HomeMy WebLinkAbout2012-2013 Low and Moderate Income Housing Asset Funds to the c
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° Dept. ID FN 14-005 Page 1 of 2
Meeting Date:3/17/2014
CITY OF HUNTINGTON BEACH
3
Fy, REQUEST FOR. HOUSING AUTHORITY ACTION
MEETING DATE: 3/17/2014
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Fred A. Wilson, City Manager
PREPARED BY: Lori Ann Farrell, Director of Finance
SUBJECT: Approve the appropriation and record the liability for the anticipated future
payment of $3,649,634 of Low and Moderate Income Housing Asset Funds to
the Orange County Auditor Controller for distribution to other taxing entities
Statement of Issue: On March 15, 2013, a petition was filed by the City with the Sacramento
Superior Court to retain Low and Moderate Income Housing Fund balances of $3,649,634 to pay
enforceable obligations incurred by the Housing Authority prior to the dissolution of redevelopment.
A ruling was issued by the Sacramento Superior Court on January 29, 2014, denying the City's
petition to retain the funds. Based on this ruling, staff is requesting an increase of appropriations in
the Low and Moderate Income Housing Fund of $3,649,634 for the potential remittance of this
amount to the Orange County Auditor Controller for distribution to other taxing entities.
Financial Impact: The appropriation and future payment of $3,649,634 will be funded from the
Housing Authority's Low and Moderate Income Housing Fund. The current cash balance in this
fund is $3,958,251. After the payment is remitted to the County of Orange for distribution to other
taxing entities, the cash balance in the Low and Moderate Income Housing Fund will be reduced to
$308,617. Governmental Accounting Standards require that this expenditure be reflected as a
Fiscal Year 2012/13 liability. However, the payment itself will not be made until a final payment
notice is remitted by the State Department of Finance (DOF) to the Housing Authority. The Court's
ruling has a negative impact on the General Fund of about $404,000 per year for the next nine
years for a total of $3,649,634. This amount reflects the remaining annual debt service payments
on the Emerald Cove Senior Housing bonds that the General Fund will need to finance through the
final maturity date of the bonds. The current year FY 2013/14 General Fund Budget will not be
impacted as it contained sufficient funding for one year's worth of debt service payments as a
contingency.
Recommended Action:
Approve an appropriation of$3,649,634 in the FY 2012/13 Low and Moderate Income Housing
Fund Budget Account- 35280301.75200.
Alternative Action(s):
Do not approve the appropriation increase and provide alternative direction.
FHB -5-3_ Item 4. - I
Dept. ID FN 14-005 Page 2 of 2
Meeting Date:3/17/2014
Analysis:
On June 27, 2012, the Governor signed AB 1484 modifying provisions of the Dissolution Act and
imposing new requirements on Successor Agencies. Section 34177(d) of the Health and Safety
Code requires Successor Agencies to remit unobligated balances of former redevelopment agency
funds to the County Auditor-Controller for distribution to the taxing entities. Section 34179.5 of the
Health and Safety Code requires Successor Agencies to hire a licensed accountant, approved by
the County Auditor-Controller and with experience and expertise in local government accounting to
conduct two due diligence reviews (DDR) to determine the unobligated balances available for
transfer to taxing entities.
Two DDR's were required to be performed: one for the Housing Funds and one for Non-Housing
funds. On November 16, 2012, the report for the Housing Funds review was completed and
submitted to the County and State and was reviewed and approved by the Oversight Board as
required by Section 34179.6 of the Health and Safety Code. The City/Housing Authority retained
the accounting firm Vavrinek, Trine, Day & Co., LLP (VTD) and the firm was approved by the
County of Orange to perform the required due diligence reviews. The Independent Accountant's
Report on Applying the Agreed-Upon Procedures on the Successor Agency to the dissolved
Huntington Beach Redevelopment Agency made the determination that there was no balance to be
disbursed for Huntington Beach, due to prior housing fund commitments.
On December 12, 2012, the City/Housing Authority received an initial DOF Letter stating that the
Authority was required to remit housing funds. On January 7, 2013, the City and DOF held a Meet
and Confer regarding the initial DDR in Sacramento, CA. After the Meet and Confer, the Housing
Authority received a determination letter on January 17, 2013, requiring Low and Moderate Income
Housing Funds in the amount of $4,860,535 be remitted to the County for distribution to other
taxing agencies. On January 22, 2013, a partial "payment under protest" in the amount of
$1,210,901 was made to the County. The remaining balance of $3,649,634 was withheld to meet
enforceable obligations incurred prior to the dissolution of redevelopment agencies, namely the
precise amount needed over the next nine years to fund the debt service remaining for the Emerald
Cove bonds issued in association with the Emerald Cove Senior Housing Program. A petition was
filed with the Sacramento Superior Court on March 15, 2013. A ruling denying the petition was
issued on January 29, 2014. This action is required to finalize the FY 2012/13 financial statements
which are currently under review by the City's independent auditors. Taking this action does not
preclude the City/Housing Authority from pursuing additional legal remedies such as filing an
appeal of the Superior Court's decision.
Environmental Status:
Not Applicable.
Strategic Plan Goal:
Improve Long-Term Financial Sustainability
Enhance Economic Development
Attachment(s):
1. Department of Finance Final Determination Letter dated January 17, 2013.
2. Ruling on Submitted Matter dated January 29, 2014.
Item 4. - 2 JIB -54-
t4T 0,�
40 ^1 0^
12, .7
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W
DEPARTMENT OF EDMUND G. BROWN JR. - GOVERNOR
FI N A N C 91 5 L STPEET E BA12RAMENTO CA 2 95814-2706 N WWW.D0F.0A.r.0V
January 17, 2013
Ms. Kellee Fritzal, Deputy Director
City of Huntington Beach
2000 Main Street
Huntington Beach, CA 92648-2702
Dear Ms. Fritzal:
Subject: Low and Moderate Income Housing Fund Due Diligence Review
This letter supersedes Finance's original Low and Moderate Income Housing Fund (LMIHF) Due
Diligence Review (DDR) determination letter dated November 19, 2012. Pursuant to Health and
Safety Code (HSC) section 34179.6 (c), the City of Huntington Beach Successor Agency(Agency)
submitted an oversight board approved LMIHF DDR to the California Department of Finance
(Finance) on November 1, 2012. Finance issued a LMIHF DDR determination letter on December
12, 2012. Subsequently, the Agency requested a Meet and Confer session on one or more items
adjusted by Finance. The Meet and Confer Session was held on December 7, 2012.
Based on a review of additional or clarifying information provided to Finance during the Meet
and Confer process, Finance is revising some of the adjustments made in our previous DDR
determination letter. Specifically, we are revising the following adjustments because these
items were not properly classified in the DDR:
Transfer in the amount of $6,500,000 made pursuant to an Owner's Participation
Agreement (OPA)with Makallon Atlanta Huntington Beach, LLC (Makar). Finance
originally determined the transfer was ineligible because the OPA was never
implemented by Makar. Based on information provided during the Meet and Confer
session, it was determined no cash was transferred to the Housing Successor.
It was noted that Finance denied'the Makar OPA during the Housing Asset Transfer
(HAT) review in our letter dated August 31, 2012. Because the Meet and Confer
process for the HAT has not been completed, the item is still denied for transfer to the
Housing Successor and may still be questioned in current and future Recognized
Obligation Payment Schedule (RODS) reviews.
Lease Revenue Refunding Bonds in the amount of$4,054,198. Finance originally
denied this item because repayment of the bonds is secured by lease payments, and not
Redevelopment Properly Tax Trust Funds (RPTTF) or LMIHR Based on.information
provided during the Meet and Confer session, it was determined that this item was
identified in the DDR as an obligation, and should not have been classified as an asset
transfer.
ATWHB -s�-,NT Item 4. - 3
Ms. Kellee Fritzal
January 17, 2013
Page 2
Loan repayments to BTDJM Phase 11 Associates, LLC, in the amount of $15,722,100.
Finance origi
nally denied this item because the Agency requested RPTTF to fund this
obligation during the BOPS submitted for the periods covering January 2012 through
June 30, 2013. Based on information provided during the Meet and Confer session, it
was determined that this item was identified in the DDR as an obligation, and should not
have been classified as an asset transfer.
However, Finance continues to believe some of the adjustments made to the DDR s stated
balance of LMIHF available for distribution to the taxing entities is appropriate. H.Sc section
34179.6 (d) authorizes Finance to make these adjustments. We maintain the adjustments
continue to be necessary for the following reason:
• The Agency requested the retention of$4,860,535 to help pay for the above-mentioned
housing obligations. According to information provided by the Agency, $4,959,145 in
cash was transferred to the Housing Successor. However, the BOPS covering the
January 2012 through June 2013 periods only requested $98,610 in LMIHF obligations;
therefore, Finance continues to object to the transfer of$4,860,535.
The Agency's LMIHF balance available for distribution to the affected taxing entities has been
revised to $4,860,535 (see table below).
LMIHF Balances Available For Distribution To Taxing Entities
Available Balance per DDR: $
Finance Adjustments
Add:
Disallowed transfers $ 31,136,833
Revised adjustments S (26;276,298)1
Total LMIHF available to be distributed: $ 4,860,535
This is Finance's final determination of the LMIHF balances available for distribution to the
taxing entities. HSC section 34179.6 (f) requires successor agencies to transmit to the county
auditor-controller the amount of funds identified in the above table within five working days, plus
any interest those sums accumulated while in the possession of the recipient,
If funds identified for transmission are in the possession of the successor agency, and if the
successor agency is operated by the city or county that created the former redevelopment
agency, then failure to transmit the identified funds may result in offsets to the city's or the
county's sales and use tax allocation, as well as its property tax allocation. If funds identified for
transmission are in the possession of another taxing entity, the successor agency is required to
take diligent efforts to recover such funds. A failure to recover and remit those funds may result
in offsets to the other taxing entity's sales and use tax allocation or to its property tax allocation.
If funds identified for transmission are in the possession of a private entity, HSC 34179.6 (h) (1 )
(B) states that any remittance related to unallowable transfers to a private party may also be
subject to a 10 percent penalty if not remitted within 60 days.
Failure to transmit the identified funds will also prevent the Agency from being able to receive a
finding of completion from Finance. Without a finding of completion, the Agency will be unable
to take advantage of the provisions detailed in HSC section 34191.4. Specifically, these
provisions allow certain loan agreements between the former redevelopment agency (RDA) and
the city, county, or city and county that created the RDA to be considered enforceable
Item 4. - 4 AM U[3, -56-NT I
Ms. Kellee Fritzal
January 17, 2013
Page 3
obligations. These provisions also allow certain bond proceeds to be used for the purposes in
which they were sold and allows for the transfer of real property and interests into the
Community Redevelopment Property Trust Fund once Finance approves the Agency's long-
range property management plan.
In addition to the consequences above, willful failure to return assets that were deemed an
unallowable transfer or failure to remit the funds identified above could expose certain
individuals to criminal penalties under existing law.
Pursuant to HSC section 34167.5 and 34178.8, the California State Controller's Office
(Controller) has the authority to claw back assets that were 'inappropriately transferred to the
city, county, or any other public agency. Determinations outlined in this letter and Finances
Housing Assets Transfer letter dated August 31, 2012 do not in any way eliminate the
Controller's authority.
Please direct inquiries to Nichelle Thomas, Supervisor or Alex Watt, Lead Analyst at
(916) 445-1546.
Sincerely,
STEVE SZALAY
Local Government Consultant
cc: Lori Ann Farrell, Director of Finance, City of Huntington Beach
Frank Davies, Property Tax Manager, Orange County
California State Controller's Office
ATWHB --'-)7-,NT I Item 4. - 5
2 FILED
3
4 9 2014
By S.Lee, Deputy Clem
6
7
8 SUPERIOR COURT OF CALIFORNIA
9 COUNTY OF SACRAMENTO
10
CITY OF HUNTINGTON BEACH, a Case No. 34-2013-80001441-CU-WM-GDS
I I charter city and municipal corporation;
HUNTINGTON BEACH HOUSING
12 AUTHORITY, a public body corporate
and politic; and SUCCESSOR RULING ON SUBMITTED MATTER:
13 AGENCY TO THE PETITION FOR WRIT OF MANDATE
REDEVELOPMENT AGENCY OF AND COMPLAINT FOR DECLARATORY
14 THE CITY OF HUNTINGTON AND INJUNCTIVE RELIEF
is BEACH, a public entity,
Plaintiffs and Petitioners,
16 v.
47 CALIFORNIA DIRECTOR OF
FINANCE ANA J. MATOSANTOS, an
18 individual sued in her official capacity;
CALIFORNIA STATE BOARD OF
19 EQUALIZATION, an agency of the
State of California; JAN E. GRIMES,
20 INTERIM AN DCHIEF DEPUTY
ORANGE COUNTY AUDITOR
21 CONTROLLER, an individual sued in
22 her official capacity, et A.,
Defendants and Respondents.
23
24 COUNTY OF ORANGE, et a].,
25 Real Parties in Interest.
26
27
28
1
RULING ONI SUBMrFFED MATTER
Item 4. B
- ---j
- 6 AT!)'- 4TIf I-CU-WM-GDS
5S-�
I Introduction and SummaLl of Rulin
2 This case presents the issue of whether certain payments related to the provision of affordable
3 housing in the City of Huntington Beach Should be considered"enforceable obligations" under the
4 redevelopment dissolution laws.' The payments relate to an affordable senior housing project known as
5 Emerald Cove,and to 26 affordable housing units that will be constructed in connection with a large
6 mixed-use project known as Pacific City,
7 Petitioners in this case are the City of Huntington Beach,the City's Housing Authority and the
8 Successor Agency to the former Redevelopment Agency of the City of Huntington Beach. The Successor
9
Agency listed payments related to the Emerald Cove and Pacific City projects in its Recognized
10
Obligation Payment Schedule{RAPS) for the period of January I —June 30,2013, and in the housing fund
II
due diligence review process. Respondent Department of Finance("DOF")detennined that neither
12
13 project represented an enforceable obligation within the meaning of the redevelopment dissolution laws.
14 Petitioners challenge that determination in this writ proceeding.
15 The case was set for hearing oil October 25, 2013. Prior to the hearing,the Court posted a notice
16 directing the parties to appear for oral argument and to be prepared to address specified issues. At the
17 close of oral argument, the Court directed the parties to submit further briefing and established a schedule
18 for the filing of supplemental briefs,with the case to be taken under submission upon receipt of the last
19 supplemental brief. The Court subsequently received and reviewed the supplemental briefs and supporting
20 evidence. The final brief was filed, and the matter was taken under submission, oil December 6, 2013.
21 Having considered the oral and written arguments submitted by the parties, as well as the
22 documentary evidence, the Court now issues its final ruling, The Court finds that the payments related to
23 the Ernerald Cove and Pacific City projects are not "enforceable obligations" within the meaning of the
24 redevelopment dissolution laws, and thus denies the petition insofar as it challenges respondent DOF's
25 determination to that effect. The Court also concludes, however, that the provisions of the redevelopment
26
27 The background history of the passage of the redevelopment dissolution laws and the workings of the
administrative process involving tine review of claimed enforceable obligations are well-known to the parties and to
28 the Court, and need not be described in detail here.
2
RULING ON SUBMI'17ED MAVI'ER
CASE NO.34-2013-8000144 1-CU-WM-GDS
ATTI HB _59-NT 2 Item 4. - 7
I dissolution laws that permit respondent DOF to order sales and use tax offsets against petitioners are
2 facially unconstitutional and may not be used in this case. The petition is therefore granted and a writ
3 shall issue,along with declaratory and injunctive relief, directing respondent DOF to refrain from
4 ordering, or threatening to order, sales and use tax offsets in this case. The Court denies petitioners'
5 requests for relief regarding potential property tax reductions on the ground that the matter is not ripe, in
6 that there is no evidence that such reductions have been threatened or ordered in this case.
7
Preliminary Evidentiary Issues
8 Petitioners filed a Request for Judicial Notice on September 10,2013.). Respondents filed Requests
9
for Judicial Notice oil September 30, 2013 and December 6,2013. No objections were made to any of the
10
documents included in these rcqtjests. The Court is satisfied that the documents attached to the requests
are proper subjects for judicial notice. These three requests accordingly are granted.
12
13 Petitioners also filed a Request for Judicial Notice with its sur-reply brief on October 18, 2013.
14 Respondents objected to the request,as well as to the filing of the sur-reply brief,on the basis that the brief
15 and the request raised new arguments for the first time in the reply and therefore should not be considered.
16 The objection is overruled. The Court is satisfied that the document attached to the request is a proper
17 subject for judicial notice. The request for judicial notice accordingly is granted.
IS I Respondents also objected to Exhibit F attached to the Declaration of Kellee Fritzal, filed by
19 petitioners on September 10, 2013. Exhibit F consists of pages from the 2010 bond documents,and
210 respondents essentially object on the basis that the documents are incomplete. The objection is overruled.
21 The Court notes that respondent submitted a complete copy of the Official Statement for the 2010 bond
22 issuance through Its December 6, 2013 Request for Judicial Notice.
23 Standard of Review
24 Petitioners seek a writ of mandate pursuant to Code of Civil Procedure section 1085 to review the
25 actions of Respondent DOF—specifically, its conclusion that payments related to the two projects are not
26 enforceable obligations under the re development dissolution laws. In ordinary mandamus actions the
27
Court applies an abuse of discretion standard, reviewing the challenged administrative decision to
28
RULING ON SUBMFI-TED MATTER
CASE NO. 34-2013-8000144 1-CU-WM-GDS
Item 4. - 8 AM JIB -60-i NT 2
I determine if it was arbitrary, capricious, or entirely lacking in evidentiary support, or whether the agency
C�
2 failed to follow the procedure and give the notices the law requires. (Shelden v, Maria Counly Employees
3 Retirement Association. (201 G) 189 Cal.App.0' 458, 46');see also, Ridgecrest Chat-ter School v. Sierra
4 Santis Unified School District(2005) 130 Ca I.App.4'lk 986, 1003.)
5 Issues involving the agency's interpretation of statutes raise questions of law, upon which the
6 Court exercises its independent judgment, (California Correctional Peace Officers'Association, v. State
7 of California(2010) 181 Cal.AppAth 1454, 1460.)
8
Factual and Procedural Background
9
This writ proceeding under Code of Civil Procedure section 1085 arises out of an administrative
10
determination that did not involve an evidentiary hearing or other formal fact-finding procedure. The
11
Court therefore must find the relevant facts based on the evidence submitted by the parties.2 The
12
13 following shall constitute the Court's determination of the relevant facts for the two projects at issue in this
14 case, based on the preponderance of the evidence.
15 Emerald Cove:
16 The origins of the Emerald Cove project go back as far as 1984. In that year, the City's Park
17 Acquisition and Development. Fund advanced$1,740,834 to the former Redevelopment Agency to buy the
18 project site. The Redevelopment Agency leased the property to the City. At about the same time,the
I
19 Redevelopment Agency sold $4.6 million in Certificates of Participation in order to finance construction
20 of the Emerald Cove Senior Housing Project, which would be built on the property. Del,service for the
21 Certificates of Participation was to be paid from lease payments the City would make to the
22 Redevelopment AgenCY.3
23 At the tune the project began, the Redevelopment Agency evidently established a practice of
24 transferring housing funds from the Low and Moderate Income Housing Fund to the City in the amount
25
26
2 NTo formal administrative record has been lodged with the Court. All evidence has been presented through
27 declarations or requests for judicial notice.
28 See, Declaration of Kellee Fritzal, paragraph 5.
4
RULING ON SUBMWI-17131)MATTER
ATV 1 J,B -61_`W1211-CU-WM-GDS Item 4. - 9
I that the City was required to pay under the project lease.' Although it appears to be undisputed that this
2 practice was established early in the history of the project, and continued to be followed for years
n
afterwards, the practice was not memorialized in writing. Accordingly, no documentary evidence has been
4 submitted to the Court establishing' or describing that practice in the form of a contract,a resolution,or
5 otherwise,.
6 In September 1991, the Redevelopment Age
ncy issued a new round of Ceitificates of
7 Participation, in the amount of S5.7 million, for the purpose of paying,off the original 1984 Certificates of
8 Participation and refunding the debt for the project at a lower interest rate. As part of this transaction,the
9
Redevelopment Agency assigned the City's lease payments under the 1984 lease to a bond trustee for
10
payment of debt service on the 1991 Certificates of Participation. The Redevelopment Agency continued
11
its practice of transferring funds from the Low and Moderate Income Housing Fund to the City in the
12
13 amount of the City's lease payrnents.'
14 In March 1998,the Cit),and the Redevelopment Agency formed a joint powers authority known
Is as the City of Huntington Beach Public Financing Authority.6
16 In September 2000, the Public Financing Authority refinanced the project by issuing bonds Known
17 as the September 2000 Lease Revenue Bonds, Series A. Proceeds from the sale of the bonds were used, in
I g part, to pay off the 1991 Certificates of Participation. At this point, ownership of the property evidently
19 had been transferred from the Redevelopment Agency to the Public Financing Authority, although it is
20 unclear from the evidence when Such transfer occurred. The bond docurnents submitted to the Court
21 demonstrate, however, that the City would lease certain real property and improvements from the Public
22 Financing Authority pursuant to a Lease Agreement dated August 1, 2000, and would make lease
23 payments from legally available Rinds in amounts calculated to be sufficient to pay principal and interest
24 on the bonds when due. The Redevelopment Agency continued its practice of transferring funds from the
25 Low and Moderate Income Housing Fund to the City in the amount of the City's lease payments(which
26 See, Declaration of Kellee Fritzal.,paragraph 6,
27 5 See, Declaration of Kellee Fritzal, paragraphs 7-8.
28 See, Declaration of Kellee Fritzal,paragraph 9.
5
RULING ON SUBMITT11)MATTER
CASE NO,34-2013-80001441-CU-1'JM-GDS
Item 4. - 10 AM HB -62-:NT 2
I now were being made to the, Public Financing Author]t),).7
2 Sometime prior to 2003,ownership of the project evidently transferred once again from the Public
3 Financing Authority to the Redevelopment Agency. As before, it is unclear fro the evidence when the
4 transfer occurred. In 2003, the Redevelopment Agency transferred ownership of the project to the City,
In
5 On February 19, 2008, the City Council and the Public Finance Authority each approved a
6 resolution authorizing the issuance and sale of lease revenue bonds that were intended to refinance a series
7 of prior bond issues, including the outstanding 2000 Series A revenue bonds. The resolutions, which were
8
substantially identical, stated that"...in order to provide for repayment of the Bonds, the Authority will
9
lease certain real property and improvements...to the City pursuant to a lease agreement...under which the
10
City will agree to make lease payments to the Authority from moneys in its General Fund and the City will
11
budget and appropriate sufficient amounts in each year to pay the full amount of principal and interest on
12
the Bonds".9
13
14 On May 18, 2009,the City and the Redevelopment Agency entered into a written Cooperation
15 Agreement involving the Emerald Cove project. The Agreement stated that the Redevelopment Agency
1.6 desired to implement its affordable housing goals Linder the Community Redevelopment Law by acquiring
17 the project fi-orn the City and transferring it to a nonprofit corporation known as Jamboree Housing, Inc.,
18 for rehabilitation of the project and operation as affordable rental housing units for very low income and
19 low income senior citizen houseliolds.'o The Redevelopment Agency accordingly purchased the project
20
7 See, Declaration of Kellee Fritzal, Exhibit C,first page. See also,Paragraph 10 of the declaration:"The HBIZ-A
21 continued to transfer Housing Funds to the City for the City to make its lease payments to the PF Authority and
thereby fund debt service on the 2000 bonds."
22 8 See, Petition for Writ of Mandate,paragraph 34 and footnote 2.
23 9 See,Supplemental Declaration of Kellee Fritzal, Exhibit 1. it is unclear from the evidence submitted to the Court
whether the Redevelopment Agency or the Public Financing Authority owned the Emerald Cove project at this point.
24 The resolutions contain no mention of a lease agreement between the City and the Redevelopment Agency. The
Request for City Council Action accompanying the resolutions mentions that the 2000 bonds refinanced the Emerald
25 Cove Senior Housing Project and several capital projects included in South Beach Phase I improvements, South
Beach Phase 11 improvements,a new Beach Maintenance Facility, energy retrofitting of various facilities, the design
26 cost of the City's Sports Complex, and water system improvements.
'a It is not possible to determine from the documentary evidence when the ownership of the project was transferred to
27 the City. Indeed, it is frequently difficult to determine which of several public entities actually owned the project at
any g given time. However,the uncertain ownership of the project does not appear to be material to the decision in this
28 case,
6
RULING ON SUBMI'l-FED-MATTER
CASE NO.34-20 t 3-8000144 1-CU-WM-GDS
AMHB -6-)-'NT 2 Item 4. - 11
I from the City for a stated purchase price of$8,584,218.00. A portion of the purchase price, amounting to
2 $5,271,218, was to be paid through the execution of a promissory note. That amount represented the
3 remaining debt service payable on the portion of the 2000 Public Financing Authority bonds that was
4 allocated to the project. The remainder of the purchase price, $3,3 13,000, would be paid through the
5 City's retention of the entirety of the working capital of the City's Emerald Cove Housing Fund."
6 The promissory note established a schedule of payments from the Redevelopment Agency to the
7 City starting oil September 1. 2009 and ending on September 1, 2021, with payment;.;ranging from
8 $404,418.57 to $406,236.50." Petitioners state that the annual payments were equal to those of the
9 outstanding debt service due on tile 2000 bonds.'3
10
The Cooperation Agreement also provided that the Redevelopment Agency granted the City a
11
security interest in so-called "Set Aside Funds'* as collateral security for the payment of the
12
13 Redevelopment Agency's obligations tinder the promissory note." The Cooperation Agreement defined
14 the "Set Aside Funds" as",,.that portion of taxes allocated arid paid to the [Redevelopment] Agency for
15 the Merged Redevelopment Project which are required to be.deposited in or otherwise used for the
16 purposes of the Low and Moderate Income Housing Fund of the [Redevelopment] Agency Pursuant to
17 Section 3)33334.2, 33334.3 and 33334.6 cif the Community Redevelopment Law."'s In other words, to
18 SeCUre payment of the promissory note, the Cooperation Agreement gave the City a Security interest ill tax
19 increment funds received by the Redevelopment Agency that were required by law to be placed in the Low
20 and Moderate income Housing Fund.
21 During the period between the issuance of the 2000 bonds and the execution of the 2009
22 Cooperation Agreement, the Redevelopment Agency continued its practice of transferring funds from the
23 Low and Moderate Income Housing, Fund to the City in the amount of the City's lease payments (which
24
11 See, Declaration of Kellee Fritzal,paragraphs I 1-13 and Exhibit D.
25 '`See, Declaration of Kellee Fritzal, Exhibit E, page 6.
26 13 See, Declaration of Kellee Fritzal,
paragraph 15. No evidence other than Ms. Fritzal's statement to this effect is
cited,but this fact does not appear to be disputed by respondents.
27 14 See, Declaration of Kellee Fritzal, Exhibit D, page 4, Section 203.
28 See, Declaration of Kellee Fritzal, Exhibit D, page 3.
7
RULING ON SUBMITTED MATTER
CASY,:NO.34-2013-8000144I-CU-WN1-GDS
Item 4. - 12 ATTViB -64-NT 2
I now were being made to the Public Financing Authority)."
2 In September 2010,the Public Finance Authority issued a new round of bonds, known as the
3 Lease Revenue Refunding Bonds, 2010 Series A, which refunded the 2000 bonds. As was the case with
4 the 2000 bonds,the bond documents submitted to the Court state that the City would lease certain real
5 property and improvements from the Public Financing Authority pursuant to a Lease Agreement, in this
6 instance dated June 1,2010, and would make lease payments from legally available funds in amounts
7 calculated to be sufficient to pay principal and interest on the bonds when due.17
9 The Legislature enacted the redevelopment dissolution laws though AB I x26 on June 28,2011.
9 Litigation challenging the dissolution laws by means of a petition for extraordinary writ relief in the
10
California Supreme Court ensued almost immediately. On August 11, 2011,the Supreme Court issued an
order staying AB I x26,except for those provisions of the legislation that enacted Division 24, Part 1.8 of
12
13 the Health and Safety Code. Part 1.8 provided for an immediate"freeze"of the activities of
14 redevelopment agencies, Suspending their ability to enter into or modify contracts.
15 Following the Supreme Court's decision upholding AB I x.26 in California Redevelopment
16 Association v. Matosantos(2011) 53 Cal. 4"'231, all redevelopment agencies in the State, including the
17 1 Redevelopment Agency of the City of Huntington Beach,were dissolved by operation of law effective
Ig February 1, 2012. In this case,the former Redevelopment Agency's designated Successor Agency
19 Subsequently attempted to list the Redevelopment Agency's pledge of tax increment funds tinder the
20 Cooperation Agreement as an enforceable obligation on two separate occasions in administrative
21 proceedings involving respondent DOF.
22 In August 2012, the Successor Agency submitted a Recognized Obligation Payment Schedule for
23 the period of January 1-June 30,2013. The schedule listed-'Emerald Cove 2010 Series A Lease Revenue
24 Refunding Bonds Debt Service Payments'*as Itern 12, with a total outstanding debt or obligation of
25 $3,649,834 and a total due during the 2012-2013 fiscal year of$404,932(the amount due under the
26
27 16 See, Declaration of Kellee Fritzal,paragraph 19.
28 17 See,Declaration of Kellec Fritzal,Exhibit F,first page.
8
RULING ON SUBMI17ED MATTER
CASE M 34-2013-8000144 1-CU-WM-GDS
AM H B -65--;NT 2 Item 4. - 13
I promissory note on September 1,2013). The Successor Agency sought funds for the annual payment from
2 the Redevelopment Property Tax Trust Fund(RPJ7F),18
3 On October 11, 2012, respondent DOF wrote a letter to the City's Director of Finance stating its
4 initial determination regarding Item 12,as follows: "Item No. 12— Payment for a Lease Revenue
5 Refunding Bond in the amount of$3.6 million. This bond is secured solely though (ease payments,and
6 there is no requirement to repay this bond with tax increment. [Health and Safety Code] section
7 34183(2)(B) states RPTTF can fund revenue bonds, but only to the extent the revenue pledged is
8 insufficient to make payments, and only where the agency's tax increment revenues were also pledged for
9 repayment, Therefore, this item is not an enforceable obligation and is not eligible for RPTTF funding."19
to
Following statutorily required"meet and confer"process, respondent DOF issued a second letter
t I.
dated December 18,2012, in which it stated its final determination regarding Item 12,as follows:
12
"Finance continues to deny the item at this time. Finance denied the item as this bond is secured
13
14 solely through lease payments, and there is no requirement to repay this bond with tax increment. [Health
15 and Safety Code] section 34183(2)(B) states RPTTF can fund revenue bonds,but only to the extent the
16 revenue pledged is Insufficient to make payments,and only where the agency's tax increment revenues
17 were also pledged for repayment. The Agency contends the Item is an enforceable obligation because at
18 the time the former RDA Purchased the Emerald Cove property from the City, a promissory note was
19 issued for the remaining debt service payable due[sic]on the bond. Section 203 of the Cooperation
20 Agreement pledges tax increment funds for payment of bond debt service payments for the Emerald Cove
21 2010 Series A Lease Revenue Bond. [Health and Safety Code] section 34171(d)(2) states that written
22 agreements entered into at the time of issuance, but in no event later than December 31,2010, of
23 indebtedness obligations, and solely for the purpose of securing or repaying those indebtedness
24
25 Is See,Declaration of Kellee Fritzal, Exhibit G. Item I of the Recognized Obligation Payment Schedule�&O sought
approval of a payment of$442,905 under the Land Sale Agreement for Emerald Cove,which was listed as having a
total outstanding debt or obligation amount of$5,676,433). While petitioners' opening brief discussed Item 1,
26 petitioners Filed a Response to Supplemental Reply Opposition on December 17,2013 which confirms that they are
not disputing respondent DOF's determination as to that item. The Court therefore makes no findings regarding Item
27 1, and it is not discussed further in this ruling.
28 "'See, Declaration of Kellee Fritzal,Exhibit H.
9
RULING ON SUBMITTED MATTER
CASE NO,34-2013-8000144 1-CU-W.v1-GDS
Item 4. - 14 AM 11 B -66-:NT 2
I obligations, may be deemed eiiforceable obligations. Although the Cooperation Agreement is solely for
2 the purpose of securing or repaying indebtedness obligations, it was not entered into at the time of
I
issuance of the indebtedness obligations. The Cooperation Agreement is dated May 18, 2009 and the
4 Lease Revenue Refunding Bonds were dated May 13, 2010, Finance has not issued a Finding of
5 Completion to the Agency;therefore, the provisions of[Health and Safety Code section 3417 1 apply.
6 [Health and Safety Code] section 34171(d)(2)states that agreements, contracts, or arrangements between
7 the city, county, or city and county that created the RDA and the former RDA are not enforceable
8 obligations. Therefore, this item is currently not an enforceable obligation and not eligible for RP17F
9
funding."20
10
In addition to listing the housing bond obligation on the RODS, the Successor Agency also
11
attempted to obtain respondent DOF's approval to retain housing funds for payment of the promissory
12
13 note through the due diligence review process. As required by the rules of that process, the Successor
14
Agency submitted a due diligence report for the Low and Moderate Income Housing Fund, prepared by
15 independent accountants and dated June 30, 2012, The report set forth the unobligated balances of
16 housing funds that were found to be available for transfer to other taxing entities, and concluded that the
17 surns to be paid tinder the promissory note, in the amount of$4,054,198, were obligated and not available
18 for transfer.21 In letters dated December 12, 2012 and January 17, 2013, respondent DOF, in essence,
19 stated its determination that the funds claimed to be associated with payments on the promissory note were
20 unobligated in that they were not associated with an enforceable obligation.22
21 Pacific City:
22 On June 14, 2004, the City Council approved"Findings and Conditions of Approval" for the
23 Pacific City project, which was to be a large mixed-use development including 516 market rate residential
24 condominiums, retail, office and restaurant space, and a hotel, The City Council's actions involved
25 approval of a tentative tract map, a conditional use permit, a special permit, and a coastal development
26 20 See, Declaration of Kellee Fritzal, Exhibit I-
27 21 See,Declaration of Kellee Fritzal,Exhibit K.
28 22 See, Declaration of Kellee Fritzal,paragraphs 28-31 and Exhibits L and N.
10
R U L INTG bN SUBMITTED MATTER
CASE NO,34-2013-80001441-CU-WM-GDS
AM 1 113 -67-1 NT 2 Item 4. - 15
I permit. The conditions of approval included a requirement that a minimum of IS percent of the total
2 housing units Should be affordable to very low income, low income and moderate income families(a total
3 of 78 units). A minimum of 50%of such units were required to be on-site.2'
4 On October 9,2006,the City,the Redevelopment Agency and a private developer known as
5 Makallon Atlanta Huntington Beach, LLC entered into an Owner Participation Agreement under which
6 Mak-allon would build the Pacific City project. The Owner Participation Agreement included an
7 Affordable Housing Plan under which Makal Ion agreed to pay the Redevelopment Agency$20,000,000,
8 and the Redevelopment Agency would construct 117 affordable housing units within the Redevelopment
9
Agency's Merged Redevelopment Project Area(but evidently not within the Pacific City project site
10
itselo.11
11
Before any construction began on the Pacific City project(and before any payments were made to
12 1
13 tile Redevelopment Agency under the affordable housing plan), Makalion's batik lender for tile project
14 foreclosed on its trust deed, In October 2011, ownership of the property on which the Pacific City project
15 was to be built was transferred to a new developer known as 21002 HB, LLC."
16 As stated above, the Legislature enacted AB I x26 on June 28, 2011, and provisions of those laws
17 1y dissolving the Redevelopment Agency went into effect on February 2, 2012,
18 On July 25, 2012,the City Council amended the entitlements previously granted for the Pacific
19 City project in 2004, in order to allow the new developer time to enter into a development agreement for
20 the ProjeCt.21
21 The City and the new developer entered into a Development Agreement on August 20, 2012." On
22 the same date,the City Council approved a resolution formally terminating the earlier development
23
24
25 23 See., Declaration of Kellee Fritzal, paragraphs 34-35 and Exhibit P.
26 24 See, Declaration of Kellee Fritzal, paragraphs 38-39 and Exhibit S.
21 See, Declaration of Kellee Fritzal,paragraph 40.
27 26 See, Declaration of Kellee Fritzal,paragraph 41 and Exhibit T.
28 27 See, Declaration of Kellee Fritzal, paragraph 42 and Exhibit U.
11
RULING o-,N suwwrml)MATTER
CASE NO.34-2013-80001441-CU-WM-GDS
Item 4. - 16 AMH13 -68-',NT 2
I agreement with Maka llon.28
2 Also an August 20,2012, the City and the new developer entered into an Affordable Housing
3 Agreement which provided that (lie new developer would provide 51 moderate incorne units on-site and
4 the City's Housing Authority Would provide 26 very low income units off-site, for a total of 77 LlnitS,29
5 The 77 units are required by law based oil the number of market rate units in the Pacific City project,
6 pursuant to Health and Safety Code section 33413(b)(2),a part of the Community Redevelopment Laws
7 that was not affected by the passage of AB I x26 or subsequent dissolution legislation. The City's Housing
8 ALIthority estimates that it will cost approximately $6,500,000 to construct its 216 unit share of the
9 necessary Uni,S.30
10
As described above in connection with the Emerald Cove project, in August 2012 the Successor
11
Agency submitted a Recognized Obligation Payment Schedule for the period of January ]-June 30, 2013.
12
The schedule listed "Pacific City—Very Low Income Units" as Itern 17,with a total outstanding,debt or
13
14 obligation of$6,500,000 and the sarne total stated to be due during the 2012-2013 fiscal year. The
15 Successor Agency sought funds for the very low income units from the Low and Moderate Income
16 Housing Fund."
17 On October 11. 2012,respondent DOF sent a letter to the City's Director of Finance stating its
18 initial determination regarding Item 17 as follows: "[Flealth and Safety Code] section 34163(c)prohibits a
19 RDA from amending or modifying existing agreements, obligations or commitments with any entity for
20 ally purpose after June 27, 2011. Therefore, this item is not an enforceable obligation."2
21 After the statutorily-required meet and confer process, respondent DOF issued a second letter
22 dated December 18,2012 stating its final determination regarding Item 17, as follows:
23 "Finance continues to deny the item. Finance denied the item as [Health and Safety Code] section
24
25 re See, Declaration of Kellee Fritzal, paragraph 43 and Exhibit V.
,
26 9 See, Declaration of Kellee Fritzal,paragraph 45 and Exhibit W.
See, Declaration of Kellee Fritzal,paragraph 47,
27 See,Declaration of Kellee Fritzal, Exhibit G.
28 See, Declaration of Kellee Fritzal, Exhibit 1,
12
RULING ON SUBM, =ED MATTER
CASE NO.34-2013-80001441-CU-WM-GD5
AM f 1,13 -69-:NT 2 Item 4. - 17
I 34163(c) prohibits a RDA from amending or modifying
I I existing agreements,obligations, or commitments
2 with any entity for any purpose after June 27,2011, The Agency contends the item is an enforceable
obligation because $6.5 million in the Low and Moderate Income Housing Fund (LMIHF)was
4 encumbered for the production of affordable housing relating to the development located oft Pacific Coast
5 Highway and commonly known as the Pacific City project resulting from entitlements issued for the
6 Pacific City project in 2004. However,obligations associated with.the former RDA's previous statutory
7 housing obligations are not enforceable obligations. Upon the transfer of the former RDA's housing
8 functions to the new housing entity, [Health and Safety Code] section 34176 requires that 'all rights,
In
9
powers, duties,obligations and housing assets...shall be transferred' to the new housing entity. This
10
transfer of'duties and obligations' necessarily includes the transfer of statutory obligations; to the extent
I I
that any continue to be applicable. To conclude that such costs should be on-going enforceable obligations
12
13 Of the Successor agency could require a transfer of tax increment for life—directly contrary to the wind
14 down directive in AB I x26/AB 1484. Therefore, this item is not an enforceable obligation,i,-13
15 The Successor Agency also included the cost of building the 26 units in its Due Diligence Review
16 and Housing Asset Transfer review submissions. Respondent DOF responded to these Submissions by
17 determining that this item was not an enforceable obligation, on essentially the same basis as was set forth
8 in its December 18, 2012 letter.34
19 Discussion: Enforceable Obligations
20 Emerald Cove:
21 As described above in the factual findings, petitioners claim that the annual payments due from the
22 Redevelopment Agency to the City under the 2009 promissory note constitute an enforceable obligation
23 that respondent DOF should have recognized. In making this claim, petitioners rely initially on two
24 provisions of the redevelopment dissolution laws that define "enforceable obligations"as including
25 "bonds", (see, Flealth and Safety Code sections 34167(d)(1)and 34171(d)(1)(A))and "[a]ny legally
26
27 31 See, Declaration of Kellee Fritzal, Exhibit J.
28 34 See, Declaration of Kellee Fritzal, paragraphs 52-58 and Exhibits Y,1313 and CC.
13
RULING ON SUBMITTED MATrER
Item 4. - 18 k"t'l-113- --7-/-0--`VP1241-CU-WM-GDS
I binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or
2 public policy." (See, Health and Safety Code sections 34167(d)(5) and 34171(d)(1)(E).)
3 Petitioners' reliance on these statutes is unavailing, because another, more specific, portion of
4 Health and Safety Code section 34171( )applies here. Subdivision(d)(2)of the Statute provides that for
5 purposes of Part 1.85 of AB lx26, which formally dissolved redevelopment agencies and established
successor agencies, (lie term"enforceable obligation"does not include"...agreements,contracts or
7
arrangements between the city, county or city and county that created the redevelopment agency and the
8
former redevelopment agency." This specific statute controls over the more general definitions of
9
enforceable obligations contained in Health and Safety Code sections 34167(d)and 3417l(d)(1). (See,
10
Stone Street Capital, LLC v. California State Lotte?ly Commission (2008) 165 Cal. App. 4"' 109, 1 19)
11
The 2009 promissory note and the accompanying cooperation agreement undeniably were
12
13 "agreements, contracts or arrangements between"the City and the Redevelopment Agency and therefore
14 fall squarely within the terms of the statute. As such,the promissory note and cooperation agreement may
15 not be treated as enforceable obligations under the redevelopment dissolution laws, unless an exception
16 applies.
17 Health and Safety Code section 34171(d)(2)does contain a potential exception to the general rule
18 that agreements between a city and its redevelopment agency may not be treated as enforceable
19 obligations,which is stated as follows: "However, written agreements entered into(A)at the time of
2 issuance, but in no event later than December 31,2010, of indebtedness obligations, and ( ) solely for the
21 purpose of securing or repaying those indebtedness obligations may be deemed enforceable obligations for
22 the purposes of this parts,35
23 Petitioners contend that the promissory note and cooperation agreement fail within,this excerption.
24 This contention is not persuasive, for reasons of both timing and substance,
25
26 Health and Safety Code section 34171(d)(2)contains another exception for loan agreements entered into between a
redevelopment agency and the city,county or city and county that created it, within two years of the date of creation
27 of the redevelopment agency. This exception does not apply because the 2009 promissory note and cooperation
agreement were entered into more than two years after the establishment of the Redevelopment Agency of the City of
28 Huntington Beach in 1969.
14
RULING ON SUBMIT7El3 MATTER
CASE NO.34-2013-80001441-CU-wM-GDS
ATTIM -?i-',NT 2 Item 4. - 19
I With regard to timing,the exception applies to agreements entered into at the time of issuance of
2 "indebtedness obligations". Subdivision(e)of the statute defines this term as meaning bonds, notes,
3 certificates of participation,or other evidence of indebtedness, issued or del ivered by the redevelopment
4 1 agency, or by a Joint exercise of powers authority created by the redevelopment agency, to third-party
5 investors or bondholders to finance or refinance redevelopment projects undertaken by the redevelopment
6 agency in cot-npliance with the Community Redevelopment Law,..". In this case,the Certificates of
7 Participation Or bonds issued in connection ,vith the Emerald Cove project at various times qualify as
8
indebtedness obligations", because all were issued to third-party investors or bondholders to finance or
9
refinance the Emerald Cove project. However, petitioners' contention that the 2009 agreements are
10
enforceable obligations tinder the exception founders on the fact that the various indebtedness obligations
I I
were issued in 1984, 1991,22000 and 2010, while the Cit),and the Redevelopment Agency entered into the
12
promissory note and cooperation agreement at a different time, in 2009.
13
14 Petitioners have submitted evidence to show that the issuance of the 2010 round of refinancing
15 bonds was considered and authorized as early as 2008, but that actual issuance of the bonds was delayed
16 until 2010 as the result of adverse market condition S.36 Based on this evidence, petitioners argue, in effect,
17 that the 2010 bond issuance should be considered as a single transaction taking place from 2008 to 2010,
18 with the 2009 agreements at issue here being treated as an integral part of that transaction. Petitioners
19 further argue that the statutory language applying the exception in subdivision (d)(2) to agreements
20 entered into"at the time of issuance" of indebtedness obligations should be interpreted as meaning
21 agreements entered into"in connection with", but not necessarily"simultaneously With", the issuance of
22 indebtedness obligations.
23 The Court finds petitioners' proposed interpretation of the statutory exception to be unconvincing.
214 In this case, the City and the Redevelopment Agency entered into the two agreements approximately one
25 year before the 2010 bonds ,�vere issued. To interpret the statutory language"at the time of issuance"to
26 apply to an action taken nearly a year before the issuance of bonds, as petitioners suggest,stretches such
27 36 See, Petitioners' Supplemental Evidence re Hearing on Merits, filed October 25,2013, Exhibits A and B;
28 Declaration of Kellee Fritzal,filed November 15,2011
15
RULING ON SUBMITMID MA*rTER
CASE_K0. 34-2013-8000144 1-CU-WM-GDS
Item 4. - 20 AMH13 _7-�_NT 2
f— -
I language far beyond its reasonable and ordinary meaning. Petitioners cite no evidence of legislative intent
2 that would Support such an expansive interpretation of the statutory timing requirement. The Court
3 therefore finds no basis for adopting that interpretation here.37
4 With regard to substance, petitioners'contention that the 2009 agreements fall within the terms of
5 the exception in Health and Safety Code section 34171(d)(2)also fails. Part(B)o-f the exception provides
6 that, to be considered as all enforceable obligation, an agreement between a redevelopment agency and its
7 sponsor must be one entered into solely for the purpose of securing or repaying indebtedness obligations,
8
In this case, the City and the Redevelopment Agency did not enter into the 2009 cooperation agreement
9
and promissory note solely for the purpose of securing or repaying the outstanding or prcrjected bonds oil
to
the Emerald Cove project. They did so, and apparently primarily so,for the purpose of transferring
11
ownership of the project frorn the City to the Redevelopment Agency so that the latter could implement its
12
13 affordable housing goals by conveying,the project to a nonprofit corporation for rehabilitation and
14 operation as affordable rental housing units for senior citizen households.38 The fact that the 2009
15 C)
agreements had a purpose other than solely securing or repaying indebtedness obligations precludes those
16 agreements from being considered enforceable obligations tinder Health and Safety Code section
17 34171(d)(2).
18 Because the City and the Redevelopment Agency did not enter into the 2009 promissory note and
19 cooperation agreement at the tune of issuance of any of the bonds or Certificates of Participation for the
20 21 37 The temporal link between tile 2009 agreements and the earlier rounds of financing for tile project in 1984, t991
Z�
and 2000 is even more attenuated, and petitioners make no attempt to link,the 2009 agreements to those earlier
22 indebtedness obligations.
C,
38 Indeed,the contractual Recitals contained in the 2009 Cooperation Agreement, which describe the purpose of the
23 agreement from the points of view of both parries, make no reference to securing or repaying the outstanding bonds
oil the project, (See, Declaration of Kellee Fritzal, Exhibit D.paragraphs A-D) Furthermore, it is difficult to accept
24 the concept that the 2009 agreements were intended to secure payment of the bonds for the project. The bonds were
secured by the City's lease payments on various properties(which may have included Emerald Cove). But the result
25 of the 2009 agreements was that the City sold the project to tile Redevelopment Agency,which then transferred the
Project to a third party. After this transfer,there is no apparent reason why the City would have been making lease
26 payments for the Emerald Cove project to anyone, (indeed, it is not clear why the City,which owned the project as
I of 2009,would have been making lease payments then, either.) Certainly,the facts regarding this project are far
27 from clear. However,since the 2009 agreements so clearly do not fit within the statutory definition of an
"enforceable obligation",it is possible to decide this case withotit needing to map the enact contours of the project's
28 obscure ownership history.
16
RULING ON sui3mirr1 D MAVI'ER
CASE NO. 34-2013-80001441-CU-WM-GDS
ATT)Ll B -7 3-:N T 2 Item 4. - 21
I
I � Emerald Cove project, and did not enter into those agreements solely for the purpose of securing or
2 repaying outstanding indebtedness obligations on the project, those agreements may not be considered
3 "enforceable obligations" Linder the provisions of Health and Safety Code section 34171(d)(2).
4 In their reply brief, petitioners argue that Health and Safety Code section 3417 1(d)(2)does not
5 apply to their case becausd it went into effect on February 1, 2012 (after the Supreme Court lifted the stay
6 of Part 1.85) and does not apply to agreements that were entered into prior to its effective date. In essence,
7 petitioners argue that respondent DOF improperly applied the statute retroactively.
8 governs respondent DOF's review of claimed
This argument is not persuasive. The statute
9
enforceable obligations on any BOPS submitted after the statute's effective date, and thus operates
10
prospectively, In this case, respondent DOF's review involved the RODS submitted in August 2012 and
11
12 claiming a payment to be made under the promissory note in the 2012-2013 fiscal year, i.e., months after
13 the effective date of Health and Safety Code section 34171(d)(2). Respondent DOF thus did not apply the
14 statute retroactively in the sense that it was used to invalidate payments made before the effective date of
15 the statute.
16 To the extent that petitioners contend that respondent DOF was precluded frorn applying the
17 statute, even prospectively, to payments under a contract that predated the statute's effective date,that
18 contention is unpersuasive as well. There is a general principle that statutes should be construed to operate
19 prospectively absent clear indication that the Legislature intended there to operate retroactively,and there
20 is a strong presumption against retroactivity. (See,Myers v. Philip Morris Compcinies, Inc. (2002) 28 Cal.
21 4"' 828, 840-, McClung v. Employment Developmera Department(2004) 34 Cal.4"467,475.) However,
22 the presumption against retroactivity is "not a straightjacket",and evidence that the Legislature intended a
23 statute to operate retroactively may be found in the wording of the statute itself. (See, Mannheim v.
-24 Superior Cow-t(1970) 3 Cal. 3"'678, 686.)
25 in this case, Health and Safety Code section 34171(d)(2) shows the Legislature's clear intent to
'1 6 have the statute operate retroactively in the sense that it would apply to contracts entered into before its
2 7 effective date. The statute was enacted on June 28, 2011 and would have gone into effect immediately if
18
17
RULING ON SUBMITTED MATTER
CASI, NO.34-2013-80001441-CU-WM-GDS
Item 4. - 22 ATbim --7/-i-NT 2
I not for the stay issued by the Supreme Court. The fact that the statute applies to agreements entered into
2 "at the time of issuance...of indebtedness obligations", but no later than December 31, 2010,a date prior
3 to enactment of the statute, unmistakably indicates that the statute was intended to apply to agreements
4 already in existence as of its effective date, Respondent DOF therefore was not precluded from applying
5 the statute to the 2009 agreements.
6 Petitioners also contend that failing to treat the payments Linder the 2009 promissory note as
7
enforceable obligations is inconsistent with Health and Safety Code section 34175(a), which states: "It is
the intent of this part that pledges of revenues associated with enforceable obligations of the former
9
redevelopment agencies shall be honored. It is intended that the cessation of any redevelopment agency
10
shall not affect the pledge, the legal existence of the pledge, or the stream of revenues available to meet the
11
requirements of the pledge." Petitioners argue that the grant of a security interest contained in Section 203
12
1 of the Cooperation Agreement constitutes a pledge Of revenues that must be treated as an enforceable
14 agreement.
15 This argument is unpersuasive because it begs the question: it assumes that the 2009 Cooperation
16 Agreement and accompanying promissory note were enforceable obligations when, as a matter of law,
17 they were not, for the reasons stated above.'9
18 Petitioners also argue that Health and Safety Code section 3417 1(d)(2)does not apply to the
19 agreements at issue here, because those agreements are not of the type that the Legislature intended the
20 statute to reach. As support for this argument, petitioners refer to the circurnstances, leading tip to the
1
21 enactment of the redevelopment dissolution laws through AB I x26. Petitioners contend that these
22 circumstances demonstrate that what they refer to as the"nullification" provisions of the redevelopment
23 dissolution laws were intended to apply only to last-minute, non-arni's-length redevelopment agency-
24 sponsor agency transactions that were entered into for the purpose of"circumventing" the pending
25 adoption of AB I x26. Petitioners also argue that the December 30, 2010 date contained in the Statute
26 indicates that agreements entered into earlier than that date were not intended to be affected by the new
27 39 it also assumes that the City was still making lease payments to the Public Financing Authority for the Ernerald
28 Cove project as of 2009. As discussed above, it is not at all clear that this was the case.
18
RULING ON SUBM HTED MKITER
CASE NO3 34-2013-8000144 1-CU-WM-GDS
ATT)HB -7;-:NT 2 Item 4. - 23
I laws.
2 :
Again, petitioners' arguments fail to persuade. Although it seems clear that the Legislature was
3 concerned about the types of last-minuter transactions petitioners describe, nothing in the redevelopment
I P
4 laws in general, or in Health and Safety Code section 34171(d)(2) in particular, indicates that the
Legislature Intended to limit the applicability of the rule that redevelopment agency-sponsor agency
6 agreements would not be considered "enforceable agreements"to the time immediately preceding,the
7 enactment of the laws, or to,a limited group of especially suspicious transactions. Instead, Health and
8 Safety Code section 3417 1(d)(2)flatly states that"any"agreement between a redevelopment agency and
9 its sponsor agency Is not an enforceable agreement, without limitation as to time or type of agreement,
10
unless the agreement falls within one of the stated exceptions.
11
Moreover, the December 31, 2010 date included in the statute applies only to the limited exception
12
13 for agreements entered into at the time of issuance of indebtedness obligations, making such agreements
14 enforceable obligations if entered into prior to that date. This is not ail indication that other redevelopment
1 agency-sponsor agency agreements, not within the scope of the firnited exception, were intended to be
5
16 treated as enforceable obligations if entered into earlier than that date,
17 Finally, petitioners argue that the 2009 agreements regarding the Emerald Cove project have been
18 "immunized"from the redevelopment dissolution laws by virtue of the fact that they were validated by
19 operation of law Linder the validation statutes(Code of Civil Procedure sections 960,et seq.)when no
20 action to challenge them was Filed within the mandated 60-day statute of limitations.
21 The validation statutes provide that a public agency may bring an action to determine the validity
22 of certain inatters which are authorized by law to be determined pursuant though validation actions. (See,
23 Code of Civil Procedure section 860.) If no proceedings are brought by the public agency, "any interested
24 person" may bring an action to determine the validity of the matter in question, (See, Code of Civil
25 Procedure section 863.) In this case,the parties do not appear to dispute the concept that a public agency
26 or at) interested person may bring an action to determine the validity of a public agency contract such as
21 the 2009 agreements at issue here. Accordingly, the Court will assume for purposes of analysis that a
28
19
RULING ON SUBMITTED NIATI"ER
CASE NO.34-2013-8000144 1-C.U-WM-GDS
Item 4. - 24 ATT111413 -76-NT 2
I � validation action could have been brought regarding the 2009 agreements.
2 Validation actions brought by the public agency involved or by an interested party are subject to
3 very short 60-day statutes of limitations, as stated in Code of Civil Procedure sections 860 and 863. There
4 is no dispute that the statute of lim challenge for any I ge to the 2009 agreements expired long ago. It is
5 also clear that once the statute of limitations has expired with regard to a public agency action subject to
6 the validation statutes, no interested person may thereafter file a validation proceeding to challenge that
7 action, (See, e.g,, Graydon v. Pasadena Redevelolyinent Agency(1980) 104 Cal. App. 4"' 631, 646.)
8 None of this, however, supports the proposition advanced by petitioners, which is that pre-existing
9
redevelopment agency-sponsor agency agreements were in any way"immunized"from the effects of the
10
redevelopment dissolution laws. The validation statutes limit the time within which an "'interested person"
II
(or, as the title of Code of Civil Procedure section 863 states, a"private party")may challenge a public
12
agency action. In this case, no interested person or private party has brought an action seeking to
13
14 invalidate the 2009 agreements,or to challenge public agency action, as occurred in Graydon v. Pasadena
15 Redevelopinew Agency, supra. Instead, the Legislature enacted a law declaring(with certain limited
16 exceptions)that redevelopment agency-sponsor agency agreements will not be treated as "enforceable
17 agreements" for the purposes of the redevelopment diSSOILItiOn laws. Thereafter, respondent DOF,the
18 state agency charged with administering the dissolution and wind-down process, applied that law to the
19 21009 agreements.
20 Petitioners cite to nothing in the validation statutes.. or In case law, suggesting that the validation
21 statutes %vere intended to Iiinit the power of the Legislature to enact laws affecting the enforceability of
22 pre-existing agreements between public agencies in general, or between redevelopment agencies and their
23 sponsor agencies in particular.40 Nor do petitioners cite anything in the validation statutes or case law
24 suggesting that they were intended to restrict administrative action taken Linder SLICh legislative
25 enactments. The Court therefore finds that the validation statutes have no application to this matter, and
26
27 40 In this case, petitioners do not argue that any portion of the redevelopment dissolution laws represented an
unconstitutional impairment of contracts between public agencies, or otherwise explicitly assert that the Legislature
28 lacked the authority to enact laws affecting such contracts.
20
RULING ON SUBMIYFED MATTER
CASE NO.34-20 13-80001441-CU-W-GDS Item 4. - 25
ATTII-j-r, -77-:NT 2
I respondent DOF's deterin i nat ions in this case are not barred by those statutes.
2 The Court also notes that, as respondent DOF argues,a validation judgment is binding and
3 conclusive only"...as to all matters therein adjudicated or which at that time Could have been
4 adjudicated". (See, Code of Civil Procedure section 870(a).) Thus, a hypothetical validation judgment
5 regarding the 2009 agreements, or the running of the statute of limitations, would have precluded only
6 claims regarding the validity of those agreements which were, or could have been made,at the time the
7 agreements were made. The redevelopment dissolution laws were not in effect at that time. The effect of
8 Health and Safety Code section 3417 l(d)(2)therefore Could not have been adjudicated before the statute
9
of limitations for a validation action had run. Accordingly, Subsequent administrative action by DOF,
even if assumed to be a validation-type challenge to a public agency action, is not bat-red.
11
The Court accordingly finds that respondent DOF's disapproval of payments relating to the
12
Ernerald Cove project was supported by substantial evidence and legally correct,and therefore inust be
13
14 upheld. Pacific City:
15
16 As described above in the factual finding-,, petitioners clairn that the estimated $6.5 million cost of
17 building 26 affordable housing units in connection with the Pacific City project is an enforceable
18 obligation that respondent DOF should have recognized. Petitioners contend that this cost qualifies as an
19 "enforceable obligation",as that terns is defined in 14calth and Safety Code sections 34167(d)(3)and
20 34171(d)(1)(C), because it represents the cost of complying with an obligation imposed by state law.
21 Specifically, petitioners contend that the state law imposing the obligation is the provision of the
22 Community Redevelopment Law that required redevelopment agencies to make at least 15 percent of all
23 new and substantially rehabilitated dwelling units developed within a project area"...available at
24 affordable housing cost to,and Occupied by, persons and families of low or moderate incorne", with not
25 less than 40 percent of such units to be available to, and Occupied by, very low income households. (See,
26 Health and Safety Code section 334 13(b)(2)(A)(1).) Petitioners argue that this requirement survived the
27
dissolution of.'redevelopment agencies, because it was untouched by AB 1x26 or other redevelopment
28
21
RULING ON SUBM11TED MATTER
CASE NO�34-2013-8000144 1-CU-W,\4-GDS
Item 4. - 26 ATT)aB --7,s-:NT 2
I dissolution legislation, and that it continues to bind the City and its Housing Authority. Thus;they argue,
2 respondent DOF should have determined that the estimated cost of constructing the 26 units of affordable
3 housing was an enforceable obligation.
4 Respondent DOF dues not dispute the contention that the affordable housing requirement of
5 Health and Safety Code section 33413(b)(2)(A)(i)continues to exist and thus binds the City and the
6 Housing Authority. However,respondent DOF contends that the City and its }-lousing Authority are
7
ineligible to receive finding from the RPPTF through the ROPE or due diligence review process because
8
the affordable housing obligation for the Pacific City project did not arise until after the dissolution of the
9
former Redevelopment Agency, and therefore is a separate obligation of the City and its Housing
10
Authority.
11
The Court finds respondent.DOF's contention to be persuasive. The facts of this case demonstrate
12
13 that,although the City originally granted entitlements for the Pacific City project in 2004,and tine
14 Redevelopment Agency and the City entered into a development agreement with the original developer in
15 2006, the project was not built, or even begun,by that developer(or any other) prior to the time the
16 Redevelopment Agency was dissolved by operation of law on February 1, 2012. Instead,the affordable
17 housing obligation for the Pacific City project arose out of subsequent development agreement with a
1$ new developer, and involved a significantly different obligation.
19 As discussed above,the original developer went into bankruptcy before any construction began,
20 and ownership of the project site transferred to a new developer in October 201 1. At this point, the project
21 essentially was defunct, because there was no longer an existing development agreement with a developer
22 under xvltich the project actually would be built. Moreover,although another potential developer had
23 taken over ownership the project site,there is no evidence in the record that there was any assurance at that
24 time that the new developer would continue the project in the same form. The obligation of(lie
25 Redevelopment Agency,any other governmental body,or the developer of the project to build an specific
p y g yg p p 1 y P
26
number of affordable Dousing units could not be determined until the final form of the project was known
27
through execution of a final development agreement (and any amendment of the earlier approvals if
28
22
RULING ON SUBMITTED MA,r,rF-R
CASE NO.34-20 t 3-8000 t 44 t-CU-wM-GDS
ATT)H _;9-:NT 2 Item 4. - 27
I required by changes in the project). Thus, in effect, any affordable housing obligation arising out ofthe
2 project as planned in 2004 and 2006 also was defunct no later than October 2011.
3 In fact,the City and the new developer did not enter into a new development agreement until
4 August 2012, after the Redevelopment Agency had been dissolved by operation of law. At the same time,
5 the City formally terminated the first development agreement. The new agreement revived the project,
6 including the original plan to construct 516 dwelling units. At this point,the execution of the new
7 1
development agreement revived the affordable housing obligation as well (albeit in a different form, as
discussed below). However, because the Redevelopment Agency had been dissolved at this point, it was
9
not a party to the new development agreement, which was between the City and the new developer. The
10
second development agreement was a new agreement, not involving the Redevelopment Agency. The
11
existing affordable housing obligation thus may not simply be traced back to the original 2004
12
entitlements or the 2006 development agreement. The Court accordingly concludes that the existing
13 L, C,
14 affordable housing obligation arising under the second development agreement is a new obligation of the
1 City, and not a surviving obligation of the former Redevelopment Agency.
5
16 This conclusion is supported by the fact that the governmental affordable housing obligations
17 arising out of the two development agreements for the Pacific City project differ significantly. In the first
18 version of the project,the City,the Redevelopment Agency and the original developer agreed that all
19 affordable housing units would be developed off the actual project site, with the developer paying the
20 Redevelopment Agency$20 million and the Redevelopment Agency developing a total of 117 units
21 elsewhere in the merged redevelopment area. In the second version of the project,the City and the new
22 developer agreed that the new developer would construct a majority of the affordable housing units(5 1)
23 on-site,with the City's Housing Authority developing a total of 26 units elsewhere. This new and
24 different agreement may not be treated as a continuation of the original agreement involving the former
25 Redevelopment Agency, because the.Agency, if it had been in existence at the time of the second
26 development agreement, would have been barred by the"freeze" provisions of the redevelopment
27 dissolution laws from amending or modifying existing agreements,obligations, or commitments with any
28
23
RULING ON SUBMITTED MATTER
CASE NO. 34-2013-8000144 1-CU-WNI-GDS
Item 4. - 28 AM14B -8,,.)-'.NT 2
I entity for any put-pose, (See, Health and Safety Code section 34163(c).) Thus, the existing governmental
2 affordable housing obligation for the Pacific City project may not be traced back to the original
3 entitlements and the First development agreement. The obligation arose in its actual, current form as an
4 independent obligation of the City and its Housing Authority only after the Redevelopment Agency was
In M
5 dissolved and a new development agreement was executed.
6 1
The intent of the redevelopment dissolution laws is to provide for payment of the enforceable
7 obligations of former redevelopment agencies. (See, for example, Health and Safety Code section
8 34175(a): "It is the intent of this part that pledges of revenues associated with enforceable obligations of
9 the former redevelopment agencies are to be honored.") In this case, the existing governmental obligation
10
to develop 26 units of affordable housing in connection with the building of the Pacific City project is an
11
obligation of the City(and its Housing Authority) which arose through execution of a development
12
13 agreement in August 2012, after the former Redevelopment Agency had been dissolved,' It is not an
14 obligation of the former Redevelopment Agency. Thus, the Court finds that respondent DOF's
15 disapproval of payments relating to the Pacific City project was supported by substantial evidence and is
16 legally correct, and therefore must be upheld.
17 Discussion: General Equitable Considerations
19 After arguing the met-its of whether the payments related to the Emerald Cove and Pacific City
19 projects are enforceable obligations within the meaning of the redevelopment dissolution laWS, petitioners
20 conclude by arguing that it simply".. Would be inequitable to allow the taxing entities to keep the
21 petitioner's motley,,.42 The sole basis for this argument Is petitioners' contention that the amounts it
22 claims for these projects represent enforceable obligations. However, as discussed at length above,those
23 amounts do not represent enforceable obligations. Consequently, as petitioners state,substantial amounts
24 of'money petitioners otherwise might have been entitled to use for their own purposes will be released to
25
26 4 1 The Court observes that any governmental obligation to enforce the new developer's agreement to provide 56 units,
on the,project site is also an obligation of the City that arose out of the execution of the second development
27 agreement,and not an obligation of the former Redevelopment Agency.
28
42 See,pet C, 13
petitioners' Opening Brief on Merits, Heading V. , page 31
24
RULING ON SUBMITTED MATTER
CASE NO. 34-2013-8000144 1-CU-WM-GDS
ATT)1113 -8 1-NT 2 Item 4. - 29
I other taxing entities under the operation of the redevelopment dissolution laws. Admittedly, this result
'nay create some financial difficulties foi-the petitioners, but those difficulties are not injuries the Court can
redress. The Legislature must be presumed to have considered the possible consequences to public entities
4 - redevelopment
and to have balanced the various interests and equities involved when it enacted the i
5 dissolution laws. Petitioners' argument that the result is inequitable is little more than an argument against
6 the Legislature's policy choice. Whether the dissolution laws represent good or bad policy is not a matter
7 for the Court. Petitioner's equitable argument therefore provides no basis upon which the Court may
8
invalidate DOF's actions in this case.
9
Discussion: Constitutional Validity of AB1484 Enforcement Mechanisms
10
Petitioners contend that the provisions of the redevelopment dissolution laws which authorize the
11
offset of sales and use taxes and the reduction in property taxes are constitutionally invalid because they
12
13 violate Section 24(b) (adopted by Proposition 22 in 2010) and Section 25,5(a)(2)(A)(adopted by
14 Proposition I A in 2004)of Article XIII of the California Constitution, Because the Court has determined
15 that the Emerald Cove and Pacific City projects do not represent"enforceable obligations"tinder the
16 redevelopment dissolution laws, and because the evidence submitted in this case demonstrates that
17 respondent DOF has asserted that it will enforce its determinations'to that effect through the use of sales
18 and use tax offsets, the Court finds it necessary to address the constitutional issue, at least as to sales and
19 use tax OffSetS.43
20 Although petitioners' constitutional challenge to the enforcement provisions of AB 1484 arises out
C
21 of a particular case, their argument is framed, in essence, as a facial constitutional challenge. In other
22 words, petitioners contend that the challenged enforcement provisions, which are found in Health and
23
24 43 See,respondent DOF's lettei-to the City of Huntington Beach Successor Agency dated August 5,2013,stating that
DOF"_intends to notify the Board of Equalization to withhold the City of Huntington Beach's sales and use tax in
25 an amount equivalent to the ordered sum. This withholding will occur in September 2013." (See, Declaration of
Kellee Fritzal, paragraph 59 and Exhibit DD.) See also, respondent DOF's letter to the City of Huntington Beach
26 Successor Agency dated August 8,2013, superseding the August 5 letter,which states that"...in the event of a
continued failure to remit the ordered sure,Finance intends to seek a withhold of the City's sales and use tax in an
27 alTIOUnt equivalent to the ordered sum no earlier than November 2013." (See, DOF's Request for Judicial Notice
filed September 30, 2013, Exhibit D) As of the date of this ruling,there is no evidence that respondent DOF actually
28 has ordered the offsets, but there is also no evidencc that it has withdrawn its threat to make that order.
25
RULING ON SUBMIT'FED MATTER
CASE NO. 34-2013-8000144 1-CU-WM-GDS
Item 4. - 30 ATTkui _,g2_NT 2
I Safety Code section 34179,6(h)(1)(C), violate the California Constitution without reference to the
2 particular facts of this case.
3 On December 9,2013,the Court issued a ruling in another redevelopment-related case,League of
4 California Cities, et al., v, Ana J. Matosantos, et al., Case No.2012-80001275, finding that the sales and
5 use tax enforcement provision contained in Health and Safety Code section 34179.6(h)(1)(C)facially
6 violates Article XIII, Section 24(b)of the California Constitution and that DOF therefore may not lawfully
7 use, or threaten to use it, in redevelopment dissolution cases. The parties in this case have presented no
8 substantially new or different evidence or arguments than those presented to the Court in the League of
9
California Cities case. The Court therefore adopts the ruling in the League of California Cities case as its
10
ruling on the constitutional issue in this case. That ruling, with slight changes adapting it to the
I I
circumstances of this case, is set forth as follows.
12
13 To prevail on their facial constitutional challenge to the sales and use tax offset provision of
14 Health and Safety Code section 34179.6(h)(1)(C), petitioners carry a heavy burden. "The courts will
15 presume a statute is constitutional unless its unconstitutionality clearly, positively,and unmistakably
16 1 appears; all presumptions and intendments favor its validity." (See, City of Los Angelis v, Superior Court
17 (2002)29 Cal. 4" 1, 10-11.) If there is any doubt as to the Legislature's power to act in any given case,
18 the doubt should be resolved in favor of the Legislature's action, Restrictions and limitations imposed by
19 the Constitution are to be Construed strictly,and are not to be extended to include matters not covered by
20 the language used, (See,California Redevelopment Associalion v. Matosantos(2011) 53 Cal.4"' 231.)
21 The traditional rule governing facial constitutional challenges has been that a statute is invalid on
22 its face only when it is incapable of any valid application. A party challenging the facial validity of the
23 statute"...cannot prevail by suggesting that in some future hypothetical situation constitutional problems
24 may possibly arise as to the particular application of the statute.... Rather, petitioners must demonstrate
25 that the act's provisions inevitably pose a present total and fatal conflict with applicable constitutional
26 provisions." (See, Tobe v. City of Santa Ana(1995)9 Cal. 4'h 1069, 1084,quoting Pacific Legal
27 Foundation v. Brown (1981) 29 Cal. 3 rd 168, 180-18 1.) If the court can conceive of a situation in which
28
26
RULING ON SUBMITTED MA,rTER
CASE NO,34-2013-80001441-CU-WM-GDS
ATTV11B -u-'NT 2 Item 4. - 31
I the statute could be applied in a constitutionally valid manner, the facial challenge must be rejected.
2 This traditional rule has been relaxed in certain cases in favor of a more lenient standard, in which
3 the challenger need only dernonstrate that a statute conflicts with the Constitution "in the generality or
4 great majority of cases." (See, Guat-dionship qfAnn S. (2009)45 Cal. 4", 1110, 1126.�4
5 In this case, the Court need not resolve the issue of which of these two standards applies, because
6 the sales and use tax offset provision of I lealth and Safety Code section 34 1 79.6(h)(1)(C) is
7 unconstitutional under either standard. (See, Zzickernmn v. Board of Chiropractic Examiners(2002)29
9 Cal, 0'32, 39: "We need not resolve this controversy [over the applicable standard] because the result
9
would be the saine under any of the tests.
10
Article X111, Section 24(b)of the California Constitution provides: "The Legislature may not
11
reallocate, transfer, borrow, appropriate, restrict the use of, or otherwise use the proceeds of any tax
12
imposed or levied by a local government solely for the local government's purposes."
13
14 It is undisputed that sales and use taxes are taxes levied by local governments solely for the
15 purposes of those local governments. Sales and use tax revenues therefore fall squarely .vithin the
16 protection of Article X111, Section 24(b).
17 Moreover, it is undisputed that the effect of the challenged sales and use tax offset provision, once
IS used, will be to take sales and Use tax revenues from one local government entity for the ultimate Purpose
19 of paying there to other local government entities. The very purpose of the due diligence review process is
20 to determine the amount of cash and cash equivalents that are available for allocation fl-0111 successor
21 agencies to taxing entities. (See, Health and Safety Code section 34179.6(a),(0.) The purpose of the
22 sales and use tax offset provisions is to give DOF a means of making this transfer when a city or county
23 actually holds the funds that DOF has determined should be transferred to other taxing entities and refuses
24 to turn them over. Thus, it is clear that the challenged sales and use tax offset provisions operate to
25 reallocate,transfer, appropriate or otherwise use the proceeds of sales and use taxes within the meaning of
26
27 44 As the California Supreme Court has stated: "The standard governing a facial challenge to the constitutional
-
validity of a statute has been the subject of controversy in this Court," (See, Kaslai-v. Lockyei-(2000)23 Cal, 4"'457,
28 502.)
27
RULING ON SUBMUTEDMATTER
CASE NO, 34-2013-8000144 1-CU-WM-GDS
Item 4. - 32 AM 1111 -84-1 NT 2
I Article X111, Section 24(b).
2 The Court accordingly concludes that the sates and use tax offset provision violates Article X111,
3 Section 24(b) on its face.
4 Respondent DOF contends that the sales and use tax offset provision is constitutionally valid
5 because it represents a remedy or penalty for wrongful conduct by successor agencies and cities or
6 counties in the context of redevelopment dissolution,and the Constitution does not foreclose the use of
7 sales and use tax offsets as a remedy or penalty.
8 In making this contention, respondent DOF argues that the purpose of Article X111, Section 24(b),
9
and the intent of the voters who enacted it through Proposition 22,was to prevent statewide transfers of
4-1
10
revenue or other actions that affected the revenues of all local entities throughout the state, but not to
II
prevent the use of limited transfers in the form of remedial or penalty offsets in a handful of cases.
12
13 Evaluating this contention requires the Court to determine the proper construction and
14 interpretation of Article XIII, Section 24(b). In matters of legislative construction, including constitutional
15 interpretation,the overriding concern is to determine the intent of the legislation in order to effectuate the
16 purpose of the law. Where the law is one that has been enacted by the voters, it is the intent of the voters
17 that controls,
18 While the court looks first to the language of the measure,the literal meaning of a measure Must
19 be in accord with its purpose. A literal construction should not prevail if it is contrary to the legislative
20 intent apparent in the measure. (See, Trq&SchoolOnline, Inc. v, Clarke (2003) 112 Cal. App. 4"' 736,
21 740.) "The intent prevails over the letter, and the letter will, if possible, be read so as to conform to the
22 spirit of the act." (M, quoting Lungren v. Deukmejian(1988)45 Cal. 3 d 727, 735; see also, [,gland
23 Police Officers Association v. Cit))of Upland(2003) 111 Cal. App.4"' 1294, 1304.) The courts inust give
24 legislation a reasonable construction which conforms to the apparent purpose and intention of the
25 lawmakers who enacted it, (See, TraffieSchoolOnline, Inc., v. Clarke, supra, 112 Cal. App, 4"'at 740.)
26 Once the intent of the electorate has been ascertained,the provisions must be construed to conform to that
27 intent: "the voters should get what they enacted, not more,and not less," (See,People v. Park(2013) 56
28
28
RULING ON SUBMITTED MATTER
CASE NO.34-2 013-8000144 I-CU-WM-GDS
AMH -s�-:NT 2
Item 4. - 33
I Cal, 4"'782, 796, quoting Hodges v, Superior Court (1999) 21 Cal. 4" 109, 114..)
2 in determining the purpose of legislation, both the policy expressed in its terms and the object
3 implicit in its history and background should be recognized, by reference to the language used,the ballot
4 sulninary, and the argument and analysis presented to the voters. (See,In re Schaefer(1981) 116 Cal.
5 App. 3'6 588, 597;Amador Valley Joint Union High School District v. State Board of Equalization (1978)
6 22 Cal. 3d 208, 245-246.) The object that the legislation seeks to achieve and the evil that it seeks to
7 prevent are of prime consideration in its interpretation. (See, People ex rel. Sat?Francisco Bc�y
8 Conservation & Development Commission v. Etnet�lville(1968) 69 Cal. 2"d 533, 543.)
9 Looking first to the language of Article X III, Section 24(b), the Court Finds that such language is
10
framed as a complete prohibition t�-
against the Legislature taking or using local tax revenues. Article X111,
Section 24(b) contains no exceptions from this prohibition for any reason. The language of the
12
Constitution itself therefore provides no support for the contention that the intent of the voters in enacting
13
14 the measure was to permit the Legislature to take or use local tax revenues for a limited purpose as a
15 remedy or penalty applicable to only a few local entities. instead,the broad, prohibitory language of
16 Article X111, Section 24(b)appears to reflect the voters' intent to permit no exceptions from that
17 prohibition under any circumstances.
Is Looking next to the ballot measure through which Article X111, Section 24(b)was enacted,
19 Proposition 22 contained an explicit statement of purpose: "'The purpose of this measure is to
20 conclusively and completely prohibit state politicians in Sacramento from seizing, diverting, shifting,
21 borrowing,transferring, suspending, or otherwise taking or interfering with revenues that are dedicated to
22 funding services provided by local government or funds dedicated to transportation improvement projects
23 and set-vices."45
24 Nothing in this statement of purpose indicates that the intent of the voters was to permit the taking
25 of local tax revenues for remedial or penalty purposes, even on a limited basis. Instead,the language of
26 the statement of purpose, particularly the language highlighted above, indicates that the intent of the voters
27 4-1 See, DOF's Request for Judicial Notice filed in the League of fbrnia Cities case on October 25,2013, Exhibit
28 A,page DOFO I I (emphasis added).
29
RULING ON SUBM17TED MATTER
CASE NO. 34-20 t 3-8000144 1-CU-WNI-GDS
Item 4. - 34 AM RB -M-NT 2
I was to enact a total prohibition on the taking of local tax revenues for any reason. This is clear from the
2 fact that the harm Proposition 22 was intended to prevent was explicitly described as legislative action that
interferes with revenues dedicated to funding services provided by local government. Taking local sales
4 and use tax revenues in any case, for any reason, including as a remedy or penalty under the
5 redevelopment dissolution laws, undeniably interferes with revenues dedicated to funding services
6 provided by the local government affected by such action. There is nothing in the statement of purpose, or
7 in Article X111, Section 24(b), that Suggests that the voters intended to permit the Legislature to interfere
8 with the revenues of even one or a few local governments,even those that could be described as
9
`'wrongdoers".
10
Tfie Court therefore finds that respondent DOF's contention regarding the inapplicability of
I I
Article X111, Section 24(b)to rernedial or penalty offsets to be unpersuasive. Instead, the Court finds that
12
13 the intent of the voters in enacting Article XIII, Section 24(b) was to prevent the Legislature from taking
14 local tax revenues from any local entity for any purpose, and that there is no exception for remedies or
15 penalties involving a limited number of local entities under the redevelopment diSSOILition laws.
16 Interpreting Article X111, Section 24(b) in this manner gives the voters what they enacted, not more and
17 not less.
18 Based strictly on the language of the challenged statues and Article X111, Section 24(b),the Court
19 also concludes that(here does not appear to be any manner in which sales and use tax offsets could be
20 done without violating the Constitution. Because Article XIII, Section 24(b) represents a complete
21 prohibition against the legislative use of sales and use tax revenues for any PLIJ-POSC,every offset, even an
22 offset imposed against a local entity wrongfully withholding funds found to be Unencumbered through the
23 due diligence process, would represent a use of sales and use tax revenues forbidden by the Constitution.
24 Even construing Article X111, Section 24(b) strictly, and resolving all doubts in favor of the Legislature's
25 plenary authority,the use of sales and use tax offsets cannot be deemed constitutiona I 46
21
27 41, In the Lecigne of CalVbrnia Cities case,the intervenors also argued that the sales and use tax offset provisions
could be reformed by the Court to eliminate constitutional defects. Respondent DOF does not raise that contention in
28 this case,so the Court does not address it in this ruling. The Court rejected it in the League of California Cities case.
30
RULING ON SUBMITTED MATTER
CASE.NO.34-2013-80001441-CU-WM-GDS
ATT11113 -87-NT 2 Item 4. - 35
I 'I"he Court therefore concludes that petitioners are entitled to relief with regard to the sales and use
2 tax offset provision of Health and Safety Code section 34179.6(h)(1)(C). Judgment shall be entered in
3 favor of plaintiffs declaring that this provision is invalid under Article XIII, Section 24(b)of the California
4 Constitution. A writ of mandate and an injunction shal I be issued directing respondent DOF to cease any
5 41
use or threatened use of that provision in this case.
6 Propert-
y Tax Reductions-.
7 In addition to the sales and use tax offset provisions, Health and Safety Code section
.W79,6(h)(1)(C) also provides an alternative remedy in the due diligence review process. If DOF does
9 not order a sales and use tax offset, "...the county auditor-controller may reduce the property tax
10
allocations of the city, county, or city and County that created the former redevelopment agency".
11
Petitioners also challenge that provision as unconstitutional.
12
Unlike the situation with the sales and use tax offsets, however, petitioners have provided no
13
14 evidence to the Court that the Orange County Auditor-Controller has threatened to take, or has taken.. any
15 action under this statute to reduce the property tax allocations of any local entity as a result of the due
16 diligence process.48 Fu.rtlien-nore, the Court notes that possible property tax reductions under Health and
17 Safety Code section 34179,6(h)(1)(C) involve an action that is entirely within the discretion of the county
18 auditor-controller, in that the statute does not provide that respondent DOF may order or direct the county
19 auditor-controller to reduce property tax allocations.49 Petitioners' challenge to the property tax reduction
20 provision of Health and Safety Code section 3417M(h)(1)(C) is not ripe. It therefore does not appear to
21 47 in light of the ruling that the challenged sales and use tax offset provision is unconstitutional under Article X111,
Section 24(b),the Court finds it unnecessary to address the issue of whether that prevision is also unconstitutional
22 under Article X111, Section 25.5(a)(2)(A), as petitioners argue.
23 "The Court notes that the Orange County Auditor-Controller was named as a respondent in the case,and filed ,in
Answer on April 17,2013,but has not filed any briefing on the petition.
1
24 Compare Health and Safety Code section 34179.6(h)(2),which permits DOF,as an alternative or additional
remedy to those stated in paragraph(1),to direct the county-auditor Controller to deduct unpaid due diligence
,
25 demands from future allocations of property tax to a successor agency. In this case, petitioners focus their challenge
on the potential for reduction of the City's property tax allocations,and do not specifically challenge the enforcement
26 mechanism involving successor agency property tax allocations under Health and Safety Code section 34179.6(h)(2).
The Court therefore makes no ruling on the validity of that section, but notes that the most recent evidence of
27 potential enforcement actions, as stated in respondent DOF's letter dated August 8, 2013, involves only the
withholding of sales and use tax revenues,and not reduction of the successor agency's property tax allocations. (See,
M
28 respondent DOF's Request for Judicial Notice filed September 30,2013, Exhibit D.)
31
RULING ON SUBMITTED MATTER
CASE NO.3 4-2013-80001441-CU-WM-G DS
Item 4. - 36 ATT)1113 -gs-NT 2
I the Court that declaratory or other relief is warranted at this time,
2 Conclusion
For the reasons stated above,the Court finds that the payments related to the Emerald Cove and
4 Pacific City projects are not"enforceable obligations"within the meaning of the redevelopment
5 dissolution laws, and thus denies the petition for writ of mandate insofar as it challenges respondent
6 DOF's determination to that effect, The Court also concludes, however,that the provisions of the
7 redevelopment dissolution laws that permit respondent DOF to order sales and use tax offsets against the
8
petitioners are facially unconstitutional and may not be used in this case. The petition for writ of mandate
9
is therefore granted and a writ shall issue, along with a declaratory judgment and a permanent injunction,
to
directing respondent DOF to refi-ain from ordering, or threatening to order, sales and use tax offsets
11
against petitioners in this case. The Court denies petitioners' requests for relief regarding property tax
12
reductions.
13
14 In accordance with Local Rules 2.07 and 2.15, counsel for petitioners is directed to prepare a
15 formal order granting declaratory and injunctive relief and the petition for writ of mandate on their claims
16 regarding sales and use tax offsets, and otherwise denying such relief, incorporating this Court's ruling as
17 an exhibit; and a Sepal-ate judgment; submit the order and judgment to all other counsel for approval as to
18 form in accordance with Rule of Court 3.1312(a);and thereafter submit them to the Court for signature
19 and entry of judgment in accordance with Rule of Court 3.13 12(b).
20
21
22
23
24 DATED: January 29, 2014
25
JudlAdemic -IA 4K Y
26 Superior Court of Cali rrnia,
County of Sacramento
27
28
32
RULING ON SUBMI'[TED MATTER
CASE NO.34-2013-90()01441-CU-WM-GDS
ATTkm -sq-NT 2 Item 4. - 37
CERTIFICATE OF SERVICE BY MAILING
(C.C.P. Sec. 1013a(4))
2
1, the undersigned deputy clerk of the Superior Court of California, County of
3 Sacramento, do declare under penalty of perjury that I did this date place a copy of the above-
4 entitled RULING ON SUBMITTED MATTER in envelopes addressed to each of the parties, of
5 their counsel of record as stated below, with sufficient postage affixed thereto and deposited the
6 same in the United States Post Office at 720 9"' Street, Sacramento, California.
7
8 GUILLERMO A. FRIAS, ESQ. SUSAN K. SMITH
KANE, BALLMER & BERKMAN DEPUTY ATTORNEY GENERAL
9 515 South Figueroa Street, Suite 1850 300 South Spring Street, Suite 1.702
Los Angeles, CA 90071 Los Angeles, CA 90013
10
I I SETH GOLDSTEIN MARK SERVTNO
12 DEPUTY ATTORNEY GENERAL DEPUTY COUNTY COUNSEL
P.O. Box 944255 333 West Santa Ana Blvd,, Suite 407
13 Sacramento, CA 94244-2550 Santa Ana, CA 92701
14
15 AMELIA M. YURCH, ESQ. LAURIE A. SHADE, Senior Deputy
WINET PATRICK GAYER 333 West Santa Ana Blvd., Suite 407
16 CREIGHTON & HANES P.O. Box 1379
1215 West Vista Way Santa Ana, CA 92702-1379
17 Vista, CA 92083-6227
18
19 M. LOIS BOBAK, ESQ. ANN LEVIN, ESQ.
WOODRUFF, SPADLIN & SMART, RUTAN & TUCKER, LLP
20 AC 611 Anton Blvd, Suite 1400
555 Anton Blvd., Suite 1200 Costa Mesa, CA 92626-1931
21 Costa Mesa, CA 92626-7670
22
Superior Court of California,
23 County of Sac' memo
24
Dated: January 29,2014 By: S. E
25 Deputy Clerk
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27
28
33
RULING ON SU13M11TED j%,IAT['ER
CASE NO.34-20 1 3-8000 1 44 1-CU-WM-GDS
Item 4. - 38 ATT)HB -go-:NT 2