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March 8, 2011 > A guessing game

A guessing game

By Simon Wong

While cities throughout the state of California fully support Governor Jerry Brown's desire to close the massive $26.6 billion state budget deficit, his January proposal to dissolve redevelopment agencies (RDA) and appropriate their assets to offset $1.7 billion of State Medi-Cal and trial court costs is of deep concern. Brown acknowledges the immediate loss of funds by RDAs and cities but claims his proposal will return more monies (based on property tax formulae) to the "local level," by which is meant schools, not municipalities.

If the Governor's proposal to eliminate redevelopment from July 1, 2011, is serious, the state would freeze RDA activities and assets as soon as legislation is signed and have three years to challenge any RDA actions executed after January 1, 2011. It would seize and dispose of RDA assets, receive the proceeds and re-allocate 16 percent to cities in Alameda County.

A successor agency, possibly the city or housing authority, would assume the administrative function of the dissolved RDA which previously received only 13 percent of property taxes. Municipalities would be permitted to issue voter-approved debt, requiring a 55 percent majority, secured by increases in property taxes, for economic development.

A seven-member oversight board, to which city councils could appoint only one member, would have authority for and approval of the successor agency's decisions and operations. The County Auditor-Controller will audit each RDA by October 1, 2011, determine asset values and the amount of tax increment that would have been allocated to other agencies and entities, as if the agency existed, and have the authority to administer the funds and distribute the taxes. It will charge the RDA for these services. With effect from July 2012, the Auditor-Controller will allocate what would have been tax increment to first, schools and community colleges; second, existing debt service of the former RDA; third, limited administrative costs of the successor agency; fourth, if anything remains, to cities, counties and special districts. The California Department of Finance would oversee the entire process and the participating entities, including the oversight boards and Auditor-Controller.

However, what Brown will actually do is uncertain. Is the proposal to eliminate redevelopment a threat, posturing or simply a feasibility study of a way of helping close the state's massive budget deficit? Will unspent bond proceeds have to be used to redeem bonds before they mature? If the state refuses to recognize debt obligations between "related entities," must loans from a city's General Fund to the RDA be written off?

Nobody has seen draft legislation, so it is difficult to respond. The Senate Budget Committee recommends the Governor's proposal with no changes but the Assembly Budget Committee, which met on February 18, supports the appropriation of $1.7 billion of assets (payable to the state by June 1, 2012, as per the proposal) from California's RDAs but not their abolition. Conference Committee will hold private negotiations. The California Redevelopment Association, League of California Cities, RDAs, municipalities and other agencies are monitoring the situation closely. Some anticipated a decision on March 1 and others on March 10.

According to Northcross, Hill and Ach, financial advisors to public agencies, the most realistic options, if redevelopment is eliminated, are: Option 1- rely upon cooperative and loan agreements, anticipating recognition by the state; Option 2 (Land) - land exchange agreement (transfer of title) between RDA and city for payment of debt OR create an economic development corporation (EDC) and transfer property from the RDA; Option 3 (Financing) - securitize existing obligations between RDA and city (create a bond for existing debt) OR sell a real bond (taxable or tax exempt) on market to leverage tax increment

A non-profit EDC would have its own governing body. The city effectively transfers control of property to a third-party entity. A possibility is for council members to sit on the EDC board.

If the state does not recognize RDA obligations to the city, how can debt repayment be expedited? Could they be securitized as a bond, assigned to the city in lieu of debt with the possibility of later sale to a third party?

Projects reliant upon RDA funding for completion are at-risk but is borrowing an alternative? Seeking capital is an expensive, time-consuming, labor-intensive process and it might be more practical to do nothing at this stage.

Many RDAs and cities have pre-empted the state to try and protect their assets and revenues, entering into cooperative agreements to enable projects to continue and re-confirming loan agreements. Others have considered their options and are ready to act at a moment's notice to avoid loss.

"RDAs and cities need options they can 'unwind' should the state's redevelopment proposal come to nothing or prove far less draconian than rumors suggest," says Craig Hill, Northcross, Hill and Ach.

Each city is responding according to its own needs. According to Hill, there is no global solution for the state's 400+ RDAs. Additionally, the Governor's proposal has unintentionally pitted local agencies against each other. One city is trying to capture as much of its RDA tax increment and local school board members are accusing the RDA board of attempting to deprive the schools of funding.

"Legislators are starting to realize the proposal to abolish these agencies is very short-sighted. Once they discuss real projects, it ceases to be a theoretical issue. Their dissolution will kill 300,000 jobs and wipe out $2 billion of state and local revenues. It makes no sense for California to receive $1.7 billion then lose $2 billion," said Chris McKenzie, Executive Director, League of California Cities, when he addressed the Alameda County Mayors' Conference in February.

"Proposition 22, passed in November 2010, prohibits the state from taking funds used for transportation or local government projects and services and is an incredibly powerful instrument in our fight against the Governor's proposal. We needed to make it impossible for the state to take local redevelopment and transportation funds, property tax, sales tax, utility users' tax... Three legal experts in Proposition 22, redevelopment law, contract law and the state Constitution's Article 16 Public Finance share the opinion that Brown's proposal is blatantly unconstitutional," emphasized McKenzie.

"The state thinks it can circumvent the performance of the law by abolishing the RDAs, per se. Proposition 22 is drafted to prevent state appropriation. Most people don't know of their RDA but know their city council exists and understand mayors and council members make decisions about affordable housing, eliminating brown fields, reducing vehicular travel. Redevelopment generates tremendous benefit. We're confident of our legal position," McKenzie concluded.

The Hayward RDA and Low and Moderate Housing Fund operating budgets will be adjusted immediately to cover anticipated expenses for the rest of this fiscal year. There will not be any securitization of intra-agency loans. The City Manager/RDA Executive Director was authorized, on March 2, to take the following actions only if and when adoption of legislation threatening RDA assets and obligations is imminent - transfer title of RDA assets to the city but not as payment for debt; use the remaining RDA tax increment to settle loans owed to the city's Water and Sewer Funds ($1,872,952) and make a partial repayment ($720,000) of a loan owed to the city's General Fund; approve a $1,872,952 loan from the Water and Sewer Funds to the General Fund, to be set aside as a reserve, to facilitate the city's "transition process" should the state eliminate the RDA.

Milpitas has authorized the formation of a non-profit EDC with the city manager as executive director, or president, and whose board will consist of the City Council. The EDC's articles of incorporation would set out its business and responsibilities. The intention is for it to succeed the RDA and assume responsibility for implementing the Milpitas RDA's plans, if the RDA is dissolved, with city staff authorized to contract with the EDC for services and project development.

On February 22, the Community RDA, City of Union City and Public Financing Authority approved the issue of $40M of subordinate lien tax allocation bonds, to mature in 25 years, to generate $24M for the Project Fund and $6M for the Housing Fund. The decision to proceed was taken in light of the uncertainty surrounding the Governor's proposal and the RDA's intention to raise funding at some point in the future to move projects forward, particularly the Intermodal Station Transit-Oriented Development Project, viz. design and construction of the Public Building in the Station District and/or design and construction of the pedestrian connection from the back of Cheeves Way to the 25-acre R&D parcel and Phase 2 of Mid-Peninsula Housing Coalition's (Mid Pen) affordable housing project.

Union City City Council/RDA will consider four assignments of RDA interests to the city on March 8. First, an Exclusive Negotiating Rights Agreement with Green Valley Corporation, dba Barry Swenson Builder. Second, leases and rental agreements Third, execution of a Public Improvement Agreement with the RDA and city and authorizing the use of tax increment funds for specified public improvements. Fourth, an Option and Purchase and Sale Agreement (Phase 2 parking; public parking) and an Option, Purchase and Sale, and Right of First Offer Agreement (retail/commercial space and parking) for the Mid Pen Station District Housing development.

Fremont City Council/RDA rejected staff's recommendation, on February 22, that the RDA purchase the city's former corporation yard site on Sequoia Road for approximately $8M and a one-acre parcel on Central Avenue (next to Fire Station 6) for $1.72M. The transactions would have been funded by RDA Affordable Housing monies. According to the discussion, should the Governor's proposal transfer such funds to the county housing authority, the latter has indicated it would return the funds to the city.

Newark has two redevelopment areas, established in 2001 and 2010, and bonds have not been issued for either. There is little tax increment. Consequently, Newark City Council/RDA has not felt it necessary to take action but remain concerned by the proposal to abolish the RDA. Redevelopment is considered important for the city's future. Without it, there will be adverse impacts. Although Newark has an EDC, the existing RDA board/City Council is considered the more likely "successor agency," if the RDA is dissolved. Newark believes the League of California Cities will prevail in its fight against the state.

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