October 9, 2012 / 12:25 PM / 5 years ago

RPT-Loss of redevelopment adds to pain for California cities

5 Min Read

By Jim Christie

SAN FRANCISCO, Oct 8 (Reuters) - California cities face not only familiar financial challenges but new ones posed by the loss of redevelopment agencies at a time of growing concern about strained budgets.

Three of the state's 482 cities have filed for Chapter 9 bankruptcy protection from creditors this year, raising eyebrows in the $3.7 trillion U.S. municipal debt market. City officials are determined to keep the number low but say a law dissolving redevelopment agencies is complicating their work.

California cities for six decades used redevelopment agencies to tackle blight and fund housing projects. But they also hoarded property tax revenue raised within redevelopment zones, prompting state leaders last year to close some 400 of the agencies and funnel that revenue to other local agencies California has been propping up.

Local officials have not forgiven the move. They see it as a raid on their coffers as local "successor" agencies must pay redevelopment agency debt with a fraction of tax-increment revenue that redevelopment agencies once claimed for themselves.

"The state took money from us to deal with their mess and we got the trickle down," said David White, finance director for Fairfield, California.

Fairfield's redevelopment agency used to gross $30 million to $35 million a year in tax-increment money, White said. Now he expects $4.5 million to $5 million a year of that revenue.

Anger, Pain, Confusion

Local officials complain they are having to wind down redevelopment while having to tend to wobbly general funds.

"The pain has been different from city to city, but it's been very unpalatable," said Chris McKenzie, executive director of the League of California Cities, which is suing the state over some provisions of redevelopment's dissolution.

Officials in Atwater, for example, say losing redevelopment is one reason their city may face Chapter 9 bankruptcy. Last week they approved a fiscal emergency declaration that could be used put the Central Valley city of 28,000 on the fast track to becoming California's fourth city to file for bankruptcy this year, following Stockton, San Bernardino and Mammoth Lakes.

The law scrapping redevelopment has also raised concerns about bond payments.

Grover Beach was short of tax increment revenue when the law took effect, so it tapped bond reserves for a redevelopment debt payment. The other option was to use general fund dollars, but that would have risked losing them as the law ruled out such loans, said Robert Perrault, city manager for Grover Beach.

"If redevelopment had not been eliminated, we would have felt comfortable using the general fund because we know it would have been paid back in a matter of months," Perrault said.

Standard & Poor's Ratings Services responded in February to the draw on the reserves by lowering tax allocation bonds issued by Grover Beach's development agency to 'BBB' from 'BBB-plus'. S&P lifted its outlook on the debt to stable in July.

"It's taken a few months to sort all this out," Perrault said, noting his seaside city of 13,100 made its August redevelopment debt payment in June and has refilled its reserve.

Tehachapi, population 14,000, also tapped reserves for a redevelopment debt payment due to a delay in its tax-increment allocation. "There's been confusion at every level," said City Manager Greg Garrett.

Inheriting Trouble

In Monrovia, the agency taking on the city's redevelopment agency's work missed an $11.75 million note payment in June. The debt had been routinely refinanced prior to the law dissolving redevelopment. The law was, however, unclear as to whether that could go on so Monrovia held off on the note payment.

"We had to put up a disclosure basically saying we were going to go into default," said Mark Alvarado, finance director for the city of 37,000 residents in the foothills of the San Gabriel Mountains east of Los Angeles.

Legislation has since been approved to allow refinancings and Monrovia aims to refinance its notes. But it faces another redevelopment challenge - a lawsuit by a property developer inherited from its redevelopment agency. Citing the suit, S&P last month lowered Monrovia to 'BBB-plus' from 'A'.

Nearby Azusa also inherited trouble from its redevelopment agency as it had loaned money to the agency to buy property. Now the city of 46,000 residents must sell the properties, and likely at a loss, said City Manager James Makshanoff.

In response to complaints by local officials, the state Senate's leader aims to reintroduce a bill that would revive local tax-increment authority. Governor Jerry Brown recently vetoed a previous bill, saying he would reconsider it after tallying savings to the state from redevelopment's dissolution.

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