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California’s Third District Court of Appeal Holds City Cannot Use Redevelopment Funds to Pay Revenue Bond Debt

The Third District Court of Appeal has held that the City of Santa Maria cannot use redevelopment funds to pay bond debt because the redevelopment agency’s tax increment funds were not pledged for repayment of the bonds. [City of Santa Maria v. Cohen ___Cal.App.5th___, Case No. C081190 (3rd Dist. 2017).]

As successor to the former Redevelopment Agency of the City of Santa Maria, the City of Santa Maria (“City”) owns parking facilities that were acquired and/or constructed with the proceeds of certain bonded indebtedness dating back to 1984. The city leases the parking facilities from the city as successor. The bonded indebtedness was most recently refinanced with bonds issued in 2003.

In May 2012, the city as successor sought approval from the California Department of Finance (the “Department”) to make payments due on the 2003 bonds from the redevelopment property tax trust fund (the “Fund”). The department determined that the fund should not be used to make the bond payments because the Health and Safety Code did not permit payments to be made on revenue bonds under the circumstances.

The city sued to challenge the department’s determination that the fund could not be used for the bond payments. The trial court agreed with the Department that because tax increment revenues were not expressly pledged to satisfy the bond payments, the city as successor was not entitled to use the fund to make the bond payments. The trial court further concluded, however, that to the extent the City’s lease payments for the parking facilities were insufficient to cover the bond payments, the City as successor was entitled to use the Fund to make the bond payments under another section of the Health and Safety code to the extent parking lease payments . The City appealed to reverse the ruling that it could use the Fund only if parking lease payments were insufficient to cover the bond payments.

The court first addressed and rejected the City’s argument that it could use the Fund to make payments pursuant to section 34183(a)(2)(C). The court held that “if the conditions in subdivision (a)(2)(B) are not satisfied, then the successor agency has no right under subdivision (a)(2)(C) of section 34183 to access the fund to make the revenue bond payments disqualified under subdivision (a)(2)(B).” Slip Op. at 11. Because the bond payments qualified as “[p]ayments scheduled to be made on revenue bonds,” the city as successor was entitled to money from the Fund to make those payments, if at all, only pursuant to subdivision (a)(2)(B) and only if the conditions in that subdivision were met.

The court then addressed the City’s argument that precluding the use of the Fund because tax increment was not pledged for the repayment of the bonds would work a violation of California’s constitutional debt limit as detailed in Cal. Const., art. XVI, § 18. The court rejected this argument as well, noting that under Health and Safety Code section 34173(e), “[t]he liability of any successor agency…shall be limited to the extent of the total sum of property tax revenues it receives pursuant to this part and the value of assets transferred to it as a successor agency for a dissolved redevelopment agency.” Slip Op. at 12. Because the City and its general fund were insulated from direct liability for the bond debt the constitutional debt limit, did not affect the decision that the City as successor was not entitled under section 34183 to use the Fund to make the bond payments.

This case is significant because it provides a clear interpretation of the Health and Safety Code and the type of payments that can be made using redevelopment property tax trust funds.

(Alex DeGood)