response letter from Rutan & Tucker.

A. Patrick Muñoz
Direct Dial: (714) 662-4628
E-mail: pmunoz@rutan.com
April 19, 2012
Kate Vvedenskaya, Analyst
Department of Finance
915 L Street
Sacramento, CA 95814
Re:
City of Twentynine Palms - Final ROPS
Dear Ms. Vvedenskaya:
Our office represents the City of Twentynine Palms (“City”) in its capacity as the
Successor Agency (“Successor Agency”) to the former Twentynine Palms Redevelopment
Agency (“RDA”). The Successor Agency was established by the dissolution of all
redevelopment agencies on February 1, 2012, as a result of the California Supreme Court
decision in California Redevelopment Association v. Matosantos (2011) 53 Cal.4 th 231, which
upheld Assembly Bill 26 from the 2011-12 First Extraordinary Session of the California
Legislature (“ABx1 26”) as not violating Article XIII, Section 25.5(a)(7) and Article XVI,
Section 16 of the California Constitution. This letter is submitted to you, along with supporting
documents, in response to your email dated April 17, 2012, at 9:09 a.m., sent to Mr. Richard
Warne, requesting applicable supporting documentation for the following items listed on the
Oversight Board-approved Recognized Obligation Payment Schedule (“ROPS”):
• Item #1
• Item #2
• Item #9
• Item #11
• Item #12
2011 Tax Allocation Bonds Series A
2011 Tax Allocation Bonds Series B
Contract for Engineering Services
Project Phoenix – Community Center
Project Phoenix – Affordable Housing
With respect to Items #1, 2, 11, and 12, the documents all relate to repayment and use of
bond proceeds that have been issued and obtained pursuant to law. On March 22, 2011, the City,
RDA, and Twentynine Palms Public Financing Authority (“Financing Authority”) approved
resolutions that resulted in the issuance of the following debt: Twentynine Palms
Redevelopment Agency Tax Allocation Bonds, 2011 Series A (Four Corners Project Area) in the
amount of $8,575,000 (“Series A Bonds”), and Twentynine Palms Redevelopment Agency
Housing Tax Allocation Bonds, 2011 Series B (Four Corners Project Area) in the amount of
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Kate Vvedenskaya, Analyst
April 19, 2012
Page 2
$3,000,000 (“Series B Bonds”). (The Series A Bonds and Series B Bonds are collectively
referred to as the “Bonds”). Repayment of the Series A Bonds was secured by the RDA’s nonhousing
tax increment funds, and repayment of the Series B Bonds was secured by the RDA’s
“20% Set-Aside” housing tax increment, commonly known as “Low and Moderate Income
Housing Funds,” which must be used to increase and improve the City’s supply of low- and
moderate-income housing.
The Bonds, both the Series A Bonds and Series B Bonds, are designated tax-exempt.
The Bonds were sold on April 19, 2011. The final maturity date for the Bonds is
September 1, 2042, and the first optional call date is September 1, 2021.
Pursuant to two Indentures of Trust dated March 1, 2011, one agreement for the Series A
Bonds and the other for the Series B Bonds (collectively, the “Indentures”), between the RDA
and U.S. Bank National Association, as trustee, the proceeds from the sale of the Bonds, after
deducting costs of issuance and coverage for reserve accounts, were transferred and deposited in
the “Project Fund” established under the Indenture for the Series A Bonds, and into the “Low
and Moderate Income Housing Fund” for the Series B Bonds. (See, Indenture of Trust for Tax
Allocation Bonds, 2011 Series A, § 3.04; Indenture of Trust for Housing Tax Allocation Bonds,
2011 Series B, § 3.04.) Based on information from Successor Agency staff, trustee U.S. Bank
National Association had, on March 31, 2012, $7,412,014 in proceeds from the Series A Bonds
and $2,565,674 in proceeds from the Series B Bonds, not including amounts in the reserve funds.
The proceeds from the Series A Bonds and Series B Bonds are collectively referred to in this
letter as the “Bond Proceeds.”
The Official Statement for the Bonds, dated April 19, 2011, issued by Wedbush
Securities, Inc. (“Official Statement”), provides that proceeds from the Series A Bonds are to be
used to fund public improvements related to Project Phoenix and other projects in the RDA’s 5-
Year Implementation Plan, and that proceeds from the Series B Bonds are to be used to fund
housing activities included in the RDA’s 5-Year Implementation Plan for the Project Area (i.e.,
Four Corners Project Area, or “Project Area”). (Official Statement, p. 13.)
The current and applicable 5-Year Implementation Plan includes Project Phoenix (which
itself is in the Project Area), related public improvements (such as the community center and
waste water management facility), and new affordable housing development within the Project
Area. (5-Year Implementation Plan, pp. 16-17, 28.) 1
1
A copy of the current 5-Year Implementation Plan, incorporated by reference into the Bond
documents, is included along with the materials accompanying the response from the Successor
Agency.
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Kate Vvedenskaya, Analyst
April 19, 2012
Page 3
Furthermore, Section 5.13 of the Indenture for the Series A Bonds includes the following
covenant:
The Agency hereby declares its intent, and so covenants for the
benefit of the owners, to utilize the proceeds of the Bonds solely
and exclusively for the elimination of blight and lawful and proper
redevelopment purposes and projects within the Project Area, or
which provide direct benefit to the Project Area, in that the owners
are provided a pledge and lien upon tax increment generated in the
Project Area and the increase in tax increment produced by the
expenditure of the proceeds of the Bonds for the redevelopment
purposes within or for the benefit of the Project Area produces
clear and material benefit to the security and credit of the owners.
Additionally, Section 5.12 of the Indenture for the Series B Bonds includes the following
covenant:
The Agency shall take all actions necessary to assure the exclusion
of interest on the Bonds from the gross income of the Owners of
the Bonds to the same extent as such interest is permitted to be
excluded from gross income under the Tax Code as in effect on the
Closing Date.
The covenants cited above are only a sampling of the many terms and conditions that
dictate how the Bond Proceeds are to be used, and how the Bonds’ tax exempt status is to be
preserved. In short, these covenants require that the Bond Proceeds be utilized for projects
indentified in the Project Area, including specifically Project Phoenix. These covenants in the
Bonds are to be honored so that the Successor Agency can comply, not only with the language in
ABx1 26, but also with the intent of the Legislature as expressed in:
• Health and Safety Code section 34174(a), which provides that “nothing in this
act [ABx1 26] adding this part [Part 1.85 of Division 24 of the Health and Safety
Code] is intended to be construed as an action or circumstance that may give rise
to an event of default under any of the documents governing the enforceable
obligations.” [Emphasis added.]
• Health and Safety Code section 34175(a), which provides, “It is the intent of this
part [Part 1.85 of Division 24 of the Health and Safety Code] that pledges of
revenues associated with enforceable obligations of the former redevelopment
agencies are to be honored. It is intended that the cessation of any
redevelopment agency shall not affect either the pledge, the legal existence of
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Kate Vvedenskaya, Analyst
April 19, 2012
Page 4
that pledge, or the stream of revenues available to meet the requirements of the
pledge.” [Emphasis added.]
Health and Safety Code section 34171(d), added by ABx1 26, defines “enforceable
obligations” to include, among other types of agreements and arrangements, bonds, including
required debt service, reserve set-asides, and any other payments required under the indenture or
similar documents governing the issuance of outstanding bonds.
It is beyond doubt that the Bonds issued by the RDA are “enforceable obligations” under
ABx1 26. As such, the City, as Successor Agency, has the duty to perform and honor the
covenants required by the Bonds. (Health & Saf. Code § 34177(c) [“Successor agencies are
required to . . . Perform obligations required pursuant to any enforceable obligation.”].)
Even more, ABx1 26 includes additional mandatory provisions applicable to the Bonds.
For instance, successor agencies must “maintain reserves in the amount required by indentures,
trust indentures, or similar documents governing the issuance of outstanding redevelopment
agency bonds.” (Health & Saf. Code § 34177(b).) Additionally, successor agencies are required
to:
Continue to oversee development of properties until the contracted
work has been completed or the contractual obligations of the
former redevelopment agency can be transferred to other parties.
Bond proceeds shall be used for the purposes for which bonds
were sold unless the purposes can no longer be achieved, in which
case, the proceeds may be used to defease the bonds.
(Health & Saf. Code § 34177(i) [Emphasis added].)
It is a long-standing canon of statutory construction that the word “shall” is construed as
“mandatory” (as opposed to “discretionary”). (Tarrant Bell Property, LLC v. Superior Court
(2011) 51 Cal.4th 538, 542, quoting Common Cause v. Board of Supervisors (1989) 49 Cal.3d
432, 443[“we ‘ordinarily’ construe the word ‘may’ as permissive and the word ‘shall’ as
mandatory, ‘particularly’ when a single statute uses both terms”].) Accordingly, if the purposes
for which bonds were sold can be achieved, the bond proceeds must be used for those purposes.
Such is the situation with the Bond Proceeds here. The express purpose of the Bonds, as
explained in the Indentures and Official Statement, is to fund redevelopment and affordable
housing activities in the Project Area, with specific reference to Project Phoenix and public
improvements related thereto.
The Department of Finance (the “Department”) appears to have recognized this type of
situation with Bonds such as those identified here. In the Department’s document available on
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April 19, 2012
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its Internet Website, entitled “Redevelopment Agency Dissolution Under ABx1 26 – Frequently
Asked Questions,” the Department notes:
Specific situations involving bonds that have been sold but for
which the specific things to be done with the bond proceeds are not
obligated through contracts for performance will have to be
reviewed to see if obligations to bond holders require such
contracts to be made by successor agencies or whether bonds must
be defeased.
As discussed above, the obligations to the bond holders expressed by the covenants in the
Indentures and Official Statement (and other documents provided) require such contracts for the
use of the Bond Proceeds so that public improvements related to Project Phoenix and affordable
housing in the Project Area can be completed. In other words, the purposes for which the Bonds
were sold can – and must – still be achieved. (Health & Saf. Code § 34177(i).)
Conversely, the ability to realistically defease the Bonds cannot occur, due to the
September 1, 2021 first optional call date. Moreover, simply transferring the Bond Proceeds to
the county auditor-controller for disbursement to other taxing entities (Health & Saf. Code
§ 34177(d)) is not an option, due to the tax-exempt status of the Bonds.
The City Attorneys’ Department for the Post-Redevelopment Working Group of the
League of California Cities issued “Questions & Answers” dated March 23, 2012, concerning,
among other topics, bond proceeds. In that Q&A, the guidance provides:
Q: Should the Successor Agency not remit bond proceeds in particular
instances
A: The general consensus is that tax-exempt bond proceeds should not be
remitted to the A/C [auditor-controller] because the use -- distribution to
other taxing entities -- could be inconsistent with the authorized use of tax
exempt bonds, leading to serious consequences under federal law.
Our office agrees. The Indentures have covenants that require the RDA to maintain taxexempt
status of the Bonds for the benefit of the bond holders. As long as the Bond Proceeds are
used for their covenanted purposes (i.e., public improvements related to Project Phoenix and
affordable housing in the Project Area), they should remain tax-exempt. (See Official Statement
– LEGAL MATTERS – Tax Matters, pp. 47-48.) However, the issuing agency’s failure to
comply with the bond covenants could result in the Bonds losing their tax-exempt status, which
would have significant tax consequences for bond holders. (Ibid.)
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Kate Vvedenskaya, Analyst
April 19, 2012
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For all of the reasons stated above, the Successor Agency and our office submit to the
Department that the Bonds (which includes all documents relating thereto) are “enforceable
obligations” under ABx1 26, and pursuant to multiple covenants, the Bond Proceeds must be
used for purposes identified in the Bonds. As such, Items #1, 2, 11, and 12 should remain on the
ROPS as enforceable obligations.
The same is true for Item #9, a Contract Services Agreement for Pre-Engineering and
Environmental Services for the Highway 62 Improvement Project between the City and Dokken
Engineering (“Dokken Services Contract”). This is an agreement entered into on October 13,
2009, for work done in connection with publicly owned improvements, namely street widening,
adding curb, gutter and sidewalk improvements, and providing drainage facilities along State
Route 62 from Encelia Road to Split Rock Road, which runs through and adjacent to the Project
Area. The publicly owned improvements required compliance with the California
Environmental Quality Act (“CEQA”), specified requirements by CalTrans, and, because federal
funds were anticipated to be used, the National Environmental Policy Act (“NEPA”). (Dokken
Services Contract, Exhibit A, p. 1.) Additionally, the publicly owned improvements would be
funded, in part, by federal funding once engineering and environmental clearance had been
obtained. (Id.) In accordance with Health and Safety Code section 33445, the applicable law at
the time of the contract, the RDA allocated up to $250,000 to assist in payment of these
engineering and environmental study services needed to comply with CEQA and NEPA. (See,
Reso. No. 09-05; Reso. No. RDA 09-01; Staff Report for Dokken Services Contract, pp. 1-2;
Oct. 13, 2009 Meeting Minutes, Item #10.3.) 2 Under ABx1 26, “enforceable obligations”
include payments “required by the federal government,” “preexisting obligations to the state,”
and/or required by “obligations imposed by state law.” (Health & Saf. Code § 34171(d)(1)(C).)
Moreover, as set forth in the relevant documents approving the Dokken Services Contract
(provided along with this letter), payments for the services under the Dokken Services Contract
were to be funded by the RDA. As such, the RDA has the obligation to pay the remaining costs
incurred by Dokken for work completed under the contract.
In closing, our office sends this letter to clearly delineate the Successor Agency’s position
concerning Items #1, 2, 9, 11, and 12 on the ROPS as being obligations that are enforceable and
are to be honored with the source of payment identified in the ROPS. Information contained in
this letter, and any and all further responses and information that may be provided to the
Department, are being provided as an accommodation to your office. The City, acting in its
capacity as the Successor Agency, does not intend to waive any constitutional, statutory, legal, or
equitable rights, and expressly reserves any and all rights, privileges, and defenses available
under law and equity, including but not limited to any causes of action under Article I, Section
2
A copy of Resolution No. 09-05, Resolution No. RDA 09-01, the staff report, and meeting
minutes, are included along with the materials accompanying the response from the Successor
Agency.
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Kate Vvedenskaya, Analyst
April 19, 2012
Page 7
10 of the United States Constitution and Article I, Section 9 of the California Constitution, for an
unconstitutional impairment of contracts caused by any action of the Department or any other
State agency that impairs the Successor Agency’s ability to honor the covenants in the
enforceable obligations.
Thank you for your consideration.
RUTAN & TUCKER, LLP
APM:lr
A. Patrick Muñoz
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