TWENTYNINE PALMS — With an acknowledged degree of trepidation, Twentynine Palms is proceeding with a cutting-edge legal strategy to outmaneuver the state in wresting back $31 million in bond proceeds that were seemingly foreclosed upon by the state when it shuttered municipal redevelopment agencies last year.
City officials believe that the law the state legislature passed in 2011 may be trumped by federal securities regulations, meaning the money the Twentynine Palms Redevelopment Agency bonded for last year must be utilized only for the purpose that bondholders were told the money would be applied toward.
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, ABX1 26 and ABX1 27, put forth by Governor Jerry Brown and passed by the legislature last year, redevelopment agencies were closed out and their funding routed to law enforcement and education.
Both ABX1 26 and ABX1 27 were challenged by a coalition of cities but upheld by the California Supreme Court. Effective February 1, all municipal redevelopment agencies were dissolved. Part of the legislation called for cities to create for themselves or have the county create for them a successor agency to each former redevelopment agency which would oversee and wind down the defunct agency’s functions and dispose of any 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, 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. That bond money was made available before the law went into effect but was never expended.
At the May 22 Twentynine Palms City Council meeting, the council voted 4-1, with councilman Jay Corbin dissenting to move forward with a legal strategy formulated by city attorney A. Patrick Munoz to challenge the state’s attempt to horn in on the city’s redevelopment money.
Munoz, of the law firm Rutan & Tucker, believes he can convince a judge 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. If the city were to hand off the bond proceeds to the state and the state were to use the money for a purpose other than what the city had specified in marketing the bonds to the bond buyers, that would constitute fraud, according to Munoz.
“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.”
In this way, Munoz’s strategy calls for 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 has theorized. Munoz suggested the city will have to be very precise about how the money earmarked for Project Phoenix is expended.
Munoz drafted a contract between the successor agency and the city by which the successor agency is to turn over the bond spending authority to the city with a directive that it go toward Project Phoenix. After the contract was presented to the council on May 22 and approved with the 4-1 vote, the oversight board took up the issue the following day, May 23, and its seven members voted unanimously to endorse a resolution to transfer their duties and obligations to administer the bond proceeds to “the city in its capacity as a municipal corporation.”
Munoz insists the dual approval of the contract by the council and the oversight board legally categorizes the bond proceeds as an enforceable obligation of the former redevelopment agency.
Munoz has been working closely with a city consultant, Rosenow Spevacek Group, in communicating with the California Department of Finance to determine the likely reaction to the city’s legal gambit. According to Rosenow Spevacek associate Matt McCleary, the California Department of Finance has been at best tentative in its response to specific questions about its interpretation of enforceable obligations under both state and federal law and whether federal securities regulations take precedence over AB X1 26, signaling the state is unsure of the strength of its own legal position.
Munoz has recommended that if the Department of Finance does not accept the contract for the Project Phoenix expenditures as legitimate, that the city and its successor redevelopment agency proceed with litigation against the state. Munoz acknowledged the strategy could entail a protracted “legal fight with the Department of Finance.”
Councilman Corbin indicated he was against the strategy on two separate grounds. He said the housing portion of Project Phoenix was not worth pursuing at this point since there is no demand for housing and that he was against engaging in costly litigation against the state. His colleagues said they too did not relish a legal battle in Sacramento, but indicated they had a case worth making.
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