Two lawsuits against the State of California allege that the adoption of AB1X26 in 2011 violates both the California and the United States Constitutions. AB1X26 eliminated all of California’s approximately 400 redevelopment agencies and required successor agencies, typically the municipalities where the redevelopment agencies were located, to wind down redevelopment activities. TIF fund balances not pledged to the repayment of outstanding obligations were to be transferred to the State for redistribution to other local taxing bodies. Any pending projects or transactions that were not formally approved by June 29, 2011 were terminated and the validity of other recent obligations issued or entered into after January 1, 2011 was reviewed. In passing this law, the legislature terminated the State’s TIF program and put the payment of outstanding obligations for both on-going and completed projects in jeopardy.
The two lawsuits, Syncora Guarantee Inc. v. State of California and City of Cerritos v. State of California, are both based on the theory that the United States Constitution and the California Constitution prohibit legislation that impairs existing contracts and that AB1X26 deprived bondholders of money owned to them under existing contracts. AB1X26 requires payment of redevelopment bonds to be made out of general property tax coffers, with the same priority as all other claims against the property taxes. However, the redevelopment bonds were issued based on assurances under the California Constitution that all property tax increment generated in a particular area would be used for redevelopment activities within that project area.
A finding by the Court that AB1X26 violates the contractual impairment clause of either the California or the United States Constitution may result in the entire act being struck.
The California Supreme Court previously upheld the constitutionality of AB1X26 in California Redevelopment Association v. Matosantos however the issue of impairment of existing contracts was not raised in the Matosantos case.