SAN FRANCISCO — Holders of more than $22 billion of bonds tied to California redevelopment agencies may be impaired if the RDAs are stamped out, according to a second lawsuit filed in a legal battle over this year’s legislation targeting the agencies.
A coalition of Southern Californian cities and redevelopment agencies has filed the lawsuit in Superior Court in Sacramento challenging two new laws that force the RDAs to either cough up money for the state budget or else close their doors.
The state Supreme Court is already weighing a challenge by redevelopment agencies and their advocates to two new laws the Legislature passed as part of the budget. One eliminates the state’s 400 RDAs, while the second gives them the option of coming back to life if they pay $1.7 billion this year to fill a gap in the current budget.
“In multiple ways, [the legislation] impairs bondholders,” said Jeffrey Oderman, a lawyer with Rutan & Tucker in Orange County representing the plaintiffs, which include Cerritos and Carson. “We are really all sitting for the moment waiting to see what the Supreme Court will do.”
The main defendants named in both suits are California finance director Ana Matosantos and Controller John Chiang.
If the Supreme Court rules against the agencies by either upholding both laws or just the one that dissolves them, Oderman said his coalition would proceed with its suit, raising several new issues about the process of closing down RDAs.
Oderman said holders of redevelopment agency tax-allocation bonds would be impaired by the state’s plan to put bond money from all the extinguished RDAs into a commingled fund.
“The concern is that source of funds is much less secure than the pledge of tax increment from a specific project,” he said.
Another concern in the suit is that certificates of participation would be passed to the sponsoring city or county because the lease-leaseback agreements with the redevelopment agencies would be voided.
That result, the plaintiffs said, would put local governments in violation of a state constitutional requirement that voters approve any long-term tax-backed debt.
The state has yet to respond to the suit because it has been granted an extension until after the other case is settled by the high court. California officials declined to comment on the suit.
The plaintiffs in the Supreme Court case said the two cases are separate.
“We haven’t really been focusing on that case,” said Tom Hart, deputy director of the California Redevelopment Association. “It really has been their bailiwick.”
The main thrust of the argument by the redevelopment agency advocates in the Supreme Court case centers around Proposition 22, a ballot measure passed in 2010 prohibiting the state from taking or interfering with revenue dedicated to local governments.
The court heard oral arguments in the case last week and seemed to give weight to the possibility of overturning the law seeking payments from the agencies, but upholding the bill that dissolves them.
The court — which has expedited the case and granted a stay on most parts of the new laws — expects to reach a decision by Jan. 15.
California’s RDAs have $19 billion of outstanding tax allocation bonds and $3.5 billion of COPs and revenue bonds outstanding, according to the annual report released this month by the controller on the agencies’ fiscal 2010 finances.
The controller’s report does not include the agencies’ rush to sell bonds in the first half of 2011 after Gov. Jerry Brown released his budget proposal to axe redevelopment.
Aside from the legal issues raised by Cerritos and Carson, their case could have the consequence of prolonging the legal limbo for RDAs and the state.
“This is certainly far from over,” Lewis Feldman, a partner at Goodwin Procter in Los Angeles and an expert in public finance and real estate finance law, said about the redevelopment legal fight.
Some RDAs have already been pushed to the brink of default because they have been unable to enter into financing agreements due to the Supreme Court case.
San Jose last month had to hold extended negotiations with JPMorgan in order to extend its redevelopment agency’s letter of credit on a variable-rate bond series for six months due to uncertainty caused by the new legislation about the agency’s legal ability to enter into an extension agreement. The issue was resolved by having the new LOC placed with the bond trustee.
Further legal wrangling could add to the insecurity felt by banks and investors.
“In general, the market for sure has punished the redevelopment bonds in terms of the bid price,” said Michael Pietronico, head of fixed-income research and co-founder of Miller Tabak Asset Management. “The perception is that the credit quality could suffer if the state goes ahead with its plan.”
For example, the San Jose Redevelopment Agency’s tax allocation bonds maturing in 2020, rated BBB-plus by Standard & Poor’s with a yield to maturity of 5.10%, traded over the last 10 days at a spread of 292 basis points compared to triple-A rated bonds, according to Thomson Reuters.
RDA bonds below investment grade are the ones to watch, Pietronico said.
At the end of October, Standard & Poor’s put 16 agency bonds on negative CreditWatch because they may come under more financial strain if they lose the ability to use funds other than pledged revenues and reserves to cover shortfalls.
Falling property assessments have reduced many agencies’ tax increment that they use to cover debt service. As a result, the RDAs have used other funds, such as intergovernmental loans and tax increment from other projects, to cover debt service rather than dipping into reserves.
If the Supreme Court upholds the two laws next month, the California Redevelopment Association has said that it expects roughly 20% of RDAs to be shuttered because their sponsoring cities or counties will be unable or unwilling to make the payments the state government is demanding.
