(March 8) The city of Twentynine Palms is initiating litigation against the state to preserve bond proceeds issued by the former redevelopment agency in March 2011.
In a closed session February 26, the city council voted 5-0 to sue the California Department of Finance for the return of bond proceeds issued for 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.
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 in 2011 at Governor Jerry Brown’s behest and then upheld by the state Supreme Court last year following a legal challenge by a confederation of cities.
More than three months before the legislature passed AB X1 26 and AB X1 27, the city finalized the Project Phoenix initiative and the city council, which doubled as the city’s redevelopment agency board, issued two tax allocation bonds for a total of $31 million for the Project Phoenix downtown revitalization. Those bonds were issued before the laws went into effect.
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 in 2011 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, is set to assert to the court that 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 allows 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.
The city has already followed Munoz’s recommendation to have  the city’s successor agency lay claim to the redevelopment money and declare its intent to proceed with Project Phoenix.  AB X1 26 and AB X1 27 provided for the creation of locally based oversight boards to see to the discharging of remaining redevelopment money.  Last May, 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. On a 4-1 vote on May 22, the city council voted unanimously to transfer  the seven-member oversight board’s duties and obligations to administer the bond proceeds to “the city in its capacity as a municipal corporation.”
City manager Richard Warne this week told the Sentinel, “Twentynine Palms is only one of 53 redevelopment agencies that issued bonds between January 1 and June 30, 2011. The total amount of the bonded obligation for all of those cities is $1.5 billion, so the use of these bond proceeds is a significant statewide issue yet to be resolved. Under AB 484 the California Department of Finance can grant cities litigation costs related to the dissolution of redevelopment agencies. In the city of Twentynine Palms’ schedule for our dissolution costs between January 1 and June 30, 2013, we put down $200,000 for litigation costs and the Department of Finance granted that. The Department of Finance understands this is a significant issue that needs to be resolved one of two ways, legislatively or by litigation. What the department did was give us $200,000 to sue them. The $200,000 will be used for the litigation cost.”
The council’s action on February 26, Warne said, “authorized the city attorney to file litigation against the Department of Finance so that the city can move forward with the expenditure of  bond proceeds. It is the city’s position that the bond documents are contracts and the state cannot interfere with those. In addition to that the city would be violating IRS and SEC regulations as well as put the tax exempt status of the bonds in jeopardy if it does not spend the money for the purpose for which the bonds were issued.”
According to Warne, “AB X1 26 prohibits the cities and their redevelopment agencies from  entering into new arrangements to issue bonds for redevelopment purposes. The law was silent on the use of bond proceeds issued prior to the adoption of the legislation. In our case, the bonds were sold before the legislation was in place and they were issued in accordance with the law. The bond documents clearly state they were for Project Phoenix. The city will not violate SEC regulations nor will it violate the bonds’ tax exempt status. The city has to take certain actions within a three year period of the bonds’ issuance with regard to starting to expend the money and we must complete construction within a five year period for the bonds to maintain their tax exempt status.”
AB X1 26 and AB X1 27 carry provisions requiring that any litigation challenging them be undertaken in Sacramento Superior Court. Warne said that despite the hoops the city must jump through,  “We are confident this will be resolved legislatively or in court within the time frame outlined in the bond documents.”
Assemblyman Richard Blum has introduced legislation, AB 981, which would authorize any cities with redevelopment agencies that issued bonds before AB X1 26 and AB X1 27 passed to spend that bond money for the redevelopment purposes outlined in the issuing documents. That legislation, if it passes and is not vetoed by the governor, will render any litigation the city is filing moot.
Munoz believes the city will prevail in court and the state will have to go along with the city’s discharge plan because the bonds are enforceable obligations and the proceeds are secure.
Warne said the state cannot prevail in the litigation since, “There are constitutional restrictions against the impairment of contracts.”
Warne said that “It is cheaper to litigate this item and resolve it than continue the current process. Everyone is spending money going up to Sacrament to the Department of Finance and making arguments. Every time you employ attorneys and consultants, it costs money. We will be continuing to do that for years. It is cheaper to resolve this legislatively or in the courts and get finality on this than just being in limbo.”