State RDA Hit Impacts SBC Cities Differently

(August 3)  RANCHO CUCAMONGA–More than a year after the state legislature moved to shutter redevelopment agencies up and down the state, there is a wide variance  in the response by cities to that takeaway and the effectiveness of those differing strategies. San Bernardino County, with its 24 incorporated municipalities, is a microcosm of California with regard to the adjustments being made to the loss of redevelopment authority. While some of the county’s cities are rolling with the state’s punches and on occasion scoring points with counterblows to Sacramento, others are taking it on the jaw and one has gone  down for the count.
Redevelopment agencies were adjuncts to municipal government intended to transform troubled neighborhoods or districts while rejuvenating the local economy. 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.
Last year the state legislature, at Governor Jerry Brown’s behest, passed Assembly Bills XI 26 and XI 27, which set an abrupt timetable for the closing out of municipal redevelopment agencies by October 1, 2011. A legal challenge by a coalition of cities delayed the implementation of that close-out until this year. When the law passed, there were thousands of redevelopment agency projects that various cities had begun but had not finished, 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.
Some San Bernardino County cities were pro-active in the face of the state’s threat to yank redevelopment authority from them, while others docilely accepted the state’s action and its outcome as inevitable.
Remarkably, one of the county’s smaller and most remote cities, Twentynine Palms, has proved to be the feistiest of the county’s municipal entities in resisting the state.
Even before AB X1 26 and AB X1 27 were passed in 2011, the 25,048-population city hatched a plan to protect its redevelopment funding. As 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.
Having made that precautionary move, the city of Twentynine Palms this year has proceeded with an extremely  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, 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 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.
Another San Bernardino County city that has not taken the state’s action lying down is Rancho Cucamonga.
Before AB X1 26 and AB X1 27 went into effect, 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, to undertake an I-15 interchange improvement project at Base Line Road on which the city has already spent $11 million and to make improvements to the public works yard on the southwest corner of Ninth Street and Hellman Avenue.
Because elements of those projects were not bid out at the time the redevelopment agency was closed down, the state maintained that money previously earmarked for those redevelopment efforts cannot be used to see those projects to completion. The California Department of Finance holds that bond proceeds for contracts made after AB X1 26 and AB X1 27 passed and were signed into law on June 28, 2011  are not “enforceable financial obligations.”
The city of Rancho Cucamonga  appealed the state Department of Finance’s decisions in that regard and began exhausting all other administrative remedies in seeing that the money would be freed up. At the same time, the city solicited 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.
City attorney Jim Markman vowed that if the state continued to deny the city access to the money, he would file suit against the state in Sacramento Superior Court to test his interpretation of the law that bond proceeds can be utilized for “ongoing feasible projects.”
That threat of legal action, simultaneous with the passage of new legislation, Assembly Bill 1484, has strengthened Rancho Cucamonga’s position. AB 1484 became law June 27, one day short of a year after AB XI 26 and AB XI 27 were passed,  and allows newly created “development agencies” to seek the return of bond proceeds that were taken away by AB XI 26’s and AB XI 27’s dissolution of  redevelopment agencies. AB 1484 allows remnants of previously available redevelopment money to be allocated to the successor development agencies, pursuant to a strict accounting and auditing regime.
Consequently, the necessity of Rancho Cucamonga’s threatened legal action has passed, at least temporarily. Rather than detailing Markman to Sacramento to file that litigation, the city council this week voted to utilize available money in the city’s capital-improvement fund for the completion of unfinished redevelopment projects with the intention of the city seeking reimbursement from the proceeds of its already issued bonds as soon as they become available.
If the state again seeks to hold up the funding, Markman will switch back into a litigative mode. Meanwhile the city wants to move forward with the projects, most particularly the Baseline/I-15 widening project, by the end of the year because by doing so it will qualify for $8 million in federal funding.
The city of Chino has also refused to back down in the face of the state’s effort to commandeer its 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.
On the other end of the spectrum, the cities of San Bernardino and Redlands have fared far less well, seeing money they were highly dependent upon taken away from them, leaving them in financial straits.
San Bernardino officials this week filed for Chapter 9 bankruptcy protection in federal court, an action unprecedented in San Bernardino County history. While the closure of its redevelopment agency by the state was not the only or even a primary cause of San Bernardino’s current financial crisis, the loss of redevelopment funding was a resounding blow. Indeed, a portion city employees were paid by the redevelopment agency and when the state legislature took up consideration of AB XI 26 and AB XI 27, San Bernardino officials began casting about for a way of preserving its redevelopment funding. A stratagem they hit upon was to create a nonprofit called the Economic Development Corporation, which the city hoped could siphon off most, if not all of its redevelopment revenue, convert it into funding for programs that would pass legal muster and apply it in the same fashion that redevelopment money had been traditionally used.
In March 2011, three months before AB XI 26 and AB XI 27 were passed into law, the San Bernardino City Council voted to transfer $525 million from the San Bernardino Economic Development Agency, which the city was closing out, to a newly created nonprofit municipal adjunct agency dubbed the San Bernardino Economic Development Corporation.
In carrying out their bureaucratic sleight-of-hand, the city named Emil Marzullo, who had served in the capacity of the  city’s economic development agency’s director, as the director of the San Bernardino Economic Development Corporation.
Inevitably, however, state officials said “no dice” to San Bernardino’s desperate move. On May 31, the California Department of Finance informed the city that it considered the San Bernardino Economic Development Corporation to be a bogus institution that could not lay claim to any money, let alone the $525 million Marzullo’s operation had tried to take possession of. Marzullo, as executive director of a division without any funding, was recently handed a pink slip.
The city of Redlands likewise is smarting from the financial blow dealt it by the state. On July 26, its redevelopment successor agency borrowed $3.1 million from the city’s water department to cover a bond payment. The city council authorized that “loan,” which potentially might never be paid back.
The Redlands Redevelopment Agency in years past had issued bonds and sold them to investors. Those bondholders yet need to be paid under the terms of the bond sale. Redlands’ successor agency has opened up accounts and was depositing money in them to stay current on the payments to those bondholders. On July 13 the county auditor-treasurer informed the city that all funds in successor agency accounts after June 30, the end of the fiscal year, were considered reserves and would have to be turned over to the state.
The same legislation that Rancho Cucamonga believes will benefit it in its showdown over the eventual control of leftover redevelopment money, Assembly Bill 1484, contains a provision that in Redlands’ case worked to its detriment.  Under AB 1484, Redlands had to make the bond payment by July 16 or face daily fines of $10,000.
Redlands reluctantly, and under protest, made the payment. City officials are trying to see if they can offset that unanticipated loss by selling off property once owned by the city’s redevelopment agency. They are also seeking to see if through future communication with the California Department of Finance they can convince the state that the loan is a dischargeable debt the agency, which is now in the hands of the state, must satisfy. The city has placed the loan on its successor agency’s obligation payment schedule. By forwarding a request to the state through its successor agency oversight board, the city believes the state Department of Finance will recognize the loan as a debt that must be paid by the bond proceeds.
The city arranged for the $3.1 million loan at a .38 percent interest rate over ten years.

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