Legal Alerts

Governor Brown’s Budget Summary, released Monday, January 10, includes a proposal to eliminate all local redevelopment agencies and dismantle tax increment financing as part of an effort to close the State’s $25 Billion budget deficit. The proposal would disestablish all redevelopment agencies statewide effective July 1, 2011, and establish yet to be defined successor agencies charged with using the property taxes that redevelopment agencies would otherwise have received to retire debts and contractual obligations in accordance with existing payment schedules. Urgency legislation will be introduced shortly that would immediately prohibit redevelopment agencies from incurring any further bond or contractual obligations. In FY 2011-12, tax increment remaining after payment of agency obligations would be used primarily to pay State General Fund costs for Medicaid and trial courts. A small portion would be distributed to cities, counties and special districts. Beginning in FY 2012-13, amounts remaining after payment of pre-existing obligations would be distributed to cities, counties, special districts and schools in amounts proportionate to their share of the base county-wide property tax.

The proposal would also transfer amounts currently held in redevelopment agencies’ low and moderate income housing funds to local housing authorities. It is unclear whether this transfer would apply only to current balances or to future allocations of tax increment as well. 

Finally, to replace tax increment financing, the proposal would send a constitutional amendment to the voters to authorize cities and counties to pledge amounts raised through a tax override (apparently not including property taxes), to assist development projects similar to those now assisted by redevelopment agencies, if approved by 55% of the voters. 

The Governor’s proposal faces many legal and political obstacles before it can become law. The January proposal is ordinarily seen as a starting point for negotiations with the Legislature. On its face, the proposal raises constitutional questions, including compatibility with: (1) Article XVI, section 16 of the California Constitution, which established tax increment financing and requires tax increment to be paid to redevelopment agencies; (2) Article XIII, section 25.5 (Propositions 1A and 22) which prohibits legislation requiring the transfer of tax increment to the State, any agency of the State or any local jurisdiction; and (3) State and Federal constitutional provisions prohibiting legislation impairing the obligation of contracts. 

Bill language implementing the proposal is not currently available. The lack of specifics in the Governor’s proposal leaves many questions unanswered and frustrates any attempt to give general advice to redevelopment agencies about what can be done to protect their redevelopment programs. Nevertheless, BB&K offers the following counsel:

1. Immediately inventory the agency’s financial obligations to make certain they are properly documented. Every financial obligation should be supported by an agreement or some other debt instrument. A good place to start would be to take the agency’s most recent statement of indebtedness and identify the legal instruments supporting each item listed. Some agencies have, for example, allocated funds to the construction of public improvements through their budget without memorializing this obligation with a cooperation agreement. Any such oversights should be corrected. 

2. Evaluate current DDAs, OPAs and other agreements to identify agency financial obligations that remain to be performed. If there are obligations for which funds have been reserved but not yet spent, the agency may want to take actions to further obligate those funds. 

3. Evaluate on-going negotiations with developers and property owners. Some negotiations may be complete or nearly complete and all that remains is to finish the necessary documentation. 

4. Don’t panic and make bad deals. This is just the beginning of a long budget negotiation. There is no reason to panic or rush into transactions on undesirable terms. 

5. Don’t do anything that will reflect badly on efforts to convince the Legislature that the Governor’s proposal is ill-considered and unworkable. Taking precipitous actions to hide assets or rushing into bizarre financial transactions will undermine redevelopment agencies’ credibility with the Legislature. 

6. Immediately contact your representatives in the Senate and Assembly and protest the Governor’s proposal in the strongest possible terms. 

Best Best & Krieger attorneys will continue to monitor the State budget process and keep our clients informed. For questions regarding the budget proposal, its possible implications or other redevelopment matters, please contact BB&K attorneys Brent Hawkins or Elizabeth Hull, or an attorney in the firm’s Municipal & Redevelopment Law practice group.

Disclaimer: BB&K e-Bulletins are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.