PREFACE
Our basic charge is to examine the existence of projected General Fund deficits. This report mainly addresses the fact that the Redevelopment Agency (RDA) owes a large debt to the City and recommends the best way to achieve repayment. We believe that the City should receive such payment as soon as possible as one way to at least partly offset the deficits..
While it is still too early for us to provide detailed comments on the subject of a possible deficit in the General Fund, it has been shown to us that significant capital expenditures are needed. It seems obvious to us that a City-wide consensus would be needed to get the necessary 67% voter approval of any proposed tax or bond measure to pay for these or other proven needs. A necessary condition to build this consensus is the proof to the voters that the money already provided to Council/Agency care is being spent wisely and managed correctly. To begin this, we believe that all outstanding debt owed to the City by the RDA must begin to be repaid promptly.
We believe that the roles of the Council and the RDA need to be clearly defined. Our studies also revealed what we judge to be the need for changes in the way the Agency manages its operations, and we have recommended some.
In all, there are six recommendations - supported by key findings. They are that: the RDA repay its debt to the City in a timely manner; that the RDA improve its financial accounting; that the interest rate on borrowings carry that of the LAIF; that the RDA build a reserve fund; that accountability be established for missteps of the past; and that the RDA set specific guidelines for staff.
GENERAL INFORMATION AND BACKGROUND:
Approved by the voters in 1952, State of California Community Development Law allows cities to create Redevelopment Agencies and their Project Areas to try to eliminate economic and physical ":blight", now defined in Assembly Bill 1290 (1994) The Agencies (RDA's) are given considerable powers to do this, including those of eminent domain and the ability to incur debt. . The agencies are funded with ":tax increment":, of which 20% must be spent on housing for those of low and moderate income. The tax increment is defined as any increase in property taxes in the Redevelopment Project Area (whether the result of agency activity or not) after the time the Agency was created. Without an agency, many of these ":tax increments": would normally go to the City, the county, the schools etc.
Many cities adopted redevelopment agencies (some declaring entire cities to be ":blighted":). Some (but not El Cerrito) used their funds in ways eventually deemed improper by the Legislature. Recognizing this, and that the agency tax increments diverted funds from other taxing entities, AB1290 was enacted in 1994 to restrict how funds are spent and to require agencies to ":pass through": some of this tax increment to these other taxing entities. Some agencies had already negotiated such arrangements and the Bill allowed those to be accepted, or rejected and the formula in the Bill adopted instead. El Cerrito's RDA must now pass through about 30% of its tax increment after the 20% set aside for housing.
El Cerrito created its Redevelopment Area in 1977. The members of the Council also form the board of the Agency, a practice that is a common one. The Project Area encompasses all of San Pablo Avenue (and much adjacent residential property), the Plaza and the two other small areas. The total assessed value of property within the Project Area is about $250 million. To date the RDA has spent nearly $20 million in tax increments and bond proceeds, about $4.3 million of it on low and moderate income housing as required by State law. At present writing, its total debt is $12,722,939.
The Agency has engaged in 11 projects and spent heavily on three: the Target store, Del Norte Place, and the PDG project now open (Staples, Walgreen, Pep Boys and Hollywood Video) near Cutting and San Pablo. The Agency's redevelopment plan was extended for another 20 years (37 years total) in 1994 by about 45 votes out of 9500.
CotW FINDINGS ABOUT THE RDA AND ITS FISCAL STATUS.
1. THE RDA'S DEBT TO THE CITY The Agenda Bill of June 17, 1996 and the accompanying Resolution 96-54 (Council) and 436 (Agency) confirm that an RDA debt to the City exists and they specify principal and interest.
The RDA agreed, when created, to reimburse the General Fund for City staff time charges. It has done so for about $2 million compared to the roughly $3.8 million the City would have received in taxes without the RDA.
Starting in 1991-92 the RDA began to experience financial difficulties, and it ceased then to make these payments as well as for interest charges on loans for Agency staff support, instead accumulating a debt to the City. Part of the problem was that the State took away some $363,000 of tax increments, out of a total of about $5.16 million, over the three years from 92/93 to 94/95. The Agency has since continued to borrow and to accrue debt to the City. The interest rates on the debt bear no relation to those the City receives on on its reserve funds (such as the Local Agency Investment Fund (LAIF) or even any bank CDs, some of which are higher and some lower.
In 1996 the RDA and the City Council (the same people) agreed to backdate (to 1991-92) the per cent of staff time charged to the Agency in an attempt to be more realistic. This change resulted in a reduction of the RDA's debt to the City as based on earlier agreements. Neither the old or new estimate of staff use numbers was based on hard data; rather they were ":best guesses": of staff.
We find this sequence of events inappropriate since it sets a precedent that RDA and City agreements can be changed retroactively. Since the same people make up both the RDA and the City Council, a conflict of interest can exist for these bodies, and such backdating of agreements can jeopardize the General Fund. The City can end up subsiding the RDA or vice-versa.
In the case of one loan, the AT/SF note, the actual financial agreement was drawn up by staff, and the section not requiring interest on deferred payments resulted in missed income to the General Fund. This agreement was executed between the City Manager and the manager of the RDA at a time when it was probably evident to both that the RDA would be unable to make payments immediately.
Even with these changes, the RDA still owed $1.38 million to the City's General Fund. Without the above-mentioned backdating the debt would have been approximately $1.72 million. The RDA refinanced its bond debt in late 1997 and early 1998, resulting in a one-time cash influx of $605,000. This was used to retire part of the RDA's debt to the City, including the AT&SF note cited above. A City analysis shows the remaining debt to be $877,161.14 as of 12/31/98, which would rise to $890,318.56 if no further payment is made before the end of the fiscal year..
It is the view of the CotW that without a specific, timely and verifiable repayment plan for this existing debt, it is unlikely that the taxpayers would reach the level of trust needed to support any proposed tax increase or bond measure. It would be difficult to counter the argument that the City should first collect existing debts before asking for additional funds.
2. THE NEAR TERM STATE OF THE RDA
The RDA has no bonding capacity in the near future since most of its tax increment income is tied up in existing bond payments, debts to private and corporate individuals, the AB1290-required ":pass through":, low and moderate income housing commitments, legal costs, staff costs etc. Therefore a main reason for continuing the Agency, i.e. the ability to use bonding capacity in the revitalization of the Plaza, has been severely limited by RDA commitments to date. It still has its other powers.
3. LEGAL SETTLEMENTS BY THE RDA
Law suits involving real estate transactions in both the public and private sectors are quite common. The RDA has been involved in three such cases since its inception in 1977.
The RDA was sued by Schurgin in 1989 for $1.14 million for defaulting on its DDA (Disposition and Development Agreement) after many delays by Schurgin. The cost of the settlement is stated in the Agenda Bill of May 2, 1990 to be $730,000 for which the Agency received title to two land sites, now part of the PDG area, valued at $300,000 plus other benefits. Legal costs are not known.
Recently the RDA settled two cases: with Petfood Express, due to a mistake in the writing of the original lease agreement, and with Plaza developer Wilton-Terranomics which became insolvent. These have resulted in substantial financial consequences to the taxpayers, not only in the costs of the settlements but also in legal fees involved, partly offset by the payment of $80,000 to the Agency by Wilton-Terranomics.
In the Wilton-Terranomics case, the RDA should have tried to collect funds as in the agreed upon procedure which required up front payment by the developer. It did not take such action until the developer was 120 days delinquent in payment.
Since the discussions and decisions that led to these lawsuits occurred in closed sessions, the CotW is unable to determine how the results came about. Until the results are understood and corrective action taken, the RDA may well repeat history in the future unless it adopts procedures to minimize the chances of such events.
4. FISCAL MANAGEMENT
The RDA has only partially kept accounts on a project basis. An example is the Schurgin settlement cited above which has not appeared in PDG project cost statements. Things like staff support and legal fees are found only in a general account. The RDA does not account separately for its spending of bond proceeds vs. current tax increment funds. Furthermore the City has not verified how money it lends from the General Fund gets to the RDA. Staff claims it to be a one-time loan at the beginning of the fiscal year, but that is unconfirmed. The RDA needs to have a reserve, so borrowing from the City and questions of this kind can be eliminated.
Therefore the RDA and the public are unable to do factual cost/benefit analyses of the wisdom of the projects. The current fiscal practices are wholly inadequate and amount to bad management.
5. ROLE OF STAFF
We believe that the RDA should have clear guidelines as to what the role of staff is, and to explain this to the public. Is staff there to provide analysis, advocate certain actions and/or is it there to recommend policy? Frequently, staff (as recently as the Honda proposal) recommends a particular action. If RDA feels this is appropriate, then its staff needs to realize that they should be held accountable if things go awry. Also it seems that staff's analysis appears to us, at least occasionally, to be quite inadequate. Staff sometimes encourages immediate action due to possible crises arising. In the recent Honda case the RDA was first contacted nearly 8 months ago, yet when the RDA considered an Exclusive Negotiating Rights Agreement, the public was not provided even an elementary cost/benefit analysis. We believe this practice should not be repeated.
6. FUTURE ACTIVITIES OF THE RDA
There is general consensus in the CotW that the RDA can no longer continue as it has. This is necessitated by the fact that the RDA will be financially pressed in the foreseeable future. The CotW believes there needs to be extensive discussions as to what the Agency could be in the future, how it would be staffed, what its activities would be and what financial resources are available to carry out any new function. It is also not clear if current staff would have the right background for the new activities . It should be noted that the RDA, due to its financial constraints, has no leverage in negotiating with developers, since the latter could threaten not to come to the City or to leave if not subsidized.
AS A RESULT OF THE ABOVE POINTS (1-6) THE CotW RECOMMENDS THAT:
The RDA would go into hiatus until the debt to the
city is repaid, but it would retain its powers to carry out the above activities.
Only if an extraordinary opportunity arose could the RDA delay the debt
payments so as to participate financially. Any other activity by the RDA
that required money during this time would have to come from the General
Fund with adverse effects on basic services.
This proposal would involve RDA staff layoffs and ceasing City staff support and its payments (to start concurrently) and continuing payments of principal and interest on the debt to the City until it is paid off.
Review and understand why the missteps cited in Findings 3, 4 and 5 occurred. Take those actions needed to prevent recurrence and to build public trust.
Repayment Analysis
Assumptions
a. The total RDA debt is $1.38 million, as of June 1998, based on the cited 1996 Resolutions.
b. The RDA has repaid $605,000. The remaining debt is, therefore, approximately $780,000.
c. Tax increments are based on the 97-98 values and are projected to increase at 2.4% per year.
d. There will be no unexpected RDA expenditures (e.g., legal settlements or judgements).
e. Repayment is to start in the 98-99 fiscal year, retaining present costs for the 98-99 year.
f. Interest rate on RDA debt is to match the LAIF rate, now about 5.4%.
g. All times/moneys are approximate and good to the nearest 3 months/$10,000.
Options for Repayment
1. Repay what is owed in one year.
Conclusion: Not feasible unless the RDA can borrow the
money elsewhere.
2. Repay over various time periods.
A. Repay in no more than 4 years. Suspend RDA activity, paying only debt obligations and reporting costs of about $25,000 per year. This requires that RDA staff be laid off.
B. Repay in about 6 years. Same as A. except RDA staff is kept but there is no payment for City staff support other than the reporting costs.
C. Repay in about 15 years to match the end of the Redevelopment Plan. Assume RDA staff is kept, City staff payments continue, $100,000 per year is devoted to economic development/promotion and debt obligations are met.
Variables tested
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