Redevelopment Pass-through Payments to School District Were Improperly Calculated Because County Ignored ERAF Payments in Determining District's Percentage Share Of Property Taxes

March 7, 2010 | Bulletin No. 935112.2

In Los Angeles Unified School District v. County of Los Angeles, (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., January 27, 2010), a California Court of Appeal considered whether the allocation of tax sharing “pass-through” payments from a community redevelopment project to a school district was improperly calculated because, in determining the school district’s share of property taxes, it failed to consider the Educational Revenue Augmentation Fund (ERAF) funds which shift property tax dollars to school districts from cities, counties and special districts. The Court of Appeal held that the pass-through payments must be calculated based upon both the school district’s regular share of property taxes, and the ERAF funds. For Los Angeles County and other counties that have used a similar pass-through calculation method, this ruling results in a significant increase in redevelopment pass-through funds to school districts and a corresponding drop in pass-through payments to counties, special districts and cities.

What This Means To You

Local agencies that receive pass-through payments from redevelopment projects in their jurisdictions should carefully examine the method that has been used for calculating those payments. School districts in counties that have been using the same calculation method employed by Los Angeles County may find that they are entitled to a greater share of pass-through payments reflecting the ERAF funds they have received. Other affected taxing agencies may be subject to drops in pass-through payments. Further administrative challenges and litigation over proper pass-through calculations are likely in counties outside Los Angeles.

Facts

The Los Angeles Unified School District ("District") filed a petition for writ of mandate to compel the County of Los Angeles ("County"), City of Los Angeles, and numerous community redevelopment agencies and special districts to increase the District's allocation of community redevelopment project pass-through payments under Health and Safety Code section 33607.5.

The tax allocation issue at the heart of the case involves the interplay between two statutory schemes: the Educational Revenue Augmentation Fund ("ERAF") legislation which was enacted in 1992, and the pass-through legislation, which was enacted in 1993.

The ERAF requirement arose out of the 1991-1992 budgetary crisis that severely tested the state's ability to meet its financial obligations under Proposition 98, which establishes a minimum guaranteed state funding entitlement for schools. The ERAF legislation helped the state meet its Proposition 98 obligation by reducing the property tax allocation of cities, counties, and special districts, and shifting the amount of the reduction to ERAFs for distribution to schools. The ERAF legislation also added sections which required redevelopment agencies to make supplemental deposits to ERAFs during specified fiscal years.

The pass-through legislation requires redevelopment agencies to share or pass-through a portion of their property tax increment to affected local taxing agencies, including school districts. The ruling noted that payments made pursuant to the pass-through legislation "uniquely benefit schools in that they are deemed to contain fixed percentages of property tax and non-property tax revenues, and only the latter may be used for educational facilities." The pass-through calculation is based upon a specified percentage of each affected taxing agency's share of the total property taxes levied within the redevelopment project. The pass-through legislation applies only to redevelopment projects which were adopted or amended in 1994 or later.

District's litigation involves the proper method to calculate the percentage share of property taxes that each affected taxing entity receives during the fiscal year the funds are allocated. In determining shares of property taxes, County consistently disregarded District's ERAF revenue. The trial court held that although District "undeniably received ERAF revenue that was comprised primarily of property taxes, it was properly excluded from the calculation of its percentage share of property taxes." The trial court found that the ERAF and pass-through legislation are separate statutory schemes that should not be read together because a windfall would result to the detriment of non-school taxing entities.

Decision

The Court of Appeal reversed the decision of the trial court. The appellate court focused on language in Subdivision (d)(5) of Sections 97.2 and 97.3 of the Revenue and Taxation Code, which states that "For purposes of allocations made pursuant to Section 96.1 . . ., the amounts allocated from the [ERAF] pursuant to this subdivision, other than amounts deposited in the [ERAF] pursuant to . . . the Health and Safety Code, shall be deemed property tax revenue allocated to the [ERAF] in the prior fiscal year."

The court found that the Legislature's incorporation of ERAF legislation into section 96.1's yearly allocation of property taxes implements "an annual shift of property taxes to [ERAFs] for distribution to the schools." The court stated that "Although this shift was implemented at the expense of cities, counties, and special districts, the Legislature was clearly authorized to make this distribution . . . and '[i]t is not the province of the judiciary to second-guess the wisdom of legislative appropriations.'"

The pass-through payments are required to be allocated "in proportion to the percentage share of property taxes each affected taxing entity . . . receives during the fiscal year the funds are allocated." District asserted "that because it undeniably receives ERAF revenue that is allocated as property taxes to the ERAF under subdivision (d)(5), it must be included in the calculation of its percentage share of property taxes, which will necessarily increase its future pass-through allocations." The Court of Appeal agreed with District. The court stated the statutory language "plainly and unambiguously states that property tax revenue shifted to [ERAFs] under sections 97.2 and 97.3 is deemed property tax revenue allocated to the [ERAFs]." The court stated, "Given that, in the County's words, 'ERAFs are merely an accounting device,' we are compelled to conclude that any property tax revenue deemed allocated to the [ERAFs] under subdivision (d)(5) necessarily qualifies as property tax revenue to the school that received it."

The County asserted that because the ERAF is not mentioned in the pass-through legislation, the Legislature did not mean to include ERAF payments in calculating pass-through allocations. The court disagreed. The pass-through legislation, by its own terms, requires "County to allocate the pass-through payments according to the percentage share of property taxes that each affected taxing entity receives in a fiscal year." The court found that "[i]t is impossible to calculate correctly the property taxes that [District] receives while excluding the property received from [ERAFs]." The court found that it had to read the statutes together "so as to give effect, to the extent possible, to all of their provisions." If the court adopted County's interpretation, it would effectively eliminate subdivision (d)(5). On that basis, the court declined to interpret the statute in the manner urged by County.

However, the ruling viewed ERAF deposits made by redevelopment agencies as different from the mandatory shifts of city, county and special district property taxes into the ERAFs, because redevelopment agencies are permitted to make supplemental ERAF deposits with non-property tax revenue. Because subdivision (d)(5) has "an exception that effectively precludes the County from treating the supplemental deposits as property taxes allocated to ERAFs, [the court concluded] they were not intended to be treated as such." The court noted that subdivision (d)(5) differentiates between property taxes that are allocated to ERAFs and supplemental deposits made from other sources that are not allocated to ERAFs. The court stated, "In light of this distinction, we conclude the supplemental ERAF deposits made by redevelopment agencies under the Health and Safety Code may be excluded from the pass-through allocations."

The Court of Appeal reversed the decision of the trial court and remanded for further proceedings to determine the revised pass-through amounts to be allocated to District. County or other parties may appeal the ruling to the California Supreme Court.

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Diana D. Halpenny | 916.321.4500

Jon E. Goetz | 805.786.4302