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Redevelopment Agencies Prepare to Fight for Their Lives

After an agonizing six-month prelude, the curtain has finally risen on the drama that is redevelopment in California. Agencies are now forced contemplate the costs of staving off their own demise.

Yesterday Gov. Jerry Brown signed a pair of budget trailer bills -- ABx1 26 and ABx1 27 -- that would wrest $1.7 billion in the coming fiscal year from the state's nearly 400 redevelopment agencies. The so-called "two-bill" solution eliminates redevelopment but permits agencies to buy their way back in, by forking over a total of $1.7 billion in 2011-12 and $400 million 2012-13. The laws take effect on October 1.

The "remittances" to the state permitting redevelopment agencies to stay in business must be "voluntary" in order to avoid violating Proposition 22, the 2010 measure that prevents the state from forcibly taking local redevelopment funds. The governor has contended that Prop. 22 does not explicitly prevent lawmakers from dissolving redevelopment agencies altogether.  

But a dramatic court battle is about to begin. The Community Redevelopment Agency and the League of California Cities have vowed to file a joint lawsuit contending that any transfer of tax-increment funds violates Proposition 1A, passed in 2004, and other provisions of the state Constitution, in addition to Prop. 22. 

"They have fashioned a phony voluntary plan that is anything but voluntary," said Chris McKenzie, executive director of the League of California Cities. 

McKenzie said that the lawsuit will be filed within a matter of days directly with the state Supreme Court, rather than to Superior Court, because of its statewide jurisdiction. McKenzie said he hopes that the court will issue a swift ruling, possibly within 4-6 months. 

"We hope we get the court to issue a stay very soon so everybody can take a breather and wait for the court to make a decision," said McKenzie.

McKenzie said that the League's and CRA's legal strategy has not been announced. The new "voluntary" component of the budget trailer bills is not likely to cause a change in strategy from when the Legislature was threatening outright elimination. 

"We're certainly hopeful that the courts will issue an injunction because of the irrevocable damage they will cause," said David Bloom, spokesperson for the state's biggest agency, the Los Angeles Community Redevelopment Agency.  "And then the state will be back in a hole again." 

Steve Shea, consultant to Senate Pro Tem Darrel Steinberg (D-Sacramento), claims, however, that even if a court strikes down certain parts of ABx1 26 and ABx1 27, ABx1 26 contains a provision—a "poison pill," according to Shea—that would limit agencies' function to that of merely servicing existing debt. They would, therefore, cease to pursue new projects and would waste away as project areas expired. 

"It's very difficult to see any possible resolution that would require redevelopment agencies to be restored in their pre-existing format," said Shea.   

Shea said that the payment scheme and other aspects of the legislation resemble those that were included in the CRA's own proposed legislation, which also called for voluntary payments. The difference, said Shea, is that "the CRA's didn't have the elimination component."  

For those agencies that survive, Shea said that the budget legislation foreshadows reform legislation that will be considered in the next legislative session. 

In the meantime, redevelopment agencies around the state must decide whether to fold up shop or stay in business by paying the "remittance." "We're not issuing blanket recommendations," said McKenzie. "We encourage them to look at their own situation and make what they deem the best determination."  

Unless a court issues a stay, the laws call for agencies that intend to pay to notify the state within 90 days of the law's signing – the end of September. Agencies can ask for a one-month extension.  Unless a judge issues a stay, agencies do not have the option of staying in business without paying the remittance.

Payments would be spread among the state's redevelopment agencies in rough proportion to the size of their tax increments. As the state's largest agency, the Los Angeles Community Redevelopment Agency would pay roughly $95 million this fiscal year, according to analysis conducted by the California Redevelopment Association. Many smaller agencies would pay several hundred thousand dollars. 

No matter what, any payment would be a burden for most agencies. 

"We're not walking around with a nine-figure sum in our back pocket," said CRA/LA spokesperson David Bloom. "It is a significant hit to us."  

As such, agencies that choose to stay alive will almost invariably have to curtail programs and scrap planned-for projects. 

"If the city elects to opt into the AB 27 option, that means that we're going to have to take a look at all of our projects and activities," said Derek Danziger, spokesperson for San Diego's Centre City Development Corporation. Danziger said that the agency could "delay, postpone, defer, or eliminate (projects such as) parks, fire stations, public infrastructure."

While most agencies are expected to fight for their survival—and support the lawsuit, according to McKenzie—the decision to submit to the funding transfer rests with city councils and county boards of supervisors. Therefore, the ability to pay remittances does not depend directly on an agency's liquidity, but presumably city councils would hesitate to support agencies if they would have to draw from their cities' respective general funds.  

"(Payment is) a decision the agency doesn't make. That's the city," said Jim Morales, general counsel for the San Francisco Redevelopment Agency. "They will need to take a look at the budget and the agency's budget and determine if that's an appropriate amount at the city can assume."  

Those that do not notify within the 90 are assumed to be shutting down, at which point their assets and liabilities will be turned over to "successor" agencies. 

In many respects, the signing of the budget legislation marks only the beginning of the real battle over redevelopment. In the past six months debates have raged over the efficacy of redevelopment, the prospects for redevelopment reform, and even the value of the tax increment, which some say is far less than the governor's estimate of $1.7 billion. A week after taking office, Brown called for the elimination of redevelopment. The League and the CRA responded by proposing that agencies provide schools with voluntary contributions in exchange for extending the life of their projects.

For some cash-strapped agencies, a win in court may be their only hope of survival. Agencies that have the funds, and that wish to continue doing their work, are now gearing up to assess their finances and ask their respective city councils to approve the transfer of funds to the state. Many are prepared to adhere to the 90-day deadline even though the lawsuit could push the deadline back. 

"Our legislative body has a summer recess, so if the city were to pursue the option there would be added pressure because of the need for hearings and advance notice of the legislation," said Morales.  "It's do-able but clearly it's pushing it."  

One interpretation of the legislation contended that agencies that participated in the lawsuit would forfeit their opportunity to stay alive via remittances. Spokespeople from several agencies mention this concern. However, Shea said that he was "not aware" of any such provision. 

Statewide, clear trends have not yet emerged regarding which agencies will fold versus which will submit to the payment. Bloom noted that some large agencies are relatively stable whereas the San Jose Redevelopment Agency – traditionally one of the biggest and strongest agencies -- is over-leveraged and has been running on a skeleton crew for several months. 

As of now, therefore, no one knows how many agencies could fold if the legislation is upheld. 

"We don't have a sense of that," said Shea, of the Senate Pro Tem's office. "The bill doesn't require (the Department of) Finance to release those numbers until September.  It's obviously a significant decision. We want to put the agencies in the best possible shape."  

All along, supporters of redevelopment have argued that agencies and their programs stoke exactly the sort of economic development and employment that the state needs amidst its historic economic downturn. A chorus of developers, public officials, and legislators have called for the Legislature and governor to keep redevelopment intact so that it can be reformed and made more effective. Many, including State Controller John Chiang, have criticized agencies for pandering to developers, avoiding oversight, and using specious findings of blight. 

For agencies, many of those arguments became moot with the stroke of Brown's pen yesterday. 

"It would be imprudent for us to just wait and hope," said Bloom. "I anticipate that we will have things in place to protect the city's prerogatives and finances as much as possible should we not be successful in court."  

Contacts: 

David Bloom, Spokesperson, Los Angeles Community Redevelopment Agency, 213-977-1600

Jeff Danziger, Spokesperson, San Diego Centre City Development Corp., 619.235.2200 

Chris McKenzie, Executive Director, League of California Cities, 916.658.8200

Jim Morales, General Council, San Francisco Redevelopment Agency, 415.749.2400

Steve Shea, Consultant, Sen. Darrel Steinberg, (916) 323-2263

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