(October26)   TWENTYNINE PALMS — The city of Twentynine Palms appears to have made significant headway in convincing California  officials to allow it to continue to utilize bond money it issued last year for redevelopment purposes, despite the passage of legislation that shut down redevelopment agencies statewide.
It remains to be seen whether the city will get that money back.
Twentynine Palms, a city of  the 25,048 in San Bernardino County’s Mojave Desert Outback, is at the forefront of efforts challenging the redevelopment agency-shuttering Assembly Bills XI 26 and XI 27, which were passed by the state legislature last year at Governor Jerry Brown’s behest and then upheld by the state Supreme Court early this year following a legal challenge by a confederation of cities.
At issue in Twentynine Palms’ challenge is the fate of  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.
Even as AB X1 26 and AB X1 27 were winding their way through the legislature in 2011, the city  hatched a plan to protect its redevelopment funding. As the 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 the Project Phoenix downtown revitalization undertaking.  That bond money was made available before the laws went into effect but was never expended.
Having made that precautionary move, the city of Twentynine Palms this year proceeded with its   aggressive challenge of the state Department of Finance in its effort to wrest  back $31 million in bond proceeds.
Twentynine Palms officials maintain 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.
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, as  the issuer, and the bond purchasers, and as such are enforceable obligations. If the city were to hand off the bond proceeds to the state  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 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.”
Prior to the council’s May 22 vote, on April 27 California Department Finance program budget manager Mark HiIl denied releasing the bond proceeds back to Twentynine Palms because, he maintaind, no contracts were in place before June 28, 2011. Redevelopment agencies were prohibited from performing new business by Assembly Bill IX26, effective June 29, 2011. This included expanding financial or legal obligations, incurring new debt, and buying or selling property. The Project Phoenix bonds, however, had been issued in March of 2011. Hill’s letter referenced the redevelopment agency entering into a contract after June 27, 2011.
The new laws do permit successor agencies to enter into contracts that would allow the transfer of duties that the city enacted in May.
Munoz maintains the oversight board’s May approval of the contract classifies the bond proceeds as an enforceable obligation of the former RDA.
Last month, on September 19,  Twentynine Palms Mayor John Cole, city manager Richard Warne, Munoz and Munoz’s colleague at the law firm of Rutan & Tucker, Bill Ihrke, along with a city consultant, Matt McCleary of the Rosenow Spevacek Group, flew to Sacramento. There, they presented a special consultant to the Department of Finance detailed to deal with local government issues pertaining to shuttered redevelopment agencies, Steve Szalay, and other Department of Finance officials with bond documents, a timeline for Project Phoenix, copies of previous correspondence with the Department of Finance and a highlighted roster of misassumptions and errors on the Department of Finance’s part with regard Project Phoenix, along with a summary of the legal argument that the money should be returned to the city.
There was an acknowledgement at that time that Department of Finance officials had not previously seen or considered much of the documentation relating to Project Phoenix.
In a letter dated October 7, Szalay indicated that the Department of Finance approved the successor agency’s obligations payment schedule for January 1 through June 30, 2013, but left unaddressed a host of questions with regard to the city’s legal and procedural claim for the return of the bond money. Szalay did state in the letter that the Department of Finance’s review “disclosed the improper transfer of the agency’s bond proceeds.”
Twentynine Palms officials are now preparing for a further in-depth discussion of the return of the redevelopment money to Twenty-nine Palms. If that does not achieve the desired results, the city would have the option of suing the state in Sacramento Superior Court for the return of the money.