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January 3, 2012

The California Supreme Court rendered an opinion on redevelopment agency legislation on December 29, 2011.  In their statement, the Court upheld ABX1 26, the redevelopment agency elimination bill, and struck down ABX1 27, the redevelopment agency continuation bill that would have allowed redevelopment agencies to continue if they paid a substantial fee to the state.  ABX1 26 was upheld on the basis that legislation was used to create redevelopment agencies, therefore legislation may be used to eliminate redevelopment agencies.  ABX1 27, however, was struck down on the basis that California voters passed Proposition 22 in November 2010, which is designed to keep local funds local.  Paying a fee to the state would have been in violation of Proposition 22.

The Department of Finance of the State of California has stated that pledged revenues will continue to be available to make redevelopment agency bond principal and interest payments when due.  Redevelopment agency bonds are secured and payable from tax increment revenues, which are derived from property tax revenue generated from a given project area over the base assessed value, and allocated to the redevelopment agency.  State and Federal Constitutional laws prevent the impairment of contracts, and redevelopment agency bond official statements clearly pledge tax increment revenue to the payment of principal and interest when due.  Currently, annual tax increment revenue across all California redevelopment project areas stands at approximately $6.7 billion.  Annual debt service across the respective redevelopment agency debt stands at approximately $5 billion.  What comes into question is where the remaining $1.7 billion in tax increment revenue will be allocated, and what will come of the few redevelopment agency project areas where pledged revenues are insufficient to cover debt service.

As currently scheduled, a successor agency will be created to administer future redevelopment agency debt service obligations, on or around March 1, 2012.  The tax increment revenue for a given project area will be set aside in a special fund for the benefit of bondholders.  Many cities have stated that they will continue to fight the legislation, and hope to engage in redevelopment activities in the future.  They believe the agencies create jobs, improve communities, and provide for affordable housing.  The State counters believing they may use the excess $1.7 billion above debt service for State budget items, even though that would be in violation of Proposition 22.  The Court’s decision established certainty that bondholders will be protected, and the State does have the ability to eliminate redevelopment agencies.  However, uncertainty continues to loom regarding the future of redevelopment activities, and where tax increment revenues in excess of debt service will be allocated.

This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.

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