City of Big Bear Lake v. Cohen ( 2017 )

Filed 6/14/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
----
CITY OF BIG BEAR LAKE et al., C076576
Plaintiffs and Appellants, (Super. Ct. No.
34-2013-80001504-CU-WM-
v. GDS)
MICHAEL COHEN, as Director, etc., et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Sacramento County, Allen
Sumner, Judge. Affirmed as modified.
Best Best & Krieger, Iris P. Yang and Irene S. Zurko for Plaintiffs and Appellants.
Kamala D. Harris and Xavier Becerra, Attorneys General, Douglas J. Woods,
Senior Assistant Attorney General, Marc A. LeForestier and Nancy J. Doig, Deputy
Attorneys General, for Defendants and Respondents.
After the Legislature passed the bill to freeze redevelopment activities and
eventually dissolve redevelopment agencies but before Governor Brown signed it into
law (Assem. Bill No. 26 (2011-2012 1st Ex. Sess.) enacted as Stats. 2011, 1st Ex. Sess.
2011-2012, ch. 5 (Assembly Bill 1X 26)), City of Big Bear Lake entered into what it
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called a Cooperation Agreement with its soon-to-be-dissolved redevelopment agency.
Under the Cooperation Agreement, City of Big Bear Lake agreed to complete several
projects in the city and the former redevelopment agency agreed to pay for the projects.
On the same day, City of Big Bear Lake (not the former redevelopment agency) entered
into two contracts with private companies for services related to the projects. The next
day, Governor Brown signed the Dissolution Law, and it became effective immediately.
(Id. at § 16.) On the same day Governor Brown signed the law, the former
redevelopment agency entered into a contract with a private company for services related
to another project listed in the Cooperation Agreement. Eventually, the former
redevelopment agency transferred $2.6 million to City of Big Bear Lake to fund the
contracts mentioned.
The Dissolution Law1 (Assembly Bill 1X 26) immediately froze redevelopment
(taking from redevelopment agencies the authority to create new enforceable obligations)
and provided that only existing enforceable obligations of the former redevelopment
agency could be paid from the funds held by the redevelopment agency and from future
tax increment revenue. The law provided that any excess after payment of enforceable
obligations would be distributed to local taxing entities. Later legislation (Assembly Bill
1484) declared that certain agreements between local municipal governments and their
sponsored redevelopment agencies, such as the Cooperation Agreement here, are not
enforceable obligations.
In this case, we determine, consistent with the trial court: (1) the contested
transactions did not create enforceable obligations of the former redevelopment agency,
(2) the Dissolution Law’s invalidation of sponsor agreements (agreements between a city
1 We refer to the original law dissolving redevelopment agencies (Assembly Bill
1X 26) as well as later legislation on the subject (Assem. Bill No. 1484 (2011-2012 Reg.
Sess.) enacted as Stats. 2012, ch. 26, § 6 (Assembly Bill 1484)) as the Dissolution Law.
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and its former redevelopment agency) does not violate the California Constitution, and
(3) it is irrelevant that City of Big Bear Lake claims it no longer possesses the funds it
received from the former redevelopment agency. We also conclude, consistent with our
decision in City of Bellflower v. Cohen (2016) 245 Cal. App. 4th 438 (Bellflower), that the
statutory remedy of offsetting City of Big Bear Lake’s sales, use, and property taxes to
capture the $2.6 million is unconstitutional. Therefore, we modify the trial court’s
judgment to the extent it found the proposed sales, use, and property tax offsets
constitutional. And we affirm the judgment as modified.
BACKGROUND
The Dissolution Law directed redevelopment agencies to continue making
payments on enforceable obligations (Health & Saf. Code, § 34169, subd. (a))2 but
prohibited those agencies from incurring additional obligations, freezing all such
activities (§ 34162, subd. (a)). A primary goal of the Dissolution Law was “to preserve,
to the maximum extent possible, the revenues and assets of redevelopment agencies so
that those assets and revenues that are not needed to pay for enforceable obligations may
be used by local governments to fund core governmental services including police and
fire protection services and schools.” (§ 34167, subd. (a).) The Legislature expressed the
desire “that redevelopment agencies take no actions that would further deplete the corpus
of the agencies’ funds regardless of their original source.”3 (Ibid.)
On June 27, 2011, the day before the Dissolution Law was signed by Governor
Brown and became effective, City of Big Bear Lake and its former redevelopment
agency, knowing about the imminent change of law and the Legislature’s intent, signed
2 Hereafter, unspecified code citations are to the Health and Safety Code.
3 For a summary of the Dissolution Law, see California Redevelopment Assn. v.
Matosantos (2011) 53 Cal. 4th 231 (Matosantos) and City of Brentwood v. Campbell
(2015) 237 Cal. App. 4th 488, 494 (Brentwood).
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the Cooperation Agreement. The agreement stated that the former redevelopment agency
“desires to transfer that certain amount of redevelopment tax increment funds, and the
Bond Proceeds secured with redevelopment tax increment funds . . . to the City, and the
City desires to accept such funds for the City to acquire land and construct and install
certain public improvements within the Project Areas.” Under the terms of the
Cooperation Agreement, the former redevelopment agency agreed to transfer to City of
Big Bear Lake $23.5 million and the city agreed to undertake specified public
improvements.
Also on June 27, 2011, City of Big Bear Lake entered into an agreement with
Matich Corporation for street and drainage improvements for about $2.5 million. The
city also had a 2006 agreement with Wireless Consulting – Joseph A. Cylwik (also
referred to as Cylwik Property Management) to provide engineering services on an as-
needed basis. Under this contract, Cylwik Property Management provided services
related to the Matich Corporation project.
On June 28, 2011, the day the Dissolution Law and its freeze on the activities of
redevelopment agencies took effect, the former redevelopment agency entered into an
agreement with RRM Design Group for professional services related to several projects.
The former redevelopment agency agreed to pay RRM Design Group about $900,000.
The Dissolution Law required redevelopment agencies to prepare an Enforceable
Obligation Payment Schedule (EOPS) listing all of its own enforceable obligations.
(§ 34169, subds. (g) & (h).) As required by the Dissolution Law, the former
redevelopment agency prepared its EOPS, listing its enforceable obligations. The EOPS
included City of Big Bear Lake’s contracts with Matich Corporation and Cylwik Property
Management and the former redevelopment agency’s contract with RRM Design Group.
But the EOPS did not list the Cooperation Agreement; nor did it reflect that the former
redevelopment agency would be transferring $2.6 million to City of Big Bear Lake for
payment on the listed contracts. Department of Finance (DOF) reviewed the EOPS and
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requested documentation on the Matich Corporation contract, but DOF did not return the
EOPS to the former redevelopment agency for reconsideration as allowed by the
Dissolution Law. (§ 34169, subd. (i).)
Before the former redevelopment agency was dissolved by operation of law on
February 1, 2012 (Matosantos, supra, 53 Cal.4th at p. 275), the former redevelopment
agency paid to City of Big Bear Lake $2.6 million and the city paid the money to Matich
Corporation, Cylwik Property Management, and RRM Design Group.
When the former redevelopment agency was dissolved, City of Big Bear Lake
became the successor agency to wind down the affairs of the former redevelopment
agency.
After the California Supreme Court decided Matosantos upholding the
constitutionality of the Dissolution Law, the Legislature passed and the Governor signed
Assembly Bill 1484, which required an audit of successor agencies to determine whether
unobligated tax increment revenues were available for transfer to taxing entities. (See
Assem. Bill No. 1484 (2011-2012 Reg. Sess.) adding Stats. 2012, ch. 26, §§ 17, 40.)
This “due diligence review” or DDR (§ 34179.5, subd. (a)) identified “[t]he dollar value
of assets and cash . . . transferred after January 1, 2011, through June 30, 2012, by the
redevelopment agency or the successor agency to [a sponsoring entity] and the purpose of
each transfer.” (§ 34179.5, subd. (c)(2).) The amendment to the Dissolution Law
required the successor agency to submit the results of this audit to the successor agency’s
oversight board (§34179.6, subd. (c)) and to DOF, which had the authority to adjust any
amounts in the DDR (§ 34179.6, subd. (d)).
Crucial to this case, Assembly Bill 1484 also modified the definition of
“enforceable obligations” to exclude all agreements between a former redevelopment
agency and its sponsoring entity (sponsor agreements), with exceptions not relevant to
this appeal. (§ 34171, subd. (d)(2).)
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As required by the Dissolution Law, City of Big Bear Lake, acting as the
successor agency, obtained a DDR, which listed transfers from the former redevelopment
agency to City of Big Bear Lake. Included in that list was $2,629,622 for
“[r]eimbursement to City [of Big Bear Lake] for street capital project expenses.”
After review of City of Big Bear Lake’s DDR, DOF adjusted the amount available
for distribution to local taxing entities to include the money paid by the former
redevelopment agency to the city under the Cooperation Agreement for work performed
by Matich Corporation, Cylwik Property Management, and RRM Design Group.
(§ 34171, subd. (d)(2).)
DOF met and conferred with City of Big Bear Lake but reiterated its position that
the $2.6 million “was transferred in accordance with an agreement between the City and
the [former redevelopment agency].” DOF informed City of Big Bear Lake in a letter
that, if the city did not comply within 30 days, DOF would direct the Board of
Equalization to withhold sales and use tax from the city. In response, City of Big Bear
Lake informed DOF that it was not in possession of those funds.
City of Big Bear Lake, both in its municipal capacity and as successor agency of
the former redevelopment agency, sought a writ of mandate and declaratory relief against
DOF and others. As relevant to this appeal, City of Big Bear Lake challenged DOF’s
determinations that the Cooperation Agreement and the contracts with Matich
Corporation, Cylwik Property Management, and RRM Design Group did not result in
enforceable obligations. City of Big Bear Lake also sought a declaration that the
proposed offset of its sales, use, and property taxes was unconstitutional.
The trial court entered judgment in favor of DOF and the other defendants. The
trial court determined:
 The Matich Corporation and Cylwik Property Management contracts were not
enforceable obligations of the former redevelopment agency because those
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contracts were made between City of Big Bear Lake and those private contractors
and did not involve the former redevelopment agency.
 The contract between RRM Design Group and the former redevelopment agency
is void because it was entered into after the Dissolution Law freeze went into
effect.
 The Cooperation Agreement is not an enforceable obligation of the former
redevelopment agency because it is a sponsor agreement.
 The fact that all payments were made under the Cooperation Agreement before it
was rendered unenforceable by Assembly Bill 1484 is not dispositive.
 City of Big Bear Lake cannot claim that DOF approved the payments made under
the Cooperation Agreement to City of Big Bear Lake as part of the EOPS because
City of Big Bear Lake did not list the Cooperation Agreement in the EOPS.
 DOF’s determinations in this case do not violate Proposition 22 because City of
Big Bear Lake did not disclose the Cooperation Agreement in its EOPS.
 The Dissolution Law does not violate the contracts clauses of the United States
and California Constitutions.
 DOF correctly determined that City of Big Bear Lake failed to transfer $2.6
million for distribution to local taxing entities.
 The validity of the enforcements provisions of the Dissolution Law, allowing the
state to withhold sales, use, and property taxes, is not ripe for review because the
funds are no longer in the possession of the City of Big Bear Lake.
DISCUSSION
Before we turn to City of Big Bear Lake’s arguments on appeal, it is helpful to
step back and look at the four agreements at issue in this case: (1) the city’s contract with
Matich Corporation, (2) the city’s contract with Cylwik Property Management, (3) the
former redevelopment agency’s contract with RRM Design Group, and (4) the
Cooperation Agreement between the city and the former redevelopment agency. Very
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simply, none of these contracts supports an enforceable obligation on the part of the
former redevelopment agency.
First and second, the former redevelopment agency was not a party to the Matich
Corporation and Cylwik Property Management contracts. Therefore, those contracts did
not create an enforceable obligation on the part of the former redevelopment agency.
Third, the former redevelopment agency’s contract with RRM Design Group was
void under the Dissolution Law because it was entered into after the freeze took effect.
(§ 34162, subd. (b).) Therefore, the contract did not create an enforceable obligation on
the part of the redevelopment agency.
And fourth, the Cooperation Agreement was a sponsor agreement (an agreement
between the former redevelopment agency and its sponsoring agency). Under Assembly
Bill 1484, such agreements are not enforceable (and there is no statutory exception
applicable here). (§ 34171, subd. (d)(2).)
Since none of these four contracts creates a current, enforceable obligation on the
part of the former redevelopment agency, neither DOF nor the trial court erred in
determining that $2.6 million of the funds transferred from the former redevelopment
agency to City of Big Bear Lake were not supported by enforceable obligations.
Therefore, City of Big Bear Lake must provide $2.6 million for distribution to local
taxing entities. (§ 34179.5, subd. (a).)
I
Enforceable Obligations
City of Big Bear Lake makes three arguments that the agreements entered into by
the former redevelopment agency must be viewed as enforceable obligations of the
former redevelopment agency under the Dissolution Law. It argues: (1) any agreement
must be viewed as an enforceable obligation if it was enforceable when the transfers of
funds were made, (2) the RRM Design Group contract was not affected by the freeze
component of the Dissolution Law even though the contract was not signed until the
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freeze had taken effect, and (3) DOF tacitly approved the transfers by the former
redevelopment agency by not objecting to them. None of these arguments has merit.
A. Enforceability of Agreements that were Enforceable When Funds
Transferred
City of Big Bear Lake contends that the Cooperation Agreement was an
enforceable obligation because, at the time the city and former redevelopment agency
entered into and fulfilled the obligations under the contract, it was an enforceable
obligation under the Dissolution Law. The premise of City of Big Bear Lake’s argument
is that, if the sponsor agreement created an enforceable obligation when it was entered
into and executed, the Legislature either did not or cannot reach back and make the
obligation unenforceable. For this proposition, City of Big Bear Lake offers no authority.
(See Okasaki v. City of Elk Grove (2012) 203 Cal. App. 4th 1043, 1045, fn. 1 [plaintiffs’
contention in opening brief forfeited for failure to provide authority].) And in any event
the premise is false. The Legislature could and did retroactively invalidate sponsor
agreements entered into before the Dissolution Law was passed. (See Brentwood, supra,
237 Cal.App.4th at pp. 496-500.)
B. Enforceability of Contract between Former Redevelopment Agency and
RRM Design Group
City of Big Bear Lake also contends that the contract entered into between the
former redevelopment agency and RRM Design Group is an enforceable obligation
because, even though it was signed on June 28, 2011, the day that the freeze under the
Dissolution Law took effect, it was approved by the former redevelopment agency the
day before, on June 27, 2011. This contention also fails because the contract was signed
after the freeze took effect and therefore it did not create an enforceable obligation.
But City of Big Bear Lake complains that the former redevelopment agency was
“bound by the RRM Contract once the [former redevelopment agency’s] governing board
approved it on June 27, 2011. The actual execution of the contract was a ministerial act
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. . . .” Even assuming for the purpose of argument that the former redevelopment agency
staff had the ministerial duty to sign the contract (which is dubious because it no longer
had the authority to do so on June 28, 2011), RRM Design Group was under no such duty
and did not sign the contract until June 28, 2011. In other words, no potentially binding
contract existed until RRM Design Group signed it June 28, 2011. No binding contract
existed before the freeze took effect. The general rule is that a contract is not binding
until both parties sign it. (Sparks v. Mauk (1915) 170 Cal. 122, 123.) We see no reason
in this case to deviate from the general rule. Therefore, since no binding contract (and,
hence, no enforceable obligation) existed before the freeze took effect, the freeze
prevented the formation of a binding contract. (§ 34162, subd. (b).)
C. Tacit Approval by DOF
Under the Dissolution Law, the former redevelopment agency was directed to
continue to meet its enforceable obligations until it was dissolved. (§ 34169, subd. (a).)
In connection with this requirement, the Legislature directed the former redevelopment
agency to list its enforceable obligations. (§ 34169, subd. (g).)
The former redevelopment agency listed the contracts with the private contractors
in its EOPS (§ 34169, subd. (g)), which it approved on August 22, 2011, reflecting the
allegedly enforceable obligations of the former redevelopment agency through December
31, 2011. While DOF had the statutory authority to return the EOPS to the former
redevelopment agency for reconsideration (§ 34169, subd. (i)), it did not. The EOPS
listed the contracts with (1) Matich Corporation, (2) Cylwik Property Management, and
(3) RRM Design Group, even though two of the companies (Matich and Cylwik) entered
into contracts with the city and not with the former redevelopment agency and the other
contract (with RRM Design Group) was void. (The former redevelopment agency was
supposed to list its own obligations in the EOPS, not those of the city (§ 34169.)) The
former redevelopment agency did not list the sponsor agreement (Cooperation
Agreement) in the EOPS. Before its dissolution, the former redevelopment agency made
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the transfers listed in the EOPS, including the transfers disputed in this case, to City of
Big Bear Lake (not to the contractors).
On appeal, City of Big Bear Lake asserts: “DOF tacitly approved the [former
redevelopment agency’s] transfers to the City and those transfers were valid.” While the
city discusses the statutes concerning the EOPS and the duty to pay enforceable
obligations, it offers no authority for the proposition that this asserted tacit approval made
those alleged obligations enforceable, even though they were not enforceable under the
Dissolution Law. Specifically, the transfers to City of Big Bear Lake under the
Cooperation Agreement for payments to Matich Corporation, Cylwik Property
Management, and RRM Design Group were unenforceable because the payments were
made to satisfy a sponsor agreement. Also, the agreement with RRM Design Group was
not an enforceable obligation because the contract was signed after the freeze went into
effect. These were not enforceable obligations, and “tacit approval” did not turn them
into enforceable obligations.4
II
Proposition 22
City of Big Bear Lake contends that the Dissolution Law violates Proposition 22
(2010), which generally prohibits the state from redirecting a redevelopment agency’s tax
increment revenue. (Cal. Const., art. XIII, § 25.5, subd. (a)(7).)5 The city argues that the
4 City of Big Bear Lake does not assert that DOF is equitably estopped from
determining that the Cooperation Agreement was not an enforceable obligation. We
therefore do not discuss that issue.
5 The constitutional provision on which City of Big Bear Lake relies prohibits the
state from “[r]equir[ing] a community redevelopment agency (A) to pay, remit, loan, or
otherwise transfer, directly or indirectly, taxes on ad valorem real property and tangible
personal property allocated to the agency pursuant to Section 16 of Article XVI to or for
the benefit of the State, any agency of the State, or any jurisdiction; or (B) to use, restrict,
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constitutional provision precludes DOF from invalidating payments that were valid when
they were made. As noted above, the trial court rejected this argument because the city
did not include the Cooperation Agreement in its EOPS. But the city claims it was
justified in not listing the Cooperation Agreement because it listed the “ultimate
recipients”—Matich Corporation, Cylwik Property Management, and RRM Design
Group—in the EOPS. After City of Big Bear Lake filed its opening brief, we held in
Brentwood that retroactive invalidation of sponsor agreements does not violate
Proposition 22.
Before we reach the constitutional issue, we agree with the trial court that City of
Big Bear Lake did not preserve this issue of whether the Dissolution Law violates
Proposition 22 under the facts of this case because the city did not include the
Cooperation Agreement in its EOPS. As the trial court reasoned, “[w]hatever merit[] this
argument may have for payments valid[ly] made prior to the [redevelopment agency’s]
dissolution, the failure to properly disclose the payments on the EOPS invalidated the
payments. There is thus no Proposition 22 violation.” Listing the “ultimate recipients,”
as City of Big Bear Lake characterizes it, did not meet the requirement of the statute to
list the “enforceable obligations.”
In any event, as we held in Brentwood, the retroactive invalidation of the
payments made under the Cooperation Agreement before the former redevelopment
agency was dissolved did not violate Proposition 22, even if the payments were made
when the sponsor agreement was enforceable. (Brentwood, supra, 237 Cal.App.4th at pp.
496-500.)
City of Big Bear Lake claims that Brentwood is distinguishable. It argues: “Here,
all of the payments were made under the Cooperation Agreement during the ‘freeze’
or assign a particular purpose for such taxes for the benefit of the State, any agency of the
State, or any jurisdiction . . . .” (Cal. Const., art. XIII, § 25.5, subd. (a)(7).)
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period, and were listed on the [former redevelopment agency’s] EOPS, which DOF did
not disapprove.” We need not pause long on this argument that Brentwood is
distinguishable because it is based on an unpersuasive argument concerning the facts.
Here, the disputed payments were not made to the outside contractors listed on the EOPS;
instead, the payments were made to City of Big Bear Lake under the Cooperation
Agreement, which was not disclosed on the EOPS. There is no merit or reason to City of
Big Bear Lake’s argument that it was sufficient to list the contracts with the outside
contractors in the EOPS because those contracts did not create enforceable obligations on
the part of the former redevelopment agency, which is borne out by the fact that the
former redevelopment agency made payments to the city, not to those outside contractors.
Since the foundation of City of Big Bear Lake’s attempt to distinguish Brentwood is
unsupportable, we need not undertake a further comparison of the two cases.
III
Possession of Funds
City of Big Bear Lake contends that, because the city has already spent the money
received from the former redevelopment agency, there are no “unobligated balances
available for transfer to taxing entities.” (§ 34179.5, subd. (a).) We see no relevance to
this argument. It does not justify City of Big Bear Lake’s refusal to turn over funds that
must be turned over under the Dissolution Law.
Section 34179.5, subdivision (a) directs “each successor agency [to] employ a
licensed accountant, approved by the county auditor-controller and with experience and
expertise in local government accounting, to conduct a due diligence review to determine
the unobligated balances available for transfer to taxing entities.” This provision does not
require the licensed accountant to determine (1) whether City of Big Bear Lake has spent
the money received from the former redevelopment agency or (2) what is in City of Big
Bear Lake’s coffers; instead, it requires the licensed accountant to apply the Dissolution
Law, analyze the transactions, and do the math to determine how much money the city
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must turn over. Section 34179.5 provides the process, but it does not require the licensed
accountant to determine whether the city possesses the funds. City of Big Bear Lake
establishes neither by the language of the statute nor by any other authority that it cannot
be ordered to turn over funds for distribution to taxing entities just because it has already
spent the money it received from the former redevelopment agency.
To reiterate, the former redevelopment agency had no obligation with respect to
the Matich Corporation, Cylwik Property Management, and RRM Design Group
contracts. Therefore, the fact that City of Big Bear Lake paid on those contracts cannot
be attributed to any obligation of the former redevelopment agency.
City of Big Bear Lake argues that it cannot recover the funds from the private
companies that received payment for their services. Again, the city does not explain how
this is relevant to the inquiry required by section 34179.5.
City of Big Bear Lake’s argument that it no longer possesses the funds received
from the former redevelopment agency does not justify refusal to turn over $2.6 million
for distribution to taxing entities under the Dissolution Law.
IV
Sales, Use, and Property Tax Offsets
In its correspondence with City of Big Bear Lake, DOF stated that it, if the city did
not turn over funds identified by DOF to be distributed to taxing entities, then the state
would capture those funds by offsetting sales, use, and property tax revenues to which the
city was entitled.6 (§ 34179.6, subd. (h).) The trial court concluded that the issue was
not ripe for review. City of Big Bear Lake raises the issue again on appeal. Since
6 We recognize that the trial court declined to address this issue, opining that it was
not ripe for review. Since we have directly addressed this issue in Bellflower and since
the state notified City of Big Bear Lake, at least initially, that it would invoke that
remedy, we address it here.
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briefing was completed on this case, we decided Bellflower, supra, 245 Cal. App. 4th 438,
in which we held that the proposed offsets under section 34179.6, subdivision (h) would
violate Proposition 22 (2010). We therefore must modify the trial court’s judgment.
DISPOSITION
The judgment is modified to prohibit the state from using the remedies in section
34179.6, subdivision (h) to capture funds by offsetting sales, use, or property taxes to
which City of Big Bear Lake is entitled. With that modification, the judgment is
affirmed. DOF is awarded its costs on appeal. (Cal. Rules of Court, rule 8.278(a).)
NICHOLSON , J.
We concur:
BLEASE , Acting P. J.
ROBIE , J.
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