them to dissolve.  Further, the Court invalidated AB 1X 27 in its entirety, which would have allowed RDAs to continue to operate if payments were made by cities and counties to benefit schools and special districts.  The outcome: As of February 1, 2012, all redevelopment agencies in California must be dissolved.

The elimination of RDAs has been fiercely opposed by the California Redevelopment Association and the League of California Cities, among others.  Proponents of RDAs say that they create jobs and infrastructure, while opponents claim they drain much-needed funding from schools and the state, and that RDA funds have, in many cases, been used irresponsibly.  As part of trying to close the gaping hole in the state budget, Governor Brown originally proposed elimination of RDAs altogether.  But the Legislature took a slightly altered approach via AB 1X 26 and AB 1X 27, which the Governor signed in June 2011.

In its ruling, the Supreme Court categorized AB 1X 26 and 1X 27 into three distinct components: (1) the “freeze” component, which essentially freezes RDAs in their tracks (except from continuing to honor existing obligations) and prevents RDAs from doing new business; (2) the “dissolution” component, which dissolves all RDAs and transfers control of RDA assets to “successor agencies” (i.e., the cities or counties that created the RDAs); and (3) the “exemption” component, which would have allowed RDAs to continue to operate where cities and counties elected to make specified payments to county education and special district augmentation funds on behalf of the RDAs.  The Court held that the Legislature had the power to implement the “freeze” and “dissolution” components, stating, “What the Legislature has enacted, it may repeal.”  As part of this, the Court held that the majority of the RDAs assets must be disposed of, the proceeds of which (along with any remaining unencumbered RDA funds) must be remitted to county auditors-controllers for distribution to cities, counties, special districts, and school districts as if no RDA had ever existed. 

The Court found that the “pay to play” provisions in AB 1X 27 that allowed for continued operation of RDAs were not truly optional and were thus unconstitutional, noting “[a] condition that must be satisfied in order for any redevelopment agency to operate is not an option but a requirement.”  By finding the “exemption” component in AB 1X 27 to be unconstitutional, the Court held that the entire bill must be invalidated. 

The impacts of the Supreme Court’s ruling in the California Redevelopment Association case will surely be extensive but are unclear at this stage.  There is the possibility that new legislation will be pursued to allow for the limited operation of RDAs in the future, although no such legislation has been proposed yet.  What is clear now is that based on the limited extensions granted by the Court as part of its ruling, all redevelopment agencies must be dissolved no later than February 1, 2012, and that “successor entities” will need to be prepared to dispose of the majority of the assets previously held by RDAs and to give the proceeds and unencumbered RDA funds to the counties for disbursement to a variety of governmental agencies.

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