On December 29, 2011, the California Supreme Court upheld legislation that abolishes redevelopment agencies in California and struck down a companion law that would have allowed Redevelopment Agencies to continue to exist if they were to pay a certain portion of the tax increment that they collected to the State.

The Court’s decision means that approximately 400 Redevelopment Agencies throughout California will be disbanded and their obligations will be transferred to successor entities, typically local cities and counties where the Redevelopment Agencies are located.  As a result of the law, any pending projects or transactions that were not formally approved by June 29, 2011 will terminate and the validity of certain recent obligations issued or entered into after January 1, 2011 will be reviewed.

Newly constituted Oversight Boards comprised of local city and county officials have until March 1, 2012 to approve the list of enforceable obligations and the obligation payment schedules.  The lists must then be submitted to the State by April 15, 2012.  The Oversight Boards will also be charged with disbanding the Redevelopment Agencies and selling Agency assets.  Once the Redevelopment Agencies are disbanded, these Boards will oversee the distribution of taxes that would otherwise have been under the purview of the Redevelopment Agencies.

The California Department of Finance estimates that approximately $2.2 Billion out of $5 Billion in annual tax increment revenue must be set aside to pay debt service obligations for existing bonds.  The remainder of the tax increment would be distributed to local governments to ease budgetary pressures.

Under California’s Community Development Law, twenty percent (20%) of tax increment funds were allocated to low-income and moderate-income housing.  The Supreme Court’s ruling may have a significant impact on the construction and availability of affordable housing in California.

The California Redevelopment Association and the California League of Cities have already called on the California Legislature to commence work on legislation that would re-create Redevelopment Agencies, citing comments made by key California legislators that the purpose of the legislation was not to eliminate redevelopment agencies completely, but rather to limit their sizes and budgetary impacts.  However, because of the significant financial challenges facing California, it is unclear whether the State Legislature will be supportive of such an effort.

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