The California Supreme Court threw hundreds of redevelopment agencies out of business in a ruling that will benefit state budget coffers but hobble local economic development and housing programs.
The court ruled unanimously in favor of a state law passed last summer that abolished redevelopment agencies and voted 6 to 1 to strike down a companion measure that would have allowed the agencies to continue if they shared their revenues.
More than 400 redevelopment agencies will cease to exist after Feb. 1. Authorized by law since 1945, the agencies have been responsible for such success stories as Old Pasadena and San Diego's Gaslamp Quarter but also plagued by projects that some argued had little public benefit.
Redevelopment agencies, which use a portion of property tax money to partner with developers to encourage development in blighted areas, control about $5 billion a year in tax revenue. After agencies repay their existing bonds, those revenues will go instead to schools and special districts.
Gov. Jerry Brown, who first proposed eliminating redevelopment agencies to help solve the state's fiscal crisis, expressed satisfaction with the court's decision, noting that it "validates a key component of the state budget and guarantees more than a billion dollars of ongoing funding for schools and public safety."
Advocates for the agencies are expected to return to the Legislature to ask lawmakers to recreate them, probably under some sort of revenue-sharing agreement.
"We hope the Legislature goes back to fix this," said Chris McKenzie, executive director of the League of California Cities. "This is a tool the state cannot afford to lose."
The court's decision came in response to a lawsuit filed by redevelopment agencies and cities against both the law eliminating redevelopment and the companion measure that would have required revenue sharing.
The ruling, written by Justice Kathryn Mickle Werdegar, said the Legislature had the power to create redevelopment agencies and the power to end them.
Los Angeles Councilman Tony Cardenas called the decision "a major blow to the City of Los Angeles and its ability to recover from this economic recession."
"Having grown up in Pacoima, I've seen firsthand the impact blight has on a community, and I've also been able to watch how a community can be revitalized with the right kind of redevelopment, like what we've seen with Pacoima Plaza, the NoHo Arts District and Bunker Hill," Cardenas said. "Without redevelopment agencies I am afraid we won't see the kind of investment our neediest communities deserve."
Larry Kosmont, who advises many cities on redevelopment and budgetary issues, called the court's action "a watershed event for cities." He predicted the decision could lead to cuts in city services, including police and fire departments.
But counties applauded the ruling.
Los Angeles County Board of Supervisors Chairman Zev Yaroslavsky said redevelopment over the years "evolved into a honey pot that was tapped to underwrite billions of dollars worth of commercial and other for-profit projects."
The projects "had nothing to do with reversing blight, but everything to do with subsidizing private real estate ventures that otherwise made no economic sense," Yaroslavsky said.
Deputy Santa Clara County Counsel James R. Williams, whose office advocated the positions taken by the court, said the ruling would eventually add $90 million to the county's coffers and provide schools in Santa Clara County with $150 million annually. In the past, the state has been "backfilling" the loss to schools, Williams said.
"All counties will benefit in the sense that they will ultimately receive this money back as general fund money," he said, although some have their own redevelopment agencies or agreements with city agencies to share revenues.
"What happens now is the state subsidizes redevelopment agencies by backfilling losses to school districts when schools lose money to redevelopment," Williams said.
Steven L. Mayer, a lawyer for the redevelopment agencies and the League of California Cities, declined to second-guess their legal strategy to sue to overturn both the law eliminating redevelopment and the compromise measure to require revenue sharing. Most redevelopment agencies would have continued to exist if the compromise law had been upheld, an alternative the agencies vastly preferred to being shut down altogether.
"Hindsight is always 20-20, isn't it?" Mayer said.
The court traced the growth of redevelopment agencies in California back to Proposition 13, the 1978 initiative that slashed propery taxes and limited governments' ability to raise new revenues.
"Proposition 13 created a kind of shell game among local government agencies for property tax funds,'" Werdegar wrote, quoting a planning guide. "'The only way to obtain more funds was to take them from another agency. Redevelopment proved to be one of the most powerful mechanisms for gaining an advantage in the shell game.'"
The court decision struck down the compromise, revenue-sharing law on the grounds that it violated Proposition 22, passed by voters in 2010 to limit the state's fiscal powers.
Chief Justice Tani Cantil-Sakauye dissented on that part of the ruling, complaining the court majority read Proposition 22 too broadly.
"Although the system of redevelopment in this state has been far from perfect, it certainly is worth noting redevelopment projects like the restored Public Market Building in downtown Sacramento, the Bunker Hill project in downtown Los Angeles, Horton Plaza and the Gaslamp Quarter in downtown San Diego, HP Pavilion in San Jose, and Yerba Buena Gardens in downtown San Francisco," the Chief Justice wrote.
She called the compromise bill an attempt to "balance the benefits of continued redevelopment with the need to fund vital local government services."
Some legislators who have long been critical of redevelopment said Thursday they would oppose any effort to revive the agencies.
"Redevelopment has become a cash cow for developers, NFL team owners and big box stores who have been on the public dole for a long, long time, subsidized by these redevelopment funds," Assemblyman Chris Norby (R-Fullerton) said after the court's ruling. The agencies "should have shut up" instead of suing to overturn the laws. "Now they've lost it all," he said.
He suggested that supporters of redevelopment may be fighting a lost cause.
"Where will the money come from?" he asked. "The state's broke."
Times staff writer David Zahniser contributed to this report.