PREFACE

    While gathering information needed to address the question of a possible deficit in the City's General Fund, it became very clear that understanding the role of the Redevelopment Agency as part of the answer to that question was of immediate importance.

    While it is still too early to provide detailed comments on the subject of a possible deficit in the General Fund, it is obvious that significant capital expenditures are needed. It is also obvious that a city wide consensus would be needed to get the necessary 67% voter approval of any tax or bond measure to pay for them.

    A necessary condition to build this consensus is the belief of the voters that the money already being given to the Council/Agency Members is being spent wisely and managed correctly. To achieve this we believe that all outstanding debt owed to the City by the RDA must be repaid. We also believe that the relationship between the Council and the RDA needs to be more clearly defined and rigorously managed.

GENERAL INFORMATION AND BACKGROUND

    The state of California allows cities to create Redevelopment Areas (managed by redevelopment agencies) so as to eliminate "blight" (a very generally defined condition) and to foster economic development. The Redevelopment Agencies (RDA) are given considerable powers, including eminent domain and the ability to issue bonds (without voter approval). The agencies are funded with "tax increment", 20% of which must be spent on affordable or low cost housing. The tax increment is any increase in property taxes in the Redevelopment Project Area (whether the result of Agency activity or not) from the time the Agency was created. These "tax increments" would normally go to the City, the county, the schools etc. Since a large number of cities took advantage of the redevelopment law (some declaring entire cities to be "blighted"), the property tax loss to the counties and schools became so large that the state modified the law (in AB1290) to force agencies to "pass through" some of this tax increment to the cities,schools and county etc.

    El Cerrito created its Redevelopment Area in 1977. It encompasses all of San Pablo Avenue (and much adjacent residential property), the Plaza and the two other small areas. To date the RDA has spent nearly $20 million of tax increment, about $4.3 million of it on low-cost/affordable housing. The total value of property assessed within the Agency area is about $250 million. The Agency was heavily involved financially in 3 projects: the Target store, Del Norte Place, and the PDG project currently being built (Staples, Walgreen and Pep Boys). The Agency was renewed for another 20 years in 1994 by about 45 votes out of 9500.

FRT FINDINGS ABOUT THE RDA AND ITS FISCAL STATUS

1. THE RDA'S DEBT TO THE CITY

    The RDA agreed, when created, to reimburse the General Fund for City staff time charges. Starting in 1991-92 the RDA began to experience financial difficulties, and it ceased to make these payments, instead a cumulating a debt to the City. In 1996 the RDA and the City Council (the same people) agreed to backdate (to 1991-92) the % of staff time. This change resulted in a considerable reduction of the RDA's debt to the City. Neither the old or new % of staff use numbers were based on hard data; rather they were "best guesses" of staff. The interest percentages on the debt have no connection to real interest the City receives on its reserve funds (such as the Local Agency Investment Fund (LAIF) or even any bank CDs.

    We find this sequence of events financially 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 exists 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.

    Nevertheless, 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 approx. $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. The RDA currently owes the City about $780,000.

    It is the view of the FRT that without a specific, timely and verifiable repayment plan for this existing debt, it is unlikely that the taxpayers would support a tax increase since 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 state required "pass through", low cost housing commitments, legal judgments, staff costs etc. Therefore the 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 the past financial activities of the RDA.

3. LEGAL JUDGMENTS AGAINST THE RDA

    Going back to the 1980s, the RDA was sued by Shurgin for defaulting on its Exclusive Negotiating Rights Agreement. The FRT was unable to determine the cost of the settlement and the legal fees involved but it is believed to be substantial.

    Recently the RDA settled two cases: Petfood Express and Wilton-Terranomics. These have resulted in substantial financial consequences to the taxpayers, not only in the costs of the settlements but also in legal fees involved. City management cites excessive zeal by previous member(s) of Council/Agency. Since the consequent discussions and decisions leading to these lawsuits occurred in closed sessions, the FRT is unable to determine whether City management should also share in the responsibility. In the Wilton-Terranomics case, not only did the RDA not follow usual procedure in requiring up front payment by the developer, but neglected to stop activity until the developer was 120 days delinquent in payment.

    Until responsibility is assigned in these cases, the RDA is likely to repeat history in the future. The FRT recommends that in the future such decisions be made in open meetings and that the facts be ascertained and recommendations made so that such occurrences can be prevented.

4. FISCAL MANAGEMENT

    The RDA has not kept accounts on a project basis. Therefore, it and the public are unable to do factual cost/benefit analyses of the wisdom of these projects. The RDA does not account separately for its spending of bond proceeds vs. current tax increment funds. Furthermore the City has not verified the flow of money from the General Fund to the RDA.

    The current fiscal practices are wholly inadequate and amount to bad management. The RDA needs to have a reserve, so borrowing from the City and questions of this kind can be eliminated.

5. ROLE OF STAFF

    The RDA needs to set guidelines as to what the role of staff is. 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 will be held accountable if things go awry. Also it seems that staff's analysis is, at least occasionally, quite inadequate yet staff encourages immediate action due to possible crises arising. In the Honda case the RDA was first contacted nearly 6 months ago, yet when the RDA considered an Exclusive Negotiating Rights Agreement, staff had not even provided an elementary cost/benefit analysis. This seems a repeat of previous missteps.

    To rectify these problems the RDA needs to set specific guidelines for the role of staff.

6. FUTURE ACTIVITIES OF THE RDA

    There is general consensus 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 FRT 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 its new function. It is also not clear if current staff would have the right background for the new activities required. It should be noted that the RDA, due to its financial constraints, has no leverage in negotiating with developers, since the latter often threaten not to come to the City or to leave if not subsidized.

AS A RESULT OF THE ABOVE POINTS (1-6) THE FRT RECOMMENDS:

1. The RDA cease activity no later than the end of the fiscal year 1998-99, except for payments on bond and note debt and those activities required by state law, until the debt to the City is repaid. We expect this to take from 3 to 4 years. The RDA would go into hiatus until the debt to the city is repaid, but it would retain its powers. This way if an extraordinary opportunity arose, the RDA could be involved.

   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.

   Any activity by the RDA that required money during this time (except for those noted in paragraph 1 above) would have to come from the General Fund. This should be done only under extraordinary circumstances, since the resulting adverse effects on the General Fund would force reduction in essential City services.
   

2. The RDA establish proper financial accounting such that:
1. Costs are tracked on a monthly and project basis
2. Expenditures of tax increment and bond proceeds are accounted for separately
3. Use of City staff be documented to reflect real costs as the original 1977 City/RDA agreement called for
4. Until the RDA builds up a reserve, cash flow accounting of money borrowed from the City be done.
3. Interest rates on all borrowings from the City's General Fund are to carry the rate of the LAIF fund
4. The RDA should build up a reserve when practicable so item III above will become moot.
5. Accountability should be established for the missteps of the past to prevent their recurrence. If Agency members, staff, management and/or the legal advisors are found to be responsible for the missteps (items 3,4,5), appropriate corrective action needs to be taken.

RDA Assumptions

1. RDA has repaid $605,000

2. Total RDA debt is approx. $1.38 million, (H. Stern memo confirms Agency's legal right to back-date agreement in 1996 to 1991) THERFORE REMAINING DEBT AFTER ITEM "1" IS TAKEN INTO ACCOUNT IS APPROX. $780,000

3. Tax increment revenue projections are taken from E. Tierney for 98-99 and then projected to increase at 2.4%/year

4. Repayment starts in 98-99 fiscal year, but staff and city reimbursement is maintained for 98-99

5. Interest cost on RDA debt to city to be at 5.4%/year (LAIF fund return)

6. All times / money are approx. and are for option comparison only

7. Petfood settlement costs RDA $250k, amortized at 8%, with balloon payment in 03/04

8. Wilton Terranomics will pay RDA $80k to settle all claims by RDA

9. Cost to taxpayer is Tax increment - pass-thru

10. City income assumes cost of city staff supported by RDA payment at nominal 20% cannot be reduced by better management and/or layoffs.

11. City staff support @nominal 20% is zeroed out for option 2.C for comparison purposes only.