California’s recent redevelopment legislation has made Moody’s Investor Services and The City of Santa Clarita “moody”, potentially placing the city’s future redevelopment in greater jeopardy.

On Wednesday, Moody’s Investor Services announced it was putting all its rated California redevelopment tax allocation bonds “on review” for possible downgrade due to Governor Brown’s signing of AB 1X 26/27 in June and the resulting State Supreme Court review.

After passage of the state budget, the League of California Cities and the California Redevelopment Association filed a petition asking the California Supreme Court to overturn AB 1X 26/27 on the grounds that the legislation is an unconstitutional violation of Proposition 22, which passed overwhelmingly by voters in November 2010.

The City of Santa Clarita has joined the petition.

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Unfortunately, the legal wrangling has created uncertainty for Moody’s over the future of redevelopment agencies and the tax allocation bonds they issue.

“One of the two new laws eliminates tracking of revenues that secure these bonds and changes the flow of funds used to pay debt service. If left unchanged, this law would be significantly negative for bondholder credit. The other law would increase the financial burden on redevelopment agencies, a generally more modest, negative credit impact,” said Moody’s.

According to the League of California Cities Governor Brown’s actions are “fiscally irresponsible” and will have real-world implications for taxpayers and bond investors.

“If redevelopment bonds are downgraded, it makes it more expensive for agencies to issue debt. That hurts all state and local government entities and ultimately all taxpayers. It also undermines investors’ confidence in all California debt obligations,” said Chris McKenzie, executive director, League of California Cities.

Santa Clarita City Manager Ken Pulskamp likened the two state budget bills passed by Governor Brown as “ransom” by forcing the city to pony up $750,000.

“The first eliminates redevelopment agencies and provides a methodology for agencies to wind down the redevelopment activities and pay the remaining the debts that they have,” said Pulskamp.

The City Manager sarcastically described the second bill as “voluntary.”

“The other bill provides a voluntary program where agencies would pay to play by submitting what we refer to as ransom payments. Really it’s designed so the State can make up a $1.7 billion shortfall in their budget,” Pulskamp said.

He calls the bills “blatantly illegal.”

“They have tried to demonstrate to the public that they are balancing the budget. But when they’re balancing the budget they’re using something illegal as a way to estimate more revenue coming in,” said Pulskamp.

McKenzie emphasized the two bills’ negative impact on the economy and employment.

“Overturning these unconstitutional bills will help protect the creditworthiness of local government, and ultimately help protect our local economies by preserving redevelopment as a vital job-creating tool,” McKenzie said.

In August, The California Supreme Court agreed to hear the case and is working toward a ruling before the first payment is due January 15, 2012. The court also granted our request for a “stay” of AB 1x 26 and 27.

The court has asked for additional briefings from both sides to get more information. According to the League of California Cities the process should be wrapped up by early October. After that, the court reviews and then issues its ruling.