The city of Glendale’s recent victory over the state in an obscure lawsuit about loans it made to its defunct redevelopment agency could have major ramifications throughout California. A Sacramento Superior Court judge ruled March 16 that the former Glendale Redevelopment Agency owed the city nearly $32 million in interest payments on loans the city had made to it since 1972. The state of California had claimed that the agency owed less than $1 million. If the judge’s decision holds up, the agency would pay the city the $32 million over decades from collected property taxes that would otherwise be kept by other government entities, including the state. Patrick Whitnell, general counsel at the League of California Cities in Sacramento, said the decision, if it is not overturned on appeal or by legislative action, could boost the budgets of cities up and down the state. “Businesses have a strong interest in the cities having some certainty in their budgets,” he said. “It’s also possible the city could use (the money) in other ways, such as development projects.” The lawsuit is the latest skirmish in the longstanding dispute between the state and municipalities over money generated by the redevelopment agencies, which Gov. Jerry Brown and the Legislature dissolved in 2011 over accusations the agencies were wasting funds on bad projects. The estimated $1.7 billion in agency bank accounts, plus a part of the $5 billion the agencies generated annually in tax revenue, also helped plug the state’s huge budget deficit at the time. The lawsuit has its origin in the establishment of redevelopment agencies, usually decades ago by most cities. The idea of redevelopment was that cities would form agencies to secure financing for construction projects in blighted areas. The beneficiaries of the construction – namely the landowners in the area – would then pay higher property taxes, and these incremental tax dollars would pay the loans or bonds that financed the project, as well as provide financing for other projects. To get the process started, cities often loaned money to redevelopment agencies soon after they formed. When Glendale started a redevelopment agency in 1972 to help build the Glendale Galleria mall, it made such a loan to the organization, as well as other loans for specific projects over the years. The interest on those loans was the point of contention in the lawsuit – and some of the money could pay for future infrastructure and development projects. “We pride ourselves on having a safe, well-maintained city. If we can’t (keep) those dollars, we can’t maintain our infrastructure,” said Philip Lanzafame, economic development director for Glendale. ‘Clearly unfair’ The dispute began not long after the state dissolved redevelopment agencies in 2011, at which point cities were not allowed to begin planning new development projects using redevelopment funds. So-called successor agencies sprang up to finish projects already started or for which legal agreements had already been signed with developers or other entities. The successor agencies also were charged with collecting property taxes to pay off the loans and other obligations of the defunct redevelopment agencies. After those obligations were paid, the property tax money would then go to other taxing agencies, including cities, counties, school districts and the state. Meanwhile, cities began to look to recover both the principal and interest charges they felt were due to them from establishing the redevelopment agencies – something that had not previously been an issue as long as cities felt the agencies’ existence would extend in perpetuity. In Glendale’s case, there is no dispute over the principal amount of loan it issued to its redevelopment agency – $13 million that it will be paid back in future property taxes. As for the interest rate, Glendale’s original loan documents specified the rate as the Local Agencies Investment Fund or LAIF rate, an average of what municipalities were getting on their investments. The LAIF is variable and is published every quarter. But when the state shut down development, its Department of Finance decided the interest rate should be the LAIF at that moment, which was 0.28 percent, an extremely low rate by historical standards. Based on that rate, the successor agency owned Glendale only $974,200. But Lanzafame, who also runs Glendale’s successor agency, said that since the 1970s, the LAIF rate had gone as high as 12 percent. Cities want to be paid back using a formula that computes the interest based on the published LAIF rate for each quarter during which a loan was outstanding. “We did everything the Department of Finance asked, then they said they would use this low interest rate. The difference in that interpretation was $30 million,” he said. Assemblyman Mike Gatto, D-Glendale, arranged a meeting with the Department of Finance and city officials to negotiate a settlement last May, to no avail. Gatto agrees with the court’s logic that borrowers, even government agencies, should abide by their original contracts. “To take an adjustable rate, and then offer to pay a fixed rate – which happens to be the lowest in history – that’s clearly unfair and I don’t think it’s legal,” he said. After negotiations failed, Glendale filed suit on Aug. 14 seeking to force the Department of Finance to accept the variable interest rate. After a two hour hearing in February, Judge ShellyAnne Chang ruled in Glendale’s favor. Gillian van Muyden, chief assistant city attorney in Glendale who worked on the suit, expects the state will appeal the decision. What’s more, there is a budget trailer amendment floating around Sacramento to essentially reverse the court decision. The amendment, proposed by Brown and presented in an Assembly Budget Subcommittee meeting on March 3, would establish the most recently published LAIF rate as the cap for payment on redevelopment loans. That rate is now 0.25 percent. The proposal is currently on hold in the subcommittee. “Their goal is to amend the law to create a fixed interest rate,” van Muyden said. Gatto said news of a legislative amendment was “disturbing,” but there are lawmakers on both sides of the issue. Multiplying obligations In response to a request for comment, Brown’s office issued a statement that “the state is reviewing the final judgment and is considering its options.” While $30 million isn’t a big number in the state Capitol, if the Glendale decision applies to other cities it could add up fast. Larry Kosmont, chief executive of Kosmont Cos., a Los Angeles municipal economic development consulting firm, said 427 former redevelopment agencies are in various stages of dissolution, and many had inter-governmental loan agreements similar to Glendale’s. “There is a disconnect between those agreements and the interest rates the state had settled on. This decision could be fairly meaningful – there is a lot of money at stake,” said Kosmont, who is tracking more than 80 lawsuits in which cities have sued the state over some issue regarding the dissolution of their redevelopment agencies. At the time of dissolution, Glendale’s redevelopment agency had interests in 10 projects, plus four that were in process and slated for construction. Projects funded by loans involved in the lawsuit include the North Brand Improvement, a facelift for the commercial thoroughfare from the 134 Freeway to Glenoaks Boulevard; Marketplace Parking Structure in downtown Glendale; and Glenoaks Boulevard Improvement near Central Avenue. Lanzafame said some of the $32 million could help fund “capital improvement projects.” Kosmont noted that most cities are still very interested in economic development but they are currently occupied with the dissolution process. Meanwhile, they are using whatever tools are available to spur development. “Redevelopment was a power tool, and now we’re using hand tools,” Kosmont said. “It takes longer and it’s more complex.” Gatto said that while he favors allowing cities to receive interest payments based on the higher LAIF rate, for now he does not favor bringing back redevelopment – an idea that still has some currency in Sacramento. “I don’t mean to shock anybody, being a Democrat, but there is a free market,” he said. “I mean, are there any real estate developments in California that would pencil out without government handouts? I believe the answer is yes, at fair market rates.”