By Tim Reid
LOS ANGELES (Reuters) - Bond insurer Syncora Guarantee has filed a lawsuit to prevent California from eliminating the state's 400 local redevelopment agencies, claiming that the plan unfairly deprives bondholders of money they are owed.
The lawsuit, filed on August 1 in California Superior Court in Sacramento, is part of a rapidly expanding battle between Wall Street and California as the state, and individual cities, look at ways to avoid debt payments to alleviate an ongoing budget crisis.
Last year Governor Jerry Brown signed a bill that eliminated all of California's 400 redevelopment agencies, which are widely used around the country. They sell bonds to fund local development projects and pay them off with the increased property tax revenue resulting from the projects.
Brown's move meant that $1.7 billion in redevelopment funds would instead flow to the state, rather than the agencies, to be used for schools and other local services. The total California budget for this fiscal year is $91 billion.
Syncora Guarantee, a subsidiary of Syncora Holdings Ltd., in the lawsuit says eliminating the redevelopment agencies violates both the California state constitution and the U.S. Constitution because both have clauses prohibiting states from imposing laws that impair contractual rights. The suit says the law violates previous contracts signed by the agencies, bondholders and Syncora.
"The amount of money available to repay bonds has been significantly reduced," the lawsuit states.
An attorney for Syncora declined to comment directly on the case and referred Reuters to the complaint.
A spokesman for the California Department of Finance said the state's obligations to settle bond payments had not changed with the abolition of the redevelopment agencies.
He pointed out that the California Supreme Court upheld California's right to abolish the agencies in a ruling on December 29 last year.
The court also noted in its ruling that under the law abolishing the redevelopment agencies, "existing obligations" had to be met by successor agencies.
"There is nothing in the bill that would in any way effect those bond payments being made," the spokesman said.
California is the country's biggest issuer of municipal debt. In June the ratings agency Moody's Investors Service downgraded to Ba1 all California tax allocation bonds rated Baa3 or higher, citing increased uncertainty over timely debt repayments due to the elimination of the redevelopment agencies.
In July Fitch took various ratings actions on 62 Californian redevelopment tax allocation bonds, affirming some and cutting others.
Syncora's lawsuit speaks to wider concerns for California's bondholders and bond insurers.
Three Californian cities have filed for bankruptcy protection in the past two months, and more may follow as municipalities grapple with the legacy of years of deficit spending.
The bankruptcy cases are being closely watched by investors because they will be test cases of whether cities in financial trouble can be allowed to renege on their bond debt and pension obligations.
Last week two bond insurers challenged the eligibility of Stockton, California, to file for bankruptcy protection.
A unit of MBIA Inc said in court filings that Stockton's failure to ask for concessions from its biggest creditor, the California Public Employees' Retirement System, the largest public U.S. pension fund, before it filed for bankruptcy showed that it had not negotiated with its creditors in good faith.
In a separate filing, Assured Guarantee also contended that Stockton undermined its case by favoring Calpers.
Bondholders and bond insurers are also closely monitoring the bankruptcy filing of the southern California city of San Bernardino, which filed for bankruptcy protection last month. That filing followed on the heels of bankruptcy filings by Stockton and Mammoth Lakes.
In addition to the state of California, the Syncora lawsuit names as defendants Larry Walker, the auditor-controller of San Bernardino County; state Comptroller John Chiang, and the state's director of finance, Ana J. Matosantos.
Walker is named because he has oversight over the Southern California Logistics Airport Authority and the Hesperia Community Redevelopment Agency, both of which, Syncora says, have bonds insured by Syncora.
The case is Syncora Guarantee Inc -v- State of California, et al, Superior Court of California, Sacramento, No. 34-2012-80001215.
(Additional reporting by Karen Pierog in Chicago; Editing by Leslie Adler and M.D. Golan)