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California RDA Law Upheld

DEC 29, 2011 2:23pm ET
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The California Supreme Court upheld a law on Thursday that would allow the dissolution of the state’s redevelopment agencies, but struck down a bill that would have allowed the agencies to remain in business if they were willing to pay a percentage of their income into a fund to help pay the state’s education costs.

The two bills — AB 1X26 and AB 1X27 — were approved as part of the budget process earlier this year.

“It is not a surprise to me that the court ruled as it did,” said Lewis Feldman, chair of the Los Angeles office of national law firm Goodwin Procter. “Redevelopment agencies are a creature of the state Legislature and they were created by an act of legislation. And the court held they could be eliminated in the same manner.”

The California Redevelopment Association and the League of California Cities, along with San Jose and Union City, filed a lawsuit in July to block the laws, saying they violate the state constitution. The defendants named in the suit included California finance director Ana Matosantos and Controller John Chiang.

Over the past several years, the Legislature has taken funds from the redevelopment agencies to bolster funding of the state’s schools. In 2010, voters passed Proposition 22 to prevent the state from taking money from the agencies to make up state funding gaps.

The justices referred to Proposition 22 in their ruling, saying that it expressly forbids the Legislature from requiring such payments, which makes the second bill unconstitutional, because payments to the state can’t be deemed “voluntary” if they are a requirement for continued operations of the agencies.

According to the state’s reading of the law, when the agencies are shut down, the money to pay debts would be put in a special fund and bondholders would get paid, said H.D. Palmer, a spokesman for the Department of Finance. In this year’s state budget, the state directed that $5 billion should go toward payments on the bond debt, Palmer said. The state expects to have $1.7 billion left after the bond payments are made to fund other state budget items. The state’s 400 RDAs have $20 billion of bonds outstanding.

“Today’s ruling by the Supreme Court upholds and confirms key elements of the state budget,” Palmer said. “It marks a victory for the state’s schools. It will redirect more than $1 billion to the state’s schools this year and be an ongoing source of funding.”

San Diego Mayor Jerry Sanders said, “This money grab by the governor will have severe negative impacts on our neighborhoods and our economy for decades to come. We will begin working immediately with our state legislators to pass new laws giving us tools enabling reinvestment in our lower-income communities.”

The California Redevelopment Association, a lobbying organization for redevelopment agencies, has been sending e-mails to its members saying it would not wait until the Supreme Court ruling to begin lobbying legislators, Feldman said.

Feldman thinks trading of redevelopment agency bonds will pick up in view of the Supreme Court’s ruling.

“I don’t think today’s action affects the existing redevelopment obligations,” Feldman said. “It is the new obligations that need to be analyzed carefully. The administrative procedures and aspects of local government need to be evaluated prior to the issuance of bonds, because basically the court said that redevelopment agencies can’t issue bonds.”

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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