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California RDAs Prompt Move by Moody's

SAN FRANCISCO — Uncertainty over what happens next for redevelopment agencies in California has prompted Moody’s Investors Service to downgrade $11.6 billion of tax allocation bonds.

Moody’s said the move affects tax allocation bonds rated above Baa2, which will be lowered by one notch due to concerns about bond payments as the state’s redevelopment agencies are phased out.

“The implementation and potential for varying interpretations of the new legislation incrementally raises the risk that some debt service payments will not be made on a timely basis,” said Moody’s analyst Dari Barzel in a report late Tuesday.

At the end of December, the California Supreme Court upheld legislation that abolishes redevelopment agencies, while striking down a companion law that would have let the RDAs survive if they gave up tax money to the state.

The court’s decision started the process of unwinding California’s some 400 redevelopment agencies and transferring obligations, including bonds, to new “successor agencies” under a complicated oversight process.

Experts and industry players have been sounding the alarm about chaos caused by the new law.

Moody’s said the tight time frame for municipalities to comply with and interpret the legislation may prove challenging.

Included in that challenge is the reallocation of tax increment revenue, which is used to pay debt service on tax allocation bonds. Moody’s says the reallocation of such revenues collected by RDAs “may initially conflict with existing bond indentures.”

According to the legislation, existing tax increment revenues would be put into a trust fund held at the county level that would be used to pay debts. Leftover revenue would go to other taxing entities — such as school districts — as property tax. Moody’s said resolution of such conflicts could take a substantial amount of time.

“The limited, one-notch downgrade across the Baa2 and above rating spectrum reflects the broad-based but modest nature of this new risk,” Barzel said. “While Baa3 and lower-rated tax allocation bonds also face this new risk, their overall risk profile remains consistent with their current ratings.”

Although Moody’s said the existing legal protection of the tax-allocation bond contracts preserve fundamental security, it still left open the door for further downgrades.

Even before Gov. Jerry Brown’s move to eliminate RDAs as a way to grab their revenues to help close the state’s budget deficit, some agencies were facing credit concerns as tax increment collections dropped in light of declining real estate values.

Moody’s warned that any new legislation that does not preserve timely debt-service payments could result in rating downgrades.

Lawmakers have already begun trying to clean up the uncertainty left by the court’s decision. A bill has been introduced to delay the start of the dissolution law by 10 weeks.

Senate President pro Tem Darrell Steinberg, D-Sacramento, said in an opinion piece last week that California could also potentially allocate money from selling RDA assets to local governments for economic development.

Another measure that has passed out of committee would save 20% of tax money collected by RDAs for low-income housing.

Confusion over the legislation stems in part from a complicated review process it creates that forces RDA reorganizations to pass muster at several levels.

Each agency will be under the jurisdiction of a new oversight board, while obligations must also be signed off on by the county auditor-controller and finally by the state Finance Department.

The law reverts all of the assets and liabilities of the redevelopment agencies to a “successor agency,” likely the local city or county that previously oversaw them, that will be required to wind down the RDA.

The successor agency will put together a payment schedule for the RDA liabilities that will be then passed on to the county auditor-controller, state controller and then the Finance Department. The law also requires the local auditor-controller to perform an audit of the RDA.

The oversight boards will be charged with selling RDA assets, which will be divided among the local taxing agencies, as well as distributing affordable housing money.

In October, Standard & Poor’s said more than a dozen redevelopment agencies’ creditworthiness were particularly at risk due to the legislation because of weak debt-service coverage and liquidity, while large payments loom.

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