ALAMEDA, Calif. — With the fate of California redevelopment agencies still unknown, the agencies are rushing deals to market at an accelerated pace — and appear to be paying a steep price for it.
Gov. Jerry Brown proposed to eliminate redevelopment agencies when he released his budget proposal in January. If he gets his way, the state’s 425 local RDAs will be abolished, with successor agencies created to oversee their remaining contractual obligations — such as the tax-allocation bonds the agencies issue.
The fate of Brown’s redevelopment proposal appears to be entwined with the governor’s overall budget proposal — which was very unclear as of Tuesday afternoon, though both Assembly Speaker John Perez and Senate President pro tempore Darrell Steinberg scheduled budget votes for Wednesday afternoon.
The budget plan hinges on a June special election in which voters would decide on extending temporary state taxes.
To meet that timetable, lawmakers must approve the election soon. However, Brown, a Democrat, appears to be struggling to obtain the handful of Republican votes he would need to achieve the two-thirds supermajority to approve the ballot measures he wants.
The Assembly’s Republican leader, Connie Conway, told a Fresno radio station Monday that negotiations had stalled between Brown and the GOP senators who were willing to broker a deal.
“The talks are done and over and they walked away,” Conway said.
Draft RDA legislation language assumes that agencies would be prohibited from incurring new debt as soon as a bill is signed by the governor.
That appears to have pushed redevelopment agencies into the market. Through March 14, California agencies have already sold $642 million in tax-allocation bonds this year, after selling only $1.18 billion in all of 2010.
They have paid a premium to do so at a time when many issuers are steering clear of the muni market.
Redevelopment bonds have always paid a bit of a premium compared to similarly rated debt in other sectors, according to Bud Byrnes, chief executive at Encino, Calif.-based RH Investment Corp., a broker-dealer specializing in California municipal bonds.
“Many asset managers have a knee-jerk reaction: no hospitals, no housing, no redevelopment agencies,” he said.
That premium has increased exponentially for California RDAs rushing to market this year, with many tax-exempt deals at spreads of 200 to more than 300 basis points over the Municipal Market Data triple-A curve.
A sale last week by the Ukiah Redevelopment Agency is a case in point — most tax-exempt maturities came at a 310-basis point spread to MMD when Piper Jaffray & Co. priced the deal March 8.
Byrnes said a typical, solid, A-rated non-redevelopment credit from a city government might expect to pay a 75-point premium.
“I think it’s a 225 basis point penalty that’s somewhat undeserved,” he said. “If you have confidence in and understanding of the market, there are bargains out there.”
The doubts and fears created by the debate over redevelopment’s future make it even harder to sell the debt to the typical muni investor, Byrnes said.
“They don’t want something dangerous,” he said. “A municipal bond buyer is not looking for adventure.”
That atmosphere is further charged by RDA advocates who have taken to the airwaves with radio ads warning that redevelopment is in danger.
“Customers read headlines and listen to sound bites,” he said. “They are afraid.”
Ukiah’s city leaders were well aware of the pros and cons of jumping into the market.
The City Council met as its redevelopment agency Feb. 16 to approve its bond sale.
According to the meeting’s video archive, city leaders and council members were worried that they were about to lose what they consider to be local funds.
Their financial adviser, Robert Gamble of PFM, told them there would be a cost if they felt compelled to issue bonds quickly to encumber the funds.
“We don’t want to be in the market at the same time as 100 other redevelopment agencies,” he said.