LOS ANGELES — As California lawmakers dither over legislation to clean up the messy and sudden dissolution of the state’s redevelopment agencies, cities are turning to the courts for clarity.
Cleanup legislation to guide the RDA’s dissolution remains stuck in the Sacramento legislative mud, and the cities that have taken over the obligations of their former redevelopment arms say they’ve been left in the lurch as they try to adopt budgets by the end of June with incomplete information.
The agencies were dissolved under terms of a law passed in 2011, along with a companion bill that would have allowed RDAs to stay alive if they shared revenue with the state.
The state Supreme Court struck down the companion bill in late 2011; the dissolution of every single redevelopment agency was something of an unexpected consequence.
Since then, there’s been a scramble to determine which obligations of the old RDAs are valid and need to be honored by their successors.
“It has really been quite an intense process,” said Cecilia Estolano, a consultant advising 71 Los Angeles County cities about the process of winding down their redevelopment agencies.
The successors to the RDAs, in most cases their sponsoring city or county, were required to submit a “recognized obligation payment” schedule to the state Department of Finance, which on Friday began posting on its website letters on which ROPs have been approved and which ones have not, said spokesman H.D. Palmer.
In some cases, the department taken a narrower view than the cities over which redevelopment obligations are recognized.
There are at least two active bills in the Legislature designed to clarify the answer to that question, while Gov. Jerry Brown’s Department of Finance has suggested language of its own for cleanup legislation that could be enacted with the state budget.
Whether any of the cleanup bills come to pass remains to be seen.
Nine cities are not waiting for state lawmakers.
The cities, eight from Southern California, filed suit last week seeking a court order dictating that property taxes be distributed to pay for each valid enforceable obligation, which includes bond payments.
The lawsuit, City of Palmdale v. Matosantos, (Ana Matosantos is the state finance director), asked that each county auditor-controller be allowed to set aside sufficient property taxes to pay enforceable obligations that remain in dispute after June 1 until such disputes have been resolved.
After a hearing before Sacramento County Superior Court Judge Timothy Frawley on Wednesday, he refused the cities’ request for a temporary restraining order.
“One of the things that we note, for some of the folks who have been talking about bond payments, like National City, is that we have approved their [bond payments],” Palmer said.
The lawsuit specifically mentions concerns that the actions taken by the state could result in bond defaults for cities that agreed to become successor agencies for their RDAs.
The cities’ lawsuit argues that the process currently in place will not provide enough funds for some redevelopment successor agencies to make debt service payments on bond obligations that become due in 2012.
That is the case even though before the RDAs were dissolved, the holders of such bonds were lawfully given a first pledge of the agencies’ tax increment revenue to secure such debt-service payments.
The suit argues the state has “established a series of illegal procedures involving new documents, deadlines and deductions which are nowhere found in or authorized by AB 26,” according to the legislation covering redevelopment dissolution.
The League of California cities has not taken a position in support of the cities, or the state, on the lawsuit.
“Our position at the league is that the law should be faithfully implemented,” said Chris McKenzie, the group’s executive director.
“We are not plaintiffs,” McKenzie said. “We are making sure various city attorneys are talking to each other and those cities involved in the litigation are sharing information with each other.”
According to McKenzie, the law envisions an allocation of the funds to meet contractual obligations, including bond covenants.
“As the main fiscal agent of the state and reviewer of these issues, the Department of Finance has an even higher obligation to ensure the law is followed to the letter,” McKenzie said. “When it does not, local agencies have every right to seek judicial review in order to make sure valuable community projects that should be funded receive the funding and that bondholders’ rights to payment are respected.”
Estolano, a former head of the Community Redevelopment Agency of Los Angeles, said the expectation has been that state will come up with clean-up legislation to clear up the confusion, but that hasn’t happened.
Meanwhile, cities that are already fiscally strapped are in the position of backstopping their former redevelopment agencies, and losing money or having their bonds downgraded.
State officials have set up a scenario where the localities can’t plan ahead as they like or are forced to take out short-term paper because the state has failed to provide clear guidance, she said.
“There is not a provision to get paid back,” Estolano said. “So it makes the cities reluctant to front the money.”
In the years before the dissolution of the redevelopment agencies, cities would typically give short-term loans to the RDAs to help them do such things as make bond payments.
“That way of borrowing money back and forth is much more complicated and difficult to do now,” Estolano said. “So they are going to limit how much money they put into it.”
Estolano’s firm, Estolano LeSar Perez Advisors LLC, in advising successor agencies in Los Angeles County, has drafted a training manual, instructions for the appointees to new oversight boards for RDA successor entities, and advised the oversight boards on the recognized payment schedule.
The six-month schedule is akin to a budget that the successor agencies have to present to the oversight board outlining what the agencies outstanding obligations are, she said.
It is that recognized obligation payment schedule that determines how much money county auditor-controllers will give to each redevelopment successor agency, Estolano said.
The Department of Finance has 10 days to reject or deny the items on the ROPs. The department is posting the letters of acceptance or rejection on its website.
“It’s clear that people want to make sure the bond payments get paid,” Estolano said, even if oversight boards may have questioned some of the line items in the successor agency budget.
“They want to assure the rating agencies that if there are cash-flow issues, they work them out so that no one misses payments,” she said.
Although all three of the rating agencies downgraded the RDAs after the Supreme Court’s decision in January, Eric Hoffmann, an analyst in Moody’s San Francisco office, said he does not anticipate cities or other successor agencies will receive widespread downgrades from the redevelopment dissolution process.
“I think it will be isolated cases like Azusa,” Hoffman said. The small Southern California city received a two-notch Moody’s downgrade last week, in part because of intra-fund debts the city’s former redevelopment agency owes to the city general fund.
“I am still hopeful there will clean-up legislation,” McKenzie said. “The fact it was not passed in a timely manner made this process more complex for the state and local agencies.”
The way the redevelopment dissolution legislation was written is confusing, he said.
“Our fundamental position is that it ought to be faithfully implemented,” McKenzie said. “State officials have chosen to implement it in a way that is inconsistent with the way the law is written.”