Metro Red Line Tax Approved by High Court

In a key victory for Southern California’s financially strained mass transit program, the state Supreme Court on Thursday upheld a plan to tax commercial property owners in Los Angeles to help pay construction costs for the $3.6-billion Metro Red Line subway.

The ruling approving the creation of so-called benefit-assessment districts was hailed by the Los Angeles County Transportation Commission and Southern California Rapid Transit District, both of which have been suffering months of budget overruns and revenue shortfalls.

“This is very good news,” said Michael Bustamante, a spokesman for the transit commission. “The $130 million generated by these fees would have had to have come from other projects if the court had not ruled as it did.”

“The Supreme Court found that the Legislature did it right and the RTD did it right,” said RTD board Chairman Marv Holen, who praised the lawyers who had argued the district’s case.

The decision, widely awaited by government agencies throughout the state, also removes a legal cloud over similar special assessment plans used in an array of water, utility and other such districts throughout the state.

The benefit-assessment districts approved by the high court will assess a fee of 30 cents per square foot on commercial property within “walking distance” of Metro Red Line subway stations. These fees are expected to cover about 11% of the cost of the first 4.4-mile segment of the line and could continue for 16 years.

The theory behind the benefit-assessment districts is that subway stations increase the value of nearby property by making it easier to erect expensive, high-density high-rise buildings. Rather than let private property owners reap the entire benefit of public investments in transit, the districts impose a fee on property near stations to “capture” some of the increased value.

With their decision, the California justices reversed a state appellate ruling that had struck down the assessment. The appeals court ruled that the law creating the benefit-assessment districts in Los Angeles only allowed property owners to challenge the fees--a violation of “one-person, one-vote” constitutional guarantees.

But in a 5-2 decision, the high court said those guarantees do not apply to special benefit-assessment districts. Such districts do not exercise general governmental powers, the court said, and non-property holders, such as renters, will not be paying the tax.

“If the benefit districts are approved, the levy will fall directly on precisely that limited class enfranchised by (the law)--owners of commercial property within the district,” Justice Armand Arabian wrote for the court. “Non-voting residents of the districts will bear no discernibly direct financial burden.”

Dorothy Wolpert, a lawyer for the RTD, said the ruling would benefit public transportation throughout California. “The idea of benefit districts is an old one, but this was the first such district created for a large public transportation system,” Wolpert noted.

The state Supreme Court’s dissenters contended that all residents within Metro Rail assessment districts should be permitted to vote.

“Because the burden of the assessments will be passed on to other members of the community in the form of higher rents and higher prices for goods and services, the right to vote on a financing mechanism . . . may not be restricted to owners of commercial property,” Joyce L. Kennard wrote in a dissent joined by Justice Stanley Mosk.

Dean E. Dennis, a lawyer for Atchison, Topeka and Santa Fe Railway Co., an opponent of the assessments, said an appeal may be filed with the U.S. Supreme Court.

“This ruling appears to give local governments broader ability to impose these districts than had previously been the case,” Dennis said. “This is good news for local governments but bad news for property owners who we feel deserve better protection of the right to vote.”

According to Wolpert, the court majority said it saw nothing in the state Constitution to prevent local governments from experimenting with benefit-assessment districts for a variety of purposes.

“The court has said this time-old method of capturing windfall to property owners can be used in many different ways,” she said. “It’s not just for street lights and sewers.”

Under the plan, assessments would provide $130 million of the projected $1.25-billion cost of five subway stations over the first 4.4-mile segment of the subway system, a section due to open in 1993. Similar assessments are planned to cover $75 million of the costs of other two segments of the 18.6-mile subway through Hollywood and to the San Fernando Valley.

The RTD created the benefit-assessment districts in 1985 after getting the authority to do so from the Legislature. Residential property owners later were exempted at the urging of the Los Angeles City Council. Commercial property owners investigated the possibility of forcing a referendum on the issue, but they did not collect the number of signatures required by state law.

The law required them to collect signatures representing 25% of the assessed value of all property affected, regardless of the number of buildings or property owners involved. This formed the basis of their one-person, one-vote legal challenge.

RTD imposed the assessments in 1987, collecting $19.2 million. However, some outraged property owners claimed that the fee was to blame for quintupled tax bills, a charge denied by the RTD. But the district then agreed to postpone further assessments until the subway was operating; property owners in turn agreed to pay interest on the funds the RTD would have to borrow.

As construction progressed, the RTD covered the revenue gap by borrowing $45 million from its reserves. Late last year, however, the financially strapped transit district had to ask the Transportation Commission to cover the gap until the assessments could resume.

RTD Planning Director Gary A. Spivak said he expects the annual assessments to resume in December, 1993, about six months after the first segment of the Red Line subway is scheduled to open.

Income from the benefit-assessment districts has become more important recently because the Transportation Commission has been hammered by a series of fiscal problems that threaten to force a rewrite of its ambitious 30-year transportation improvement plan.

For example, the commission said last fall that its Green Line could run $250 million over budget while its sales-tax revenue could fall as much as $133 million below expectations this year and next. The district also faces a Feb. 6 date in the state Court of Appeal over a second sales-tax surcharge that is being challenged by the Libertarian Party.

Benefit-assessment districts have been used elsewhere. In Denver, commercial property owners within 400 feet of a downtown transit mall agreed in 1982 to finance maintenance of the mall by paying between 5 cents and 40 cents per square foot of land; the 10-year agreement was so successful that it is being renewed this year, with higher fees.

In Chicago, commercial and industrial property owners in the Loop have agreed to a 2% property tax increase to help pay for the local share of an $800-million supplemental light-rail system to improve public transit in the crowded city center.

Stein reported from Los Angeles and Hager from San Francisco.