January 3, 2012

California Supreme Court Upholds Legislation Disbanding Redevelopment Agencies

On December 29, 2011, the California Supreme Court upheld legislation that disbanded redevelopment agencies (“RDAs”) and allowed the State of California to take $1.7 billion in redevelopment funds, funneling it into the State’s General Fund.  The court then struck down legislation that would have allowed redevelopment agencies to stay in business by paying a fee to the State. The combined effect of the ruling is that redevelopment agencies in California will no longer exist once the transition to successor agencies has been completed.  RDA advocates have stated that this is the worst possible outcome for RDAs. 

The Redevelopment Bills at issue are briefly described below.

ABX1 26: the “Dissolution Bill”

ABX1 26 eliminates RDAs. As of the effective date of ABX1 26 (June 29, 2011), most RDA operations are suspended and RDAs are precluded from incurring additional debt or making payments on existing debt, with the exception of fulfilling enforceable obligations entered into prior to such effective date. “Enforceable obligations” are described in ABX1 26 as bonds, loans, and payments required by the federal government or imposed by State law, judgments or settlements, contracts necessary for the continued administration or operation of the RDA, and any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy.

ABX1 26 provides for the designation of a successor agency to replace each dissolved RDA. Such successor agency – likely the city or county that created the RDA – will assume the RDA’s debts and obligations and expedite the winding down of the RDA’s affairs.

ABX1 26 also gives the Controller authority to recover certain assets that were transferred by an RDA. Many RDAs transferred property to local governments and other authorities in anticipation of the passage of the Redevelopment Bills. Any financing using RDA funds after January 1, 2011, may be reevaluated by the State to ensure that an RDA has not attempted to circumvent the legislation.

ABX1 27: the “Continuation Bill”

ABX1 27 would have permitted an RDA to remain operable after October 1, 2011, notwithstanding ABX1 26, so long as the RDA adopted an ordinance (a “Continuation Ordinance”) by no later than November 1, 2011, declaring its intention to continue operations and promising to make certain annual payments to the State and certain other taxing agencies. 

ABX1 26 was upheld and ABX1 27 was struck down.  Thus, there is no opportunity for RDAs to make a payment to stay in existence. “Enforceable Obligations” will remain, but otherwise, RDAs will begin to transition to successor agencies, with a wind-down date of February 1, 2012. 

As we predicted, this legislation and the subsequent California Supreme Court decision will have significant effects on the way property is developed in California, specifically in urban areas.  Housing projects, brownfield development, and public investment related to real estate are immediately impacted.  The shift in landscape will present challenges and opportunities for developers, municipalities, school districts, and the financial world.  We are continuing to monitor the situation and are prepared to help navigate in light of these recent events.