More Drama Expected as Dissolution Process Continues

LOS ANGELES — Moody's Investors Service is coming up on the 90-day deadline set in a February report where it will decide whether or not it will continue to rate the bonds of the successor agencies to California's 427 redevelopment agencies.

The process dissolving the state's RDAs has not become smoother although it has been nearly a year-and-half since a ruling from the state's supreme court permitted dissolution of the agencies.

Moody's report came after it made a series of downgrades of the RDA bonds in the months following the dissolution announcement.

Since the state Supreme Court in December 2011 upheld the law dissolving California's redevelopment agencies, the so-called successor agencies — in most cases, the municipalities that created the RDAs — have had to tally their debts and assets, get them approved first by a county-level committee and then by the state, so they could make the required payments to the state and debt service.

Moody's analysts don't feel that they are receiving sufficient or clear enough information from the agencies, according to Eric Hoffman, a Moody's senior vice president, speaking on a panel at the National Federation of Municipal Analysts panel in San Diego last week.

Last June, Moody's downgraded California's RDA bonds to Ba1 reflecting the sharply increased uncertainty of continued timely cash flow, Hoffman recounted during his panel presentation.

The state's so-called recognized obligation payments schedule, or ROPs, process functions on a six-month time frame, where successor agencies provide budgets outlining the amount they need to make bond payments and to cover expenses of the streamlined successor agencies.

The issue that has arisen is that typically the first bond payment of the year is less than the second, Hoffman explained.

If the state only approves the lower amount needed for the first payment, successor agencies are coming up short for the second payment, and then have to return to the state in the appeals process called meet-and-confer so they receive enough money to pay the second payment of the year.

"Because we don't have the disclosure we need, we may withdraw the ratings," Hoffman said. "It wasn't clear if this biannual distribution was going to work."

The bonds now being repaid by the successor agencies have received bond downgrades from all three major rating agencies because the RDAs used reserves to make bond payments last year while they awaited a decision from the state.

After its series of rating downgrades that came after the California Supreme Court ruling, Moody's came out with a report in February that announced it was doing a 90-day review to decide whether or not they want to continue to rate the state's RDA bonds. The review is slated to end on May 28.

The caveats are that Moody's wants the successor agencies to provide information on semiannual debt-service coverage, have data provided by a third party and be given the cash balance of the debt-service reserves.

In order to receive an investment-grade rating from Moody's, the RDAs will have to have a project area size of more than 1,000 acres, debt service coverage of more than 2 times including all pass-throughs, and incremental assessed value totaling more than 80%, according to Moody's February report.

The report is not the only significant event likely to affect the bonds expected over the next few months.

The successor agencies are now at the point where they are providing the state with lists of all the commercial real estate properties owned by the agencies. That process is expected to continue through June.

Late last year, the successor agencies were required to provide information on any unused monetary assets related to the successor agencies' affordable housing component.

The California Department of Finance, which is leading the state's efforts in the process, announced that some of that money had to be redistributed to local entities, including cities, schools and other local districts.

The conclusions reached by the department as to how much money the successor agencies had to redistribute resulted in a furor from many successor agencies, which claimed the state was rejecting redevelopment agency housing projects that were far enough along in the process before the dissolution occurred that they should have been approved.

The idea behind the original legislation, according to comments made by DOF spokesman H.D. Palmer in previous interviews, was that any tax-increment money left after paying off the RDA bonds would be split among the city, school district and other districts, such as water districts, that usually receive a share of property taxes.

The hope was that schools would receive more money locally, lessening the amount California had to provide through an equalization law ensuring that all school districts receive the same amount of funding.

The successor agencies are now providing the state with lists of all the commercial real estate properties owned by the agencies. Once the state Department of Finance receives those lists, it will determine which properties cities and counties, through their successor agencies, are allowed to keep and which ones they need to sell off.

A ruling also is expected from the judge in the Syncora case, likely the most bond-noteworthy of the 93 lawsuits against the state on the issue, according to Stephanie Downs, a senior associate with Meyers Nave, who spoke on the same panel as Hoffman.

In August, bond insurer Syncora sued the state in Sacramento County Superior Court, challenging the laws that shut down RDAs. It said they imperil bond payments and unconstitutionally impair bondholder and insurers' rights.

The insurer claims the laws have significantly reduced money available to repay bonds, and wants the court to declare them unconstitutional.

"What happens if [Syncora or the other litigants] win? Would they go back to the same old RDA structure? I don't think they would," Hoffman said.

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