(January 15)  The state of California has struck back at the city of Twentynine Palms’ cutting edge effort to preserve bond proceeds issued by its former redevelopment agency.
In 2011, the state legislature at Governor Jerry Brown’s behest passed Assembly Bills XI 26 and XI 27, two redevelopment agency shuttering laws which closed out all municipal and county redevelopment efforts statewide. A coalition of cities fought the law, but the state Supreme Court upheld the measure.
While 317 of the state’s 482 incorporated cities went along with the new law without question and shut down their redevelopment agencies, 165 cities have resisted the state on the issue. That resistance ranged  from registering relatively mild protests to filing lawsuits against the state and its Department of Finance, which is the entity designated under the law to make a determination with regard to how the money that was in the possession of the former redevelopment agencies is to be disbursed.
Twentynine Palms, led by its city attorney A. Patrick Muñoz of the law firm Ruttan & Tucker, has been the most aggressive of San Bernardino County’s 24 cities in disputing the state’s action in confiscating redevelopment money and then redistributing it to other local taxing agencies or using it for education or public safety purposes.
At stake in the matter for Twentynine Palms, a city of 25,048 in San Bernardino County’s Mojave Desert outback,  are two tax allocation bonds issued for a total of $8.5 million. Those bonds were intended to defray the cost of Project Phoenix, a downtown revitalization which is to include a community center, a 250-seat theater, classrooms, a civic plaza, a park, a paseo, residential units, a wastewater treatment plant, and improvements to the downtown fire station. The last of the bonds were issued three months before  AB X1 26 and AB X1 27 passed and went into effect.
Based on an analysis by Muñoz, the Twentynine Palms City Council publicly asserted that that AB X1 26 and AB X1 27 are trumped by federal securities regulations, meaning the money the Twentynine Palms Redevelopment Agency bonded for in 2011 must be utilized only for the purpose that bondholders were told the money would be applied toward.
The city followed Muñoz’s recommendation to have the successor agency to the redevelopment agency lay claim to the redevelopment money and declare its intent to proceed with Project Phoenix.  AB X1 26 and AB X1 27 provided for the creation of locally based oversight boards to direct the discharging of remaining redevelopment money.  In  May 2012, Muñoz drafted a contract between the successor agency and the city by which the  successor agency turned over the bond spending authority to the city with a directive that it go toward Project Phoenix. On a 4-1 vote on May 22, 2012 the city council voted unanimously to transfer the seven-member oversight board’s duties and obligations to administer the bond proceeds to “the city in its capacity as a municipal corporation.”
To reinforce that action, on February 26, 2013, the city council authorized Muñoz to file litigation against the Department of Finance so the city could move forward with the expenditure of the bond proceeds. The city took the position that the bond documents are contracts that created specific obligations between the city, as the issuer, and the bond purchasers, and as such are enforceable obligations such that the state cannot interfere with them. Moreover, according to Munoz, the city would be violating IRS and SEC regulations as well as put the tax exempt status of the bonds in jeopardy if it does not spend the money for the purpose for which the bonds were issued.
AB X1 26 and AB X1 27 contained a provision requiring any municipalities that contested the law to do so in Sacramento Superior Court.  The California Department of Finance is being represented by the California Attorney General’s Office’s civil division in the case. On December 23, the California Attorney General’s Office laid out an answer to Twentynine Palms’ legal action preparatory to an upcoming January 24 hearing on the matter.
According to deputy attorney general Michael Witmer, $12 million of the tax allocation bonds issued by the city – offered to bondholders in March 2011 – while earmarked for Project Phoenix, contained no concomitant contracts to build anything or a defined plan of how the bond proceeds were to be expended.
Witmer maintains the assertion by Muñoz and a consultant working for the city in the capacity of community development director, Matt McCleary, that Project Phoenix disbursements could be placed on the phased out redevelopment agency’s recognized obligations payment schedules runs contrary to instructions from the California Department of Finance that the project was not to be listed on the payment schedule.
Witmer told the court that the transferring of bond authority from the successor agency to the city was an illegal ruse and had to be rescinded. He further brought into question the escalating cost of the project, noting that it was originally cast as a $750,000 effort under a different name, the “Split Rock Housing Project,” first noted in the Twentynine Palms Redevelopment Agency’s five-year plan in 2009. It drew to itself other facets over the next two years, including a $3 million bump for affordable housing and then another $2.5 million increase until it was listed as representing an $8.5 million undertaking
“[A]s contemplated in the five-year plan, Project Phoenix and the Split Rock housing development only needed $2.5 million,” Witmer told the court. “Even with all of the other projects listed in the five-year plan included, the aggregate added up to less than $5 million.”
In early 2011, Witmer said, the city openly defied the spirit of the anticipated new law, saying  “the city worked feverishly to expand Project Phoenix to utilize the funds it had obtained by issuing bonds” and after AB X1 26 and AB X1 27 were signed into law by Governor Brown, broke the law outright on May 22, 2012  when it “entered into an agreement with itself” to transfer the money from the successor agency “for the express purpose of circumventing the Department of Finance’s disapproval of Project Phoenix as a recognized obligation payment schedule item.”
Upon McCleary’s representation that California Department of Finance Budget Manager Matt Hill had stated that the city could assume the authority of the successor agency if the oversight board approved such a transfer, the oversight board unanimously approved the switch.
According to Witmer, this was done “surreptitiously” in that the transfer of bond proceeds to the city had been done without consultation with the California Department of Finance or its approval. “[T]he city/successor agency went ahead and caused the bond trustee — U.S. Bank — to pay over the funds to the city-as-city,” Witmer writes. The California Department of Finance remained in the dark about the illegal transference of bond proceeds for nearly six months, Witmer claimed. A month later, in December 2012, the California Department of Finance directed the city to reverse the transaction, according to Witmer. While Witmer maintained the California Department of Finance consistently declined the city’s moves to leave payments toward the Phoenix Project bonds on the recognized obligations payment schedule because they did not qualify as enforceable obligations, Muñoz and McCleary insist the California Department of Finance was twice told about the switch and the city was given no instructions by the department to undo the transfer.
Witmer asserts the bond payments are not enforceable obligations because the bond documents do not specify the completion of the Project Phoenix or Split Rock projects. And because the contracts for the projects were entered into after AB X1 26 and AB X1 27 went into effect on June 28, 2011, Witmer maintains the city’s intended use of the bonds is prohibited.
Muñoz, bond counsel, disclosure counsel and the city outsmarted themselves by putting wiggle room in the language of the bond documents that was meant to protect the city and redevelopment agency from being sued by the bondholders if the city did not proceed with the completion of the bonded-for improvements, Witmer maintains. Those clauses render the bonds unenforceable obligations, he suggested, as does other language in the bond documents warning investors of the pending redevelopment agency shuttering laws – AB X1 26 and AB X1 27 – that would compromise the city’s ability to proceed with redevelopment projects.
Moreover, Witmer said the city had missteped when it did not include representatives of other taxing entities that had previously been beneficiaries of money disbursed by the redevelopment agency  such as the Morongo Unified School District, the Hi-Desert Memorial Healthcare District and Copper Mountain College on the oversight board.
Witmer said the city had manipulated, misled and made patsies out of the oversight board.
“[I]t appears that the successor agency may not have given the oversight board accurate information in connection with key decisions,” Witner told the court.