California Appellate Court Provides Guidance

Passthrough payments negotiated prior to the dissolution of redevelopment agencies must be paid in full before remaining tax increments are distributed. The Third District Court of Appeal clarified the “mangled” statutory scheme governing the allocation of tax increments to local taxing entities in its May 27 decision in City of Chula Vista v. Sandoval, et al.

The Messy (Mangled?) Question
After redevelopment agencies were dissolved in 2011, tax increments that would have gone to redevelopment agencies were required to be deposited in a local trust fund. County auditors are tasked with administering and distributing the trust fund assets to local taxing entities according to the scheme developed by the Legislature in Health and Safety Code sections 34183 and 34188.

Section 34183 establishes the order in which the auditor must allocate the trust fund assets. It requires that administrative costs, passthrough payments, and enforceable obligations be paid first and in that order. The remaining pool of money must then be distributed according to section 34188.

Section 34188 dictates that all distributions of the remaining pool of money must be proportionate to the tax entity’s pro rata share under the allocation system developed by the Legislature for determining the amount of property tax increments political subdivisions receive annually. With time, the Legislature enacted AB 1484 to “clarify” that passthrough payments must be paid in full, whether or not they exceed a tax entity’s pro rata share.

But what must be distributed under section 34188 in light of AB 1484? This is the heart of the appeal in City of Chula Vista.

Are passthrough payments included in calculating the size of the pool of money that is shared pro rata by the taxing entities?

The City of Chula Vista and six other cities sought a writ challenging the methodology used by the San Diego County Auditor to distribute the pool of former tax increments generated by redevelopment.

Competing Methodologies
The Auditor paid administrative costs, passthrough payments and enforceable obligations first, and distributed the balance in accordance with section 34188. The result was that through the passthrough payments, some entities received more than their pro rata share.

The cities argued that passthrough payments must be combined with the actual residual of the trust as the pool of money to be shared pro rata.

The Solution
The appellate court agreed with the cities. The fundamental purpose of section 34188 was to include passthrough payments as a part of a taxing entity’s pro rata share and thereby equalize tax distributions between those taxing entities with favorable passthrough agreement and those without — but that purpose is incompatible with the mandate of AB 1484.

Unable to harmonize the two, the court held that section 34188 must yield to the later enacted AB 1484. Thus, the Auditor’s methodology prevailed and passthrough payments must be paid before any pro rata distribution.

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