Bond Insurer Sues to Undo Redevelopment Dissolution

21 Aug

Wall Street has weighed in on the dissolution of California’s former redevelopment agencies. Earlier this month, bond insurer Syncora Guarantee sued the state, claiming that the shuttering of 400-odd redevelopment agencies unfairly deprives bondholders of the money that they are owed. The insurer claims that the law violates both the California and U.S. constitutions, which each contain provisions that prohibit states from imposing laws that impair contractual rights.

In response to the suit, the California Department of Finance notes that the law includes explicit protections for bondholders and parties who entered into legitimate contracts or agreements with the former redevelopment agencies. It’s also hard to ignore the fact that the California Supreme Court has already affirmed the Redevelopment Dissolution Act. Still, Syncora contends that the law’s vagaries and the limitations it placed on funds have left local governments with fewer options to pay their debts.

The suit is just the latest in a series of actions taken by Wall Street firms that are growing increasingly unsettled by the state’s financial situation. Bond insurers have already challenged Stockton’s eligibility for seeking bankruptcy protection and creditors are closely monitoring the fallout from the beleaguered city of San Bernardino’s declaration of bankruptcy. Earlier this year, Moody’s downgraded the ratings for $11.6 billion worth of California tax allocation bonds shortly after the California Supreme Court sounded the death knell for the state’s redevelopment agencies.

In spite of some positive signs from investors, California’s state and local governments still have some work to do. There’s been plenty of finger pointing about who’s to blame for the state’s ill fiscal health. Let’s hope that this blame game evolves into a dialogue that works to identify how to finally address the structural deficiencies that got us into this mess in the first place.

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