Earlier this month, Syncora Guarantee, a bond insurer out of New York, filed legal action against the State of California for abolishment of 400 redevelopment agencies (RDAs), like Oakdale’s.

Last year California Governor Jerry Brown signed a bill that eliminated all of California’s redevelopment agencies, which are widely used around the state. The RDAs sold bonds to fund local development projects and paid 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 to the agencies.

In December 2011, the California Supreme Court ruled that the elimination was legal and redirected the more than $1 billion in redevelopment funds to fill a state budget gap.

Syncora Guarantee, a subsidy of Syncora Holdings Ltd, believes that the loss of city RDAs are contributing to bankruptcy filings and financial problems to cities. Syncora claims that provisions of the law dissolving the redevelopment agencies and redistributing their funds has “significantly reduced” money available to repay bonds.

In May, Moody’s downgraded Oakdale’s Sewer Enterprise Revenue bond rating affecting $1.6 million in debt, citing concerns about the city’s lagging economy and uncertainty of future financial performance including the elimination of the redevelopment agency.

In its lawsuit, Syncora Guarantee claims that 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 RDAs.

When dissolved in February 2012, the Oakdale RDA still owed the city approximately $3.7 million for projects and obligations from as far back as 1997. The RDA was making yearly payments on these bonds and now the successor agency will have to make those payments on a schedule using RDA’s former funding mechanisms.

Syncora Guarantee, which provides bond insurance for debt issues by California redevelopment agencies, seeks a court order declaring the measures are unconstitutional and blocking the state from implementing them.

“We’re following it closely,” said Oakdale Interim City Manager Stan Feathers regarding the new lawsuit. “It has long-term implications to all California cities. It goes to the city’s ability to pay debt and stay solvent.”

Feathers said the loss to the city was approximately $2.2 million per year without the redevelopment agency.