Rancho Inching Toward Litigation With State Over RDA Bonds

Spurred on by Twentynine Palms and Chino, both of which have refused to docilely accept the state of California’s takeover of their redevelopment money, Rancho Cucamonga has resolved to sue the state if it is denied the bond proceeds it needs to see already initiated redevelopment construction projects to completion.
Governor Jerry Brown last year induced the legislature to pass two laws, AB X1 26 and AB X1 27, which dissolved more than 400 redevelopment agencies up and down the state. A legal challenge of those laws by a collection of cities failed and the shuttering of redevelopment agencies is proceeding.
Redevelopment agencies used a variety of funding mechanisms, including the issuance and sale of municipal bonds, to create infrastructure, promote economic development and eradicate blight. Theoretically, redevelopment bonds would pay for infrastructure improvements that would result in an increase in property values, in turn generating increased property tax. That property tax revenue increase, referred to as increment, would be utilized to pay the bondholders on a yearly basis.
In Rancho Cucamonga, as in many other cities, millions of dollars worth of redevelopment bonds had been issued and sold before AB X1 26 and AB X1 27 were passed and went into effect.  The resultant redevelopment projects were begun but unfinished, with millions of dollars left to fund the projects’ completion when the state foreclosed on the money.
The legislation shuttering the redevelopment agencies called for the creation of successors to the cities’ and counties’ redevelopment agencies to oversee the extinguishment of their authority and the discharging of their enforceable  financial obligations.
Provisions of AB X1 26 and AB X1 27 allowed successor agencies to utilize tax proceeds and bond money to complete ongoing projects pursuant to strict regulations and requirements, including having service or construction contracts in place before the laws went into effect. Another provision of the laws was that any lawsuits brought against the state over the agency dissolution or the availability of funding had to be litigated in Sacramento Superior Court.
Rancho Cucamonga was in the process of using its redevelopment authority and bonding capability to widen a portion of Foothill Boulevard on the west side of town, widen the I-15 interchange project at Base Line Road and make improvements to the public works yard on the southwest corner of Ninth and Hellman avenues.
Because elements of the aforementioned projects were not bid out at the time the redevelopment agency was closed down, the state is maintaining that the money cannot be used to see those projects to completion.
The California Department of Finance holds that bond proceeds for contracts made after the day AB X1 26 and AB X1 27 passed and were signed into law, June 28, 2011,  are not “enforceable financial obligations.”
The city of Rancho Cucamonga is appealing the state Department of Finance’s decisions in that regard and exhausting all other administrative remedies in seeing that the money is freed up. At the same time, the city is soliciting bids for the uncompleted work. City emissaries have been dispatched to Sacramento to see if the Department of Finance will entertain the validity of the city’s claims.
If the state continues to deny the city access to the money,  city attorney Jim Markman has been authorized to file suit against the state.

James Markman

While the law has yet to be tested, one interpretation is that bond proceeds can be utilized for “ongoing feasible projects.”
If Rancho Cucamonga does file suit, the case will be adjudicated in Sacramento.
Two other San Bernardino County cities have hatched strategies to hang on to their redevelopment money.
In April, the city of Chino’s redevelopment successor agency, taking stock of the consideration that the city of Chino had made more than $15 million in loans to its redevelopment agency for improvements in its redevelopment agency project areas, submitted to the state Department of Finance a recognized payment schedule for the first half of 2012 that called for the successor agency to begin retiring the debt on more than $15 million in promissory notes issued by the Chino Redevelopment Agency and held by the city of Chino. In May, the redevelopment successor agency followed up on its April action, and  submitted to the state a recognized obligation payment schedule for the second half of 2012 that cited payment on the promissory notes as an outstanding obligation.
The Department of Finance, according to Jeff Oderman, an attorney for the Chino redevelopment successor agency, has rejected the approved list, holding that loans made to the redevelopment agency by the city that founded it are, with the dissolution of the redevelopment agency, invalid debts. According to a number of attorneys, however, the promissory notes from the Chino Redevelopment Agency held by the city of Chino, like many other debts pursuant to loan arrangements involving other cities and  their respective redevelopment agencies, are enforceable under AB X1 26 and AB X1 27. Chino is on the verge of seeking a litigative remedy in Sacramento Superior Court.
The city of Twentynine Palms is proceeding with an even more aggressive challenge of the state Department of Finance in its effort to wrest  back $31 million in bond proceeds.
Twentynine Palms officials believe that AB X1 26 and AB X1 27 are 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.
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.
Twentynine Palms City Attorney A. Patrick 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.
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. 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.”
Acknowledging the strategy could entail a protracted “legal fight with the Department of Finance,” Munoz has recommended that if the state of California does not accept the contract for the Project Phoenix expenditures as legitimate, the city and its successor redevelopment agency should proceed with litigation against the state.

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