McGuire v. City of Portland ( 2015 )

90 June 16, 2015 No. 12
IN THE OREGON TAX COURT
REGULAR DIVISION
Teresa McGUIRE, et al.,
Plaintiffs,
v.
CITY OF PORTLAND
and Portland Development Commission,
Defendants,
and
PORTLAND STATE UNIVERSITY,
Defendant-Intervenor.
(TC 5226)
Plaintiffs (taxpayers) filed an action seeking declaratory judgment as to
whether revenues raised by Defendant Portland Development Commission (PDC)
to fund its obligations under a disposition and development (D&D) agreement
between itself and Defendant-Intervenor Portland State University (PSU) were
raised specifically to fund the public school system by reason of being dedicated
exclusively for educational services. Taxpayers argued that funds expended under
the D&D agreement to develop or redevelop building spaces, while taxable, would
produce rental revenue for PSU and would be owned by PSU. Focusing on these
economic benefits to PSU, taxpayers argued that the expenditures were therefore
to fund the public school system. PDC argued that while there could be incidental
benefits to PSU by reason of the D&D agreement, its purpose in expending funds
was to insure that taxable commercial space was developed or redeveloped in the
urban renewal area in which PSU is one important resident. PDC then pointed
to the tax increment revenues (TIF) that would accrue by reason of that activity
as well as the reduction of blight that would occur. PDC argued that both of those
factors are benefits that perfectly fit the general government urban renewal pur-
poses of PDC. Granting Defendants’ joint cross-motion, the court ruled that noth-
ing in Measure 5 or other law prevented the government agencies involved here
from doing what they proposed to do, and that the text of Measure 5 both allows
and requires that the revenues received by PDC be categorized as for general
government purposes.
Oral argument on cross-motions for summary judg-
ment was heard June 1, 2015, in the Multnomah County
Courthouse, Portland.
Gregory J. Howe, Attorney at Law, Portland, filed the
motion and argued the cause for Plaintiffs (taxpayers).
James T. McDermott, Ball Janik LLP, Portland, filed the
cross-motion and argued the cause for Defendant Portland
Development Commission.
Cite as 22 OTR 90 (2015) 91
J. Scott Moede, Portland Office of City Attorney, Portland,
joined the cross-motion for Defendant City of Portland.
Robert T. Manicke and Eric J. Kodesch, Stoel Rives LLP,
Portland, joined the cross-motion for Defendant-Intervenor
Portland State University.
Decision for Defendants rendered June 16, 2015.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court on the second
amended complaint (Complaint) of Plaintiffs (taxpayers).
Taxpayers seek a declaration that property tax revenues
raised to fund the commitments of Defendant Portland
Development Commission (PDC) under an Agreement
for Disposition and Development of Property (the D&D
Agreement) between Portland State University (PSU) and
PDC must be characterized as revenues “dedicated to fund-
ing the public school system” for purposes of Article XI, sec-
tion 11b, of the Oregon Constitution (Measure 5).
This case is before the court on cross-motions
for summary judgment. At the hearing on this matter,
taxpayers withdrew the second and third counts of the
Complaint. Specifically, taxpayers raise no challenge to the
authority of PDC to enter into and fully perform its obliga-
tions under the D&D Agreement.
The first count of the Complaint remains to be
decided and it is against that count that Defendants have
moved for summary judgment.
The parties have entered into a stipulation of facts
and no party suggests that any material question of fact
exists so as to prevent summary judgment.
II. FACTS
The stipulation of facts and related exhibits indi-
cate the following:
(1) The parties to the D&D Agreement are the
City of Portland, acting by and through PDC, and the State
of Oregon, acting by and through PSU. The D&D Agreement
92 McGuire v. City of Portland
contemplates a cooperative venture between PSU and PDC
for the development or redevelopment of real estate that is
or will be owned by PSU.
(2) Pursuant to the D&D Agreement, PDC will
provide cash funding for development of property owned by
PSU. Provision of such funding is contingent on PSU devel-
oping commercial space in the property with a value equal,
at least, to the amount of cash funding from PDC. The tax-
able space will both generate tax increment revenues (TIF
revenues) and, in the opinion of PDC, serve to eliminate
blight and achieve other goals that achieve the purposes of
PDC.
(3) Pursuant to the D&D Agreement, PDC will
transfer certain buildings to PSU in exchange for a prom-
issory note, or notes, in an amount equal to the value of
the buildings transferred by PDC. The promissory notes
will be forgiven by PDC to the extent that PSU develops the
buildings so as to produce taxable real property with a value
equal, at least, to the value of the buildings transferred, an
amount that will also correspond to the face value of the
promissory note or notes received by PSU.
(4) The projects to be developed or redeveloped by
PSU pursuant to the D&D Agreement are multiuse projects
that will contain space devoted to educational functions of
PSU (nontaxable educational space) as well as space devoted
to commercial or retail activities (taxable commercial space).
(5) The parties have specifically stipulated that
“[t]he D&D Agreement describes the purposes for which the
PDC and PSU intend that the revenues that are the subject
of plaintiffs’ Second Amended Complaint will be used.”
(6) The parties have specifically stipulated that
“[t]he projects will provide urban renewal benefits within an
urban renewal area.”
III. ISSUE
Taking into account the counts of the Complaint
withdrawn by taxpayers at the hearing on this matter, the
issue for decision is whether revenues raised by PDC to
fund its obligations under the D&D Agreement are “raised
Cite as 22 OTR 90 (2015) 93
specifically to fund the public school system,” by reason of
being dedicated “exclusively for educational services, includ-
ing support services.”1
IV. ANALYSIS
A. Transfers of Buildings
The constitutional text of Measure 5 speaks only to
a categorization of property tax revenues that, upon receipt,
are dedicated to and therefore spent for a particular pur-
pose. The text does not require, permit or even contemplate
consideration or categorization of the dollar value, or cost, of
assets of a governmental unit already on hand at the begin-
ning of a property tax cycle and, therefore, not derived from
the current levy of property taxes.
For the reasons set forth below, the assertion of tax-
payers that transfers of buildings already owned by PDC
are subject to a challenge under Measure 5 is without merit.
The record in this matter does not disclose how
the buildings that are subject to the D&D Agreement were
acquired by PDC. Any such real estate could have been
donated to PDC (see ORS 457.190(1)2 authorizing urban
renewal districts to receive grants and contributions),
funded with income from TIF revenues attributable to prior
urban renewal activity, purchased with property tax reve-
nues from earlier years subject to Measure 5 restrictions,
or even funded with tax receipts from years prior to the
advent of Measure 5 and on hand at the time of adoption of
Measure 5. Further, the current value of any asset on hand
could well be much greater than the cost of the asset to PDC
or the value at the time PDC received the asset.
1
The quoted provisions are taken from the text of Measure 5. Or Const,
Art XI, § 11b(1). That text presents something of a challenge because it talks
of “categories” which “dedicate” revenues to general government purposes or
alternatively school purposes. It seems to the court that a “category” does not
“dedicate,” but rather reflects a dedication done by an actor. In this proceeding
and earlier cases, the actor is a unit of government that dedicates revenues to be
raised by a levy to general government purposes, to school purposes, or to some
combination of the two. The question then becomes whether any categorization of
dedicated funds is constitutionally correct, or not.
2
The court’s references to the Oregon Revised Statutes (ORS) are to 2013.
94 McGuire v. City of Portland
In all those events, the disposition of property sim-
ply does not fit either the text of Measure 5 as to catego-
rization or the mechanics of Measure 5 as to compliance
and taxpayer relief. Taxpayers point to no evidence that
their reading of Measure 5 was intended by the voters who
adopted Measure 5. The arguments of taxpayers in this
regard have the same shortcoming as did one aspect of the
opinion of this court in the case of Shilo Inn v. Multnomah
County, 333 Or 101, 124, 36 P3d 954 (2001)—they lack a
textual predicate.
The text of Measure 5 fits the annual property tax
cycle. Tax levies and the testing of such levies against con-
stitutional limitations must be done on an annual basis.
Critically, compliance with Measure 5 must be done in
advance of a levy. Urhausen v. City of Eugene, 18 OTR 395,
400-01, aff’d, 341 Or 246, 142 P3d 1023 (2006). Measure 5
only addresses and can only be applied to property tax
amounts to be spent from revenue to be raised. It is only such
dollar amounts that are referred to in the text of Measure 5.
Those dollar amounts are used in the Measure 5 computa-
tion of tax limits, which are expressed in terms of dollars
per thousand of tax levy, and the relief, through compres-
sion, that may be required to produce a current dollar rem-
edy for a taxpayer.3
The Measure 5 calculations are done by placing the
amount of school items in a numerator and the value of a
property in the denominator. A similar calculation is done
for nonschool items. Setting aside tax items not subject to
the Measure 5 provisions, the aggregate school and non-
school items together comprise the total amount of the levy.
Taxpayers read Measure 5 as requiring that
the value of assets disposed of by PDC under the D&D
Agreement be added to the numerator of the formula for
purposes of computing whether tax on any given property
of a taxpayer exceeds the school limit. However that step
puts a dollar amount in the numerator of the calculation
without any textual support for the addition. Measure 5 and
3
As our Supreme Court pointed out in Urhausen, “it is the revenues them-
selves that are the focus of Measure 5.” Urhausen, 341 Or at 254 (emphasis in
original).
Cite as 22 OTR 90 (2015) 95
the implementing statutes refer only to amounts of the cur-
rent levy. They do not permit or require that any other dol-
lar amount attributable to assets on hand be added to the
numerators in the calculation.
In addition to the lack of any textual support for their
position, the argument of taxpayers presents a second prob-
lem. It is not difficult to imagine that if taxpayers’ approach
were to be adopted, the numerators of the Measure 5 ratios
could be swollen to a level where disposition of assets on
hand would have the effect of “using up” the constitution-
ally permitted ratios—resulting in units of government
being unable to raise operating cash for the upcoming year.
Taxpayers point to no source indicating that was the intent
of the voters who adopted Measure 5.
At the hearing on this matter, taxpayers conceded
that they could not describe what remedy would be appropri-
ate if the court agreed with them as to categorization of the
transfers of property called for by the D&D Agreement. They
could propose no formula or mechanism for converting their
legal theory into a remedy that fit either the property tax
cycle or the text of Measure 5 as to both limits and remedies.
Nor can the court think of a remedy that could be fashioned
within the constitutional language of Measure 5. The fact is
that the disposition of assets on hand at the beginning of a
tax year is a matter quite different from the categorization
of revenues to be raised by a levy in the same year.
The court concludes that the reason no remedy can
be thought of that fits the situation is because, as explained,
the situation is not addressed by Measure 5 and the action
cannot constitute a violation of the substantive limitation
imposed by Measure 5.
B. Application of Measure 5 to Categorization of Expendi-
tures from Current Levy
The parties accept that some of the dollars received
by PDC from the current year levy will be spent in the year
in question to fund the undertakings of PDC pursuant to
those provisions of the D&D Agreement that call for a trans-
fer of cash from PDC to PSU.
96 McGuire v. City of Portland
The question is the purpose of those transfers of
cash obtained from the tax levy. In terms of the constitu-
tional text, the question is: Are those expenditures made
exclusively to fund the public school system?
The court addresses this question in the context of
two prior decisions of the Oregon Supreme Court: Shilo Inn
and Urhausen.
In Shilo Inn, the court was presented with funds
expended by PDC. Shiloh Inn, 333 Or at 104-05. Although
expended by PDC in furtherance of its general urban
renewal activities, the funds had been categorized as for
school purposes because the tax rate of a school district had
been used to calculate the amount of revenue that would
be transferred to and spent by PDC. Id. at 104. The court
concluded that it was the use of funds, not the nature of
the governmental unit whose rate was used in the levy pro-
cess, which determined the correct categorization under
Measure 5. Id. at 121-22, 134. Accordingly, the expenditure
of funds was considered to be for the general government
purposes of PDC and not the public school purposes of the
district whose property tax levy numbers were used in set-
ting the amount of tax.
Shilo Inn is not directly relevant in this case.
Although an urban renewal agency, indeed the same one, is
involved, no party argues that the proper categorization of
tax revenue is dependent on anything other than PDC’s pur-
pose in making the expenditures—that is, what the expen-
ditures are for.
The parties do, however, differ as to the purpose of
the expenditures of cash derived from the tax levy amounts
that have been categorized by PDC. As noted above, tax-
payers argue that the expenditure is for schools while PDC
argues the expenditures are for its general governmental
activity of urban renewal.
Taxpayers argue that funds are expended under
the D&D Agreement to develop or redevelop building space
that, while taxable, will produce rental revenue for PSU and
will be owned by PSU. Focusing on these economic benefits
to PSU, taxpayers argue that the expenditures are therefore
to fund the public school system.
Cite as 22 OTR 90 (2015) 97
PDC argues that while there may be incidental ben-
efits to PSU by reason of the D&D Agreement, its purpose in
expending funds is to insure that taxable commercial space
is developed or redeveloped in the urban renewal area in
which PSU is one important resident. PDC then points to
the TIF revenues that will accrue by reason of that activity
as well as the reduction of blight that will occur. Both of
these, PDC argues, are benefits that perfectly fit the general
government urban renewal purposes of PDC. PDC concludes
these results are all that is required to support a categoriza-
tion of the tax revenues that produce them as dedicated to
general government activities.
There is no doubt that the expenditures of cash by
PDC have multiple purposes. However, even if those expen-
ditures can in some way be viewed as supporting PSU, tax-
payers have stipulated that the actions of PDC under the
D&D Agreement will provide urban renewal benefits within
an urban renewal area. Nor do taxpayers question that pro-
duction of, or attempts to produce, urban renewal benefits
are general government activities.
The question then reduces to how Measure 5 is
to be applied to mixed-use expenditures. On this question
Urhausen is both instructive and, in the opinion of this
court, controlling.
In Urhausen, voters in a city approved a local option
levy. 341 Or at 248. Of the proceeds of the levy, approxi-
mately 93 percent were devoted to contracts between the
city and certain school entities for provision of school-based
nursing and other services. Id. Seven percent of the levy was
to be used for general government operations. Id. The city
categorized all tax revenue as dedicated to general govern-
ment operations because the city was spending the revenue
under contracts with others. Id. at 249-50. The city relied on
the provisions of ORS 310.155(3) in taking its actions. Id. at
250. Parties challenging that categorization asserted that
the disposition of the 93 percent increment was, in fact, an
expenditure for schools that had to be categorized as such
pursuant to Measure 5. Id. at 250-51.
Both this court and the Supreme Court concluded
that the expenditures by the city pursuant to contracts of
98 McGuire v. City of Portland
the 93 percent increment were expenditures for school pur-
poses under Measure 5. Id. at 248, 251-52. Although the
funds were, in some sense, spent by the city, the contract
terms rendered the expenditures as being exclusively for
purposes of public education. The city argued that because
the levy proceeds were not exclusively devoted to school pur-
poses, the provisions of Measure 5 and ORS 310.155(3) per-
mitted a categorization of the levy proceeds as for general
government purposes.4 Id. at 250, 252.
Both this court and the Supreme Court rejected the
city’s arguments as to the operation of the exclusivity clause
of Measure 5 and the validity of ORS 310.155(3). Id. at 248,
251-54. Urhausen clearly holds that for tax levies, the pro-
ceeds of which are divided between school and nonschool
expenditures, the Measure 5 limits are to be applied at the
level of expenditures and not at the level of the levy. Id. at
258. Accordingly, the exclusivity clause does not allow cate-
gorization of an entire levy as being for general government
simply because some of the proceeds of the levy are used for
general government purposes.
In the course of its argument in Urhausen, the city
asserted that the position of the challengers—and the one
adopted by the courts—would render the exclusivity clause
of Measure 5 meaningless. Id. at 254. That would be the
case because all multiple-purpose expenditures would be
divided and there would be no need for the exclusivity rule.
The Supreme Court rejected that argument, observing:
“As the Tax Court noted, the ‘exclusivity’ clause retains
importance, because the intended use of any portion of
revenues from a levy could serve both general government
and school purposes. When the same funds are used for a
facility serving both educational and nonschool purposes,
4
Measure 5 provides that “[p]roperty tax revenues are deemed to be dedi-
cated to funding the public school system if the revenues are to be used exclusively
for educational services, including support services, provided by some unit of gov-
ernment, at any level from pre-kindergarten through post-graduate training.”
Or Const, Art XI, § 11b(1) (emphasis added). The statute provides that “[t]axes on
property levied or imposed by a unit of government whose principal function is
to perform government operations other than educational services shall be con-
sidered to be dedicated to fund the public school system only if the sole purpose of
a particular, voter approved levy is for educational services or support services as
defined in this section.” ORS 310.155(3) (emphasis added).
Cite as 22 OTR 90 (2015) 99
for example, the funds would not be used ‘exclusively’ for
school purposes.”
Id. at 254. Although this observation of the Supreme
Court was clearly dicta, this court sees no reason not to
apply the reasoning in this case where, unlike the situa-
tion in Urhausen, a “facility” is involved and the “facility”
has multiple purposes. The matter is not comparable to the
division of a collection of fungible dollars produced by a
levy.
The voters who added Measure 5 to the constitution
clearly understood that there could be situations where tax
levies might be expended on items that combined both of the
Measure 5 categories—that is items that had both school
and nonschool purposes. In Urhausen, the Supreme Court
concluded that direct expenditures on services with exclu-
sive purposes could be, and should be, segregated into the
two Measure 5 categories if the intent of the voters was to be
fulfilled. Id. at 261.
Matters are more complex when, as the Supreme
Court recognized, a multipurpose “facility” is involved.5
Unlike the easy division of current dollar expen-
ditures as between some activities found to be exclusively
school related and some activities that were nonschool in
character, facilities with multiple purposes or uses can pres-
ent division or allocation problems.
The voters who considered Measure 5 could have
insisted that it contain a provision spelling out a formula
in such cases for allocation as between school and non-
school uses—perhaps relative square footage or even rel-
ative time of use as between school and nonschool use
of a facility with multiple purposes. They did not do so.
Instead, they adopted language that had an easy-to-apply
(albeit arguably imperfect) approach. That approach dic-
tates that in the case of a multiple-purpose facility, the
presence of any nonschool use causes the revenue used for
5
The observation of the Supreme Court in Urhausen does not appear to have
been limited only to expenditures for facilities. The court also observed that the
“intended use of any portion of revenues from a levy could serve both general
government and school purposes.” Id. at 254.
100 McGuire v. City of Portland
the facility to be placed in the nonschool, or general gov-
ernment, category.
In this case, the dollars that concern taxpayers are
dollars that are used to produce facilities with multiple pur-
poses. Taxpayers stipulated that one of the purposes is the
general government purpose of urban renewal. No one ques-
tions that the facilities also serve school purposes. In such
cases of multiple uses, the exclusivity rule of Measure 5
requires that such revenues therefore be characterized as
for general government uses.6 Throughout the argument
on the cross-motions, taxpayers couched their objections in
terms of Measure 5 requiring categorization of PDC activ-
ity as school related because PSU would get an economic
benefit from the acquisition of property from PDC, or the
improvement of property already owned by PSU. It appears
that PSU may, indeed, benefit from the completion of the
D&D Agreement. However, taxpayers have stipulated and
the court would, in any case, find that PDC will achieve its
organizational goals of reducing blight and producing TIF
revenue from incremental increases in value of property in
the urban renewal area.
As taxpayers concede, nothing in Measure 5 or
other law prevents the government agencies involved here
from doing what they propose to do. The question is proper
categorization of tax revenues used by PDC in fulfilling its
undertakings under the D&D Agreement. On that score,
the presence of a benefit to PSU is not determinative unless
PSU is the only beneficiary. It is not the only beneficiary
under the D&D Agreement. PDC and the citizens who enjoy
the hoped-for benefits of urban renewal, are also beneficia-
ries. In such cases, the text of Measure 5 both allows and
requires that the revenues received by PDC be categorized
as for general government purposes.
V. CONCLUSION
The joint motion of Defendants and Defendant-
Intervenor is granted. The motion of taxpayers is denied.
The Complaint of taxpayers is dismissed, with prejudice.
6
The court need not and does not address the argument of taxpayers that
ORS 310.150(7) could, in some cases, be unconstitutional.
Cite as 22 OTR 90 (2015) 101
Counsel for Defendants and Defendant-Intervenor
are directed to submit an appropriate form of judgment.
Now, therefore,
IT IS ORDERED that Defendants’ and Defendant-
Intervenor’s Joint Motion for Summary Judgment is granted;
and
IT IS FURTHER ORDERED that Plaintiffs’ Motion
for Summary Judgment is denied.