The California Supreme Court’s decision in California Redevelopment Association (CRA) v. Matosantos Commercial Corporation (No. S194861), which upheld the legislative dissolution of redevelopment agencies under AB1X 26 and invalidated the “Voluntary Alternative Redevelopment Program Act” (AB1X 27), requires redevelopment agencies (RDAs) to wind down immediately.  Cities and RDAs are clamoring for a legislative fix that would delay dissolution and allow time for the Legislature to consider narrower alternatives to the existing redevelopment framework.  The likelihood of such a fix is uncertain.  But unless it comes quickly, imminent deadlines mean that the disbanding of redevelopment will occur within a matter of weeks.

• The date upon which RDAs shall be dissolved, originally October 1, 2011 under the statute, is now February 1, 2012.  In addition, the California Supreme Court revised each effective date or deadline in AB1X 26 for performance of an obligation arising before May 1, 2012 to take effect four months later.
• RDA assets will be transferred to “successor agencies” and other public entities.  The agencies will assume former RDAs’ debt and housing obligations, and county auditor-controllers will orchestrate the dissolution process under the state's supervision.  The state Department of Finance and the state controller shall review and may modify certain oversight board decisions.  Funds formerly held by RDAs will be deemed “property tax revenues” instead of “tax increment.”
• Ultimately, funds that are not required to service debt or make payments for RDA obligations will be transferred to county auditor-controllers and distributed to benefit cities, counties, special districts, and school and community college districts.

This update summarizes (1) the wind-down process for RDAs and successor agencies, (2) oversight and review of the RDA wind-down process, and (3) important compliance deadlines in 2012. 

1.      Wind-Down Process for RDAs and Successor Agencies

• Suspension of Redevelopment Activities.  Redevelopment activities that have been suspended since AB1X 26 was enacted in June 2011 remain prohibited.  In general, RDAs may not take any actions other than making payments for enforceable obligations, performing existing contractual obligations and setting aside required reserves.  RDAs may not incur new or restructure existing indebtedness or other obligations; make loans or grants; trigger defaults; enter into contracts; amend existing agreements; prepare draft EIRs; adopt or amend redevelopment plans; approve programs or projects; or renew or extend leases.
• Obligation Payments and Schedules.   
• By August 27, 2011, each RDA was to have prepared an Enforceable Obligation Payment Schedule (EOPS) stating the RDA’s monthly payment obligations for various projects.  The EOPS must be publicly adopted, posted on the website of the city or county that formed the RDA (the "sponsoring community"), and transmitted (by mail or electronically) to the county auditor-controller, the state controller, and the Department of Finance. 
• No later than September 30, 2011, each RDA was required to prepare a “preliminary draft” of the “initial” Recognized Obligation Payment Schedule (ROPS) and deliver it to the RDA's successor agency. 
• By February 1, 2012, the successor agency must review and readopt the RDA's EOPS, modifying it if necessary and create a Redevelopment Obligation Retirement Fund. 
• After the county auditor-controller certifies a draft ROPS prepared by the successor agency, the oversight board must approve the ROPS by March 1, 2012. 
• By April 1, 2012 and May 1, 2012 (and every December 1 and May 1 thereafter), the successor agency must report to the county auditor-controller whether the total amount of property tax available is sufficient to fund ROPS obligations for next six-month fiscal period. 
• The successor agency must submit the first ROPS to the state controller and the Department of Finance by April 15, 2012.  Until a ROPS becomes operative, only EOPS payments shall be made. 
• On May 1, 2012, only ROPS payments shall be made.  

• Dissolution.  Effective February 1, 2012, RDAs will be dissolved.  Former RDAs will lose “all authority to transact business or exercise power” under the Community Redevelopment Law.
• Formation of Successor Agencies.  After RDAs are dissolved, successor agencies will form and assume former RDAs’ various enforceable obligations.  A sponsoring community may elect to be an RDA’s successor agency. However, if the sponsoring community declines, it must, under AB1X 26, adopt a resolution to that effect and deliver it to the county auditor-controller no later than January 13, 2012.  Where the sponsoring community declines, the first “taxing entity” that submits to the county auditor-controller a “duly authorized resolution” electing to become the successor agency shall become the successor agency.  If no local agency elects to be the successor agency, the governor shall appoint three county residents to serve as the governing board of a “designated local authority,” which shall serve as the successor agency until a local agency elects to become the successor agency.
  
  Although not expressly required under AB1X 26, a sponsoring community that chooses to become an RDA's successor agency is advised to adopt an affirmative resolution to that effect and deliver it to the county auditor-controller no later than January 13, 2012.

• Former RDAs’ Housing Assets.  The sponsoring community may elect to assume an RDA's housing functions; retain ownership of the RDA's housing assets (excluding low- and moderate-income housing funds); and assume the RDA's related rights, powers, liabilities, duties and obligations.  Alternatively, if the sponsoring community declines to retain such housing assets, the assets shall be transferred to the designated local housing authority or the state Department of Housing and Community Development.  The recipient of the former RDA’s housing assets may use certain Community Redevelopment Law housing powers to fulfill its housing obligations.  While not statutorily required, sponsoring communities seeking to retain ownership of an RDA’s housing assets are advised to adopt a resolution declaring such intent by January 13, 2012.

Successor Agencies' Responsibilities

.  Successor agencies shall administer the dissolution and wind down of RDA activities, including making enforceable obligation payments and disposing of former RDA property.  Their most significant responsibilities include:
• Holding Assets.  Successor agencies shall receive all assets, properties, contracts, leases, records, buildings and equipment of former RDAs (apart from unspent affordable housing funds) and control them, subject to the oversight board's supervision.
• Making Payments.  Former RDAs' pledges regarding enforceable obligations are “to be honored.”  Successor agencies must perform the actions required by enforceable obligations and make required payments regarding the former RDA's bonds, loans, employee pension obligations, legal judgments or settlements, and binding and enforceable contracts or agreements.  With limited exceptions, the agreements, contracts or arrangements between an RDA and its sponsoring community are not considered enforceable obligations binding upon successor agencies.  Successor agencies must prepare ROPS (discussed above), certified by the county auditor-controller and subject to oversight board approval, for each six-month period of the fiscal year that identifies the sources of funds to pay the former RDA's enforceable obligations. 
• Collecting Revenues.  Successor agencies must enforce all rights of former RDAs by collecting loans, rents and revenues that the RDA would have collected.
• Disposing of Former RDAs' Assets or Properties.  Successor agencies must dispose of former RDAs' assets or properties funded by tax increment revenues "expeditiously" and "in a manner aimed at maximizing value."  Sale proceeds not needed for approved projects or to wind down RDA affairs shall be transferred to the county auditor-controller to be distributed as property tax proceeds.  Alternatively, the oversight board may transfer assets constructed and used for a governmental purpose (e.g., roads, schools, parks) to the appropriate public jurisdiction.  Compensation received for the asset transfer shall be governed by the agreements relating to construction or use of that asset.
• Distributing Housing Fund Balances.  Existing balances in low- and moderate-income housing funds shall be distributed to schools, counties and special districts based on calculations made by county auditor-controllers.
• Terminating or Renegotiating Contracts.  Successor agencies shall determine whether any contracts, agreements or other arrangements between the dissolved RDA and any private parties shall be terminated or renegotiated to “reduce liabilities” and “increase net revenues of the taxing entities.”
• Monitoring "Clawback" Attempts.  Where an RDA attempted to transfer assets to its sponsoring community or another public agency after January 1, 2011, such assets shall be returned to the RDA or successor agency and used for payment of obligations or distribution as property taxes if the state controller determines the transferred assets is not "contractually committed" to a third party for the "expenditure or encumbrance of those assets."

2.      Wind Down Oversight and Review

• Oversight Boards.  Certain successor agency actions, such as making financial decisions, require oversight board approval.  Before May 1, 2012, each successor agency must provide the Department of Finance with the names of the members and chairperson of its seven-member oversight board.  With certain exceptions, the following entities may each appoint one member:  the county board of supervisors, the mayor for the city that formed the RDA, the "largest special district," and the county superintendent of education (if elected) or county board of education (if the county superintendent is appointed).  In addition, the mayor or chair of the board of supervisors may appoint one member representing employees of the former RDA.
  
  Where the RDA was formed by an entity that is both a charter city and county, the oversight board shall be composed of seven members as follows:  three members appointed by the mayor and confirmed by the board of supervisors, one member appointed by the largest special district, one member appointed by the county superintendent of education, one member appointed by the chancellor of the California Community Colleges and one member representing employees of the former RDA appointed by the mayor and confirmed by the board of supervisors.
  
  The governor may fill any vacant oversight board positions not filled by May 15, 2012 or left vacant for more than 60 days.
• Review of Oversight Board Actions.  The Department of Finance may review and modify certain oversight board actions.  In the event the department seeks to review an action of an oversight board, the department shall have 10 days from the request date to approve the action or return the action to the oversight board for “reconsideration” and the department’s subsequent consideration of approval.
• County Auditor-Controller.  The county auditor-controller shall create and administer a Redevelopment Property Tax Trust Fund for property tax revenues related to each former RDA.  Revenues equivalent to amounts that would have been allocated as redevelopment tax increment shall be allocated into this fund for servicing the former RDA's debt obligations.  Funds not necessary for such payments shall be distributed by the county auditor-controller as property tax proceeds.  In addition, the county auditor-controller shall audit the various ROPS.  By May 16, 2012 and June 1, 2012[1] (and every January 16 and June 1 thereafter), the county auditor-controller must transfer an amount of property tax revenues specified in the ROPS from the successor agency’s Trust Fund into the Redevelopment Obligation Retirement Fund.  By July 1, 2012, the county auditor-controller shall audit each RDA in its county to determine each RDA’s assets and liabilities, passthrough payment obligations to other agencies, and indebtedness.  By July 15, 2012, the county auditor-controller shall provide the state controller’s office a copy of all audits performed.  By October 1, 2012, the county auditor-controller shall report to the state controller and the director of finance the property tax revenues remitted to the Redevelopment Tax Trust Fund, various agencies, and successor agencies; sums paid to each city, county and special district; and total amount allocated to schools.
  
  
• State Department of Finance and State Controller.  The Department of Finance and the state controller shall have authority to monitor successor agencies' enforceable obligations payments and ensure compliance with the dissolution legislation.  The Department of Finance and the state controller shall receive reports from the county auditor-controllers and the state controller may audit and review a county auditor-controller's actions.  If the state controller requests a review of a given action, the state controller shall have 10 days from the request date to approve the action or return it to the county auditor-controller for reconsideration and the state controller’s subsequent consideration of approval. 

3.  Important Deadlines in 2012

The RDA dissolution process leaves numerous questions and challenges parties to respond strategically in order to optimize asset values:

• If you have a contract with a former RDA, are the obligations of that contract considered "enforceable obligations" that remain binding on the successor agency?
  
  
•  Which redevelopment actions undertaken by RDAs in 2011 are susceptible to being unwound under ABX1 26?
  
  
• How much leeway will courts give successor agency oversight boards to make decisions about former RDA assets?  In the case of conflicts in decisionmaking between the Department of Finance and successor agencies, will reviewing courts give greater deference to Department of Finance decisions because the department is statutorily authorized to review and modify successor agencies' decisions?  Or will courts feel compelled to defer to successor agencies because such agencies are more likely to be the local land use authorities who have typically made land use and land disposition decisions?
  
  
• What factors are most important for a sponsoring community to consider in determining whether to assume the role of a successor agency?  And what should successor agencies consider in deciding whether to retain the former RDA's housing assets?

This update contains highlights of certain key provisions of AB1X 26 and is not exhaustive.  Redevelopment agencies, successor agencies or other parties potentially affected by ABX1 26 are advised to contact counsel for more detailed and fact-specific advice.

[1, 2] These two deadlines are only two weeks apart because the California Supreme Court revised the first deadline (originally January 16, 2012) but left the second deadline (June 1, 2012) unchanged.

© 2012 Perkins Coie LLP