The new state budget could penalize the city up to $10,000 per day if it doesn’t follow the rules when it comes paying off former redevelopment debts, and even allows the state to keep local sales and property tax revenues if redevelopment successor agencies are found not to be in compliance.
City officials decried the “community redevelopment trailer bill,” passed by both state legislative chambers and signed by the governor last week, as an overreach of authority by the state government that could lead to a significant disruptions of public services for residents, and suggest parts of it might be unconstitutional.
Supporters of the bill, however, say it is a crucial part of the statewide effort to close an overall $16 billion budget deficit and to ensure that noncompliant former redevelopment agencies are held accountable.
“The purpose of the bill was to clarify things that were unclear or confusing in” last year’s state law that eliminated redevelopment agencies, city manager Ed Tewes said. “Some things were made more clear, and some were made even murkier.”
Last year’s bill required all property tax revenues formerly assigned to about 400 redevelopment agencies statewide to be diverted to education, public safety and other basic services. The law created new oversight boards to manage and authorize the wind-down of the RDAs to ensure their outstanding debts and contracts are paid off.
The law passed last week gives more authority to the state Department of Finance to enforce the local obligations, Tewes said. This includes “the ability to impose penalties of $10,000 a day, and – most disturbing – they are authorized to withhold the cities’ sales and property tax until they do what the Department of Finance tells you to do, when they tell you to do it.”
These orders from the state include meeting deadlines for redevelopment wind-down payments, transfers of funds and obligations and other duties related to the dissolution process.
“We have to do things faster, and the (DOF) has a longer time to review things,” Tewes added.
It is likely that the aspect of the law giving the state the power to withhold sales and property taxes will be challenged in court. Tewes suggested it’s in violation of at least two state constitutional propositions approved by voters that say the state cannot commandeer local revenues in this way.
In 2011, the city received about $6.3 million in sales tax revenue and about $6.1 million in property tax revenue, according to city staff.
Assemblymember Bill Monning, D-Carmel, voted in favor of the community redevelopment law. The law saves about $3.3 billion worth of public safety and education funding, and it will force more oversight of noncompliant or abusive RDAs and their transition agencies in California, he said.
“It is important to recognize this is part of a budget negotiation,” Monning said. “It affects the entire state. The state has an interest in oversight. I’m the first to recognize the successes of the Morgan Hill RDA programs, and the pressure that’s been put on the community by redevelopment in 2010 and 2011. Unfortunately, one size doesn’t fit all.”
Monning, who represents the 27th assembly district which includes Morgan Hill, said redevelopment has been the “number one issue” discussed within his caucus since last year’s state budget was approved.
He added that Morgan Hill’s RDA and successor agency is not one that has abused or overstepped its authority, and state officials “want to make sure we’re not penalizing people that play by the rules.”
And while the city plans to follow the rules anyway, a withholding of revenues that the city uses for public safety and fire services, for example, could be devastating for residents, Mayor Steve Tate said.
“We won’t be able to deliver city services if we don’t have the funds,” Tate said.
Furthermore, as recent RDA wind-down activity in San Jose indicates, even a hint that a bond issuer might default could downgrade the city in the eyes of credit rating agencies, Tate added. That could result in higher interest rates paid by the city and taxpayers for future loans.
Another way the new state law might impact taxpayers’ wallets is with the ensuing expensive lawsuits that are likely to follow, Tate added.
“It’s very unfortunate the state continues to think it has to get some kind of revenge on the cities,” Tate said. “A lot of (the legislators) are previous elected local officials, and I would hope they know the needs of individuals.”
Tewes noted that other parts of the law make the existing law even more confusing.
It is now “unclear,” for example, whether or not the city can refinance its former RDA bond debt as it was previously required, Tewes said. Some of the $110 million or so in bonds issued by the Morgan Hill RDA in 2008 paid a variable rate or “very low interest.” The interest agreement on those bonds expires in less than a year, at which point – until last week – the city was planning on refinancing for a fixed rate, which would pay a higher interest rate.
“This law seems to say you cannot refinance debt unless the new debt’s interest costs are lower than the old debt’s. That would seem to put a crimp in the refinancing (effort),” Tewes said.
Some aspects of the bill will be helpful to the city, Tewes added. If the city can pass a series of hurdles to become what the new law calls a “safe harbor,” it can spend about $19.3 million in unspent bond proceeds. Those funds were allocated for downtown improvements, including a three-story parking garage for commuters and visitors on Depot Street, by the city council earlier this year.
Also, the law allows the RDA successor agency, which is run by the City Council, to pay back loans made by from housing funds to the former RDA. Under the original RDA law, the agencies were required to set aside 20 percent of revenues for low- and moderate-income housing services, but that money could be loaned back for certain other RDA obligations.
In Morgan Hill, before dissolution, the RDA owed the housing fund about $6 million for state-mandated payments to education funds, Tewes said. That money can now be given back to the successor housing agency, also operated by the council, and can still be spent on home loans such as those approved by the former RDA in 2010 for about 27 prospective homeowners who wanted to buy new townhomes at the Madrone Plaza development.
State Sen. Sam Blakeslee, R-San Luis Obispo, who represents Morgan Hill, voted against the community redevelopment bill, but did not return phone calls requesting an interview.
Closing the remainder of the state’s $16 billion budget deficit depends largely on the voters, Monning added. In November, an initiative to raise the state’s sales tax will appear on the ballot, and if approved is projected to raise an estimated $8.5 billion in revenue in one year.
If the tax initiative, which also raises income taxes on wealthy residents, fails, another $6 billion in cuts to education are “built in” to the budget for the fiscal year that started Sunday, Monning said.
“Standard & Poors has said California does not have a spending problem - it has a revenue problem,” Monning said. “That’s what the fight will be about, and will continue to be about. Part of the entire redevelopment focus since Gov. Brown took office is not on opposition to community development (but is on) the resources - when you don’t have enough for education and public safety, you’ve got to prioritize education and public safety.” ?