Petaluma to take redevelopment fight to state Supreme Court

After losing an appeal in July, Petaluma is taking its legal fight to recover proceeds from $11.4 million in bonds issued under its former redevelopment agency in 2011 to the California Supreme Court.

In a special closed session on Monday, the Petaluma City Council voted to petition the court to hear its case over funding that included support for two major infrastructure projects - $3 million for the new Old Redwood Highway interchange and $7 million for the planned Rainier Avenue interchange and crosstown connector.

The bonds were issued prior to California’s dissolution of redevelopment agencies in 2011. Yet the state has barred the city from using the proceeds due to technicalities in the dissolution law, a policy that was upheld by the California Third District Court of Appeals in July.

As the money sits unused in a trust, the court ruled that the city, acting as successor to the former redevelopment agency, is still on the hook to pay interest on the bonds, shaving off hundreds of thousands of dollars in annual property tax revenue that would otherwise be dispersed among school districts, fire protection districts, the state, city and other taxable entities.

“It’s just an utter waste,” said City Attorney Eric Danly, expressing frustration with the situation. “We’d hoped for more recognition from the court of appeals on the practical impact of their decision.”

The case centers largely on whether the city was contractually obligated to use the bond revenue for the two road projects, which would have allowed the use of those funds past the dissolution of the former redevelopment agency. The appeals court ruled that was not the case, and reasoned that, unlike the “expressed agreement to pay principal and interest,” there was no binding mandate for the identified projects to be built.

The city argued that it was indeed obligated to use the revenue for “qualified redevelopment projects” like the Rainier connector, and that a failure to use the bonds as intended could jeopardize their tax-exempt status and potentially lead to additional expenses costing around $1.8 million.

Petaluma’s case was the first of several redevelopment cases over bonds issued in 2011 to be decided in the state appeals court, Danly noted.

If the city followed the current payment schedule that ends in 2024, $4.2 million in property tax revenue would go to bondholders as interest payments, said Bill Mushallo, finance director for the city of Petaluma. JPMorgan Chase & Co. currently holds the bonds in its portfolio, having purchased the entire issue in 2011.

Legislation passed in 2012 made it harder for successors of redevelopment agencies to gain access to bond revenue issued after 2010, said Leah Castella, a partner with the law firm Burke, Williams & Sorensen, which is working with Petaluma and several other California cities on redevelopment-related cases. Lawmakers were concerned that a wave of redevelopment agencies would rush to issue bonds in the final stretch before redevelopment was eliminated, depriving the state of anticipated revenue.

Yet Castella said the Rainier project and others were specifically the kind of efforts that redevelopment agencies were created to support, based on the belief that those large-scale investments would spur further economic activity and boost the state’s coffers in the long-term.

“I don’t find it a particularly compelling argument,” she said. Redevelopment agencies were created to give municipalities a way to siphon off property tax revenue for urban renewal projects, but came under scrutiny as the state faced dire economic conditions in the recent recession.

Petaluma chose not to appeal its loss in an earlier redevelopment case over $4 million in bond funding for the new East Washington Street interchange. The city funded that portion through developer traffic impact fees, which are levied on large, traffic-generating developments.

Those funds were also used to help fund the $40.9 million Old Redwood Highway interchange project, which was completed earlier this year.

The focus now turns to how the 2011 bond issue might go to support the planned Rainier project. Impact fees are expected to be sufficient to provide the $60 million needed to build the connector between North McDowell Boulevard and Petaluma Boulevard North without the interchange, while the full interchange, which faces planning hurdles with Caltrans due to its proximity to other interchanges, would bump that cost to around $120 million.

With expectation that a sales tax measure to help fund Rainier and other infrastructure needs will soon be on the ballot in Petaluma, Mayor David Glass said continuing the current legal fight over the redevelopment funding to the state supreme court was a prudent step.

“The outcome of this case will to some degree determine the tax needed to do that project,” he said.