On August 11, 2011, the California Supreme Court issued an order temporarily staying portions of the redevelopment legislation that would eliminate California redevelopment agencies (RDAs). The Court modified the order on August 17, 2011, to clarify some ambiguities in the original order (modified order). While the orders have effectively frozen the ability of RDAs to conduct new business, obligations under existing contracts (including owner participation agreements or other agreements entered into prior to the enactment of the legislation) will remain intact. Further, for the time being, the Court’s orders stayed the schedule for eliminating RDAs, transferring RDA assets and responsibilities to successor agencies, and deadlines by which RDAs must elect whether to enter into a new voluntary program. The following provides additional information on the legislation, the Court’s order and next steps.

Background

As reported in Holland & Knight’s August 9, 2011 Environment alert, “California Redevelopment Legislation Adopted After Months of Wrangling,” the redevelopment legislation was approved by Governor Brown on June 28, 2011, as part of a package of budget bills intended to close California’s budget deficit. The legislation provides for the following:

  • ABX1 26 (dissolution legislation) would eliminate RDAs effective October 1, 2011, and transfer responsibility and assets to successor entities
  • ABX1 27 (voluntary program legislation) provides that an RDA can continue to operate and function after the October 1, 2011 elimination date, provided certain steps are taken, most notably, if the RDA is able to make substantial remittance payments to local school, fire and transit districts

Court’s Order

As a result of litigation brought by the California Redevelopment Association, the League of California Cities, and the cities of San Jose and Union City, the Court has stayed most of the legislation. Provisions of the legislation that remain in effect are those that prohibit RDAs from incurring new or expanding existing monetary or legal obligations (“new obligations”). These prohibitions (as set forth in Health and Safety Code §§ 34161 - 34166) preclude RDAs from incurring new indebtedness, transferring assets, acquiring real property, entering into new partnerships and adopting or amending redevelopment plans. Another provision that remains in place after the Court’s modified order is what is being referred to as the “claw-back provision.” This provision requires the state controller to review the activities of RDAs to determine whether any asset transfers occurred after January 1, 2011, between the agency that created the RDA or any other public agency, and the redevelopment agency. If such an asset transfer did occur, the state controller will order the available assets to be returned to the RDA, making those assets available for possible remittance payments. As “assets” are not further defined in the legislation, and while the “claw-back” of monetary assets is the most practical interpretation, it is unclear whether this provision will be enforced with respect to the transfer of land assets.

Additionally, RDAs must continue to make scheduled payments and perform obligations required pursuant to any existing enforceable obligations. Among other things (and as defined in Health and Safety Code § 34167(d)), enforceable obligations include “any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy.” The modified order clarifies that RDAs must prepare and adopt an Enforceable Obligation Payment Schedule that lists all of the RDA’s enforceable obligations by August 29, 2011, and a Preliminary Recognized Obligation Payment Schedule by September 30, 2011. Accordingly, it is critical for parties with RDA contracts to ensure that the terms for payment and performance of enforceable obligations are listed on these payment schedules.

Finally, the provision of the voluntary program legislation that requires the Department of Finance to determine the 2011-12 fiscal year remittance payment for each RDA remains in effect. Once the Court decides on the merits of the legislation, and if the Court upholds the constitutionality of the voluntary program legislation, this action will help ensure a timelier implementation of the legislation as RDAs will have a better understanding of the required remittance payment under the voluntary program.

All other aspects of the stay remain in place. Accordingly, the Court’s orders freeze an RDA’s ability to enter into new obligations and require RDAs to continue to perform contracts entered into prior to the enactment of the legislation until the Court terminates, modifies or clarifies the stay. Most notably, the orders stay the legislation’s schedule for eliminating RDAs, transferring RDA assets and responsibilities to successor agencies, and deadlines by which RDAs must elect whether to enter into a new voluntary program.

Next Steps

The order sets forth an expedited briefing schedule with the goal of reaching a decision on the merits before January 15, 2012. In the interim, the orders leave further ambiguities including: (1) whether RDAs that intended to opt-in to the voluntary program legislation should proceed with resolutions and/or ordinances indicating the RDA’s intent to participate in the voluntary program and (2) what affect such resolutions and/or ordinances would have. It is believed that the parties will seek clarification on these and other issues.

Holland & Knight can provide further advice or assistance, particularly as it relates to any existing RDA contract or any new RDA business.