As Implementation Proceeds, a Lawsuit Challenges the Legislation Based on Constitutional Claims

Governor Brown has fulfilled his promise to enact legislation to reallocate funds, reform, and, in some cases, eliminate California’s redevelopment agencies (RDAs). As a result, municipalities, redevelopment agencies and private entities wishing to undertake activities within redevelopment areas face a number of choices requiring strategic, financial, political and legal expertise in the face of substantial uncertainty. Among other obligations, before October 1, 2011, each entity that created an RDA must decide whether to: (1) pass a resolution stating its intent to reform their RDA and commit to making sizeable remittance payments that will be distributed to school, fire and transit districts; or (2) begin winding down their respective RDAs and transferring assets to successor entities. The California Redevelopment Association reports that the city of San Jose and at least 59 other of the state’s 398 active RDAs will be forced to dissolve. Adding to the elements that will inform this choice, pending litigation holds out the promise of undoing – or, at least, temporarily staying – the recently enacted legislation.

In order to inform each community’s decisions, a thorough understanding of the legislation, the pending litigation and its potential implications is critical. Accordingly, this alert provides (1) an overview of the legislation with particular emphasis on near-term deadlines and the extent to which existing obligations will be honored; and (2) a summary of the ongoing litigation and legislative efforts.

Summary Overview

On June 28, 2011, Governor Brown approved SB1X 14 and ABX1 26 (Dissolution Legislation) and SB1X 15 and ABX1 27 (Voluntary Program Legislation) as part of a package of budget bills intended to close California’s budget deficit (collectively, the Dissolution Legislation and Voluntary Program Legislation are referred to herein as the “Legislation”). Collectively, the Legislation does the following: (1) the Dissolution Legislation eliminates RDAs effective October 1, 2011, and transfers responsibility and assets to successor entities; and (2) the 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.

The Legislation has also prompted a lawsuit filed on July 18, 2011, by the California Redevelopment Association (CRA), the League of California Cities, and the cities of San Jose and Union City. The lawsuit challenges the constitutionality of the Legislation and requests a stay by August 15, 2011, to prevent the Legislation from going into effect until the Court can rule on the merits of the plaintiffs’ challenge, a decision requested by December 20, 2011. In the event that the lawsuit is not successful and the Legislation is implemented as currently enacted, there are a number of time-sensitive responsibilities which agencies should be prepared to address and which private entities should be aware in order to preserve existing commitments.

Legislation Overview

The Legislation establishes the framework and timelines by which RDAs, municipalities and others must take action under both the Dissolution and Voluntary Program Legislation.

The Dissolution Legislation

Under the Dissolution Legislation, RDAs will be dissolved as of October 1, 2011. In addition, RDA activities will be curtailed and an orderly wind-down process will be instituted for redevelopment activities.

Suspension of RDA Activities

First, under the Dissolution Legislation, RDA activities will be suspended, as of the date of the legislation’s enactment, including an RDA’s ability to incur new or expand existing monetary or legal obligations.1 Despite the wind-down in RDA activities, RDAs are still required to conduct some activities. Most importantly, RDAs are required to make scheduled payments and performance obligations established pursuant to any enforceable obligations, including, for example, Development Disposition Agreements and recordable contracts.2 To comply with this wind-down requirement, each RDA must adopt an enforceable obligation payment schedule that lists all of the RDA’s existing obligations within 60 days of the enactment of the Legislation.

Creation and Delegation of Duties to Successor Agencies

As of October 1, 2011, RDAs will be dissolved and, in their place, “successor agencies” will be designated. Generally, a successor agency will be the county, city, or city and county that authorized the creation of each RDA.3 All authority, except for those provisions of the Community Redevelopment Law that are repealed, restricted, or revised, will be vested in the successor agencies. Successor agencies will continue to oversee RDA responsibilities and wind-down the affairs of the RDA. Assets of the former RDA will be transferred to the successor agency. Successor agencies are to dispose of assets with the proceeds transferred to the county auditor-controller for distribution to taxing agencies.

Successor agencies remain responsible for obligations due or imposed pursuant to the enforceable obligations. However, successor agencies will have the opportunity to terminate any existing agreements or contracts so long as they provide “necessary and required compensation or remediation for such termination.” The successor agency’s initial payment schedule shall be the last schedule adopted by the RDA. Thereafter, the successor agency must prepare a recognized obligation payment schedule on a semi-annual basis (the first of which is required by November 1, 2011) that identifies obligations and sources of payment.

Distribution of Funds

By March 1, 2012, the county auditor-controller for each county in which an RDA is located must prepare an audit of each RDA’s assets and liabilities. The auditor-controller must then determine the amount of property taxes that would have been allocated to each RDA in the county had the RDA not been dissolved and deposit that amount in the Redevelopment Property Tax Trust Fund. From October 1, 2011, to July 1, 2012, and for each fiscal year thereafter, the auditor-controller shall allocate money in the fund according to a designated order of priority.4 In the event there are insufficient funds to make all payments, lower priority funds may be used, or, in the worst case scenario, the county treasurer may loan any funds from the county treasury that are necessary to ensure payment of redevelopment agency debt. Finally, oversight boards5 will be created to ensure that RDA debts are repaid and will remain in existence until all of the indebtedness of the dissolved RDA has been repaid.

The Voluntary Program Legislation

The Voluntary Program Legislation allows an RDA to continue to carry out the provisions of the Community Redevelopment Law if a city or county with that RDA elects to participate in the Alternative Voluntary Redevelopment Program (“Voluntary Program”). If the city or county elects to follow the path laid out under the Voluntary Program, the Dissolution Legislation does not affect the RDA.

Enacting Ordinance

If an RDA decides to participate in the Voluntary Program it must adopt an ordinance indicating its intent to participate in the Voluntary Program and notify the county auditor-controller, the state controller and the Department of Finance no later than November 1, 2011. If a city intends to enact the ordinance after October 1, 2011, it shall indicate its intention by adopting a non-binding resolution to that effect.

Required Remittance Payments

Thereafter, an RDA may avoid being dissolved, and avoid being subject to the provisions of the Dissolution Legislation, if an RDA’s sponsoring community makes payments to their county auditor-controller beginning in fiscal year 2011-2012, and each year thereafter. These payments, which are due in equal installments each fiscal year by January 15 and May 15, may derive from any available funds. Payment amounts are calculated under a specific formula for fiscal year 2011-2012, for fiscal year 2012-2013, and for fiscal year 2013-2014 and beyond, as established under the Voluntary Program Legislation, Health and Safety Code Section 34194.

These payments will be distributed as follows: a minor portion of fiscal year 2011-2012 payments (and thereafter 15 percent of payments) will be distributed to special districts that provide fire protection services to participating RDA’s projects area(s) and transit districts that serve the participating RDA’s project area(s); the remainder of the funds, comprising most of the funding, will be distributed to school entities that serve the participating RDA’s project area(s).

If all RDAs were to opt-in to the Voluntary Program, which is highly unlikely, these contributions would amount to $1.7 billion for fiscal 2011-12 and appear intended to amount to $400 million in each succeeding year. If a community falls out of compliance with the Voluntary Program, namely, if it cannot make the required remittance payments, its RDA will be subject to the Dissolution Legislation.

Enforceable Obligations

In a troubling ambiguity, the Voluntary Program Legislation does not explicitly require RDAs to honor enforceable obligations. Rather, the language provides only that a city making remittances to the county auditor-controller “may use any available funds not otherwise obligated for other uses.” (emphasis added.) Because the procedures for satisfying obligations are not clear, it remains to be seen whether RDAs will be subject to litigation where existing obligations are not honored.

Ongoing Litigation and Legislative Efforts

Pending Litigation – A Constitutional Challenge to the Legislation

On July 18, 2011, the California Redevelopment Association, the League of California Cities, and the cities of San Jose and Union City, filed a petition with the California Supreme Court challenging the constitutionality of the Legislation, and requesting a stay to prevent the Legislation from going into effect until the Court can rule on the merits of the plaintiffs’ challenge. The lawsuit’s central contention is that the Legislation violates Proposition 22, the constitutional amendment passed by voters in November 2010. Proposition 22 prohibits the Legislature from diverting revenue dedicated to local government to the state. According to the plaintiffs, the revenues protected by Proposition 22 specifically include the annual increments of property taxes allocated to California’s 398 redevelopment agencies. Because provisions of the law go into effect in the coming months, the petition requests that the Court undertake an expedited schedule and make an initial ruling on the request for stay by August 15, 2011, and on the merits of the constitutional challenge by December 20, 2011. The cities of Brentwood, Oakland, Modesto, West Sacramento and Guadalupe have also filed declarations in support of this lawsuit.

On July 27, 2011, the state filed a response to the CRA lawsuit. The state claims that the Legislature has the power to terminate the RDA program as RDAs were created by the Legislature and that the Legislature was within its power to create a voluntary redevelopment program and to set the terms and conditions for participation.

Further Legislative Efforts

Finally, further legislation may provide some answers as the Legislation calls for the California Law Revision Commission to draft a Community Redevelopment Law “cleanup bill” by January 1, 2013. Further, there are continued efforts to enact legislative alternatives that would “mend not end” RDAs by more narrowly prescribing redevelopment projects deemed worthy of tax increment financing (e.g., transit-oriented infill development), as well as new options for infrastructure financing that would help fund infill development projects that may be at risk of financial infeasibility as a result of the Legislation.

Conclusion

Until the outcome of the CRA lawsuit becomes clear, it is important for RDAs and cities to prepare to comply with the Legislation by evaluating their options under the Legislation and for private entities hoping to undertake activities within the RDA area to stay apprised of the community’s plans for compliance.