"This could be a real game changer in how cities view economic development," said Larry Kosmont, CEO and president of Kosmont Cos.
Larry Kosmont, president of Kosmont Cos. says proposed legislation that would free up proceeds of so-called “Mardi Gras” bonds could spur private development.

LOS ANGELES — Proposed California legislation that could put $1.5 billion in bond proceeds from former redevelopment agencies into play could be credit positive for local governments, according to Fitch Ratings.

California's redevelopment agencies were shut down in early 2012.

As the law stands, bonds issued after January 2011 for redevelopment projects are to be defeased, so that the bonds can be paid back immediately. But defeasing the bonds would create negative arbitrage as many of the bonds were issued at high interest rates, said Steve Shea, a police advisor to Senate President Pro Tem Darrell Steinberg, the bill's sponsor.

Steinberg introduced Senate Bill 1129 to resolve some of the thornier issues involved in winding down redevelopment agencies including the fate of the bonds issued in 2011 that are currently in legal limbo.

"If the legislation passes, Fitch expects it to immediately support the affected local government's efforts to fund capital projects," according to the Fitch report released Monday. "Local governments have had fewer sources for capital since the dissolution of RDAs in California, so this bill could provide a needed boost to funding."

The bill, if enacted, could contribute to improved debt service coverage for tax allocation bonds issued by dissolved redevelopment agencies, said Karen Ribble, a Fitch analyst, who co-authored the report.

It wouldn't have a credit impact until the projects were completed and translated into increased assessed property values improving debt service coverage, Ribble said.

"It is not an immediate and direct impact," Ribble said. "But, overall it has the potential to improve debt service coverage."

The issue centers on an avalanche of bonds issued after Gov. Jerry Brown's proposal to end redevelopment became public, but before the law was passed.

Some detractors likened it to a "Mardi Gras."

California's Legislative Analyst has estimated that in the first six months of 2011, redevelopment agencies issued about $1.5 billion in tax allocation bonds, compared to about $1.3 billion during the entire year of 2010. About two-thirds of those bond issuances in 2011 had interest rates greater than 7%, compared with less than one-quarter of bond issuances in 2010, according to the LAO report.

This bill would yield a benefit to development projects on hold in California, said Larry Kosmont, president of Kosmont Companies, a Los Angeles-based government and real estate consulting firm.

"Many former agencies need funding for infrastructure that can come from the post 2011 "Mardi Gras" bonds," Kosmont said. "Which in turn will spur private funding particularly for infill residential projects and possibly some transit-oriented development mixed use projects."

Without these funds, it is possible that the development of properties held by redevelopment successor agencies will be delayed, thereby stalling new taxes and jobs, Kosmont said.

In addition to tackling the issue of the 2011 bond proceeds, the legislation also would prevent what some fear would be a fire sale of properties held by the redevelopment successor agencies. Successor agencies are now required to have a property management plan approved by the state by January 2015, and if not, they would be forced to sell off former RDA properties. More than two-thirds of the state's roughly 400 successor agencies do not have a PMP approved, Kosmont said.

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