Opinion
C077238
04-30-2018
CITY OF ONTARIO, AS SUCCESSOR IN INTEREST, ETC. et al., Plaintiffs and Appellants, v. MICHAEL COHEN, AS DIRECTOR, ETC. et al., Defendants and Appellants; COUNTY OF SAN BERNARDINO et al., Real Parties in Interest and Respondents.
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 34201380001625CUWMGDS)
This case involves the "Great Dissolution" legislation freezing operations of community redevelopment agencies (RDAs) and then dissolving them and winding-up their affairs. (Health & Saf. Code, §§ 34161-34169.5 [Part 1.8 freeze component], and Health & Saf. Code, §§ 34170-34191.6 [Part 1.85 dissolution component]; unless otherwise stated, statutory section references that follow are to the Health and Safety Code.)
Plaintiffs City of Ontario (City), as a city and as "successor agency" to the former Ontario Redevelopment Agency (RDA), collectively "appellants," appeal from a judgment insofar as it partially denied their petition for writ of traditional mandate and complaint for declaratory and injunctive relief.
Defendants/respondents are Michael Cohen as Director of the Department of Finance, to whom we refer as DOF, and the State Board of Equalization (BOE), as administrator of local sales and use taxes at DOF's direction. We refer to BOE despite the 2017 reassignment of much of its work to the California Department of Tax and Fee Administration. (Gov. Code, §§ 15570, 15570.22; Rev. & Tax. Code, § 20.5.) Another defendant, Larry Walker as Auditor-Controller of San Bernardino County, does not participate on appeal and indicates intent to comply with whatever this court decides.
Real parties in interest and respondents are local taxing entities County of San Bernardino and numerous school districts, flood and conservation districts, and a utilities agency. They have not filed a brief in this court.
Appellants challenge the judgment to the extent it upheld DOF's disallowance of certain transfers of RDA funds to City pursuant to agreements entered into before the 2011 Dissolution Law. Appellants contend these were "enforceable obligations" under the Dissolution Law, and DOF's determination to the contrary misinterpreted the statutes and violated a constitutional provision of Proposition 22 prohibiting the Legislature from redirecting RDAs' tax allocations. (Cal. Const., art. XIII, § 25.5, subd. (a)(7).)
The specific RDA transfers at issue on appeal are as follows:
(1) June and July 2011 transfers of $8.9 million from RDA to City to prepay with interest a 1994 loan of $3.5 million pursuant to an Oaks School Promissory Note;
(2) A December 2011 transfer from RDA to City pursuant to a "Reimbursement Agreement" related to lease revenue bonds issued in 2001, and a proposed transfer to reimburse for bonds issued in 2007; and
(3) June and July 2011 payments to City on tax allocation bonds ("TABs") issued by RDA in 2001, all of which were purchased by City.
Appellants also challenge DOF's determination that the Dissolution Law did not cancel an asset of RDA, i.e., City's obligation to repay money borrowed from RDA in 1998 ("RDA Advance").
DOF and BOE cross-appeal from the trial court's conclusion that a particular remedy contained in section 34179.6, subdivision (h), allowing DOF to recover misspent funds through an offset of future sales and use tax or property tax allocations ("SUT Offsets"), violates a Proposition 22 provision in California Constitution, article XIII, section 24, subdivision (b).
Applying de novo review and drawing from our recent opinions on this subject, we conclude the trial court did not err and we affirm the judgment in its entirety.
FACTS AND PROCEEDINGS
Before dissolution, the Community Redevelopment Law (CRL) authorized cities and counties to form community RDAs to assist in revitalizing blighted areas. (§ 33000 et seq.) Funding was provided by "tax increment financing," authorized by California Constitution, article XVI, section 16. (Cuenca v. Cohen (2017) 8 Cal.App.5th 200, 209 (Cuenca).) Public entities entitled to receive property tax revenue in a redevelopment project area were allocated a portion based on assessed value before the effective date of the redevelopment plan. (Id. at pp. 209-210.) Tax increment created by the increased value of project area property went to the RDA for repayment of debt incurred to finance the project. (Cal. Const., art. XVI, § 16, subds. (a), (b); § 33670, subds. (a), (b); Cuenca, at p. 210.) In essence, property tax revenues for entities other than the RDA were frozen, while revenue from any increase in value was awarded to the RDA on the theory that the increase was the result of redevelopment. (Cuenca, at p. 210.)
"Over the years, 'a perception had grown that some [RDAs] were used as shams to divert property tax revenues that otherwise would fund general local governmental services . . . .' [Citations.]" (Cuenca, supra, 8 Cal.App.5th at p. 210.) RDAs entered agreements with their "sponsor[] entities," i.e., cities, counties, or cities and counties, that created the RDAs and staffed RDA boards with officials of the sponsoring entity. (§ 34171, subd. (n); City of Tracy v. Cohen (2016) 3 Cal.App.5th 852, 855 (Tracy).) These "sponsor agreements" locked up an ever-increasing share of local property taxes. (Tracy, at pp. 855-856.)
In January 2011, Governor Brown initiated a public discussion about abolishing RDAs, in partial response to a state budget crisis, and in June 2011 the Legislature enacted the Dissolution Law freezing RDA operations and providing an orderly process for dissolving RDAs and winding up their affairs. (California Redevelopment Assn. v. Matosantos (2011) 53 Cal.4th 231, 250 (Matosantos); City of Pasadena v. Cohen (2014) 228 Cal.App.4th 1461, 1463-1467.)
Our Supreme Court upheld the law dissolving RDAs (commonly "AB 26," shorthand for Assem. Bill No. 1X 26; Stats. 2011, 1st Ex. Sess. 2011-2012, ch. 5), but invalidated a companion law (not at issue here) that would have allowed the continuation of RDAs in certain circumstances. (Matosantos, supra, 53 Cal.4th 231.) As therein described, Assembly Bill No. 26 consisted of two principal components, codified in two new parts of the Health and Safety Code. Part 1.8 (§§ 34161-34169.5) was the "freeze" provision, effective immediately upon gubernatorial signature on June 28, 2011, and Part 1.85 (§§ 34170-34191.6) was the "dissolution component." The latter dissolution component did not become operative until after the decision in Matosantos, which lifted a judicial stay of Part 1.85 and reformed its effective date from October 1, 2011, to February 1, 2012. (See Matosantos, at pp. 250-251, 274-275.)
The 2011 legislation made successor agencies responsible for winding down the outstanding "enforceable obligations" of the former RDAs. Successor agencies, the boards of which usually are also the officials of the former sponsoring entity, are separate legal entities from the sponsor. (§§ 34171, subds. (j), (d), 34173, subd. (g); City of Brentwood v. Campbell (2015) 237 Cal.App.4th 488, 491, fn. 2 (Brentwood).)
The freeze component of the 2011 legislation did not clearly exclude sponsor agreements from the definition of enforceable obligations. "During the freeze [beginning June 2011], [RDAs] were authorized to continue distributing tax increment pursuant to enforceable obligations, the definition of which included 'sponsor agreements' between a former [RDA] and its sponsor agency." (Brentwood, supra, 237 Cal.App.4th at p. 494, citing §§ 34167, subd. (d) [enforceable obligations included "[l]oans of moneys borrowed by the [RDA] for a lawful purpose . . . to the extent they are legally required to be repaid pursuant to a required repayment schedule or other mandatory loan terms" and any legally binding and enforceable agreement or contract that is not otherwise void as violating public policy], § 34169, subd. (a) [until successor agencies are in place, RDAs shall continue to make scheduled payments for enforceable obligations as defined in § 34167, subd. (d)].)
However, the freeze component of the 2011 legislation acknowledged concern about potential abuse beginning in January 2011, when the Governor first proposed abolishing RDAs. Thus, under section 34167.5, as enacted in the freeze component of the Dissolution Law, "the Controller shall review the activities of [RDAs] in the state to determine whether an asset transfer has occurred after January 1, 2011 [italics added]" between an RDA and the sponsoring entity that created the RDA. If the assets were not contractually committed to a third party, the Controller was to order the return of the assets to the RDA. (§ 34167.5, as added by Stats. 2011-2012, 1st Ex.Sess., ch. 5 (A.B. 26) § 6, eff. June 29, 2011; see also, § 34167, subd. (a) [freeze component was intended to preserve corpus of RDA funds so they may be used to fund core governmental services including police and fire protection services and schools].)
In the dissolution component, the 2011 legislation excluded sponsor agreements from the definition of enforceable obligations. (§ 34171, subd. (d)(2) [" 'enforceable obligation' does not include any agreements, contracts, or arrangements between the city . . . that created the [RDA] and the former [RDA]"]; Brentwood, supra, 237 Cal.App.4th at p. 494.) "[T]he Legislature could well recognize that because of the conjoined nature of the governing boards of redevelopment agencies and their community sponsors, such obligations often were not the product of arm's-length transactions." (Matosantos, supra, 53 Cal.4th at p. 258, fn. 12.)
In 2012, the Legislature enacted Assembly Bill No. 1484 ("AB 1484," Stats. 2012, ch. 26, eff. June 27, 2012) adding restrictions to the dissolution process. To the extent not clearly provided by the 2011 legislation, "[t]he 2012 audit process [AB 1484] represents a legislative rethinking in light of the resulting scurry on the part of sponsors and their conjoined [RDAs] in response to the announced intention in January 2011 to overturn their lucrative apple cart." (Brentwood, supra, 237 Cal.App.4th at p. 499 & fn. 14.) AB 1484 accordingly requires an audit of successor agencies and a due diligence review (DDR) to identify "[t]he dollar value of any cash . . . transferred after January 1, 2011, through June 30, 2012, by the redevelopment agency or the successor agency to [a sponsoring entity] and the purpose of each transfer." (§ 34179.5, subds. (a), (c)(3); italics added.)
AB 1484 does not change the general definition of "enforceable obligations" that already excluded agreements between a former RDA and its creator, with exceptions. (§ 34171, subd. (d)(2) [" 'enforceable obligation' does not include any agreements, contracts, or arrangements between the city . . . that created the [RDA] and the former [RDA]"]; Tracy, supra, 3 Cal.App.5th at p. 859.) However, AB 1484 added section 34179.5, which required the DDR to include the "dollar value of assets and cash and cash equivalents transferred after January 1, 2011 [italics added], through June 30, 2012, by the [RDA] or the successor agency to the city . . . that formed the [RDA] and the purpose of each transfer. The review shall provide documentation of any enforceable obligation that required the transfer." (§ 34179.5, subd. (c)(2).) The review shall add to the net balance of available funds any amounts transferred to sponsor agencies if an enforceable obligation to make that transfer did not exist, and the resulting sum is available for allocation to affected taxing entities. (§ 34179.5, subd. (c)(6); City of Bellflower v. Cohen (2016) 245 Cal.App.4th 438, 445-446 (Bellflower).)
DOF determines whether assets of former RDAs are (1) encumbered so as to be retained by the successor agencies for payment of enforceable obligations, or (2) available for transfer to local taxing entities. (§§ 34179.5, 34179.6.) DOF may order return of assets improperly transferred from RDAs to the sponsoring entity as early as January 2011, which is sometimes referenced as a "claw back." (§§ 34179.5, subds. (b) & (c), 34197.6, subds. (c) & (d); City of Culver City v. Cohen (2017) 14 Cal.App.5th 1, 13 (Culver City); Cuenca, supra, 8 Cal.App.5th at pp. 210-211; Tracy, supra, 3 Cal.App.5th at pp. 855-856, fn. omitted.)
Brentwood held the Legislature could constitutionally invalidate predissolution sponsor agreements retroactively after having abolished RDAs. (Id., 237 Cal.App.4th at pp. 496-500.) Retroactive invalidation of payments made before RDA dissolution did not violate the California Constitution (Proposition 22, Cal. Const., art. XIII, § 25.5), even if the payments were made when the sponsor agreement was enforceable. (Brentwood, at pp. 496-500; accord, City of Big Bear Lake v. Cohen (2017) 12 Cal.App.5th 922, 933.)
DISCUSSION
I
Standard of Review
Insofar as the facts are undisputed, we independently review the questions of statutory and constitutional law. (City of San Jose (2016) 5 Cal.App.5th 123, 134 (San Jose); City of Petaluma v. Cohen (2015) 238 Cal.App.4th 1430, 1438-1439.) Although a traditional writ of mandate ordinarily reviews administrative actions for abuse of discretion, at issue here is whether DOF correctly interpreted its governing statutes, which is subject to our de novo review without deference to DOF. (Tracy, supra, 3 Cal.App.5th at p. 860; but see, Brentwood, supra, 237 Cal.App.4th at p. 500 [we may accord at least weak deference to agency's interpretation of its governing statutes where its expertise gives it superior qualifications to do so, but interpretation is ultimately subject to our de novo review].)
II
The Appeal
Though not mentioned by the parties and not at issue in this appeal, we observe DOF may in some circumstances allow enforcement of sponsor agreements after DOF ultimately issues a "Finding of Completion" to the successor agency (§§ 34191.4, 34179.7), which on this record has not yet occurred.
Appellants challenge the judgment on both statutory and constitutional grounds. We begin with their statutory arguments.
A. Applicability of Post-Dissolution Statutes to Pre-Dissolution Agreements
Appellants maintain that the disallowed transfers must be allowed because the transfers were legally valid when made before RDA dissolved, pursuant to agreements entered into before RDA dissolved. We affirm our recent rejection of this position.
Thus, as we outlined ante, section 34171, subdivision (d)(2), as adopted by the original dissolution statute, provided--with exceptions--that agreements between a City and its RDA are not enforceable. (Stats. 2011-2012, 1st Ex. Sess., ch. 5, § 7.) Assembly Bill No. 1484 did not change section 34171 in that respect. But it did add section 34179.5, which in part provided for the DDR, and section 34179.6, which described the procedures following such review. (See Stats. 2012, ch. 26, §§ 17-18.)
Section 34179.5, subdivision (b)(2) provides in part : " 'Enforceable obligation' includes any of the items listed in subdivision (d) of Section 34171 [and] contracts detailing specific work to be performed that were entered into by the former [RDA] prior to June 28, 2011, with a third party that is other than the city . . . that created the former [RDA.]" (Stats. 2012, ch. 26, § 17; italics added.) Thus, Assembly Bill No. 1484 preserved the rule contained in the original dissolution statute that (with exceptions) declared contracts between an RDA and its creator to be unenforceable for dissolution purposes.
When it passed AB 1484, the Legislature intended to use section 34171, subdivision (d)'s definition of enforceable obligations to retroactively invalidate Creator/RDA agreements and "claw back" payments that were legal when made. (County of San Bernardino v. Cohen (2015) 242 Cal.App.4th 803, 814-815 (San Bernardino); Brentwood, supra, 237 Cal.App.4th at pp. 500-502.) We recently reaffirmed this view in City of Grass Valley v. Cohen (2017) 17 Cal.App.5th 567, 585 (Grass Valley).
Although section 34179.5 was enacted as part of AB 1484 in 2012, the freeze component of the original 2011 dissolution legislation also expressed concern about RDAs depleting assets beginning in January 2011 (§ 34167.5), when the Governor and Legislature first proposed abolishing RDAs, triggering the "frantic scurry" to reduce RDA assets to avoid losing them to local taxing entities such as school districts. (Tracy, supra, 3 Cal.App.5th at pp. 855-856.)
Thus, section 34167.5, as enacted in June 2011 in the freeze component of the Dissolution Law, provides: "Commencing on the effective date of the act adding this part, the Controller shall review the activities of [RDAs] in the state to determine whether an asset transfer has occurred after January 1, 2011, between the city . . . that created a [RDA] or any other public agency, and the [RDA]. If such an asset transfer did occur during that period and the government agency that received the assets is not contractually committed to a third party for the expenditure or encumbrance of those assets, to the extent not prohibited by state and federal law, the Controller shall order the available assets to be returned to the [RDA] or, on or after October 1, 2011, to the successor agency . . . . The Legislature hereby finds that a transfer of assets by a [RDA] during the period covered in this section [i.e., after January 1, 2011], is deemed not to be in the furtherance of the Community Redevelopment Law [CRL] and is thereby unauthorized." (§ 34167.5, added by Stats. 2011-2012, 1st Ex.Sess., ch. 5 (A.B. 26) § 6, eff. June 29, 2011, amended by Stats 2012, ch. 162 (S.B. 1171) § 89.)
On the other hand, section 34167, also part of the freeze component of the original dissolution bill, provides that an enforceable obligation is "Any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy." (§ 34167, subd. (d)(5).) Section 34169, also part of the freeze component of the original dissolution bill, in part provides: "Until successor agencies are authorized . . . [RDAs] shall do all of the following: [¶] (a) Continue to make all scheduled payments for enforceable obligations, as defined in subdivision (d) of Section 34167."
Additionally, the dissolution component in section 34171, subdivision (d)(1), defines "enforceable obligations" as including "Loans of moneys borrowed by the [RDA] for a lawful purpose, to the extent they are legally required to be repaid pursuant to a required repayment schedule or other mandatory loan terms" (id., subd. (d)(1)(B)) and "Any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy" (id., subd. (d)(1)(E)).
As we recently said in Grass Valley, supra, 17 Cal.App.5th at page 585: "These provisions must be harmonized with the rest of the dissolution statutes, if possible. (See Moyer v. Workmen's Comp. Appeals Bd. (1973) 10 Cal.3d 222, 230 ['the various parts of a statutory enactment must be harmonized by considering the particular clause or section in the context of the statutory framework as a whole'].) The natural way to do so is to view the category of agreements between RDA and their creators as the more specific category, and therefore generally not 'enforceable' whether or not such agreements also fall within the broader definition of 'enforceable' agreements provided by other parts of the dissolution statutes." Thus the specific exclusion of sponsor agreements (§ 34171, subd. (d)(2)), controls over the more general provisions. (Civ. Code, § 3534; Lake v. Reed (1997) 16 Cal.4th 448, 464.) "We already have so held, or necessarily implied, in a number of published cases. (See Tracy, supra, 3 Cal.App.5th at pp. 860-861 [captioned 'The Legislature Intended Retroactively to Invalidate Transfers Pursuant to Sponsor Agreements']; San Bernardino, supra, 242 Cal.App.4th at pp. 814-815 ['Construing the Dissolution Law and the cited statutes to mean that agreements between the County and the former [RDA] are enforceable obligations would negate the intent of the Legislature']; Brentwood, supra, 237 Cal.App.4th at pp. 500-502 [captioned 'The Legislature Intended to Abrogate Sponsor Agreements Retroactively'].)" (Grass Valley, supra, 17 Cal.App.5th at p. 585.)
As a matter of statutory interpretation, we reaffirm our prior opinions that the post-dissolution definitions of enforceable obligations (excluding sponsor agreements) apply retrospectively to predissolution transfers on predissolution sponsor agreements.
B. Disallowance of Specific Items Pursuant to Statutes
1. Oaks School Promissory Note
In 1994, RDA and City entered a promissory note for RDA to repay City for a loan of $3.5 million. The money was given to the Ontario-Montclair School District (School District) to relocate and build a new middle school -- the Oaks School. The promissory note did not set a payment schedule but just said the due date was the last date set forth in the "Redevelopment Plan for the Ontario Redevelopment Project No. 2 as it now exists or may hereafter be amended . . . ." Appellants say the Plan "presumably" expired with RDA's dissolution on February 1, 2012.
A separate agreement between RDA, City, and the School District was also entered in 1994, to give the School District $3.5 million to build the new school, less $416,000 purchase price for the City to buy other real property owned by the School District.
The trial court found, and appellants do not dispute, that RDA made no payments of principal or interest on the promissory note to City between 1994 and 2011. In June 2011, RDA paid City $350,000 in accrued interest for fiscal year 2010-2011. In July 2011, after the freeze took effect, RDA transferred to City $8.6 million as "prepayment" on the note -- the entire principal of $3.5 million, plus accrued interest of $5.1 million. Thus, RDA gave its sponsor $8.9 million for a $3.5 million loan.
The parties cite no evidence as to whether the small June payment was made before or after the freeze took effect on (Wednesday) June 29th, after the Governor signed the bill into law on June 28th. Appellants do not claim the payment was made before the freeze.
DOF disallowed both payments, noting that section 34179.5 and section 34171 exclude sponsor agreements from the definition of enforceable obligations (with limited exceptions inapplicable here such as loans made within two years of the RDA's creation). We accept appellants' representation that this RDA was created in 1971 and therefore the 1994 promissory note was not made within 2 years of RDA's creation.
The trial court reached the same conclusion that the promissory note was not an enforceable obligation because it fell within the scope of section 34171, subdivision (d)(2) (sponsor agreements are not enforceable obligations), could not be viewed as part of a three-party agreement with the school district, and the City could be required to return the funds. The School District was not a direct party to, or a third party beneficiary of, the promissory note. Absent evidence to the contrary, the School District's interests were presumably satisfied when the district received the $3.5 million in 1994, and would have had no further interest in when, or whether, RDA ever repaid City. The promissory note was entirely independent from any agreement involving the school district. Accordingly, the trial court rejected City's contention that DOF's disallowance of the transfer amounted to an unconstitutional impairment of a third-party contract.
We agree with DOF and the trial court, for the reasons we explained ante.
We reject appellants' argument that the promissory note qualifies as an enforceable "Loan[] of moneys borrowed by the [RDA] for a lawful purpose, to the extent [the loans] are legally required to be repaid pursuant to a required repayment schedule or other mandatory loan terms." (§ 34171, subd. (d)(1)(B).) A loan from the sponsor to the RDA would still fall within the more specific exclusion of sponsor agreements from the definition of enforceable obligations in section 34171, subdivision (d)(2). Moreover, the promissory note would not qualify anyway, because it sets no payment schedule but merely states: "Due Date. [¶] The Authorized Note Amount, and all interest accrued thereon, shall be due and payable on the last date set forth in the Redevelopment Plan for the Ontario Redevelopment Project No. 2 as it now exists or may hereafter be amended (the 'Plan'), for Maker to repay indebtedness pursuant to the Plan, if not repaid in full prior to that date." Appellants do not identify any last date set forth in the Plan but merely say in their reply brief: "The Redevelopment Plan presumably expired with the dissolution of the RDA, on February 1, 2012." Appellants suggests prepayment of the note made it an enforceable obligation, because the note explicitly allowed prepayment. However, allowing prepayment is permissive; it is not a "mandatory loan term[]." (§ 34171, subd. (d)(1)(B).)
Legislative amendments to section 34171, subdivision (d)(2), in 2015, after this appeal was filed, added to the definition of enforceable obligations, but not in a way that benefits appellants. (Stats. 2015, ch. 325, § 2 (S.B. 107), eff. Sept. 22, 2015 [expanding the time for agreements on indebtedness obligations, i.e., bonds, etc. issued to third parties, and adding agreements for state highway improvements and for repayment of obligations imposed by a federal grant or loan].)
Appellants argue the promissory note is not a sponsor agreement limited to RDA and its sponsor, but rather is "a valid multi-party agreement between the RDA, City, and a third party," the School District, and is therefore not subject to the exclusion for sponsor agreements. Appellants cite Civil Code section 1642, which provides: "Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together."
However, even assuming Civil Code section 1642 applies here, where contract law does not control questions of statutory interpretation (County of San Bernardino, supra, 242 Cal.App.4th at pp. 815-818), applicability of Civil Code section 1642 is generally a question of fact for the trial court, reviewed for substantial evidence. (Versaci v. Superior Court (2005) 127 Cal.App.4th 805, 815.)
Appellants make no substantial evidence argument and fail to address the trial court's findings, particularly the finding that, absent evidence to the contrary, the School District's interests were presumably satisfied when the District received the $3.5 million in 1994, and the School District would have had no further interest in when, or whether, RDA ever repaid City, and thus the promissory note was entirely independent from any agreement involving the school district. The School District has not asserted any rights in this case.
Instead of showing insufficiency of evidence, appellants merely say the promissory note explicitly made reference to the agreement with the School District for the same project and therefore "must be read as a network of interrelated agreements designed to complete a single project." In a footnote, appellants cite an uncitable trial court ruling in an unrelated case in which the judge enforced multi-party agreements. However, that ruling has no precedential value (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450) and in any event, comparison with other cases is rarely helpful in substantial evidence review, as each case necessarily depends on its own facts. (People v. Thomas (1992) 2 Cal.4th 489, 516.) Moreover, in that litigation -- which was brought by the third party (Forty Niners SC Stadium Co., LLC) against the successor agency -- it was agreed that the contracts involved the third party, and the successor agency argued without success that the invalidation of sponsor agreements should be interpreted to invalidate agreements between an RDA, its sponsor, and a third party.
Appellants also fail to show applicability of cases cited in their reply brief. (Kaneko v. Okuda (1961) 195 Cal.App.2d 217, 231 [two written instruments related to the same subject matter and signed as one transaction are construed together]; Bell v. Rio Grande Oil Co. (1937) 23 Cal.App.2d 436, 440 [written agreement may expressly incorporate other written agreement so that both must be construed as one].)
We conclude the promissory note was not an enforceable obligation (§ 34171), and the payments made in June and July 2011 violated the Dissolution Law. (§§ 34163, subds. (c)-(d), 34167, subd. (d)(2); San Bernardino, supra, 242 Cal.App.4th at pp. 814-815; Brentwood, supra, 237 Cal.App.4th at pp. 497, 500-502.)
2. Reimbursement Agreement for Lease Revenue Bonds
In November 2001, a joint powers authority established by City and RDA (the Ontario Redevelopment Financing Authority or ORFA) authorized issuance of lease revenue bonds not to exceed $35 million to finance renovation and expansion of a library, development of a soccer field complex, and first-phase construction of new police headquarters. Also in November 2001, City and RDA adopted resolutions calling for City and RDA to enter into a Reimbursement Agreement under which City would pay the cost of the library and soccer field projects, and RDA would reimburse City its share of the costs.
No executed copy of a reimbursement agreement was submitted to the court, and appellants told the trial court and this court that they were unable to locate an executed copy. An unexecuted copy of a proposed Reimbursement Agreement, as attached to the resolutions, states ORFA proposed to issue lease revenue bonds for the projects, and RDA "desires to enter into this Agreement to provide for the reimbursement to the City of the value of the land and the cost of the installation and construction of the Project to the extent paid or provided for initially by the City." The "Reimbursement" term stated: "To the extent the City pays or provides initially for the value of the land and the cost of the installation and construction of any building, facility, structure, or other improvement of which the Project is comprised, [RDA] agrees to reimburse the City from taxes levied in the Project Area and allocated to the [RDA] under . . . the CRL for all of the value of the land and all of the cost of the installation and construction of said buildings, facilities, structures, or other improvements" The reimbursement obligation "shall be payable to the City upon demand by the City Administrative Services/Finance Director or designee . . . ."
Thus, the Reimbursement Agreement did not call for RDA to pay debt service or other obligation on the bonds issued by ORFA, but instead reflected an interest-free loan between City and RDA for the land and construction costs.
In late November 2001, ORFA issued the bonds in the principal amount of $31.7 million. The bonds were to be repaid solely by City through lease payments made by City to ORFA pursuant to a "Lease Agreement" whereby City leased its real property and improvements to ORFA and leased it all back from ORFA for the purpose (among others) of paying the principal and interest on the bonds.
A summary report attached to the resolutions estimated RDA's total reimbursement of principal and interest on the bonds would be $21.9 million for the library and $13.8 million for the soccer field complex.
RDA claimed it made regular bi-annual payments to City beginning on August 1, 2002, to reimburse City for RDA's share of debt service on the 2001 lease revenue bonds.
In 2007, ORFA issued additional lease revenue bonds in the amount of $37.5 million, in part to finance an expansion of the soccer complex. The financing plan for the 2007 bonds included tax increment reimbursement from RDA to City of $1.2 million.
In December 2011, during the freeze period, RDA paid $19.6 million to City, purportedly to pay off the remaining balance on the 2001 bonds. At the time of RDA's dissolution, it had not paid City for the 2007 bonds.
The trial court found DOF correctly applied the law when it determined RDA's payment of a total of $19.6 million to City in December 2011 was not supported by an enforceable obligation.
We reach the same result. For purposes of this opinion, we will assume, as the trial court apparently did, that the absence of any executed reimbursement agreement is inconsequential.
The statutory inclusion of bonds as enforceable obligations (§ 34171, subd. (d)(1)(A) [bonds issued by RDAs]) does not assist appellants, because RDA's payment to City was not made pursuant to bonds but rather pursuant to the Reimbursement Agreement.
As an agreement between City and RDA, the Reimbursement Agreement falls directly within the exclusion of sponsor agreements: " '[E]nforceable obligation' does not include any agreements, contracts, or arrangements between the city . . . that created the [RDA] and the former [RDA]." (§ 34171, subd. (d)(2).)
This same provision allows a limited exception for bonds: "[W]ritten agreements entered into (A) at the time of issuance, but in no event later than December 31, 2010, of indebtedness obligations, and (B) solely for the purpose of securing or repaying those indebtedness obligations may be deemed enforceable obligations . . . ." (§ 34171, subd. (d)(2).) "Indebtedness obligations" are defined as "bonds, notes, certificates of participation, or other evidence of indebtedness, issued or delivered by the [RDA], or by a joint exercise of powers authority created by the [RDA], to third party investors or bondholders. . . ." (§ 34171, subd. (e).)
However, even assuming the unexecuted Reimbursement Agreement qualifies as a "written agreement," it is not an agreement entered into "for the sole purpose of securing or repaying" the 2001 lease revenue bonds. While the agreement refers to ORFA's issuance of the bonds, it does not provide that RDA has entered into the agreement with City in order to secure or repay those bonds. Instead, it states RDA "desires to enter into this Agreement to provide for the reimbursement to the City of the value of the land and the cost of the installation and construction of the Project to the extent paid for or provided for initially by the City," and specifically provides that "[t]o the extent the City pays or provides initially for the value of the land and the cost of the installation and construction of any building, facility, structure, or other improvement of which the Project is comprised, the Agency [RDA] agrees to reimburse the City from taxes levied in the Project Area. . . ."
That RDA promised to reimburse City for construction and land costs is different than promising to pay the cost of debt service on bonds which, as noted by the trial court, would include payment of principal and interest on the debt, and thus could be substantially more than the cost of land acquisition and construction alone.
Appellants fail to show enforceability of the reimbursement agreements.
3. TABs - Tax Allocation Bonds
In 2001, RDA issued tax allocation bonds (TABs) -- all of which were purchased by City. In June and July 2011, RDA paid City about $18 million as repayment of the bonds.
DOF determined this was not an enforceable obligation, because all bonds were issued to City, and bonds are enforceable obligations only when issued to third party investors or bondholders. (§ 34171, subds. (d)(1)(A), (d)(2), and (e).) City is not a third party. The trial court agreed.
We reach the same conclusion. The term "enforceable obligation" includes payments due on bond indenture (§ 34171, subd. (d)(1)(A)) but excludes arrangements between RDAs and sponsoring entities (id. at subd. (d)(2)). These bonds cannot qualify as enforceable "indebtedness obligations" (§ 34171, subds. (d)(2) [ "written agreements entered into (A) at the time of issuance, but in no event later than December 31, 2010, of indebtedness obligations, and (B) solely for the purpose of securing or repaying those indebtedness obligations may be deemed enforceable obligations"]), because section 34171, subdivision (e), defines "indebtedness obligations" as "bonds, notes, certificates of participation, or other evidence of indebtedness, issued or delivered . . . to third-party investors or bondholders . . . ."
Here, City -- which is not a third party -- purchased all the bonds.
Although the statute does not define "third party," construing it to include City would evade the clear legislative intent to prevent RDAs from siphoning off money and depleting the corpus of RDA assets on arrangements between conjoined entities that often were not the product of arm's length transactions. (§ 34167, subd. (a); Matosantos, supra, 53 Cal.4th at p. 258, fn. 12; Culver City, supra, 14 Cal.App.5th at p. 13.)
We conclude the TABs were not enforceable obligations.
4. RDA Advance
In 1998, RDA advanced City $1.6 million for the purchase of Saris-Regis Group properties. The City never repaid the loan.
DOF refused the Successor Agency's request, in effect, to forgive the loan as an obligation cancelled by the Dissolution Law. DOF said no contract or repayment schedule was in place, and without a valid contract or repayment schedule, the loan was considered "payable on demand." DOF accordingly counted the amount of the loan as an asset of the Successor Agency. This comports with section 34179.5's directive to determine the unobligated cash and cash equivalents, including payables on demand, available for transfer to taxing entities. (§ 34179.5, subd. (a).) The term " 'cash equivalents' includes, but is not limited to, cash in hand, bank deposits, Local Agency Investment Fund deposits, deposits in the city or county treasury or any other pool, marketable securities, commercial paper, United States Treasury bills, banker's acceptances, payables on demand and amounts due from other parties as defined in subdivision (c), and any other money owned by the successor agency." (§ 34179.5, subd. (b); italics added.)
Appellants argue the RDA Advance did not qualify as cash or cash equivalent under this statute, because there is no comma after the words "payables on demand" in the statute. Appellants therefore suppose that payables on demand under subdivision (b) qualify only if they are "amounts due from other parties as defined in subdivision (c)." However, subdivision (b) expressly states that the term (cash equivalents) "includes, but is not limited to" the examples listed in subdivision (b). (§ 34179.5, subd. (b).) In any event, City is among the parties defined in subdivision (c), which states that, at a minimum, the review shall include the value of cash or cash equivalents transferred by the RDA "to the city, county, or city and county that formed the [RDA] . . . ." While subdivision (c) specifies transfers between January 1, 2011, and June 30, 2012, the subdivision begins, "At a minimum, the review required by this section shall include the following . . . ." (§ 34179.5, subd. (c); italics added.)
Additionally, the freeze component of the Dissolution Law prohibited RDAs, effective June 2011, from "[f]orgiving all or any part of the balance owed to the [RDA] on existing loans . . . ." (§ 34163, subd. (c)(3).)
Clearly, the 1998 RDA Advance of money to the City that the City never repaid is an asset of the former RDA available for transfer to taxing entities.
Appellants nevertheless invoke section 34171's invalidation of sponsor agreements (despite challenging the statute as void with respect to RDA's siphoning money to City). (§ 34171, subd. (d)(2) ["enforceable obligation" does not include sponsor agreements with limited inapplicable exceptions such as loans made within two years of the RDA's creation].) Appellants argue the Legislature's dissolution of RDAs cancelled sponsor agreements between RDAs and the cities that created them (§ 34171, subd. (d)(2)), and therefore cancelled the City's obligation to repay the 1998 RDA Advance, because that loan was not made within two years of RDA's creation in 1971.
However, section 34171 addresses RDAs' liabilities, not assets, and therefore does not apply at all to this loan agreement, which did not create an obligation for RDA to repay City, but instead created an asset for RDA to be repaid by City.
This makes sense because the purpose of these dissolution statutes is to prevent RDAs from siphoning off to their conjoined creator, money they are holding that is supposed to be redistributed to local entities such as school and hospital districts. "The Legislature enacted the freeze provisions of the Dissolution Law 'to preserve, to the maximum extent possible, the revenues and assets of [RDAs] so that those assets and revenues that are not needed to pay for enforceable obligations may be used by local governments to fund core governmental services' and to ensure that [RDAs] would take no action that would further deplete the corpus of the agencies' funds regardless of their original source. [Citation.] The Legislature directed that these provisions 'shall be construed as broadly as possible to support this intent and to restrict the expenditure of funds to the fullest extent possible.' [Citation.]" (Culver City, supra, 14 Cal.App.5th at p. 13, quoting § 34167, subd. (a); see also, § 34179.5, subs. (b)(1) & (c)(6) [DDR determines RDA assets, including payables on demand, available for allocation to affected taxing entities].)
C. Appellants' Constitutional Claims
1. Proposition 22 - (Cal. Const., art. XIII, § 25.5, subd. (a)(7))
According to appellants, even if DOF's DDR determinations are statutorily authorized, they cannot stand because they violate a provision of Proposition 22, adopted by voters in 2010, prohibiting the Legislature from requiring RDAs "to pay, remit, loan, or otherwise transfer, directly or indirectly, taxes on ad valorem real property and tangible personal property allocated to the agency pursuant to Section 16 of Article XVI [allocation of taxes on redevelopment projects] to or for the benefit of the State, any agency of the State, or any jurisdiction. . . ." (Cal. Const., art. XIII, § 25.5, subd. (a)(7); Matosantos, supra, 53 Cal.4th at p. 260, fn. 14 ["jurisdiction" in this context includes school districts and special districts].) Matosantos held this provision of Proposition 22 did not preclude the dissolution of RDAs. (Id., 53 Cal.4th at pp. 241-242, 260-264; California Redevelopment Assn. v. Matosantos (2013) 212 Cal.App.4th 1457, 1484.)
As we said in Grass Valley, supra, 17 Cal.App.5th at pages 589-590: "We have repeatedly rejected claims that the application of the dissolution statutes violates Proposition 22. (See Cuenca, supra, 8 Cal.App.5th at pp. 233-234; Tracy, supra, 3 Cal.App.5th at pp. 861-863; San Bernardino, supra, 242 Cal.App.4th at pp. 810-814; Brentwood, supra, 237 Cal.App.4th at pp. 496-500.) Indeed, in City of Cerritos v. State of California (2015) 239 Cal.App.4th 1020, we stated 'The Supreme Court has already found that Assembly Bill [26] did not violate either article XVI, section 16 or Proposition 22, which added article XIII, section 25.5, subdivision (a)(7). (See [Matosantos], supra, 53 Cal.4th at pp. 241-242.) We are bound by the high court's ruling." (Id. at p. 1038, fn. 2; italics added.) Our Supreme Court summarized its view in part by stating "Proposition 22, while it amended the state Constitution to impose new limits on the Legislature's fiscal powers, neither explicitly nor implicitly rescinded the Legislature's power to dissolve redevelopment agencies.' (Matosantos, supra, 53 Cal.4th at p. 242.)"
Appellants suppose the DDR process must violate Proposition 22, because Matosantos held unconstitutional a companion bill to the Dissolution Law that would have permitted RDAs to avoid dissolution if their creators agreed to make certain "continuation" payments into funds benefiting the state's schools and special districts. (Matosantos, supra, 53 Cal.4th at pp. 242, 264-270, invalidating ABx 1-27 (§§ 34192-34196 [Part 1.9]), a companion bill to ABx 1-26.) However, the continuation payments were required if RDAs wanted to stay in business, and they therefore violated a particular Proposition 22 prohibition against requiring RDAs to give up tax allocations "to or for the benefit of the State, any agency of the State, or any jurisdiction." (Cal. Const., art. XIII, § 25.5, subd. (a)(7); Matosantos, supra, 53 Cal.4th at p. 264.) It was uncontested that continuation payments would benefit the state and its jurisdictions, which include special districts and school districts. (Matosantos, supra, 53 Cal.4th at p. 264.) The invalidated companion bill is of no relevance to this case.
In the distinguishable case of Bellflower, supra, 245 Cal.App.4th 438, we held that one particular statutory remedy to enforce the Dissolution Law, i.e., withholding local tax revenue from the sponsoring agency to recoup improper transfers (§ 34179.6, subd. (h)), violates a Proposition 22 provision that "[t]he Legislature may not reallocate, transfer, borrow, appropriate, restrict the use of, or otherwise use the proceeds of any tax imposed or levied by a local government solely for the local government's purposes." (Cal. Const., art. XIII, § 24, subd. (b); Bellflower, supra, 245 Cal.App.4th at pp. 444-445, 450-451, 454.) But, as noted in Grass Valley, supra, 17 Cal.App.5th at page 591, Bellflower did not discuss the propriety of the Department's determination of any enforceable obligation or, for that matter, other statutory remedies to enforce the dissolution law such as obtaining judicial relief under section 34177. (Id. at p. 450.)
As we explained in Tracy, supra, 3 Cal.App.5th at page 862: "The import of Bellflower is that the Legislature cannot withhold local tax revenues from sponsors through administrative fiat as a remedy for violation of the directives in the Great Dissolution. However, the sponsors are not rendered judgment-proof by virtue of the constitutional provision, such that their general funds are immune from answering for a violation of state law in court."
We also rejected a Proposition 22 challenge in Brentwood, supra, 237 Cal.App.4th at pages 496-500, where we held the Legislature could constitutionally invalidate predissolution sponsor agreements retroactively after having abolished RDAs. There, the city and RDA executed "public improvement agreements" (PIAs) in February and March 2011 (after dissolution was proposed) but claimed they merely "implement[ed]" projects in the works since 2008. (Id. at p. 493.) Citing Matosantos, the City of Brentwood argued that, until RDAs closed their doors on February 1, 2012, the Legislature had no power constitutionally to redirect tax increment already allocated to an RDA by retroactively invalidating all sponsor agreements executed after January 1, 2011. (Id. at p. 498.)
We rejected the argument in Brentwood, supra, 237 Cal.App.4th at pages 497-500, noting the Supreme Court's Matosantos decision turned on the continuing existence of RDAs, and thus the continuing existence of Proposition 22's protections. But because it was in the Legislature's power immediately to dissolve RDAs, it was also with the Legislature's power to implement an orderly, phased dissolution, retroactively invalidating sponsor agreements. (Ibid; see, Matosantos, supra, 53 Cal.4th at pp. 241-242, 261-263 [Proposition 22 did not rescind Legislature's power to dissolve RDAs, and RDA funds including those acquired before the passage of ABx 1-26 are not constitutionally protected in the dissolution process].)
Brentwood said: "The 'End of Redevelopment As We Knew It' (ERAWKI) took place on October 1, 2011 (though . . . Matosantos . . . gave the condemned agencies until Feb. 1, 2012, as a matter of judicial reformation, to get their affairs in order). The 2012 audit process represents a legislative rethinking in light of the resulting scurry on the part of sponsors and their conjoined [RDAs] in response to the announced intention in January 2011 to overturn their lucrative apple cart. [Fn. omitted.] Matosantos held plainly that the power to abolish [RDAs] encompassed the power to designate the points at which [RDAs] ceased to exist as legal entities and would cease to have the power to make new binding commitments. If in retrospect the facts on the ground demonstrated to the Legislature the need to have abrogated the authority to enter into sponsor agreements from the moment that ERAWKI was foretold [January 2011], rather than October 2011 (or . . . Feb. 2012) . . . , this retroactive invalidation would appear to come within the Legislature's plenary authority to dictate the manner in which [RDAs] come to their end. [Fn. omitted.]
". . . The Legislature is not attempting to impose a redistribution of tax increment on [RDAs] that had open-ended operations. Had the Legislature been willing to 'cry "Havoc," and let slip the dogs of war' (Shakespeare, Julius Caesar, act III, scene 1, line 1501), it could have immediately dissolved [RDAs] without a freeze period (as chaotic as that would have been) in response to the original proposal from the Governor, which missed the necessary two-thirds margin by a single vote in March 2011 [citation], and invalidated sponsor agreements as of that date. Nothing in Matosantos would have prevented this action. The Legislature's choice to do so with retroactive wisdom is therefore equally constitutional because it does not reflect redirection of tax increment in the coffers of a viable [RDA] of indefinite existence." (Brentwood, supra, 237 Cal.App.4th at pp. 499-500.) We concluded AB 1484, which retroactively invalidated city-RDA sponsor agreements (with limited exceptions), came within the Legislature's plenary authority to dictate the manner in which RDAs come to their end. (Id. at pp. 499-502.)
Appellants filed their opening brief before the Brentwood decision but argue in their reply brief that it is distinguishable on its facts and in any event was wrongly decided. We disagree.
As to distinguishable facts, appellants observe the Brentwood agreements were executed after January 2011, when Governor Brown first proposed dissolution of RDAs, whereas here the agreements were made long before 2011 and therefore could not have been part of the "scurry" to avoid losing money pursuant to dissolution. However, abuses between RDAs and their sponsors existed long before January 2011 and were indeed the impetus for the Governor to suggest abolishing RDAs in the first place. (Cuenca, supra, 8 Cal.App.5th at p. 210.) The issue here is the transfer of assets from RDA to City, which occurred after the freeze took effect June 29, 2011 (since appellants do not claim the small June 2011 payment on the promissory note occurred before the freeze) -- suggesting an apparent scurry to perform agreements that lay dormant for years because they were not arm's-length transactions.
Appellants claim Brentwood shows "insufficient respect for the ultimate sovereignty of the people and their ability to enact legislation through the initiative process," i.e., Proposition 22. According to appellants, Proposition 22 prohibited the Legislature from restricting RDAs' use of tax increments before dissolution, and therefore the Legislature could not effectuate the same restrictions by applying them retroactively after dissolution. Appellants cite inapposite case law that where the Legislature could have enacted a statute in the first instance, it may pass a statute that retroactively achieves the same result, barring any constitutional defect. Appellants maintain the corollary to this principle is that if the Legislature did not have authority to enact legislation in the first instance, it cannot retroactively attempt to do what it could not have done at the time.
However, the restriction is on transfers that occur after dissolution was set in motion. It does not matter that agreements were originally made years ago. Indeed, the fact that loans/agreements remained unfulfilled for as many as 17 years suggests abuse. For example, the Oaks School Promissory Note for City's loan to RDA was entered in 1994, and pursuant to that agreement City gave $3.5 million to the school district in 1994, yet RDA had still not repaid the loan by 2011, even though interest was accruing throughout those 17 years. Only in June and July 2011, after the dissolution process was set in motion, did RDA get around to paying City, in what was characterized as "prepayment" of the loan, which by that point had been inflated by interest to $8.9 million.
We conclude there is no Proposition 22 violation.
2. Impairment of Contracts
Raising another claim we have recently rejected, the City contends application of the dissolution statutes to the agreements in question improperly impairs its contractual rights. We adhere to our view to the contrary. (Grass Valley, supra, 17 Cal.App.5th at pp. 591-592.)
As to the federal and state constitutional prohibition against laws impairing contractual obligations (U.S. Const., art. I, § 10, cl. 1; Cal. Const., art. I, § 9), appellants acknowledge they, as subordinate units of the State, lack standing to assert a constitutional claim against the state under the impairment of contracts clause. (Trenton v. New Jersey (1923) 262 U.S. 182, 185 [67 L.Ed. 937, 940-941] [contract clause does not limit state's power over city as creature of the state]; Matosantos, supra, 53 Cal.4th at pp. 255-256 [cities and RDAs are creatures of the State]; Brentwood, supra, 237 Cal.App.4th at pp. 503-504.) California is free to modify or abolish its subdivisions. (City of Azusa v. Cohen (2015) 238 Cal.App.4th 619, 630-631 (Azusa); City of Emeryville v. Cohen (2015) 233 Cal.App.4th 293, 312.) City has no right to complain that the state is impairing its contractual rights. (Mallon v. City of Long Beach (1955) 44 Cal.2d 199, 209 ["the state acting through the Legislature has the power to alter contractual or property rights acquired by the municipal corporation from the state for governmental purposes"]; City of San Jose v. Sharma (2016) 5 Cal.App.5th 123, 148 ["subordinate political entities are ' "creatures" ' of the state and have no standing to challenge state action on due process or impairment of contracts grounds"].)
"[I]f a political entity has been created by the Legislature, it can be dissolved by the Legislature, barring some specific constitutional obstacle to a particular exercise of the legislative power. 'In our federal system the states are sovereign but cities and counties are not; in California as elsewhere they are mere creatures of the state and exist only at the state's sufferance.' " (Matosantos, supra, 53 Cal.4th at p. 255.) Although our Supreme Court opined that abruptly dissolving RDAs with no plan to wind-down their obligations to other entities "would inevitably raise serious impairment of contract questions[,]" (id. at p. 263), a detailed wind-down mechanism was established by the Legislature, as we have described. Further, the City does not have the right to raise the purported contractual rights of other entities. "As Hamlet pondered, 'What's Hecuba to him, or he to Hecuba/That he should weep for her?' " (Brentwood, supra, 237 Cal.App.4th at pp. 503-504; see Azusa, supra, 238 Cal.App.4th at pp. 630-631.)
Appellants nevertheless cite Matosantos, supra, 53 Cal.4th at page 263, that "As a practical and perhaps constitutional matter, to require an existing entity that has entered into a web of current contractual and other obligations to dissolve instantaneously is not possible; doing so would inevitably raise serious impairment of contract questions." Appellants argue the Legislature took great care to honor RDA contracts as "enforceable obligations" in order to avoid unconstitutional impairment of contracts. Appellants argue the Legislature intended to invalidate only sponsor agreements limited to RDAs and their creators because such intramural arrangements deserve less protection than true arm's length transactions. Appellants accordingly ask us to construe the invalidation of sponsor agreements as inapplicable to three-party agreements between an RDA, its creator, and a third party. However, this would not help appellants because, as we have explained, there is no three-party contract at issue. Although certain bonds were issued to third parties, the contract at issue is the reimbursement agreement in which the bonds played no role.
The appeal fails to demonstrate grounds for reversal of the judgment.
III
The Cross-Appeal
DOF and BOE cross-appeal from the trial court's ruling invalidating a statutory remedy (§ 34179.6, subd. (h)) authorizing DOF to "order an offset to the distribution provided to the sales and use tax revenue (SUT offset) pursuant to subdivision (a) of Section 34179.8 [if DOF orders offset, BOE shall reduce distribution of sales and use taxes to the entity that is the subject of the offset]" as a remedy for a successor or sponsoring agency's failure to turn over a dissolved redevelopment agency's funds as required by section 34179.6, subdivision (f). The result of the remedy is that tax funds -- to which the City of Ontario is otherwise entitled under its sales tax administration contract with BOE -- is transferred to the county auditor-controller for distribution to local taxing entities. The trial court ruled the statutory remedy (§ 34179.6) violates the California Constitution by reallocating, transferring, and appropriating sales taxes imposed or levied by a city for city purposes (Cal. Const., art. XIII, § 24, subd. (b)). This particular provision of Proposition 22, adopted by voters in 2010, states: "The Legislature may not reallocate, transfer, borrow, appropriate, restrict the use of, or otherwise use the proceeds of any tax imposed or levied by a local government solely for the local government's purposes." (Cal. Const, art. XIII, § 24, subd. (b).)
While this appeal was pending, we held (Bellflower, supra, 245 Cal.App.4th at pp. 450-457; accord, Tracy, supra, 3 Cal.App.5th at p. 864) that this one particular remedy -- the SUT offset remedy (§ 34179.6, subd. (h)) -- violates this provision of Proposition 22.
The issue is not whether sponsoring agencies could keep funds to which they were not entitled, but only whether the State could recover the funds via the remedy of withholding future local tax revenue. (Bellflower, supra, 245 Cal.App.4th at p. 450.)
Proposition 22 stopped years of "raids" by the Legislature of local government tax revenues to cover shortages at the state level. (Bellflower, supra, 245 Cal.App.4th at p. 445.) Another provision of Proposition 22 (Cal. Const., art. XIII, § 25.5, subd. (a)(7)) extended to RDAs a prior provision (Proposition 1A, Cal. Const., art. XIII, § 25.5, subd. (a)(2)(A), adopted in 2004) prohibiting the Legislature from reallocating "to or for the benefit of the State, any agency of the State, or any jurisdiction" real property taxes allocated to local entities. (Matosantos, supra, 53 Cal.4th at p. 260, fn. 14 ["jurisdiction" includes school districts and special districts].)
We affirm our prior holding that the section 34179.6 SUT offset remedy is unconstitutional under California Constitution, article XIII, section 24, subdivision (b). Under section 34179.6, subdivision (h), "[a]t the very least, the tax revenue belonging to the local government is 'reallocate[ed], transfer[red], . . . or otherwise use[d]' in the language of Proposition 22, taking it away from the local government to be given to other taxing entities." (Bellflower, supra, 245 Cal.App.4th at p. 451, citing Cal. Const., art. XIII, § 24, subd. (b).)
We therefore need not address appellants' (undeveloped) argument that the remedy is also unconstitutional under another provision (Cal. Const., art. XIII, § 25.5, subd. (a)(2)(A)).
Cross-appellants DOF and BOE argue the statutory SUT offset is equivalent to the common law right of setoff, a self-help remedy whereby either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or owed only the net difference. They cite Fassberg Construction Co. v. Housing Authority of City of Los Angeles (2007) 152 Cal.App.4th 720, 762, but no constitutional issue was addressed in that case. They also cite City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, which merely raised in dictum the possibility that if the City succeeded in its complaint against the County for allocation of tax revenues under the Revenue and Taxation Code, the County's obligation may be offset by voluntary repayment or direct recourse or, "as suggested during oral argument," the County "may . . . explore" offsetting future payments. (Id. at pp. 869-870.) The cited cases do not help with this cross-appeal.
We emphasize that invalidation of the statutory SUT offset remedy (§ 34179.6, subd. (h)) does not deprive the State of its other remedies. (Culver City, supra, 14 Cal.App.5th at pp. 14-17.)
We conclude the cross-appeal lacks merit.
DISPOSITION
The judgment is affirmed. The parties shall bear their own costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1) & (5).)
HULL, Acting P. J. We concur: DUARTE, J. NICHOLSON, J.
Retired Associate Justice of the Court of Appeal, Third Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.