City of San Jose v. Sharma
5 Cal. App. 5th 123
| Cal. Ct. App. | 2016Background
- In 1944 Santa Clara County enacted an ad valorem "retirement levy" to fund county pension obligations (a voter-approved tax measured by assessed value). Since 1956, tax increment from that levy within San Jose redevelopment project areas was allocated to the San Jose Redevelopment Agency.
- Redevelopment tax-increment financing (Prop. 18 / Cal. Const. art. XVI, § 16) allocates increases in property tax revenue in project areas to redevelopment agencies to pay agency indebtedness.
- The Legislature dissolved redevelopment agencies in 2011 and created a Redevelopment Property Tax Trust Fund and a statutory distribution scheme (Health & Safety Code § 34182–34183) with a prioritized allocation (the "waterfall") and a deficiency rule (the "reverse waterfall").
- Dispute: Santa Clara County (County) withheld retirement-levy tax-increment funds and the City of San Jose (successor agency, City) sued to require distribution to the successor agency; the trial court ordered (1) retirement-levy tax increment allocated to the successor agency to pay enforceable obligations, and (2) passthrough payments to the County take priority under the waterfall but may be reduced under the reverse-waterfall only to service bond debt.
- Both parties appealed: County argued retirement-levy increment must stay with County for pensions; City appealed the trial court’s limitation on how much passthrough can be diverted to pay the successor agency’s other enforceable obligations.
Issues
| Issue | Plaintiff's Argument (County) | Defendant's Argument (City / Successor) | Held |
|---|---|---|---|
| 1) Whether retirement-levy tax increment in the redevelopment project area is subject to Cal. Const. art. XVI, § 16 and must be allocated to the successor agency to pay RDA debts | Retirement levy is a special tax whose revenues may be used only for county pension purposes and cannot be diverted | Section 16 applies to all ad valorem levies on real property (including the retirement levy); the increment was always allocated to the redevelopment agency and thus to successor agency for enforceable obligations | Held for City: Section 16 covers ad valorem levies like the retirement levy; increment goes to successor agency to pay RDA obligations; County’s special-tax, gift-of-public-funds, and vested-rights claims fail |
| 2) Whether contractual passthrough payments to the County have priority over successor agency enforceable obligations, and to what extent passthroughs can be reduced under the reverse-waterfall when funds are insufficient | Passthroughs should not be subordinated except as statute allows; County argued only funds needed to service bond debt may be diverted before passthroughs | City argued enforceable obligations generally should take precedence and that the reverse-waterfall permits more extensive deductions from passthroughs | Held for County on priority question: Waterfall gives passthroughs priority over ROPS items; reverse-waterfall permits deduction from passthroughs only to the extent necessary to service bond debt (i.e., limitation to servicing bond debt) when statutory condition (subordination in passthrough agreement) is met |
| 3) Whether 2015 SB 107 changes allocation of retirement-levy increment already collected or impounded pre‑SB 107, and whether SB 107 applies going forward | SB 107 requires pension-levy revenues to remain with taxing entity unless pledged and needed; County contends SB 107 validates County allocations and applies to impounded funds | City contends SB 107 is not retroactive to taxes collected before enactment and does not validate impoundments that were not allocations; impact on post‑SB 107 funds requires factual inquiry on pledge/need | Held: SB 107 not retroactive to taxes collected before Sept. 22, 2015; appellate court affirmed distribution for pre‑SB 107 funds and remanded factual issues about post‑SB 107 funds (pledge/need) to trial court if necessary |
Key Cases Cited
- California Redevelopment Assn. v. Matosantos, 53 Cal.4th 231 (Supreme Court of California) (describing tax-increment financing and statutory background)
- Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, 22 Cal.3d 208 (Supreme Court of California) (standards for showing impairment of contract rights)
- Betts v. Board of Administration of Public Employees’ Retirement System, 21 Cal.3d 859 (Supreme Court of California) (pension benefits as vested contractual rights)
- Santa Barbara etc. Agency v. All Persons, 47 Cal.2d 699 (Supreme Court of California) (public-purpose test for transfers between public agencies)
- Patton v. City of Alameda, 40 Cal.3d 41 (Supreme Court of California) (construction of Proposition 13 exemption for preexisting indebtedness)
- City of Oakland v. Garrison, 194 Cal. 298 (Supreme Court of California) (public-purpose analysis for transfers of county funds)
- Star-Kist Foods, Inc. v. County of Los Angeles, 42 Cal.3d 1 (Supreme Court of California) (limitations on subordinate political entities asserting state constitutional claims)