City Can’t Force State’s Hand on Funding

SACRAMENTO (CN) - Petaluma cannot force the state Department of Finance to spend more than $7 in bond proceeds on a planned roadway crossing under a section of U.S. Highway 101, a California court of appeals ruled.

U.S. District Judge Elena Duarte, writing on behalf of the three-judge panel, ruled on Thursday that the funding is not an enforceable obligation under a California law dissolving redevelopment agencies.

Prior to their dissolution in February 2012, redevelopment agencies disbursed a portion of property tax revenue that was returned to the state for local housing and infrastructure projects.

At the time, Petaluma had already drawn up contracts for several projects, including the Rainier project, which is intended to extend Rainier Avenue to the west of the highway by way of an underpass.

It is part of a larger project to widen Highway 101 in Sonoma County to handle increased population.

Before the dissolution, the Petaluma Community Development Commission - the city's redevelopment agency - issued $11.3 million in Series 2011 bonds "for the purpose of providing funds for Qualified Redevelopment Projects with respect to the Project Areas."

Of that amount, $7 million were to be used to finance the Rainier project.

Petaluma entered into two other agreements relating to the project. One was with the Metropolitan Planning Group for $23,000 to provide planning assistance and coordination, and the second was an agreement with URS Corporation Americas for $856,149 for the preparation of an environmental impact report.

The city later agreed with the Sonoma County Transportation Authority to provide $498,000 for plans, specifications and estimates, and up to $7 million for the construction phase of the Rainier project.

After the redevelopment agency was dissolved, Petaluma took over as successor in order to manage the projects currently underway and make payments on enforceable obligations.

Under California's dissolution law, unencumbered balances of redevelopment agency funds have to be sent to the county auditor-controller for distribution to cities, the county, special districts and school districts.

When the city tried to submit recognized obligation payment schedules for the bonds whose proceeds were dedicated to the Rainier project, the Department of Finance disapproved them.

According to the agency, the city did not properly secure its contracts through its redevelopment agency and was not entitled to the money it had set aside for the work.

Sacramento County Superior Judge Eugene Balonon denied the city's subsequent petition for a writ of mandate that would have required the Department to approve the expenditures.

Balonon found that the redevelopment agency was not a party to the agreements in question, as required under the dissolution law.

The city appealed the decision, but the court of appeals found that the city was unable to show that the bond proceeds must go toward the Rainier project.

Although a certificate for the bonds requires that the proceeds be limited for use on the Rainier project and a highway interchange project, "nothing in the language requires that the Rainier project actually be funded or constructed," Judge Duarte said.

The language "requires only that if the bond proceeds are used, they must be used for the identified projects. It does not separately mandate that the identified projects be built," the judge said.

Petaluma tried to argue that the proceeds must be used to fund the Rainier project in order to maintain the tax-exempt status of the bonds. Failure to do so would result in a severe penalty as the interest rate on the bonds would be increased or "grossed up," the city said.

The appeal court recognized that the city "may face significant expenses as a result of the Department's disapproving the Rainier project contracts as enforceable expenses that may be paid with bond proceeds," but determined that Petaluma did not establish "that the Department's action will result in loss of the bonds' tax-exempt status and implementation of the interest 'gross-up' provision."

The penalty provision does not compel the conclusion that a binding obligation was created to fund and construct the Rainer project, Duarte said.

"Rather, the penalty provision indicates the parties were cognizant of the possibility that the interest on the bonds might lose its tax-exempt status, because the bond proceeds would not be used as originally contemplated or otherwise, and provided for a remedy in that case," the judge said.

Petaluma also failed to show that failure to use the bond proceeds will result in a breach of the covenant of good faith and fair dealing or an unconstitutional impairment of contract, the court ruled.

"We recognize that the result in this case may cause financial hardship to the city and delay a worthwhile infrastructure improvement," the judge noted, but said that the case must be decided "by applying extant law."

The parties did not immediately respond to a request for comment.

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