Alert July 29, 2011

Legal Battle Over California Redevelopment Bills

The California Redevelopment Association (“CRA”) and the League of California Cities recently filed a lawsuit (the “Lawsuit”) with the California Supreme Court challenging the constitutionality of Assembly Bill No. 26 (“ABX1 26”) and Assembly Bill No. 27 (“ABX1 27”) (collectively, the “Redevelopment Bills”). Governor Jerry Brown signed the Redevelopment Bills into law at the end of June 2011 as part of California’s budget package.

The Lawsuit alleges, among other things, that the Redevelopment Bills violate Proposition 22, adopted by California voters in November 2010, as well as certain other provisions of the California Constitution. Proposition 22 prohibits the State from redirecting funds allocated to transportation, redevelopment, or local government projects and services. The Lawsuit also requests the Supreme Court to issue a stay, which would stop the Redevelopment Bills from taking effect while the court considers the case. 

On July 28, Kamala D. Harris, Attorney General of the State of California, and Manuel M. Medeiros, State Solicitor General, filed an opposition to the Lawsuit (the “Opposition”) on behalf of the State.  The Opposition argues that the California Legislature has the power to terminate California redevelopment agencies (“RDAs”) because the Legislature created RDAs.  The Opposition also argues that the Redevelopment Bills do not violate Proposition 22, because the RDAs have a voluntary means of whether to remain in existence by making certain payments under the provisions of ABX1 27.  The Opposition further sets forth agreement with the Lawsuit that the California Supreme Court should expedite resolution of the Lawsuit because the issues presented are significant to the continued operation of the State.  Last, the Opposition argues that the Court should not issue a stay of the effectiveness of the Redevelopment Bills, because they are critically important pieces of the State’s current budget framework and are essential parts of the budget solution crafted by the Legislature and Governor Brown.

The Redevelopment Bills are briefly described below.

ABX1 26: the “Dissolution Bill”

ABX1 26 eliminates all RDAs as of October 1, 2011. As of the effective date of ABX1 26, (i.e., 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, payments required by the federal government or imposed by State law, judgments or settlements, and contracts necessary for the continued administration or operation of the RDA.

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 after January 1, 2011. 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 permits an RDA to remain operable after October 1, 2011, notwithstanding ABX1 26, so long as the RDA adopts 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.  The Department of Finance will calculate the appropriate amount that each RDA must deposit into an Educational Revenue Augmentation Fund and a Special District Allocation Fund in order to continue operating after October 1, 2011. According to the CRA, estimated payments for the 2011-12 fiscal year are expected to reach an aggregate $1.7 billion, and estimated payments for the 2012-13 fiscal year are expected to total $400 million.

Impact on RDA Bond Financings

Upon the passage by an RDA of a Continuation Ordinance, the RDA may legally continue its operations, including the issuance of bonds to finance redevelopment activities or refinance outstanding debt.  Until the Supreme Court decides the Lawsuit, however, it is unlikely that any bond counsel will be willing to provide a “clean” opinion to support such debt issuance.  Consequently, RDAs are effectively precluded from utilizing traditional tax-exempt financing vehicles until the court issues its ruling.