For many cities that have endured the painful process of dissolving their redevelopment agencies, the bloodletting has begun anew.
Last week, the legislature passed, and Gov. Jerry Brown signed, Assembly Bill 1484, a budget trailer bill meant to clarify aspects of the dissolution of redevelopment agencies and liquidation of their assets. AB 1484 salvages billions of dollars worth of bond funds, protects certain loans between cities and former redevelopment agencies, and gives cities a degree of control over bond proceeds and properties owned by former redevelopment agencies.
"Given that the legislature in their wisdom decided to eliminate redevelopment, at least we're getting a few more crumbs," said Robert Zur-Schmiede, deputy director of Development services at the City of Long Beach.
For some, however, AB 1484 is a Trojan horse, which essentially gives the Department of Finance the key to cities' coffers. AB 1484 requires that, as of July 12, cities relinquish local taxing entities' share of the 2011 property tax distribution that had gone to redevelopment/successor agencies. Cities that did not make full pass-through payments to their respective taxing entities were required to make up the difference.
"While we welcomed cleanup legislation for the redevelopment dissolution bill, there are many provisions in AB 1484 that require us to complete numerous additional steps and add layers of approval that further complicate and greatly lengthen the dissolution process," said Victorville City Manager Doug Robertson.
For many public officials, AB 1484 is the nearly unthinkable culmination in a series of efforts by which Sacramento has exacted money from local redevelopment. But whereas previous actions, including old Educational Revenue Augmentation Fund payments and the dissolution of redevelopment itself, were based purely on tax increment money, AB 1484 garnishes funds from municipal sales and/or property tax revenues.
Because of this so-called "tax claw-back" provision, many local officials are incensed, claiming that AB 1484 is an unprecedented intrusion into local affairs.
"Draconian is an overused word and probably isn't strong enough," said Larry Kuhn, city manager of Vacaville.
The claw-back ties the fate of redevelopment agencies to that of their host cities in new, powerful ways. Redevelopment agencies had been wholly separate entities from their host cities, and the vast majority of host cities agreed to serve as successor agencies only because AB 1X 26 treated successor agencies as separate legal and financial entities. AB 1484 changes that relationship by forcing cities to pay assessments from their own tax bases.
"Had this type of penalty been included in the original dissolution bill, many cities would have thought twice about becoming the successor agency," said Robertson.
DOF informed every city of its required payment—many cities owed nothing, while others owed in excess of $10 million—on July 9, and the payment was supposed to be made by July 12. City officials have complained of the inordinately quick turnaround (as a trailer bill, AB 1484 was drafted and approved with relatively little public discussion), and many say that their assessed payments are much higher than they ought to be.
Many cities paid their assessments in order to avoid a penalty of 10% of the amount owed imposed by AB 1484. But they have done so under protest, thus reserving the right to challenge the amounts owed and possibly get refunds once DOF recalculates the amounts. McKenzie said that the League does not yet have an authoritative account of AB 1484's assessments or cities' responses statewide.
Even if some cities' burdens are lightened, many will find themselves in dire financial straits.
"The real threshold of pain here is the potential to lose tax revenue and to pay fines when it's such a hard time for cities and they're already losing redevelopment," said Larry Kosmont, a consultant who is working with several cities on their dissolution process. "I think there will be some causalities."
The bill received overwhelming support from Democrats in Sacramento. Sen. Alan Lowenthal was one of the few who objected.
"The claw-back should never have been approved," said Lowenthal. "It turns an already difficult situation for the cities into one that is intolerable."
Brown's argument, however, is that the state's budget woes are less tolerable still. The funds identified in AB 1484 would be dedicated to education and therefore indirectly relieve some of the state's budget woes.
"County auditors are sending bills to successor agencies based on the calculations done by the state of dollars owed to counties, cities, schools, community colleges and special districts," said Evan Westrup, spokesperson for the governor.
While almost everyone in the redevelopment community had clamored for a fix to the hastily drafted dissolution legislation, AB 1X 26, AB 1484 was not what they had in mind. AB 1484 includes many provisions—inserted nearly verbatim—from AB 1585 (Perez) and SB 986 (Dutton), which had broad support but failed in the legislature. The penalty provision and DOF control thereof was not, however, part of those bills.
"We said, fine, put a penalty in it for the successor agencies if they don't follow the law, but we want a judge to stand in judgment not a department of state government that has proven time and time again that their number-one agenda is to take as much money as possible," said McKenzie. "It's really unfair for everybody involved for DOF to play the role of judge, jury and administrator."
McKenzie also suggested that garnishing city property and sales taxes was a violation of Proposition 22, the 2010 ballot measure that protects local government funds. AB 1484 would, therefore, be unconstitutional.
While cities see the penalties as excessive, DOF may have had little choice if it hopes to reap the estimated $3 billion that dissolution was supposed to reap for the state this fiscal year and last year.
"If you're going to have a dissolution process, someone has to enforce it. It's either going to be someone like the DOF or the attorney general," said Kosmont. "No one is going to like to be put in the position of sheriff."
Since Brown first proposed redevelopment dissolution in January 2011, those estimates have been revised downward, with some saying that the state will net less than $1 billion.
Then again, AB 1484 includes provisions that may confer significant benefits on cities and that undo some of the clunkier provisions of AB 1X 26. For cities whose books are in order and do not owe anything to their taxing entities, AB 1484 is largely positive.
"I think it actually did some very good things for successor agencies and cities," said Tiffany Bohee, interim executive director of San Francisco's successor agency. "In San Francisco we didn't have anything disputed on the two ROPS that we submitted….no dispute whatsoever. We worked very hard to comply with every aspect of the law before and after." ROPS refers to "Recognized Obligation Payment Schedule," the semiannual list of items that successor agencies must submit to DOF in order to receive state monies to pay for what they claim are legitimate debts left over from redevelopment activities.
Cities that are not quite so liquid as San Francisco have to muddle through a thicket of pros, cons, and pros that might actually turn out to be cons.
Cities' ultimate fiscal liberation lies in what AB 1484 calls a "certificate of completion," which DOF issues once a successor agency has paid off all of the money it owes to the state and to local taxing entities; this includes the equivalent of the former 20% set-aside that it must pay into the Low-Moderate Income Housing Fund.
Upon receiving a certificate of completion, cities and successor agencies receive the following benefits:
* Loan agreements entered into by cities and former redevelopment agencies are considered enforceable obligations so long as oversight boards deem them to have been for legitimate public purposes. Critics had contended that cities had loaned money to redevelopment agencies—and vice-versa—in order to shield money from the state. But some note that these loans were intended to help cities and RDA's avoid bonding or bank loans, which would have incurred higher interest rates.
* Bond proceeds from bonds issued by the end of 2010 may be used for the bonds' original intended purposes, according to their bond convents. The prospect of having to defease bonds—at considerable expense—was considered one of the more egregious oversights of AB 1X 26.
* Successor agencies do not have to conduct a fire sale to liquidate real property assets, as many had feared, and may retain properties for public purposes; those purposes can include redevelopment plans and even sale at a later date. Properties may be transferred to cities. Successor agencies must draft property management plans, to be approved by their oversight boards and DOF.
Some are nervous that the certificates of completion will not be as final as they seem, since DOF could veto items on cities' certificates when they review cities' ROPS requests. Many city officials, however, are delighted by the provisions in AB 1484, in part because it allows them to continue with a semblance of redevelopment.
"The long-range asset management plan is actually very good because it provides great flexibility for cities and successor agencies to identify which of their properties or assets they want to keep or dispose of pursuant to existing redevelopment plans or purposes," said Bohee.
Kosmont noted that with cities being able to control the fate of their properties, "the state will get a better land use result."
Regardless of those benefits, almost everyone involved with RDA dissolution expects that AB 1484 will inspire litigation—on top of the rancor that it has already created.
"It's a colossal house of cards," said McKenzie. "They're not going to get the funds that they wanted, and, more importantly, poisoned the well of the relationship between the state and cities by over-reaching, by being punitive, and by being extremely disrespectful to their peers at the city level."
Whether it is respected or not, the state has vowed to fight for the funds that it believes taxing entities should receive.
"The state is prepared to do what we need to do to make sure the law is administered effectively and that counties, cities, schools, community colleges and special districts receive the funds they should under law," said Westrup, Brown's spokesperson.
Tiffany Bohee, Interim Executive Director, San Francisco Successor Agency, 415.749.2588
Doug Robertson, Victorville City Manager, 760.955.5029
Larry Kosmont, President, The Kosmont Cos., 213.417.3300
Laura Kuhn, City Manager, City of Vacaville, 707.449-5100
Alan Lowenthal, State Senator-Long Beach, 562.495.4766
Chris McKenzie, Executive Director, League of California Cities, 916.658-8200
Evan Westrup, Spokesperson, Gov. Jery Brown, 916.445.2841
Robert Zur-Schmiede, Deputy Director of Development Services, City of Long Beach, 562.570.6555
Josh Stephens on The Urban Mystique at SPUR: January 19
On Tuesday, January 19, please join CP&DR Contributing Editor Josh Stephens and our friends at SPUR for a conversation about his book The Urban Mystique and the ineffable complexities that make all cities wondrous, maddening, and fascinating.