By Mark Gutglueck
Nearing half a decade after a move by the governor and the state legislature to close out municipal re-development programs, provisions that replicate at least some of that authority have been reestablished.
It is worth noting that while the dissolution of redevelopment agencies was both roundly criticized for depriving cities and counties of a useful tool in eliminating blight and conversely praised for stemming the abuse and corruption of that authority, the mechanisms the governor and legislature have created to replace it reproduce both the positive and negative features of the old system.
Redevelopment agencies were formerly adjuncts to local governments which were chartered to reduce blight in local communities and generate economic development. Those redevelopment agencies were empowered to utilize money available from the state and federal government, otherwise obtain loans or financing, or to use their own authority to issue bonds, the proceeds from which were used to eliminate blight and build infrastructure. The improvements from this redevelopment activity would then, theo-retically, result in an increase in the value of the property within those redevelopment agency project areas. The increased property tax revenue from those areas, referred to as tax increment, would be ear-marked to pay back the loans or debt service the bonds, that is, pay the bondholders.
In 2011, the state legislature at Governor Jerry Brown’s instigation passed legislation, ABX1 26 and ABX1 27, closing out the more than 400 municipal and county redevelopment agencies in California.
Brown asserted that there were recurrent abuses of the redevelopment system and that the money would be better utilized for public education and public safety programs.
A confederation of California cities and counties challenged ABX1 26 and ABX1 27, but ultimately the California Supreme Court ruled that both bills passed by the legislature and signed by Brown passed constitutional muster and redevelopment agencies were dissolved on February 1, 2012, and successor agencies were created to wind down their affairs. A primary function of those successor agencies was to ensure that the financial commitments made by the redevelopment agencies when they were active, such as the sale of bonds to bond purchasers which had to be debt serviced over the 20-year to 25-year to 30-year to 35-year life of the bonds, were met.
Two or three score of the cities throughout California, including four – Twentynine Palms, San Bernar-dino, Rancho Cucamonga and Chino – in San Bernardino County, sought to exploit the unexplored le-gal issues relating to the standards under which these successor agencies were to function to preserve a vestige of their redevelopment authority. Those efforts met with varying degrees of success and failure.
By far the most aggressive and successful of the San Bernardino County cities in waging this effort to prolong the use of its redevelopment agency was Twentyine Palms.
Even before AB X1 26 and AB X1 27 were passed in 2011, the 25,048-population city in San Bernar-dino County’s remote desert outback hatched a plan to protect its redevelopment funding. As the rede-velopment 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 walkway, 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 in 2012 embarked on a feisty challenge of the state Department of Finance in its effort to wrest back $31 million in bond proceeds.
Twentynine Palms City Attorney A. Patrick Munoz, of the law firm Rutan & Tucker, then filed legal action on behalf of the city in Sacramento Superior Court, the venue where the legislation required any litigation pertaining to cities’ use of redevelopment money had to be filed. The case was heard by Sac-ramento Superior Court Judge Michael P. Kenny.
Muñoz asserted in filings with the Sacramento Superior Court that the non-taxable bonds issued in 2011 created specific obligations between the city, as the issuer, and the bond purchasers, and as such are enforceable obligations and any use of the money for a purpose other than what the city had speci-fied in marketing the bonds to the bond buyers would constitute fraud.
The California Department of Finance in December 2013 told Kenny that the Twentynine Palms Rede-velopment Agency, like several other redevelopment agencies/cities, “rushed to encumber future tax increment revenues” ahead of those agencies’ legislated demise in December 2011. The department al-leged that in March 2011, Twentynine Palms “conceived, authorized, issued and sold $12 million in tax allocation bonds for the Project Phoenix downtown development and an affordable housing plan with-out contracts to build or a definite plan for spending the proceeds.”
Ultimately, however, Kenny ruled against the California Department of Finance in April 2014 and granted the petition for a writ of mandate on behalf for the city of Twentynine Palms as successor agency, allowing the city to utilize the bond money for the fulfillment of Project Phoenix. In June 2014, the Department of Finance filed an appeal of Kenny’s ruling.
Thereafter, the Department of Finance suffered multiple setbacks with regard to several cities’ efforts to control the spending of redevelopment agency money appropriated in 2011. On May 14, 2015, the department sent a letter to several cities, Twentynine Palms among them, announcing it would no long-er oppose those cities’ moves to preserve their last remaining redevelopment agency projects.
Twentynine Palms is now free to carry Project Phoenix forward.
Whereas Twentynine Palms succeeded in its effort to extend its redevelopment agency’s existence, the City of San Bernardino saw its effort end in abject failure.
San Bernardino, which filed for Chapter 9 bankruptcy protection in 2012, sought to convey $108.3 mil-lion from its redevelopment agency to a newly created municipal adjunct, the San Bernardino Econom-ic Development Corporation, to thwart the state’s seizure of that money. That $108.3 million consisted primarily of property that had been landbanked by the redevelopment agency over the last several dec-ades. In anticipation of the passage of AB X1 26, the San Bernardino City Council on March 17, 2011 approved the transfer of the real property assets to the San Bernardino Economic Development Corpo-ration. But in March 2013, California Controller John Chang and the controller’s office’s chief auditor, CPA Jeffrey V. Brownfield, informed city officials in a 53-page document that the transfer of the assets to the nonprofit the city chartered was an illegitimate attempt to have the city maintain control of redevelopment money that was supposed to be transferred to the state. Chang and Brownfield rejected as misrepresentations the city’s contentions, propounded in November 2012, that “All of the asset transfers to the San Bernardino Economic Development Corporation occurred during the period of January 1, 2011 through January 31, 2012, and the assets were not contractually committed to a third party prior to June 28, 2011.”
Furthermore, according to Brownfield, “The board of directors for the San Bernardino Economic De-velopment Corporation is made up of city of San Bernardino council members, who previously acted as the board of the redevelopment agency. The City of San Bernardino and the San Bernardino Economic Development Corporation share common governing boards and have coterminous boundaries. The City of San Bernardino provides administrative and related business support for the San Bernardino Eco-nomic Development Corporation.”
Chang ordered that the city of San Bernardino “direct the San Bernardino Economic Development Corporation to reverse the transfers of assets in the amount of $108,372,060.20 and turn over the assets with any outstanding related liabilities to the successor agency. The successor agency is directed to properly dispose of these assets in accordance with [AB X1 26].”
Three other San Bernardino County cities made efforts to shelter their redevelopment agencies and their assets from the ravages of AB X1 26 and AB X1 27.
When the state embarked on the legislative move to close out redevelopment agencies, the City of On-tario asserted that $21,677,224 in sales-tax money generated within what had been Ontario’s redevel-opment agency project areas was not subject to seizure by the state under the auspices of AB XI 26 and AB XI 27. Ontario utilized the money in question to fund major portions of its police, fire and other service programs.
The state laid claim to $21.7 million in sales tax revenue Ontario moved into accounts for the Ontario Housing Authority, which was utilizing the money on its mixed-use Town Square Project.
At the direction of Governor Brown, California Director of Finance Ana Matosantos on August 19, 2013 sent a letter to the state Board of Equalization, ordering the board to withhold Ontario’s sales tax revenue beginning in September of 2013. “Despite numerous orders by the Department of Finance, the city has refused to remit to the San Bernardino County auditor-controller $21,677,224 in unencum-bered low-to-moderate income housing fund assets of its former redevelopment agency that are in the city’s possession,” Matosantos wrote. She instructed Cynthia Bridges, the executive director of the Board of Equalization, to withhold from Ontario distribution of “sales and use tax” equal to the sum of $21,677,224. “If the sums withheld in the first month are insufficient to satisfy the $21,677,224 that the city owes to the affected taxing entities, we direct the Board of Equalization to continue the withholding in each successive month until the owed amount is fully retired,” she wrote.
Well before the state followed up with a letter to the San Bernardino County auditor-controller’s office, instructing it to distribute the money to county schools, the county and other local agencies, then-Ontario City Manager Chris Hughes wrote to Matosantos, informing her that “Since the city is not in possession of the funds, the Department of Finance does not have the legal authority to order the city’s sales and use taxes to be withheld.” Hughes’ assertion that the city did not have possession of the funds was based upon his contention that the Ontario Housing Authority is an entity that is separate and distinct from the city of Ontario.
Ontario was better equipped than most cities to carry out an expensive and protracted legal battle with the state, possessing a revenue stream greater than any other municipality in San Bernardino County, with a total of more than $462 million into all of its funds in fiscal 2013-14. Ontario Mayor Paul Leon said at that time, “The state never had the right to make that money grab and the way they are doing it is completely wrong. It is fiscally irresponsible at the state level for them to be peering into local coffers and taking what they see. I will be darned if the city of Ontario is going to make it easy for them. If they have a right to recoup that money, they are going to have to prove it and they are going to recoup it from legal sources, and that does not include the general fund of the city of Ontario or the pockets of the people of Ontario.”
Ontario officials told the state in no uncertain terms that it would seek an injunction barring the Board of Equalization from garnishing the funds.
Indeed, Ontario’s determination and its ability to back its claims with a spirited legal challenge is credited with having convinced the state that some concession with regard to making a tool to eradicate blight available to cities was needed.
Two other San Bernardino County cities – Rancho Cucamonga and Chino – did not take the state’s action lying down, either.
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 could not be used to see those projects to completion. The California Department of Finance held that bond pro-ceeds 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 were dispatched to Sacramento to see if the Department of Finance would 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, strengthened Rancho Cucamonga’s position. AB 1484 became law June 27, 2012 one day short of a year after AB XI 26 and AB XI 27 were passed, and allowed 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 allowed remnants of previously available redevelopment money to be allocated to the successor development agencies, pursuant to a strict accounting and auditing re-gime.
Consequently, the necessity of Rancho Cucamonga’s threatened legal action passed, and upon Markman’s advice, the city council 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 re-imbursement from the proceeds of its already issued bonds as soon as they became available.
At the same time, Markman stood ready, if the state were to again seek to hold up the funding, to switch back into a litigative mode.
The city of Chino also refused to back down in the face of the state’s effort to commandeer its redevel-opment money.
In April 2012, 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 im-provements 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 re-tiring 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 2012, 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 suc-cessor agency, rejected the approved list, holding that loans made to the redevelopment agency by the city that founded it were, 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, were enforceable under AB X1 26 and AB X1 27. Chino then threatened it own litigative remedy in Sacramento Superior Court.
In reaction to the ending of redevelopment authorities, some cities sought to substitute in financing mechanisms such as Mello-Roos bonds, Marx-Roos bonds or the creation of community facility dis-tricts to pay for building streets, sidewalks, sewers, schools or such appurtenances to development. But Mello-Roos and Marx-Roos arrangements entailed votes of those to be assessed in ratifying the as-sessment districts, which would then require that residents or business operators in the district pay year-ly assessments to debt service the bonds used to pay for the upfront creation of the infrastructure. Any home-, land-, or business-owners coming into the district in the future would be saddled with the as-sessments, even though they had not voted them in. For the creation of an assessment district to pass, a 2/3s vote of the residents/land owners in favor of the district creation was needed. Few approvals of such districts occurred in the 2011 to 2014 time frame.
By 2014, the state legislature relented, somewhat.
On September 29, 2014 Governor Brown signed Senate Bill 628 into law after both houses of the legis-lature had approved it on the last day of the 2014 legislative session. Senate Bill 628, which was intro-duced by Senator Jim Beall (D-San Jose), authorized municipalities and counties to create enhanced infrastructure financing districts, known by the acronym EIFDs, to fund infrastructure development and community revitalization. EIFDs can be created with greater ease than Mello-Roos or Marx-Roos districts and community services districts, not requiring a 2/3s vote, but rather by an act of the county board of supervisors or a city council. Or they can be put into place, involving the issuance of bonds and the devotion of tax increment funding to pay down that bonded indebtedness, on the authority of a vote by the people in which it needs to pass, not by 2/3s, but rather by at lesser 55 percent of the elec-torate in the district to be created.
Enhanced infrastructure financing districts can entail a bond payback period of up to 45 years from the date of the bonding approval, which is 15 years longer than was common with traditional redevelop-ment agency bond debt retirement arrangements.
Senate Bill 628 also allowed for the Enhanced Infrastructure Funding Districts to be utilized for a broader range of purposes than traditional bond funding mechanisms, including transit projects, low- and moderate-income housing, and environmental cleanup.
EIFDs are distinct from redevelopment agency bonding in one key respect. The tax increment devoted to cover redevelopment agency debt was diverted from education. That is, the property tax on property included in a redevelopment area was signed over entirely to the redevelopment agency. In the case of the enhanced infrastructure funding districts, any pre-existing property tax that is earmarked for schools will continue to go to that purpose. Nor can EIFDs divert property tax revenues from any non-consenting taxing entity within the jurisdiction of the district to be created.
During the 2015 legislative session, AB 2, which authorizes the establishment of redevelopment agen-cies under certain conditions and for certain purposes, was passed. It was signed into law by Governor Brown on September 22, 2015. AB 2 provides for redevelopment agencies authorized to utilize eminent domain to eradicate blight and, with limitations and under precise constraints, issue bonds financed by tax increment revenues derived from a defined blight eradication project area.
By Mark Gutglueck