California Redevelopment Group to Sue Over Funds Shift

SAN FRANCISCO - The California Redevelopment Association plans to file a lawsuit challenging a $350 million shift of funds to the state government from redevelopment agencies.

The board of the association, the trade and lobbying group for redevelopment agencies in California, voted Friday to proceed with the lawsuit, John Shirey, the executive director, said in an e-mail.

The $350 million shift was a budget-balancing provision in the budget the Legislature adopted in September.

The shift would amount to a 7.7% cut in each agency's budget, and there is no provision for repayment, according to the redevelopment association, which contends that the shift violates the state constitution's provisions on redevelopment.

Further information on the timing and content of the lawsuit is not yet available, Shirey said. "We're in the process of evaluating the next steps," he said.

The $350 million transfer is what is known in California as an "ERAF shift," because the agencies are directed to send the money to "education revenue augmentation funds" used to support public education in their respective counties.

Students and teachers won't see that money - it will be used to save the state general fund $350 million that it would have otherwise spent providing baseline support to local school districts.

Those ERAF shifts are subordinate to any existing debt obligations of redevelopment agencies, according to an analysis prepared for the California Redevelopment Association by law firm McDonough Holland & Allen PC.

If a redevelopment agency's bond debt obligations prevent it from making a full payment of the ERAF funds when they are due in May, they don't have to do so - but there are numerous catches, according to the analysis.

Among other things, such agencies will be prohibited from issuing new debt, and prohibited from adding new project areas or expanding existing project areas.

They would also be prohibited from spending money on most things, with the exception of outstanding debt and contractual obligations, and a maximum of 75% of their prior year's administrative expenses.

Such agencies could avoid those limits by having their sponsoring city or county government fund the difference between the total ERAF payment and the amount the agency is able to pay.

They also can borrow money for the payments in the bond market - the legislation implementing the budget deal also grants authority for a joint-powers authority to issue bonds to finance the ERAF payments on behalf of participating redevelopment agencies, according to the legal analysis.

"The bonds will be repaid out of available revenue from each participating agency, and will be secured by a pledge of property tax by the legislative body of each participating community, which will be used to make up any shortfall on the debt service for the bonds," the analysis said.

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