San Diego and nearby cities could reap millions from redevelopment lawsuit

San Diego officials say they hope to get a windfall of up to $40 million sometime this year from a lawsuit that challenges how the county divides up property tax collected by the city’s former redevelopment agency.

The Third District Court of Appeal in Sacramento is expected to rule this year in the 2014 case, which could set a precedent across California for how counties dole out money still being collected by former redevelopment agencies.

The state Legislature in 2012 dissolved redevelopment agencies, which local governments had created since the 1940s to help generate economic activity in blighted areas.

Once a local government created a redevelopment agency, it was allowed to keep any incremental growth in property tax revenue instead of sending that money to the state.

Even though the redevelopment agencies were dissolved, most still continue on as “successor agencies” that collect property tax revenue to pay off debts and other obligations incurred before the 2012 dissolution.

Once those debts and obligations are covered, any money left over is divided up by counties across the state using one of two distinct formulas.

There are two formulas because counties didn’t interpret the legislation that dissolved redevelopment agencies in the same way. One formula is more favorable to cities, and the other is less favorable.

San Diego County chose to use the formula that is less favorable to cities, prompting the city of San Diego and six other local cities — Chula Vista, Vista, Escondido, El Cajon, San Marcos and Poway — to file suit in 2014 challenging that decision.

They contend in the lawsuit that the county misinterpreted and misapplied the state legislation that dissolved redevelopment agencies. Lawyers for the county say the formula the county uses is correct.

While only those seven cities filed the lawsuit, a ruling in their favor would be expected to also affect most other cities and counties in California.

Counties using the formula more favorable to cities would be vindicated and would be allowed to continue with that practice. Counties using the formula less favorable to cities would have to shift to the other approach.

They also would be required to make lump-sum payouts to each affected city. Those payouts would be equal to the difference between the amount each city has been receiving and the amount the city is entitled to under the formula that’s more favorable to cities.

In addition, those cities would get more property tax revenue in all subsequent years because counties would be required to start using the formula that’s more favorable to cities.

A Superior Court judge in Sacramento ruled in favor of the seven local cities in 2015, ordering San Diego County to give them large payouts to make up for years of using the wrong formula and to use the formula favorable to cities moving forward.

Later in 2015, the county appealed the ruling to the Third District Court of Appeal in Sacramento.

The city of San Diego’s Independent Budget Analyst and city finance officials say the appeals court is expected to schedule oral arguments in the case sometime this year and then make a ruling. They said it’s not clear exactly when this year the appeals court will move forward with the case.

If the appeals court upholds the lower court ruling, the independent budget analyst estimates the city’s lump-sum payment would be $35 million to $40 million.

But, the budget analyst notes, even a favorable ruling this year won’t guarantee the payout comes immediately. The case could be appealed to the state Supreme Court.

In addition, the two sides could settle the case and agree to a slower method of compensating the cities than a lump-sum payout.

Cities are allowed to use excess revenue from their former redevelopment agencies as unrestricted general fund money, meaning they have wide discretion in how they spend it.

The other six cities involved in the case would receive smaller payouts than San Diego because their redevelopment agencies generated smaller amounts of property tax increment.

The difference between the two formulas — the one more favorable to cities and the one less favorable — centers on whether the county can “cap” the amount of property tax received by any particular agency.

San Diego County chose to use a formula that limits what a city can receive to the maximum amount they would have received if their redevelopment agency had not been dissolved.

In contrast, the formula more favorable to cities calculates the property tax owed to each city by first providing them money they owe for debts and obligations and then dividing whatever is left over among cities, school districts and other local agencies entitled to a share of the money.

In some cases, that allows cities with significant debts and obligations to receive more property tax revenue than they would have received if their redevelopment agency hadn’t been dissolved.

Superior Court Judge Michael Kenny ruled in 2015 that the formula used by San Diego County “unfairly reduces” the shares received by such cities. He said the state Legislature would have clearly stated if it wanted counties to use the formula less favorable to cities.

The seven cities that filed the lawsuit are being represented in the case by Colantuono, Highsmith & Whatley, a Los Angeles firm specializing in redevelopment revenue cases. Holly Whatley, the lead lawyer in the case, didn’t respond to phone calls this week seeking comment.

Whatley sent a letter last month urging the appellate court to take up the case as soon as possible. She said many cities need to know the outcome of the case for long-term budgeting purposes.

Lawyers for the county declined to comment.

Garrick writes for the San Diego Union-Tribune.