How AB 1x 26 Will Pick the RDA Carcass

 

The Supreme Court’s redevelopment ruling yesterday didn’t just kill redevelopment agencies. By upholding AB 1x 26 – the kill-redevelopment bill – the court ruling also triggered an entire funeral procession that will shut the agencies down and transition their debt and their assets to other agencies.

That process is sure to trigger more controversy – and probably lots more litigation – as cities try to protect assets they transferred away from RDAs last year and other agencies – the state, counties, and school districts – try to grab hold of them. It also puts each county’s auditor-controller in the middle of this process. But AB 1x 26 essentially represents a state takeover of tax-increment funds that are not required to pay debt by giving enormous power in the process to the Department of Finance.

AB 1x 26 assigns different responsibilities to five different players in the funeral procession. These are:

1. “Successor Agencies,” which will usually be the underlying entity that created the RDA in the first place (usually a city but sometimes a county)

2. “Oversight Boards” for each RDA, which will mostly be controlled by counties and schools.

3. Each county’s auditor-controller, who is responsible for collecting and dispersing property taxes.

4. The state Department of Finance.

5. The State Controller.

Here’s what AB 1x 26 calls on these entities to do:

Upon dissolution of the RDA, all assets and liabilities of the RDA revert to the “Successor Agency,” usually a city. At first the city would still be required to pay debt and other “legally enforceable obligations”. But the city can’t continue to operate as the RDA would. The auditor-controller and especially the Oversight Board has most of the power in determining what to do.

By March 1, each county’s auditor-controller is supposed to do an audit of each RDA’s assets and required payments and provide those audits to the State Controller by March 15. This schedule was originally created based on the assumption that the RDAs would vanish on October 1, not December 29, so it’s unlikely that the auditor-controllers can stick to this schedule. But this step is really important, because the auditor-controllers in each county have to create a “Redevelopment Obligation Trust Fund,” where the funds required to meet RDA obligations will be placed.

In other words, the city will not get the tax-increment money. The tax-increment funds required to pay RDA debt and other obligations will be placed in a trust fund and the rest will be distributed to taxing agencies as regular property tax is – which is typically something like 50% to schools, 33% to school districts, and 15% to cities, and a sprinkling to special districts. (This varies throughout the state.)

Meanwhile, an Oversight Board must be created for every RDA. Each Oversight Board will have seven members: two by the mayor, two by the county board of supervisors, one by the special districts in the former RDA, one by the county school superintendent, and one by the local community college chancellor.  Obviously, in every county – and even in large cities – there will be many Oversight Boards with overlapping memberships. This is supposed to be representative of all the agencies that share property tax, but it should be obvious that counties and schools will run this show.

And run the show the do – up to a point. The city prepares a debt and obligation schedule, which is reviewed by an auditor selected by the auditor-controller, as well as an administrative budget. The Oversight Board approves both. The Oversight Board is also charged with disposing of RDA assets. Government buildings get turned over to the appropriate government agency. The proceeds of other asset sales are divided among the taxing agencies proportionally. And they decide whether RDA affordable housing money will go back to the cities or go to the housing authorities instead.

But the Oversight Committee is not the final word – and this is a really important point in seeing how the state is truly taking control of RDA funds. Both the State Controller and the Department of Finance play an important role in overseeing the Oversight Committees, as follows:

* The “Redevelopment Obligation Repayment Schedule” prepared by every city must be approved not only by the Oversight Committee but also by both the Department of Finance and the State Controller.

* The Department of Finance has the power to overturn any action by any Oversight Committee.

You can see all the different messy situations that could arise:

* Cities could start paying off obligations they see as binding, only to be overturned by somebody else when the repayment schedule is reviewed by the Oversight Committee or by the state, which means the cities would have to get the money back or cover the cost.

*No matter where the cities land on the repayment obligations, the three review entities -- the Oversight Committee, the Department of Finance, and the State Controller -- could get into big fights over which repayments should be made. The State Controller will be more independent of short-term revenue concerns than the other two entities. And if this holds up decisions on who get repaid, this could cause concern about California in the bond market.

* The other taxing entities could start suing the cities on some of the asset transfers they made away from RDAs (this is almost certain to happen).

* Naïve oversight committees could go into “fire sale” mode on former RDA assets, which could have a significant impact on urban property values in the whole state.

* The Oversight Comittees and the Department of Finance could get into protracted, ugly battles – even litigation – over the question of whether and how to dispose of assets.

And in case you’re wondering, this whole process starts … now. Yes, the redevelopment establishment will be back in Sacramento on Tuesday trying to get a new bill passed. But in the meantime, surely the Department of Finance and the counties – the two big financial losers in redevelopment – will start pushing to create the Oversight Committees immediately, and they’re start leaning on county auditor-controllers to start the RDA audits right away.

Stay tuned -- we will stay on this story as much as we can.