Alert July 18, 2011

Lawsuit Challenging Redevelopment Bills Imminent

The California Redevelopment Association (“CRA”) recently announced that, in conjunction with the League of California Cities, it is nearing completion of a lawsuit (the “Lawsuit”) that will challenge the constitutionality of Assembly Bill No. 26 (“ABX1 26”) and Assembly Bill No. 27 (“ABX1 27”) (collectively, the “Redevelopment Bills”). Governor Jerry Brown recently signed the Redevelopment Bills into law as part of California’s budget package.

ABX1 26: the “Dissolution Bill”

ABX1 26 eliminates all California redevelopment agencies (“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.

Constitutional Challenge

The Lawsuit is expected to be filed with the California Supreme Court in late July or early August 2011, and will seek an immediate stay of the Redevelopment Bills.  It is impossible to predict whether, or to what extent, such stay will be granted.  Until granted, however, the Redevelopment Bills remain current law.

The Lawsuit is expected to argue that the Redevelopment Bills violate Proposition 22, adopted by California voters in November 2010, as well as Section 16 of Article XVI and 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.  Section 16 of Article XVI, among other things, requires all tax increment to be used to repay indebtedness incurred by an RDA to carry out a redevelopment project.

The CRA has stated that it does not expect final disposition of the Lawsuit before the end of 2011, although it hopes for a ruling on the requested stay by mid-August.

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 California 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 Supreme Court issues its ruling.