MONROVIA, Calif.—Three weeks after the California Supreme Court affirmed legislation eradicating the state’s community redevelopment agencies, local officials are scrambling to figure out what it means for them.

That helped ensure an engaged audience last week at a lunch event held by the San Gabriel Valley chapter of the California Society of Municipal Finance Officers called “ABX1 26 Is Valid and Constitutional — What the Hell Do We Do Now?”

Under the legislation, each municipality that is home to one of the state’s approximately 400 redevelopment agencies has until Feb. 1 to decide whether they want to become the successor agency and take on the responsibility of winding down projects and paying off debt.

Two speakers, Michael Busch, president of Orange, Calif.-based Urban Futures Inc., a municipal finance consultant, and Mark Huebsch, an attorney with Newport, Calif.-based Stradling Yocca Carlson & Rauth, helped those in attendance grapple with the questions and answers.

Los Angeles opted out of becoming the successor to its RDA, saying it was unwilling and unable to take on the pension liability for the agency’s 192 employees.

But other cities are taking on that obligation, including many of those represented at Wednesday’s event.

Redevelopment agencies historically operated by declaring certain areas to be blighted, than capturing incremental property tax revenue growth there.

That revenue stream was often used to back bonds issued to help revitalize the blighted areas.

California lawmakers, in an effort to balance the budget, passed two entwined bills last year, one of them abolishing all RDAs and the other allowing the agencies to stay alive if they made payments that helped the state budget.

The move was expected to reduce the state deficit by $1.7 billion.

The Supreme Court upheld the bill that would shut down the RDAs, but overturned the one that gave them the option of staying alive.

In addition to paying redevelopment employees’ salaries, local officials are wondering how they will cover the administrative costs of managing or selling the real estate projects or land owned by the agencies.

Under the legislation, for three years, municipalities will receive administrative costs from the tax increment to wind down the RDA’s activities.

In the first year, successor agencies are entitled to up to 5% of the former agency’s property tax allocation to pay for administrative costs, Busch said.

Each year after, cities are supposed to receive 3% of the property tax allocation and no less than $250,000 for any fiscal year.

But he cautioned municipal officials not to count on receiving that money.

“You may not get any administrative cost allowance,” Busch said. “It is a hierarchy, and agencies with a lot of debt and little coverage may not get anything. Some of you may have a lot of coverage, so you will get more.”

Finance officers at the meeting indicated that they were not convinced by the state’s assurances that bond payments will be the first thing paid with the tax increment formerly used to fund the redevelopment agencies.

The first budget that successor agencies submit to the oversight committee is supposed to cover Jan. 1 to June 30, but Busch advised city leaders to include bond payments scheduled for later in the year in the budget documents.

It was also suggested that finance managers create separate budget documents for cities and successor agencies.

“When you have a law that is introduced at 9 a.m. and passed at 2 p.m. the same day, there are going to be problems,” Huebsch said of ABX1 26.

“Typically, legislation passes through the different stages over a several-month period and problems get worked out,” he added. “That did not happen with this legislation.”

It did not reassure those in attendance that Moody’s Investors Service downgraded California redevelopment debt the day before the lunch meeting, citing the uncertainty inherent in winding down the agencies.

Moody’s downgraded $11.6 billion of tax-allocation bonds rated above Baa2, which will be lowered one notch.

By using Baa2 as a break point, Moody’s avoided dropping any credits below investment grade as part of the mass downgrade.

Huebsch advised city leaders to dive into the budget process and start filing disclosure information to provide bondholders with more certainty, particularly in view of Moody’s downgrade.

While most cities have moved rapidly to adopt resolutions to take on the responsibility as successor agencies, the same speed isn’t expected for establishing the oversight committees that will approve budgets and decisions made regarding redevelopment.

The committees will be comprised of unpaid commissioners who will represent interests ranging from mayors’ offices to RDA employees.

The committees are not supposed to be seated until May, even though the budgets are supposed to be completed by June 30, Busch said.

He suggested those budgets probably wouldn’t actually have the oversight committee’s seal of approval until August or later.

“We are assuming we are just on our own for the first year, because it will take that long to get the oversight committees in place,” according to one man from the audience. “We are going to do what we need to do.”

Many cities have also made loans to the redevelopment agencies that remain outstanding. Officials worry that money will not be repaid.

Glendora officials have decided to take the bold step of keeping money owed to the city’s general fund by redevelopment agencies until they are instructed otherwise, said Josh Betta, finance director and treasurer for the city of 50,000 located in eastern Los Angeles County.

“What do you do about the administrative charges and loans to the general fund?” said Betta, the chairman of the CSMFO’s San Gabriel Valley chapter. “Right now, we are getting feisty in Glendora and saying we are just going to continue the income stream until they come and get us.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.