RPVCCA_SR_RDA_2010_02_02_B_ERAFCITY OF
MEMORANDUM
RANCHO PALOS VERDES
TO:
FROM:
DATE:
SUBJECT:
REVIEWED:
Project Manager:
HONORABLE CHAIR &MEMBERS OF THE BO£
DENNIS McLEAN,DIRECTOR OF FINANCE &
INFORMATION TECHNOLOGY
FEBRUARY 2,2010
FY09-10 EDUCATIONAL REVENUE AUGMENTATION
FUND (ERAF)SHIFT
CAROLYN LEHR,CITY MANAGER~
Kathryn Downs,Deputy Director of Finance &Information
Technology
RECOMMENDATION
Direct Staff to report to the County Auditor-Controller by March 1,2010 regarding how the
agency intends to fund the 2009-10 Educational Revenue Augmentation Fund (ERAF)
payment,only if the California Redevelopment Association lawsuit is not successful.
DISCUSSION
On July 28,2009,the Governor signed AS X4 26 to address the fiscal emergency declared
by the Governor on July 1,2009.AS 26 provides for a $1.7 billion ERAF shift from
redevelopment agencies for fiscal year 2009-10 and a $350 million ERAF shift for fiscal
year 2010-11.
The California Redevelopment Association (CRA)filed a lawsuit with respect to the 2008-
09 $350 million ERAF shift,won at the trial level,and was successful in enjoining the
county auditors from collecting the 2008-09 ERAF payment.Initially,the state filed an
appeal;but on September 28,2009 the appeal was dropped and the decision regarding
the 2008-09 ERAF became final.
On October 20,2009,the CRA filed a lawsuit challenging AS 26 (the 2009-10 and 2010-11
shifts).The CRA has requested a ruling prior to May 10,2010,the payment due date for
the 2009-10 shift.The CRA,as well as the City's Financial Advisor,is optimistic that the
current lawsuit will be successful.Even though the state has changed the wording of AS
26 in response to the successful 2008-09 ERAF lawsuit,the CRA believes that the basis
RDA B-1
Raiding $2.05 billion in redevelopment funds will kill tens of thousands of jobs,
damage our economic recovery and harm local communities.
•The magnitude of this redevelopment raid will force many agencies to stop work on important
redevelopment projects,stalling or killing vital economic revitalization,affordable housing,
infrastructure and other projects that are critical in a down economy.
•According to an economic analysis prepared for CRA,$2.05 billion in redevelopment revenues
could support 198,000 full-and part-time jobs in the construction and related industries.At a time
when California unemployment is more than 12%,these raids are job killers that will further stall
our economic recovery.
(Timeline and FAQ on Following Pages)
RDA B-2
FY09-10 Educational Revenue Augmentation Fund (ERAF)Shift
February 2,2010
Page 2 of2
for the 2009-10 &2010-11 shifts has not changed,and remains unconstitutional.The CRA
has prepared a document that includes a lawsuit fact sheet,timeline,and frequently asked
questions (see attachment A).Staff will continue to monitor the lawsuit and periodically
provide updates to City Council.
Until a ruling on the current lawsuit is rendered,it is prudent to continue the procedural
steps required for the 2009-10 ERAF shift.By March 1,2010,the RDA must report to the
County Auditor-Controller how it intends to fund the 2009-10 payment of $330,125.
Currently,the County impounds all of the RDA's tax increment revenue to repay the RDA's
debt to the County.Therefore,the RDA has no cash to make the $330,125 payment.If
the lawsuit is unsuccessful,the 2009-10 ERAF shift would need to be funded with an
additional loan advance from the City's General Fund.If directed by the Board,Staff will
report this information to the County Auditor-Controller by March 15
.
FISCAL IMPACT
There is no fiscal impact at this time.However,if the CRA lawsuit is unsuccessful,an
adjustment to the General fund budget to fund a $330,125 advance to the RDA will
become necessary.
RDA B-3
Redevelo ment.Building Better Communities.••••
Redevelopment Agencies File Second Lawsuit to Block
Unconstitutional Raids of Redevelopment Funds
In April 2009,a Sacramento County Superior Court ruled that State raids of redevelopment funds are
unconstitutional,invalidating a 2008 state budget bill to take $350 million in redevelopment funds.
Despite the clear unconstitutionality,just three months later legislators and the Governor approved
budget bill ABX4-26 as part of the 2009 State budget which authorizes a devastating $2.05 billion raid of
local redevelopment funds,including $1.7 billion in FY 2009-10 and another $350 million in FY 2010-11.
The California Redevelopment Association and two of its member agencies filed a lawsuit on October
20,2009,to challenge the constitutionality of State raids of redevelopment funds.
The courts ruled it was unconstitutional in April 2009.Raiding voter-approved
redevelopment funds is STILL unconstitutional today.
•Article XVI,Section 16 ofthe California Constitution states that redevelopment tax increment
funds can only be used for specified redevelopment activities,specifically "to finance or refinance
...the redevelopment project.II Taking redevelopment funds to balance the State's budget,the
unquestioned purpose of ABX4-26,does not qualify as a constitutionally permitted use of
redevelopment funds.
•That's why in April 2009,a Sacramento Superior Court invalidated a 2008 State raid of
redevelopment funds,finding that it "violates the intent ofSection 16 (of the State Constitution),
to allocate the tax increment to the financing of redevelopment projects.II
•While legislative staff and lawyers changed the wording of the 2009 legislation in an attempt to
get around the State Constitution and Superior Court Ruling,this raid is still unconstitutional.The
clear purpose of ABX4-26 is to redirect redevelopment funds to school districts to reduce the
State's obligation to fund education.In other words,ABX4-26 is intended to reduce the State's
budget obligations -not to further redevelopment -which is a violation of the Constitution.
State raids of redevelopment funds unconstitutionally impair bonds and other
contracts.
•State and Federal Constitutions prohibit the Legislature from enacting laws that impair the
obligation of contract.Raiding $2.05 billion in redevelopment funds will jeopardize bond
covenants and other contractual obligations entered into by many redevelopment agencies
creating an unconstitutional impairment of contract.Under Article XVI,Section 16 of the State
Constitution,redevelopment agencies irrevocably pledge tax increment to pay bond debt service
and other obligations that raise capital for the redevelopment project.By redirecting funds that
are pledged to pay back bonds and other creditors,ABX4-26 impairs the contractual pledge of
revenues on which redevelopment financing is based.
(more)
RDA B-4
September 30,2008
December 4,2008
June 15,2009
June 2009
July 24-29,2009
September 28,2009
Timeline of State Raids of Redevelopment Funds and Litigation
-State Legislature passes and Governor signs AB 1389,a state
budget trailer bill raiding $350 million of redevelopment funds for state purposes in FY 2008-
2009.
-California Redevelopment Association (CRA)files lawsuit in
Sacramento Superior Court,alleging AB 1389 and redevelopment raids are unconstitutional.
_-Superior Court rules in favor of CRA,invalidates AB 1389 and says the
redevelopment raid,"violates the intent of section 16 [of the State Constitution],to allocate the
tax increment to the financing of redevelopment projects./I State of California announces it will
appeal the decision.
- A month-and-a-half after the Superior Court ruled redevelopment raids
for state purposes are unconstitutional,the legislative Budget Conference Committee votes to
include a $1.05 billion raid of redevelopment funds in a budget trailer bill ($350 millionjyr for 3
years).
-CRA warns legislators and Administration that,despite altered language,
budget bills still violate Constitution and proposed redevelopment raids are illegal.
-Legislature passes and Governor signs ABX4-26 as part of budget
package,a devastating $2.05 billion raid of redevelopment funds this year and next.
-State of California drops appeal of 2008 lawsuit,making the April
30 Superior Court decision final and binding.
__-California Redevelopment Association files second lawsuit in
Sacramento Superior Court.Lawsuit challenges constitutionality of ABX4-26 included as part of
the 2009 State budget.
RDA B-5
FREQUENTLY ASKED QUESTIONS
1)Why is CRA filing this lawsuit?
We are seeking to invalidate ABX4-26 and block the unconstitutional transfer of $2.05 billion in local
redevelopment funds to county Supplemental Educational Revenue Augmentation Funds (SERAF).
In addition to the unconstitutionality of these raids,they will hurt California's economic recovery.
Raiding $2+billion in redevelopment funds will result in the loss of tens of thousands of jobs and kill
needed economic revitalization,affordable housing,and other projects that communities
desperately need in this down economy.
2)On what grounds will you sue to invalidate ABX4-26?
Article XVI,Section 16 of the California Constitution states that redevelopment tax increment funds
can only be used for specified redevelopment activities,specifically "to finance or refinance ...the
redevelopment project./I Taking redevelopment funds to balance the State's budget -the real
purpose of ABX4-26 -does not qualify as a constitutionally permitted use of redevelopment funds
and is therefore unconstitutional.
Additionally,raiding $2.05 billion in redevelopment funds constitutes an unconstitutional
impairment of contracts.Under Article XVI,Section 16 of the State Constitution,redevelopment
agencies irrevocably pledge redevelopment (tax increment)revenues to pay back bonds and other
obligations that raise the capital to fund the redevelopment project.By raiding funds that are
pledged to pay back bonds and other creditors,ABX4-26 impairs the contractual pledge of revenues
on which redevelopment financing is based.
3)When do you expect a ruling?
We are asking the court for a ruling before May 2010,the date redevelopment agencies must make
their 2009-10 payment to the State.While there is no way to predict how long a court proceeding
will take,given the magnitude of the raid and the impact it will have on redevelopment agencies,we
are hopeful the court will rule sometime in early 2010.
4)Didn't a Superior Court rule that 2008 raids of redevelopment funds are illegal?What has
changed?
In April 2009,a Sacramento Superior Court invalidated a proposed 2008 State raid of $350 million of
redevelopment funds,finding that the State raid of redevelopment funds "violates the intent of
section 16 [of the State ConstitutionL to allocate the tax increment to the financing of
redevelopment projects./I
In September 2009,the State of California dropped its appeal ofthe Superior Court ruling,making
that ruling final and binding.
Nothing has changed since that ruling in April.ABX4-26 is likewise unconstitutional because it
redirects redevelopment tax increment funds to finance the State's obligation to fund education.
While legislative staff and lawyers changed the wording of the 2009 legislation in an attempt to get
around the State Constitution and Superior Court ruling,this raid is still unconstitutional.The
Legislature cannot change the wording or meaning of the Constitution by statute.
RDA B-6
5)The Legislature,Administration and staff say they have written ABX4-26 to address the
Superior Court ruling and that the 2009 State Budget raid is legal because funds will only
go to schools and students within a redevelopment project area,which furthers the
purpose of redevelopment.
We disagree.
In the 2008 lawsuit,the State also claimed the intent was to benefit schools,which purportedly
furthers the purpose of redevelopment.The Superior Court judge rejected that argument and found
the 2008 raid unconstitutional.
ABX4-26 is also unconstitutional because the purpose of this budget bill is to help balance the
State's budget -which does not qualify as a constitutionally-permitted use of redevelopment funds.
Under ABX4-26,schools won't receive one dime more than already guaranteed from the State.
ABX4-26 simply shifts the obligation from the State to redevelopment agencies.
Further,it is not enough that tax increment be spent within a redevelopment project area.The
constitutional requirement is that tax increment be spent to repay indebtedness incurred to finance
the redevelopment project.ABX4-26's redirection of tax increment to SERAF fails the constitutional
requirement because the revenues diverted are not related or proportional to the cost of any direct
benefit to the redevelopment project.
6)Who are the plaintiffs in the case?
The California Redevelopment Association is the main plaintiff along with two local redevelopment
agencies,the Union City Redevelopment Agency and the Fountain Valley Redevelopment Agency.
John Shirey,Executive Director of CRA,is also a plaintiff as a California taxpayer.
7)Who are the defendants?
The State of California Department of Finance will be the principal defendant in the lawsuit.For
technical reasons,we have included county auditors as defendants,since auditors are the officials
charged with the transfer of payments from the redevelopment agencies into County Supplemental
Educational Revenue Augmentation Funds (SERAF).
8)If you're victorious,won't you blow a $2 billion hole in our already deficit-ridden budget?
It is the responsibility of state lawmakers to pass a responsible budget that does not rely on
gimmicks or illegal raids of funds just as local governments have had to do.We have repeatedly
informed the Legislature and Administration that any proposal to shift redevelopment funds to
SERAF is unconstitutional and will be challenged.
Given the recent Superior Court ruling in the 2008 lawsuit,legislators and the Administration are
fully aware of the constitutional issues surrounding the redirection of redevelopment funds.
The Governor himself is on record agreeing that raiding redevelopment funds is unconstitutional.In
2004,Governor Schwarzenegger signed ballot arguments in the voter information guide in support
of Proposition lA (local government revenue protection).The voter information guide,which was
sent to millions of California voters,read:"Redevelopment agency tax increment revenues are
already protected by the State Constitution.JJ
RDA B-7
9)Given the enormity of the State's budget deficit,shouldn't redevelopment be asked to
pitch in to solve the crisis?
The irony is that if redevelopment funds were left to be invested in communities,construction
workers would be put back to work,suppliers would receive more orders,and small businesses
would be assisted.That economic activity would also generate more taxes.Thus,redevelopment
investments could be providing much-needed economic stimulus.Instead,the State's action serves
to further slow the economy.
Local governments are already facing severe financial hardships due to the down economy and have
made difficult decisions locally to balance their own budgets,including laying off staff,eliminating
community projects and cutting services.The State must balance its budget without illegally raiding
local government funds.
10)Will this impact redevelopment bond and/or credit ratings?
The impairment issue is of great concern to bondholders and redevelopment agencies alike.If the
State can alter the finances of an agency after these agencies have entered into
covenants/agreements with bondholders,it will have a negative impact on all future bonding.
In fact,a July 2009 analysis by Moody's says "the proposed $1.7 billion shift from redevelopment
agencies ...is of a substantially greater magnitude than might have been anticipated,and it could
have a material impact on some redevelopment agencies'overall credit quality."
What's more,by illegally impairing bond contracts,State lawmakers are jeopardizing the integrity of
all California state and municipal bonds.After all,bond holders are going to be much less willing to
buy California bonds if the Legislature repeatedly jeopardizes repayment of these bonds.
11)How will this impact funds for affordable housing?
For FY 2009-2010,a redevelopment agency may suspend all or part ofthe required 20%allocation
to its low-and moderate-income housing fund in order to make the required payments.If needed,
the agency may also borrow accumulated funds from its Housing fund for the FY 2009-10 year only.
It cannot do the same for the second year,FY 2010-11.
The Housing Fund must be repaid by June 30,2015.If the agency fails to repay the Housing Fund,
the required allocation of tax increment to the Housing Fund is increased to 25%for most agencies
for as long as the project area continues to receive tax increment.
Many agencies will have no alternative but to borrow at least a portion of the SERAF payment from
its Housing Fund.This will result in the delay or elimination of many affordable housing projects
where redevelopment funding is a key component of the financing,leveraging other State and
Federal financing sources.
12)Will schools lose money if you are successful?
No.Schools are constitutionally guaranteed a minimum funding level.ABX4-26 simply (and illegally)
shifts the burden for funding schools from the State to redevelopment agencies.If we're successful,
the State will have to provide funding to the schools.
RDA B-8