Mayor Charlie Hales' plan to provide urban renewal money for Portland State University has been socked with a legal challenge even before the City Council passes it.

Southwest Portland schools activist Teresa McGuire and 10 fellow citizens filed suit in Oregon Tax Court last Wednesday, asking Judge Henry Breithaupt to rule that urban renewal projects supporting PSU should be construed as going toward education.

"I hope this kind of shuts down the whole project and how it's going to pan out with Portland State," McGuire says.

If Breithaupt issues the declaratory judgment sought by McGuire attorney Greg Howe, that would mean any money going to PSU must fall within property tax caps set by the Measure 5 tax limitation passed by voters in 1990. To stay under the cap set by Measure 5, opponents to the plan argue, any property tax money that goes to PSU would have to be taken from public schools.

City and PSU officials, however, say they believe the latest plan complies with the requirements of Measure 5 and would not affect public school funding.

If the judge rules against the city, the decision also might affect Hales' complex plan to restructure six of the city's urban renewal districts, one of the mayor's top initiatives. Hales proposed scrapping the $169 million Education Urban Renewal Area surrounding PSU that was championed by former Mayor Sam Adams two years ago. As compensation, Hales' staff and the Portland Development Commission negotiated an alternate package with university President Wim Wiewel worth more than $25 million in projects for PSU.

Hales also wants to scrap a second urban renewal area, expand two others and extend the life of two more. His proposal would put more than $1 billion in property back on the tax rolls.

Howe says he doesn't care whether property taxes for education go to PSU or public schools. He just wants to make sure that Measure 5, which capped education property taxes at $5 per $1,000 in property value, is followed. The $25-plus million for PSU-related projects would come on top of the $5 per $1,000 that's already being assessed in Portland, he argues.

"If they get more than $5 per $1,000, then that violates the Constitution," Howe says.

McGuire has a slightly different agenda. She never thought the area around PSU qualified as "blighted," as required under the state's urban renewal laws. Nor did she like Adams' plan to spend urban renewal money to redevelop Lincoln High School downtown. That was an equity concern, she says. Lincoln is one of the state's most prestigious public schools, with an affluent student body.

McGuire also opposes the way urban renewal in general siphons off money for public schools, and says there should be other ways besides property taxes to support PSU.

Portland has by far the largest urban renewal program in Oregon. Much of the property tied up in urban renewal districts diverts property taxes to the Portland Development Commission that otherwise would go to public schools.

Because the state has a shared pot of money to divvy up property taxes among nearly 200 school districts, Portland Public Schools doesn't suffer directly; most of the school property taxes diverted by PDC get made up via the state school fund. But that reduces the pot of funds available for all of the state's school districts, McGuire says.

"In my mind, it's not just a Portland issue," she says. "It's at the expense of every other district in the state."

It's unclear what impact the lawsuit might have on Hales' ambitious reshuffling of urban renewal. PDC and the mayor's staff took pains to designate aid to PSU only for commercial aspects of its properties. That's in contrast to the original Education Urban Renewal Area plan, which dedicated some of the money for PSU's academic buildings.

"We believe that the package that was worked out is in compliance with the law," says Anne Mangan, PDC spokeswoman.

"As far as we know, everything's moving forward," says Scott Gallagher, PSU spokesman.

The City Council is scheduled to approve the new PSU proposal and other urban renewal district shuffling in December.

Howe says it's important to have a judge rule on his lawsuit before any property taxes go to PSU. "If we wait until after the fact, tax rates will have been set, and tax bills will have been sent."

Steve Law can reached at 503-546-5139 or

Twitter: @SteveLawTrib

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