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Jerry Brown was elected as Governor of the State of California to balance the budget.  Unlike the Federal Government, most states are required to have a balanced budget each fiscal year.  In the wake of declining revenues and rising expenses, previous administrations opted to balance the budget by utilizing one time fixes, and extraordinary measures that may not be available in subsequent years.  While the state’s expenses can be daunting, the governor is seeking alternative means of raising revenue without raising taxes, or cutting critical programs.  To accomplish this feat and pass a balanced budget, Brown has passed two pieces of legislation.  The first will shutdown redevelopment agencies to reroute funds to the state, while the second will allow them to continue if they can fund their portion of the Governor’s requested funds.  In response, the California Redevelopment Association, The League of California Cities, and several individual cities filed a lawsuit on July 18, 2011, challenging the two pieces of legislation.

 The two pieces of legislation are titled AB1X26, and AB1X27.  AB1X26, the elimination bill, calls for the elimination of redevelopment agencies in order to reroute $1.7 billion in redevelopment agency funding to the state, to help provide essential services.  AB1X27, the continuation bill, will allow redevelopment agencies to continue to operate if they can fund their portion of the $1.7 billion the governor is requesting.  Many redevelopment agencies feel they would not be able to fulfill the continuation bill, therefore, fear they will be subject to elimination. 

 As a result of the legislation, multiple parties filed a lawsuit on July 18, 2011, questioning the legality of the legislation.  The centerpiece of their argument is Proposition 22, passed by voters in November 2010, which involved keeping tax increment revenues supporting redevelopment agencies at the local level.  The plaintiffs are arguing that AB1X26 and AB1X27 are in direct violation of Proposition 22, since the objectives of the pieces of legislation are to reroute tax increment revenues from the local level, to the state level.  Defenders of the legislation feel it is legal, and would prefer to see the funds support essential services such as education and public safety, instead of redevelopment projects.  They cite that the state created redevelopment agencies through legislative action, and the state may eliminate redevelopment agencies through legislative action. 

 While local projects will be impacted by the legislation moving forward, existing bondholders will continue to have tax increment revenue to secure their debt service.  Constitutional laws at both the State and Federal level prevent the impairment of contracts.  Tax increment revenues are legally protected to support existing bonds.  Looking ahead, if the legislation is upheld, some redevelopment projects run the risk of not being completed, and the eliminated agencies will not be able to issue additional debt.  However, agencies that are able to continue may have the option to issue additional debt, complete their existing projects, and possibly create new project areas if necessary.  The future of redevelopment agencies in the State of California is unknown, but bondholders of existing redevelopment agency debt are legally protected.

Billy Schmohl
Investment Information Coordinator

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