TWENTYNINE PALMS — The city of Twentynine Palms finds itself on the cutting edge of an innovative effort to blunt the state’s dissolution of municipal redevelopment authority. As a consequence, nearly a hundred cities up and down the state are watching to see whether the city of 25,048 deep in the outback of San Bernardino County’s Mojave Desert has successfully outmaneuvered Governor Jerry Brown, his staff and the state legislature.
All of California’s cities were forced to phase out their redevelopment authorities, which used a variety of financing mechanisms to eliminate blight and spur economic development.
Pursuant to two bills put forth by Brown and passed by the legislature last year which were challenged by a coalition of cities but upheld by the California Supreme Court, the agencies were closed out and their funding routed to law enforcement and education.
Effective February 1, all municipal redevelopment agencies were dissolved. Part of the legislation shelving the redevelopment agencies called for cities to create for themselves or have the county create for them a successor agency to each city’s former redevelopment agency to oversee and wind down that agency’s functions and dispose of its enforceable obligations by scheduling and executing the payments needed to discharge those obligations. The legislation also called for an oversight board to work in concert with each county’s auditor-controller and the California Department of Finance to oversee the successor agency through the dissolution process.
In 2011, while the redevelopment agency dissolution legislation was being considered in Sacramento, the Twentynine Palms City Council, which doubled as the city’s redevelopment agency board, issued two tax allocation bonds for a downtown revitalization undertaking known as Project Phoenix. That bond money was made available before the law went into effect but was never expended.
On April 11, 2012, the Twentynine Palms oversight board held its first meeting. At that convocation, the city’s legal counsel, A. Patrick Munoz, delivered his legal opinion that the non-taxable bonds issued last year created specific obligations between the city, the issuer, the bond underwriter and the bond purchasers, and as such are enforceable obligations. Munoz, of the law firm Rutan & Tucker, suggested that if the city were to turn the bond proceeds over to the state and the state were to use the money for a purpose other than what the city had specified that would constitute fraud.
“If the proceeds were turned over to the state to be re-allocated for operational purposes, these proceeds would no longer be tax-exempt if they were not used for public works projects,” Munoz maintained. “That creates concerns as to whether we violated federal tax laws and federal securities laws due to promises we made to the public when we sold the bonds versus the way we’re using the bonds.”
Building on that basis, Munoz announced publicly a bold strategy of having the successor agency lay claim to the redevelopment money and proceeding with the previously ratified redevelopment programs, including Project Phoenix. The state will have to go along with the city’s discharge plan because the bonds are enforceable obligations and the proceeds are secure, Munoz theorized. Munoz suggested the city will have to be very precise about how the money earmarked for Project Phoenix is expended.
Munoz said he is drafting a contract between the successor agency and the city, by which the  successor agency will turn over the bond spending authority to the city with a directive that it go toward Project Phoenix. That contract will come before the city council on May 22. For the bond proceeds to then be utilized for Project Phoenix, the oversight board, which meets on May 23, will have to endorse the plan.
Munoz acknowledged there was a possibility the city will “end up in a legal fight with the Department of Finance.”
Some preliminary work in laying the ground for the ploy Munoz outlined has been done by a city consultant, Rosenow Spevacek Group.
The oversight board has approved the obligations payment schedules for the last six months of the current 2011-12 fiscal year and the first six months of 2012-13 and those schedules are being processed by the county auditor, state controller and State Department of Finance for approval.
The city had two earlier-issued tax allocation bonds outstanding for a total of $31 million and another $11.6 million for Project Phoenix, which was to include community housing and affordable housing, previously considered routine components of redevelopment projects. On April 17 the California Department of Finance sought supporting documentation for the schedules, in particular that pertaining to Project Phoenix. The Department of Finance followed up on April 27 with a letter expressing doubt that Project Phoenix’s housing components came under the definition of enforceable obligations since no contracts for the provision of the housing elements had been executed.
According to Rosenow Spevacek, however, even though Department of Finance supervisor Evelyn Suess on May 2 “stated that without contracts in place the redevelopment agency could not consider Project Phoenix an enforceable obligation, … the bond proceeds are considered enforceable obligations in the eyes of the Department of Finance” because the Twentynine Palms redevelopment agency issued the bonds prior to last year’s legislation shutting down the redevelopment agency.
In this way, it appears that Munoz’ theory that the city beat the bond issuing deadline last year and yet may be able to complete its last round of redevelopment projects might hold up if the city can ink the Project Phoenix contracts.
If the strategy works, Twentynine Palms might set a precedent for any other cities that like it issued bonds prior to the legislation taking effect last October