The Fitch Ratings service on May 1 announced it was ready to take a sunnier view of tax allocation bonds (TABs) administered by successor agencies in California's redevelopment dissolution. The changed view could affect both the sale prices of existing bonds and the interest rates available to successor agencies when they refinance their existing debt with refunding bonds.
The announcement said, "Fitch will now consider California TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service, as applicable. These changes likely will result in a moderate number of California TAB upgrades."
It said that in the first days after California dissolved its redevelopment agencies, the service "considered the legislation's negative effects on credit quality, but excluded potentially positive effects." But on review, analysts had found two things to like about the successor agencies' wind-down role. First, if the successor agency's 20% housing set-aside of the tax increment is more than enough to make currently due payments on housing-related bond debts or other "enforceable obligations", then the overflow can now be used to pay off non-housing bonds. Second, because successor agencies are barred from increasing their bond debt, no additional liens are being created to compete for funds, hence "All TAB liens have been effectively closed."
Susan Bloch, a partner with Burke, Williams and Sorensen who works on redevelopment wind-down, housing, and public finance issues, explained that since the existing housing set-aside funds would be either already redistributed or already encumbered, the new Fitch view mainly addressed the continuing influx of tax-increment funds. Referring to the semi-annual Recognized Obligation Payments Schedule (ROPS) process, she said, "Now all the money is in one pot and it gets allocated to the successor agencies twice a year to pay for enforceable obligations including the debt service."
Property tax specialist Marty Coren of HdL Coren and Cone said housing construction would not be affected because the 20% housing requirement was already lifted by the dissolution of Redevelopment.
For Tom Hart of the California Redevelopment Association, the new policy was "bittersweet because if the legislation... would've been more defining, Fitch wouldn't have had to downgrade in the first place and a lot of these issues about the bonding would've not materialized." Noting the large number of lawsuits over post-redevelopment financial disputes, he said the dissolution legislation "really put successor agencies in a bad position, and then you have the Dept of Finance making administrative decisions that could've been perceived as outside the legislation, and that's why there were so many lawsuits."
At least one effect of the new Fitch policy is already visible: on May 2, citing the new policy among other factors, Fitch upgraded a subordinate bond issue by Oakley Redevelopment Agency from 'BB' to 'BB+' and changed its outlook from 'Negative' to 'Stable', while confirming existing ratings and outlooks for some of the city's higher-rated Redevelopment TABs.
The authors of the Fitch report, analysts Scott Monroe and Yueping Liu, noted in an interview that the major benefit of savings on refunding bonds would flow to the overlapping taxing entities, which receive tax increment funds not needed for the successor agencies' approved "enforceable obligations". Since the only purpose of a successor agency is to wind down and close out redevelopment functions, they said it would be hard to define what benefit a successor agency would receive.
Liu said the change probably wouldn't speed up the wind-down process unless it generated significant savings on a bond issue's interest obligations, or unless the debt was structured to be paid off faster.
On the other hand, Monroe and Liu said issuers that had lower ratings might see a benefit in reduced insurance costs.
Coren pointed to a separate new interpretation that could also affect ability to repay bonds. A DOF letter, dated April 2, suggested that the end of Redevelopment had also brought an end to a limitation that applies in project areas created before the AB 1290 reforms took effect in 1994. In those older project areas, bonds have been subject to limits on the total amounts of tax increment income that may be collected from project areas. According to the April 2 letter, the DOF "advises county auditor-controllers to not apply tax increment caps to bar payment of Finance-approved enforceable obligations" if those caps had not been reached as of Redevelopment's dissolution. DOF's interpretation, if correct, removes one possible barrier to paying off bonds for older project areas.
However, Coren wrote that "The release of the Dept. of Finance letter triggered a discussion of the issue by the [California Redevelopment Association] Technical Committee. The bond counsel members of the committee expressed reluctance to rely on the Finance letter as it has no force in law." Some question remained whether a successor agency might still need to set aside funds in escrow to be sure of meeting payments as of scheduled deadlines.
The Fitch analysts said they rated refunding bonds issued by the Morgan Hill successor agency in November. They mentioned a privately placed issuance and another in progress that they could not discuss by name, and noted that Standard & Poor's has rated several more.
Several large municipal successor agencies have now issued refunding bonds, including a pooled effort by Los Angeles County to coordinate several city-level successor agencies' reissues.
- BusinessWire press release on Fitch TAB ratings: http://dlvr.it/5XxSbc
- BusinessWire announcement on Oakley: http://dlvr.it/5YRjBC
- On the LA County bond refunding program: http://ceo.lacounty.gov/RDD/122413%20Program%20Update.pdf ; http://ceo.lacounty.gov/rdd/Bond%20Refunding%20Program.pdf
- The DOF April 2 letter is attached.