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State Scrutinizes Successor Agency Payment Requests

Over the past month, California cities have been learning the fate of countless redevelopment projects—touching everything from graffiti-removal programs to nine-figure transit-oriented developments to billion-dollar stadiums. For many, the news is not good – especially now that the California Department of Finance has gotten into the act. 

April 15 was the deadline for successor agencies to submit Revised Obligation Payment Schedules (ROPS)—essentially lists of projects and assets that they believe should continued to be funded from the Redevelopment Property Tax Trust Fund even while the state appropriates the remainder of agencies' former tax increments. ROPS replace Estimated Obligation Payment Schedules, which have prevailed since redevelopment agencies officially went out of business Feb. 1. 

In an effort to harvest as much funding as possible for the state and other taxing agencies—and, therefore, prevent cities from appropriating more than their fair share of trust fund monies—ROPS's were to undergo several layers of scrutiny. By April 15 all ROPS's were to have been approved by each successor agency's seven-member Oversight Committee, made up of representatives from each respective RDAs' major taxing entities and audited by their respective county auditor-controllers. 

The crucial step in the ROPS gauntlet is, however, the review by the Department of Finance. AB 1X 26 requires DOF, along with the state controller, to issue the final say on the validity of items on successor agencies' ROPSs. 

DOF has taken a hard line on redevelopment since February – and, in dealing with the ROPS's, has not hesitated to call out items that, in its estimation, runs afoul of the dissolution legislation. DOF has denied tens of millions of dollars worth of projects in many cities; in some cases, denials have totaled in the hundreds of millions. DOF officials seem to be paying particular attention to the many asset transfers that occurred between cities and redevelopment agencies last year in anticipation of the end of redevelopment. 

In many cases, DOF has refused to allow high-density or transit-oriented projects to go forward – a move that makes sense in financial terms but seems to run counter to the Brown administration's urban development policy goals. And in at least one case, DOF is asking a local government to kill projects funded by federal dollars.

"We haven't done a metric in terms of this many were denied for this, this many were denied for that," said H.D. Palmer, DOF's deputy director for external affairs. But at one point last week, Palmer said that DOF had received 274 ROPS's. Of those, 46 were automatically denied over technicalities such as formatting. DOF issued letters for 164 of them and approved 29 free-and-clear.

DOF has taken on extra staff in order to comply with the required three-day turnaround once a successor agency has submitted its ROPS (many did not meet the April 15 deadline and instead turned them in late). 

DOF seems to be interpreting AB 1X 26 more conservatively than even successor agencies' oversight boards, which were expected to be conservative themselves insofar as oversight board members represent taxing entities that stand to gain from the freeing up of tax increment funds. As it turns out, many oversight boards have been sympathetic to the agendas of former redevelopment agencies. 

"They were in accord on every issue," said David Gouin, director of housing and economic development for the City of Santa Rosa. "The oversight board saw everything as adding value to all taxing entities. They did not take much time to  conclude that they should adopt the ROPS and pass along a positive recommendation to the Department of Finance." 

Those accords matter little, however, if DOF disagrees. 

"We've heard from our members that DOF is kicking back a substantial number of ROPS submittals, including ones that have been signed off on by the oversight boards," said Patrick Whitnell, general counsel for the League of California Cities.

The types of denials that DOF has issued defy easy categorization. Some automatic denials have been over paperwork problems, such as when Santa Rosa's successor agencies have listed multiple funding sources on one line of its spreadsheet. DOF has also questioned many successor agencies' administrative costs. 

Most notable is the challenge of interpreting AB 1X 26. Though legislation clearly forbade the signing of new contracts following June 28, 2011, many of the state's 400 or so successor agencies find themselves in gray areas because their respective redevelopment agencies were involved in unique, complex deals that the statute does not explicitly allow or forbid.  

Whitnell cautioned that the League has not conducted a formal survey of its members, but initially, many of DOF's objections fall into what he described as "ten different categories." Among them, the largest category is that of unexpended bond funds. 

In some cases, DOF would like successor agencies to defease bonds by paying them off early or diverting funds to other projects – and therefore paying off the bonds with other funds. Whitnell noted that many bonds cannot be redeemed early. Therefore, successor agencies would have to pay them off by taking out loans at prohibitively high interest rates. 

DOF has also questioned many agreements between cities and redevelopment agencies. AB 1X 26 forbade new agreements as if its effective date, June 28, 2011. These agreements, which often include transfers of assets, joint ventures between public agencies and private developers, and scores of variations thereof. 

One major category of obligations that the legislation seems to have missed are those that encumber future property tax funds for deals that do not lend themselves to traditional contracts. On a relatively minute scale, Omar Dadabohy, director of community development for the City of Stanton, said that the Stanton's successor agency must pay for utilities for an affordable housing complex. That obligation is implied but not explicit enough for DOF. 

"They're saying there's not going to be a contract in place," said Dadabohy. "Well, there's not going to be a contract in place. I don't have a contract with Southern California Edison. They're not being open or flexible." 

Meanwhile, in Santa Rosa, the redevelopment agency is asking DOF to approve a $120 million for the redevelopment of New Railroad Square, a major transit oriented development focused on a commuter rail line scheduled to begin service next year. TIF monies were to be used to fund affordable housing at the site and to do toxic remediation. 

"It creates just what the state, county, and city would like to have: higher density uses along a rail station," said Gouin. 

DOF has thus far refused to fund that project. 

In West Sacramento, the redevelopment of property previously owned by Sacramento-Yolo Port District is in a similar state of limbo. 

That deal that has already gone through but, like many other deals across the state, it relies on future TIF funds to complete the deal through a "performance pass-through agreement." West Sacramento Public Finance Manager Paul Blumberg said that the contract does not specify exactly how much TIF monies would be needed because the deal involves multiple funding sources and therefore it was not advantageous to indicate specific dollar amounts in the original contract – especially because no one anticipated that redevelopment would soon cease to exist. 

Blumberg said that DOF has rejected this deal because it claims that the city and port district are, effectively, one in the same, because the city appoints members to the port commission. Therefore, the deal is considered an impermissible city-agency agreement rather than a permissible third-party agreement. 

Also in West Sacramento, the master planned Bridge District redevelopment was to rely on $144 million in redevelopment funds, as well as a combination of other funding sources, including Proposition 1C infrastructure bonds. While the deal was signed before the AB 1X 26 deadline, DOF is questioning whether it actually constitutes a contract. 

"These agreements….didn't specify specific amounts going to each element because you've got a number of funding sources," said Blumberg. "All of the commitments have been made to this district that clearly describe the use of tax increment and firmly make that commitment." 

DOF has even questioned agreements that including funding from the federal government. Bakersfield Economic Development Director Donna Kunz said that while DOF has unsurprisingly questioned $4.2 million in interagency loans, it is also asking the successor agency to eliminate projects funded by three loans from the Department of Housing and Urban Development. Kunz said that the city would be submitting additional documentation in the hopes of getting that item approved. 

Generally, Whitnell said that DOF has erred on the side of questioning those requests that the legislation does not explicitly permit. 

"Our take on it, based solely on reports that we've received from our membership…is that DOF seems to be very conservative in its interpretation of AB 1X 26 to the point where in certain instance," said Whitnell. "We're not entirely certain that they're interpreting it correctly."

Some officials feel that DOF has been stretching its authority. 

"In one respect we weren't surprised," said Stanton's Dadabohy, which got $218 million worth of obligations denied. "We expected that the state would try to challenge every item and take our local tax dollars. And we were surprised by the basis for some of the comments."

Dadabohy said that part of his surprise stemmed from the fact that his staff had worked closely with DOF staff to ensure that the ROPS was prepared properly. 

This approach, said Whitnell, could mean that the process of approving and denying obligations could effectively extend for years—and get far more contentious than it has been thus far. 

  "This could lead to some legal disputes down the road with respect to the position that DOF is taking," said Whitnell. 

DOF that it is interpreting AB 1X 26 strictly and consistently. 

"We're measuring every one of these submissions by the same yardstick, which is based upon what is in AB 26," said Palmer. "Does it fall within the definition of an enforceable obligation or does it not?"  

Palmer said that successor agencies have had ample opportunity to understand what DOF's position would be on different types of obligations. As well, DOF staff members have been working directly with successor agencies on their ROPS's in an effort to avoid denials, resubmissions, and confusion. 

"Understanding that this is a very complicated process, we have been very forward-leaning in trying to get as much information out there to help successor agencies and oversight boards understand that is permissible and not permissible under AB 26," said Palmer. 

Successor agencies have been resubmitting their ROPS's to respond to DOF's comments, and they have been submitting documentation to support items that were questioned or unclear. In instances where it seems unlikely that DOF will approve an obligation, cities have been instructed to simply leave them off their revised ROPS's for the time being so that further discussions can take place. 

Henceforth, successor agencies will be submitting further ROPS's every six months. It is assumed that each iteration will include fewer obligations as former redevelopment projects are paid off and wound down. Many successor agencies prepared both 2012 ROPS's simultaneously, as the next submission date is July 1. 

For cities, each ROPS carries the fear that DOF may not approve projects that had been considered both permissible under AB 1X 26 and crucial to the city's well being. 

"We're anxious about each and every one of them," said Gouin. "Each and every item is important." 

Contacts: 

Paul Blumberg, Public Finance Manager, City of West Sacramento, 916.617.4575

David Gouin, Director of Housing and Economic Development, City of Santa Rosa, 707.543-3200

Donna Kunz, Economic Development Director, City of Bakersfield, 661.326.3765

H.D. Palmer, Deputy Director for External Affairs, California Department of Finance, 916.445.3878

Patrick Whitnell, General Counsel, League of California Cities, 916.658.8200

 

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